Rogers Communications Inc . executives have been saying all the precise issues about their dedication to a $20.4-billion takeover of rival Shaw Communications Inc . Over the subsequent three months, hedge funds are betting the telecom firm will present it’s prepared to place its cash the place its mouth is.
The hedge fund crowd is placing cash into what quantities to a preview of the possibly profitable, or disastrous, play on Rogers’s takeover by investing in Shaw’s most well-liked shares, in anticipation of cashing out on the finish of June.
For hedge funds that play takeovers – a specialty often called merger arbitrage – the large sport proper now could be shopping for Shaw’s inventory in anticipation of a deal that’s anticipated to shut within the first half of 2022. There’s a 20-per-cent-plus hole between the place Shaw’s inventory is at present buying and selling and Rogers’s $40.50-a-share provide. The low cost displays considerations that federal regulators or politicians might derail the deal over telecom competitors points. For an amazing many buyers, that’s an alluring if dangerous funding. Buying and selling in Shaw shares hit 20 occasions the traditional quantity the day the deal was introduced, as hedge funds piled in.
Arbitrageurs with shorter consideration spans imagine they’ve discovered a approach to flip a revenue on Rogers’s dedication to the takeover by June 30. Eager-eyed fund managers noticed a clause in Rogers’s 128-page provide that offers the Toronto-based firm the precise to request modifications to Shaw’s capital construction, inside motive.
Particularly, the doc said Rogers can power Shaw to redeem $300-million price of most well-liked shares on June 30, for $25 every. In return, Rogers pledged it should pay Shaw $120-million if the Calgary-based firm redeems its most well-liked shares, and the takeover doesn’t shut subsequent yr. That fee could be along with the $1.2-billion break charge Rogers will hand to Shaw if the deal falls aside.
From Rogers’s standpoint, getting Shaw to purchase again its personal most well-liked shares is sweet housekeeping, in line with one hedge fund supervisor who owns the securities. (The Globe and Mail just isn’t figuring out the supply as a result of they aren’t approved to talk publicly concerning the fund’s holdings.) These Shaw shares are solely redeemable as soon as each 5 years. If Rogers misses this chance, will probably be pressured to maintain paying out money dividends till 2026. Rogers would quite use that cash to pay down debt, or fund 5G networks.
Nevertheless, there’s a big hole between the place Shaw most well-liked shares have traded for the reason that takeover was introduced – round $21 every – and the $25 a share the corporate would pay out on the finish of June if it chooses to redeem. Wasps at picnics don’t have anything on merger arbitrage funds that scent a 15-per-cent-plus return in lower than three months. That is turning into a preferred commerce.
The danger for the hedge funds is that Shaw opts to skip the redemption, the Rogers takeover falls aside and the value slides. Previous to the takeover, Shaw most well-liked shares have been altering arms for round $14 every. The identical draw back exists for hedge funds piling into Shaw’s frequent inventory. The shares have been buying and selling round $23 previous to the takeover, and at the moment are altering arms for about $33.
Many analysts say buyers are overestimating regulatory opposition to Rogers’s development plans, and underestimating every firm’s resolve. In a report final month, analyst Jeffrey Fan at Scotia Capital stated the value of Shaw inventory confirmed the market put a 56-per-cent probability of the takeover closing, whereas “we might peg a variety of 75 per cent to 85 per cent.”
Shaw and Rogers are anticipated to point out their arms by making an announcement on the popular share redemption in late Could. At that time, each firms are committing capital, together with reputations, to their deliberate union. And hedge funds will begin to money in, or rely their losses, on this high-stakes takeover.
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