Must-know: Analyzing the Time Warner Cable–Comcast deal



Merger spread analysis

In merger arbitrage, you’ll generally buy the acquired company’s stock and sell short the acquiring company’s stock. When the deal closes, you’ll exchange the acquired company’s stock with the acquiring company’s stock and cash. Then, you’ll deliver the shares of the stock you received to close your short position.

So how will this play out when you look at the Time Warner Cable–Comcast deal?

TWC-CMCSA spread

What you can expect from the Time Warner Cable–Comcast deal

In the chart above, you can see the cash flows and timing involved in this kind of deal. These prices are based on the close of Monday, June 30.

First of all, you’d be buying Time Warner Cable (TWC) for $150.51 and selling short 2.875 shares of Comcast (CMCSA), which is trading at $54.90. Given that Comcast is an easy borrow, there should be no cost of carry on the short side.

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It’s important for you to remember that to short a stock, you need to find a borrow on the stock. If your broker can’t find you a “locate,” you’ll have to find a way to set up the position using options. If there’s no borrow and there are no options on the stock, you’re out of luck unless you’re willing to take market risk.

When you’re short a stock, you’re also short the dividend. So, you have to factor in the dividends you’re short as a cost of carry. On the other side of the coin, you’d be long Time Warner Cable and receive its dividend. As you can see from the chart above, there’s a modestly positive carry on the trade. This is a slight benefit if the deal drags on longer than expected.

Use different timing estimates

As an investor, you should always do these calculations based on different timing estimates. Time Warner Cable and Comcast are guiding for an end-of-the-year close. But that’s a point estimate. Some things are simply out of the companies’ control—particularly regulatory reviews and SEC approval of the proxy statement.

Other must-know merger arbitrage resources

You can find Market Realist’s helpful primer on merger arbitrage analysis here.

Other important merger spreads you should consider include the Covidien (COV) and Medtronic (MDT) deal as well as the DIRECTV (DTV) and AT&T (T) deal.


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