AT&T ’s T 0.50% victory in its legal battle to buy Time Warner Inc. TWX 0.05% likely handed a win to merger arbitragers, particularly some of Wall Street’s biggest hedge funds, who had bet the deal would go through.
The deal has attracted interest from big firms. Hedge funds such as Highfields Capital, Baupost Group, Sachem Head Capital Management, Paulson & Co., Fir Tree, Oz Management, and Pentwater Capital Management all reported holding Time Warner shares in recent regulatory filings.
Shortly after 4 p.m. on Tuesday, U.S. District Judge Richard Leon approved the roughly $80 billion merger. The decision sent shares of Time Warner rallying, a boon for merger arbitragers, who buy shares of the takeover target on the bet they will rise to the agreed-upon deal price. The scale of the deal also meant it could have had wide-reaching ripples across the stock market, with a ruling against it potentially causing investors to sell stocks of other companies in pending tie-ups.
“This deal is different in that it’s going to affect a lot of other things,” said James DiLeva, managing director of event-driven strategies at WallachBeth Capital, before the announcement.
Creation of a Giant
AT&T spent decades snapping up rivals and neighbors. It's now the largest U.S. pay-TV provider and second-largest wireless operator by subscribers. Time Warner has both added and shed assets but remains among the biggest players in film and TV.
Decades of consolidation
AT&T Corp.
Born 1877 as the Bell Telephone Co.*
Lucent and NCR spun off
AT&T Wireless
Cingular
McCaw Cellular
AT&T
DirecTV
Leap
Wireless
BellSouth
Southwestern Bell
Name changed
to AT&T
Pacific Telesis
Ameritech
Market cap
$211B
$75
Time Inc./Time Magazine debuts in 1923
Time Inc. magazine
division spun off
Name changed to
Time Warner Inc.
AOL spun off
America Online
Time Warner
Becomes
AOL Time
Warner
TBS
Time Warner Cable
spun off
Warner Communications
created in 1969
Sells Warner
Music Group
’05
’00
’95
’15
1985
’10
Pre-1984
’90
Market capitalization, in billions
AT&T + Time Warner
Dish
Network
$15
Viacom
$12
$20
CBS
$69
$155
$202
$824
$158
$794
$149
$557
$75
$286
Comcast
Netflix
Charter
Disney
21st
Century Fox
Verizon
Amazon
*Bell Atlantic, NYNEX and U.S. West became Verizon
Decades of consolidation
AT&T Corp.
Born 1877 as the Bell Telephone Co.*
Lucent and NCR spun off
AT&T Wireless
Cingular
McCaw Cellular
AT&T
DirecTV
Leap
Wireless
BellSouth
Southwestern Bell
Name changed
to AT&T
Pacific Telesis
Ameritech
$211B
Market cap
Time Inc./Time Magazine debuts in 1923
Time Inc. magazine
division spun off
$75
Name changed to
Time Warner Inc.
AOL spun off
America Online
Time Warner
Becomes
AOL Time
Warner
TBS
Time Warner Cable
spun off
Warner Communications
created in 1969
Sells Warner
Music Group
’05
Pre-1984
1985
’15
’00
’95
’90
’10
Market capitalization, in billions
Dish
Network
$15
AT&T + Time Warner
Viacom
$12
$20
CBS
$286
$557
$794
$824
$202
$69
$75
$149
$155
$158
Charter
Comcast
Netflix
Disney
Verizon
21st
Century Fox
Amazon
*Bell Atlantic, NYNEX and U.S. West became Verizon
Decades of consolidation
AT&T Corp.
Born 1877 as the Bell Telephone Co.*
Lucent and NCR spun off
AT&T Wireless
Cingular
McCaw Cellular
AT&T
DirecTV
Leap
Wireless
BellSouth
Southwestern Bell
Name changed
to AT&T
Pacific Telesis
Ameritech
Market cap
$211B
Time Inc. magazine
division spun off
$75
Time Inc./Time Magazine debuts in 1923
Name changed to
Time Warner Inc.
