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Why the Starz-Lions Gate Deal Isn’t Really ‘Arbitrageable’

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Spread is trading somewhat wide

In the risk arbitrage world, an 11.3% annualized return is about right given that the spread really isn’t “arbitrageable.” In a typical arbitrage situation, at the end of the deal, you exit with no position and just the cash you made on the trade. For example, if you buy a stock getting taken out for cash, you get cash. If you set up a spread where you are long the target and short the buyer, when the deal closes, you deliver your new stock of the buyer and close out your short.

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In this case, that won’t happen because of the Lions Gate (LGF) share reorganization before the deal closes. If you set up the spread right now, you will be short Lions Gate voting stock. That voting stock will split 50-50 into voting and non-voting stock prior to the close. Your Starz (STRZA) long will give you non-voting stock, so you will be left with a position where you are short Lions Gate voting stock and long Lions Gate non-voting stock. Will you be able to trade out of this position at parity? Probably not, as the non-voting stock is simply worth less than the voting stock.

This highlights another potential issue—the Lions Gate vote. Lions Gate is asking its shareholders to approve turning its voting stock into half voting stock and half non-voting stock. That’s a loss of value for existing Lions Gate shareholders. The vote isn’t a slam-dunk.

Other merger arbitrage resources

For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

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