The Arb Spread On Time Warner Is Finally Thinning; Loop Downgrades Stock

On February 15, Time Warner Inc TWX shareholders approved the $85.4 billion deal with AT&T Inc. T. Although the arbitrage spread is finally thinning, Time Warner’s shares are trading close to the deal price, Loop Capital Markets’ David Miller said in a report.

Miller downgraded the rating on the company from Buy to Hold, with a price target of $107.50. He mentioned that Time Warner’s shares outperformed the S&P 500 substantially since August 1, 2016 and were trading close to the price target, “which post deal announcement, is in line with the deal price.”

“Again, in our experience, we have never witnessed an example of a vertical merger in Media not going through, and the market is clearly pricing that in,” the analyst wrote.

Arb Spread Thinning

Time Warner’s shareholders would receive $107.50 per share, or $53.75 per share in cash and $53.75 per share in AT&T stock.

Related Link: The Plot Thickens: AT&T Filing Provides Details On Time Warner Merger, Regulatory Delay

“In our experience, this has to go down as one of the oddest arbitrage plays ever in the history of the Media sector, if not Wall Street in general,” Miller noted. He mentioned that on the Friday prior to the deal announcement, Time Warner’s shares rose 7.8 percent. The Monday after the deal was announced, shares slipped 3.1 percent on concerns around the regulatory process and comments by Donald Trump that he would block the deal.

The analyst mentioned that although there was still $8.55 per share worth of arbitrage remaining, following a $6.57 per share gain over the past seven weeks, the arbitrage spread now represented only 8.6 percent upside to the deal price.