Time Warner Inc. (TWX) is a merger arbitrage situation with an unusually positive risk-reward skew. The stock is trading at a steep discount to the $107.50 offer price (16% upside from current market levels) because the DOJ has sued to block the deal. However, the DOJ case is weak and the transaction remains more likely than not to close, in my view. More importantly, the standalone value of TWX has risen materially since the deal was announced 14 months ago, and could be 20% higher than the current market price. Investors stand to gain handsomely should the deal close within the next 6 months, but should also be rewarded if the deal doesn’t close. Heads I win, tails I also win.
Background and context
TWX is a large-cap media and entertainment business providing content under a variety of brands including TBS, TNT, HBO, CNN, Cinemax, Warner Bros. and other. Its Turner and HBO divisions create and program branded multi-platform content, earning revenue from affiliates who pay to carry TWX channels, advertising, direct subscription and content sales. Its Warner Bros. segment is a leader in the feature film industry and includes film titles based on the DC comic book universe.
