Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S.(Photographer: Michael Nagle/Bloomberg)

Risk Arbitrage Trader Profits Rise Most in Months on AT&T Deal

(Bloomberg) -- Risk arbitrage desks, the units of trading firms that buy and sell positions in companies involved in takeovers, are having their best day in months after AT&T Inc. got clearance to buy Time Warner Inc.

As of midday, the amount of money earned from arbitrage trading at event-driven desks had risen by $8.2 billion on Wednesday, the biggest one-day gain since at least November, to $31 billion this year, data from Credit Suisse Group AG showed. As a result of market reactions after the AT&T ruling, takeover stocks around the country rose to within 6.8 percent of announced deal prices, on a weighted average basis, from 8.6 percent Tuesday, according to the data, which was described to Bloomberg News by a person who had seen it.

AT&T’s victory sent ripples across stocks in media and telecom as traders saw higher odds of deals being closed. Twenty-First Century Fox Inc. is up 7.1 percent, while Comcast Corp and Walt Disney Co. swung between gains and losses amid worries about a bidding war. CBS Corp. and Viacom Inc. also gained about 3.8 percent.

Top hedge-fund holders of the following deal stocks as of March 31, according to data compiled by Bloomberg:

  • Time Warner: Highfields 1.6% stake, Canyon Capital 1.2%, Baupost 1%, TCI Fund 1%, DE Shaw 0.9%, Pentwater Capital 0.8%
  • Fox: TCI Fund 6.8%, Baupost 2.5%, Hound Partners 1.6%, Egerton Capital 1.3%, Highfields 1.1%
  • CBS: Glenview Capital 1.9%, Tremblant Capital 0.6%, Kovitz Investment 0.5%
  • NXP Semiconductors: Elliott Management 5% (as of June 5), HBK Investments 4.6%, Soroban 4.4%, Pentwater 3%, DE Shaw 2.6%, York Capital 1.4%, Arrowgrass 1.4%, Tyrus Capital 1.3%

Not every situation was a beneficiary. NXP Semiconductors NV’s proposed takeover by Qualcomm Inc., which has been awaiting approval from Chinese authorities for months, didn’t see any improvement in market odds, and in fact saw its spread widen. The price gap in the acquisition of Genworth Life Insurance Co. by China Oceanwide Holdings Group Co. also failed to improve.

“Definitely on a market-cap weighted basis the event driven space is having a very good day,” WallachBeth Capital’s Brett Buckley and James Dileva said in a message. “However, across the board on an unweighted basis, most of the rest of the deal space is kind of flat. NXPI is a mega deal broadly held and that’s down over $3. So whatever people made in TWX etc., a good bit was lost in that name alone.”

On an unweighted basis that doesn’t account for the size of the companies involved, spreads improved today but not by much, Buckley and Dileva said. Their calculations show that the non-annualized rate of return for deals greater than $500 million in equity value has tightened by 6 basis points as of midday on Tuesday.

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