Choosing the Proper Election in the Time Warner Cable Deal



The Time Warner Cable–Charter deal has an election

Time Warner Cable (TWC) shareholders have a choice in the transaction. They can elect to receive $100 cash plus .5409 shares of Charter (CHTR), or they can elect to receive $115 plus .4562 shares of Charter. The breakeven price is $177.10. In other words, if Charter’s stock price at the end of the deal is above $177.10, it makes more sense to select the first option ($100 + .5409 CHTR). If Charter’s stock price is below $177.10, then the economic choice is to elect the second option ($115 plus .4562 CHTR). If shareholders fail to make an election, they automatically get the first option.

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You can trade this or monetize it

An arbitrage fund would take advantage of this election by varying its hedge ratio as Charter moves around. If Charter is above $177.10, the trader would get the ratio to .5409 shares. If Charter drops below $177.10, the trader will buy back some Charter in order to get the ratio down to .4562.

The above chart shows how the consideration changes for various Charter prices. If Charter trades above and below that inflection point a lot during the pendency of the deal, that hedging activity will give some added return to the deal.

The way to think about this election is to imagine you have .0847 CHTR puts struck at $177.10 per share of TWC. The theoretical value of a CHTR 177.10 put that expires June 30 is just over $19, depending on some assumptions (.0847 * 19 = $1.61). You could theoretically monetize that put by selling .0847 CHTR 175 puts and rolling them until the deal closes.

For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors. Investors who are interested in trading in the tech sector should look at the S&P SPDR Tech ETF (XLK).


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