(Adds Breakingviews, Dealtalk links)
By Soyoung Kim and David Gaffen
NEW YORK, July 18 Many investors say the best
trading strategy around a potential takeover of Time Warner Inc
by Twenty-First Century Fox is to wager that
media baron Rupert Murdoch will pay up to get what he wants. The
trick is that it may be too late to place the obvious bets.
Time Warner said on Wednesday it had rebuffed Twenty-First
Century Fox's roughly $80 billion bid, or $85 per share, in
recent weeks over valuation and concerns that the Murdoch family
will have too much power. But people familiar with Twenty-First
Century Fox said Murdoch is determined to buy the rival media
Hedge fund traders and options strategists said the
traditional merger arbitrage trade - short Twenty-First Century
Fox and buy Time Warner - played out when the news broke.
Arbitrageurs seek to profit on the difference in stock
prices between an acquirer and the target. In a deal that
involves the swap of stock, that generally involves buying the
target's shares and betting the acquirer's will fall. Murdoch
made a stock and cash offer for Time Warner.
But these traders said that the time for that bet may have
passed. Time Warner's stock has risen 21 percent to $86.12,
since the news broke. Twenty-First Century Fox has fallen nearly
"Fox shares will spike higher if this deal is killed or if
Time Warner bids for something," making a defensive acquisition,
one arbitrageur said. "Time Warner will also remain range-bound,
unless there is a higher bid or it does something that destroys
the process, or something to buy another company."
So investors who missed that window must now make bolder
bets if they still want in on the trade.
Sources have said that Twenty-First Century Fox could see
more than $1 billion in synergies from a deal.
One hedge fund manager said in his reckoning synergies from
the deal could be as high as $1.5 billion, which would allow
Twenty-First Century Fox to pay as much as $95 per share to $100
per share and still have a deal be substantially accretive to
The hedge fund manager said many arbitrageurs are remaining
long in shares of Time Warner, given Murdoch's reputation as a
Murdoch, for example, overcame stiff resistance from some
members of the Bancroft family to buy Dow Jones in 2007. But he
did not raise his bid at the time.
"The key right now for me is, 'What is my downside?'" said
one hedge fund trader. "The price on the table is not the right
price. It's not going to get it done." The trader said he owns a
relatively small position in Time Warner and is evaluating how
-- and whether -- to place a bigger bet.
One way to put less money on the line while betting that
Twenty-First Century Fox will raise its bid is to buy Time
Warner stock options. Activity in the options market already
shows investors are optimistic that either a bidding war could
occur or Murdoch could end up raising his initial offer.
There was substantial activity in Time Warner call options
expiring in mid-August with a $90 strike price - bullish bets
that the stock will hit that level by that expiration.
"For you to buy an August $90, you have to believe there's a
higher bid in the next month here or an increased bid by him,"
said William Lefkowitz, chief options strategist at vFinance
There were also notable new positions taken in call options
expiring in mid-October at the $95 and $100 strike prices, which
also suggests a belief that shares will keep rising. Nearly
2,000 new contracts were purchased at the $100 strike price for
October, according to Thomson Reuters data.
But the bid-ask spread in August options contracts is at a
very wide range - between 40 and 60 cents for a number of
contracts. That makes it more expensive to make such a bet. The
better bet may be in the stock market, which has tighter
Arbitrageurs will usually play in the market with tighter
spreads because of efficiency, said J.J. Kinahan, chief
derivatives strategist at TD Ameritrade.
There are few other options at the moment to arbitrage this
deal, traders said.
In a sign that investors think Fox shares have fallen as
much as they will, short interest is muted.
As of Wednesday, short interest in Twenty-First Century Fox
was around 2.8 percent of the outstanding shares, a relatively
low amount, according to data firm Markit.
The credit default swaps market, another avenue to hedge or
bet on the trade, may not work out either, one arbitrageur said.
"These names are great credits, so even if Fox levers up to
do a deal, it won't widen much. I doubt there's much to be done
in CDS on this one," the arbitrageur said.
Twenty-First Century Fox's 5-year CDS price jumped about 20
percent Wednesday to their highest since February, but they
moved no further on Thursday and remain relatively low. Time
Warner's dropped nearly 6 percent.
(Additional reporting by Dan Wilchins, Jennifer Ablan and
Daniel Burns; Writing by Paritosh Bansal, editing by Peter