Publication Date: November 28, 2018
Disney’s acquisition of Fox is the world’s largest pending public M&A deal, and its high-profile nature, attractive return and convoluted structure has piqued the interest of most risk arbitrage investors. With US, European and Chinese antitrust rulings behind us, and with just eight jurisdictions left, risk arbitrage funds can now prepare for deal consummation. In this note, we explore the approach, criticism and likely rulings by the last major antitrust regulator: Brazil’s CADE. However, we mainly focus on trading dynamics and considerations leading into and after the ruling. We explore the mechanics, valuation and delta hedging strategies of fixed-value M&A collars, including how risk arbitrage funds will typically trade Fox / Disney. In addition, we highlight the investment pitfalls and opportunities presented when targets face elections with collars that are subject to proration. We then suggest how to properly trade around the election averaging period in Fox / Disney to minimise hedging risks in assuming how other investors will elect. Finally, we calculate a fair value for New Fox, appropriate break prices for both Fox and Disney and put the various pieces together in recommending how to most efficiently trade this risk arbitrage opportunity.
1. Brazil Antitrust Considerations: The Final Major Hurdle 2. M&A Fixed-Value Collars: Primer 3. Delta Hedging and Valuing the Fox / Disney Merger Collar 4. Cash and Stock Elections in M&A: Primer 5. Recommended Fox Election Strategies and Potential Proration Outcomes 6. Optionality Limitations and Factors Out of Investors’ Control 7. New Fox: Valuation Analyses, a Fair Price and Trading Considerations 8. Fox and Disney Break Price Analyses 9. Risk Arbitrage Trading Thoughts Appendices 1. China Antitrust Issues 2. The Processes Going into Deal Completion
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