$ATVI / $MSFT arb pitch:
– One of the most compelling merger arbs deals is based on downside risk (fundamental) vs. upside skew.
– Homerun if the deal gets approved by the global regulatory bodies – a 44%+ IRR at current prices if $MSFT acquires ATVI at $95/share.
– Opportunity exists due to the uniqueness of the deal – directional institutional investors are unable to invest due to style drift whereas arb community is spooked by several large merger arbs blowing up recently.
– The market is ascribing only a 37% deal probability, which is too low and should be around 60%.
– $MSFT already announced deal concessions and there have been indications that Microsoft will pursue Activision in the courts if the FTC sues over the deal.
– Downside is well protected by the fundamental value of the business.
– Stand-alone ATVI fundamental value range of $65-75.
– ’23 EPS of $3.84 at 13x multiple plus ~18.5/share in cash, results in a target price of $69/share.
Exp. gain: 44% IRR
Full write-up (free guest account required):