AOL spun off
America Online
Time Warner
Becomes
AOL Time
Warner
Time Warner Cable
spun off
TBS
Warner Communications
created in 1969
Sells Warner
Music Group
’15
’10
’00
’05
’95
’90
Pre-1984
1985
Market capitalization, in billions
AT&T + Time Warner
Dish
Network
$15
Viacom
$12
$20
CBS
$824
$794
$75
$69
$149
$155
$557
$202
$286
$158
Netflix
Charter
Comcast
21st
Century Fox
Verizon
Disney
Amazon
*Bell Atlantic, NYNEX and U.S. West became Verizon
Market capitalization, in billions
Amazon
$824 billion
794
557
AT&T +
Time Warner
286
202
Verizon
Netflix
158
Disney
155
Comcast
149
21st Century
Fox
75
69
Charter
CBS
20
15
Dish Network
12
Viacom
Sources: staff and news reports; FactSet (market caps)
The judge’s decision comes after the end of the normal trading day, which concludes at 4 p.m. Investors are typically able to buy or sell shares of companies in afterhours activity. Shares of Time Warner jumped 5% after the market closed Tuesday, according to FactSet. AT&T slipped 2%.
The decision also marks the conclusion of a 20-month saga that began when AT&T announced its decision in October 2016. It was expected to close by the end of 2017 but has faced regulatory scrutiny and roadblocks. Worries about the scale of the combined company led the Justice Department to sue in an antitrust case in November. The shares and options for both companies have ricocheted on the twists and turns of whether regulators would approve the consolidation.
Hedge funds hold 20% of Time Warner’s shares, according to FactSet, and traders said the sector’s exposure to the deal is far larger through the use of options and other derivatives. Some aren’t even by traditional merger arbitragers.
Buzz about the deal has ramped up ahead of the court ruling, Mr. DiLeva said, with the two stocks becoming some of the most talked-about in phone call conversations with clients.
“People have made their bets and stuck to their bets,” he said. They “have always felt that the government had a pretty weak argument.”
In merger arbitrage, the arbitrager typically shorts, or bets against, the acquirer. Shares of AT&T Inc. have fallen 12%, this year to $34.35 before Tuesday’s afterhours action. Time Warner Inc. was up 5% to $96.22 in 2018 through Tuesday’s closing price. When AT&T announced the deal in 2016, it agreed to pay $107.50 a share for Time Warner, evenly split between cash and stock.
Investors also sent options trading into a frenzy this week before the decision, data from data provider Trade Alert show. Volumes for both Time Warner and AT&T have been more than double the daily average, the data show. The two stocks had some of the most options contracts outstanding among companies in the S&P 500.
Merger-arbitrage hedge funds have returned 1.4% this year, according to industry-tracker HFR data as of June 7, in line with the broader hedge-fund industry and below the S&P 500’s 3.6% return as of Tuesday.
But it has already been a tough year for merger-arb hedge funds. Bets on Akorn Inc.’s troubled sale to Fresenius SE cost some dearly. Others lost money on Xerox Corp. , which walked away from a deal with Fujifilm Holdings Corp. Others were dinged by Qualcomm Inc.’s takeover of NXP Semiconductors NV, a white-knuckled ride as Broadcom got involved and a deal that is now being held up by Chinese regulators.
Funds have also been burned on big mergers and acquisitions in the past few years, including the nixed twin health-insurance mergers, Aetna Inc. with Humana Inc. and Anthem Inc. and Cigna Corp. , as well as the failed pipeline tie-up between Energy Transfer Equity LP and Williams Co s. that ended up in protracted litigation.
Another bump came when it was reported that AT&T had hired Michael Cohen, President Donald Trump’s personal lawyer, for advice on the deal.
Options traders anticipated extreme volatility in both AT&T and Time Warner shares ahead of the decision, Trade Alert data show. Measures of expected swings in both stocks were near one-year highs.
Meanwhile, skew, which tracks the cost to protect against stock declines, is near a one-year low for AT&T shares, data show, a potential sign that traders may not be bracing as much for a big selloff in the stock. The deal’s competing forces and complexity may have warded off some investors, according to Jim Strugger, derivatives strategist at MKM Partners.
“It’s for the pros more so than the speculators,” Mr. Strugger said. “Do you really want to take the other side of the Department of Justice?”
—Liz Hoffman contributed to this article.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
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