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Money For Nothing - Four Arbitrage Plays

October 27, 2017

"Now look at them yo-yo's that's the way you do it
You play the guitar on the MTV
That ain't workin' that's the way you do it
Money for nothin' and chicks for free
"

--Dire Straits, "Money for Nothing"

 

Who doesn't like money for nothing (aka free money), right? Heck, people will even stoop down on the sidewalk to pick up a dime (it's free!). Fortunately, the stock market also occasionally offers investors a way to make money for nothing through the use of arbitrage (or the simultaneous selling of one asset and the buying of a comparable asset at a lower price). Note that this type of arbitrage is not to be confused with risk arbitrage (or betting on whether a merger will close), which is often associated with this fellow:

Without further ado, we present below four actionable arbitrage opportunities current being offered to investors by Mr. Market in his infinite wisdom (in ascending order of potential upside). Note that all market values are calculated as of October 26, 2017.

 

1. Standard Diversified Opportunities Fund (ticker SDI; see their SEC filings here), trading at $10.50/share: Standard Diversified is a holding company set up by the hedge fund Standard General LP (see their SEC filings here), which owns the following assets:

 

a. 9,842,373 shares of Turning Point Brands (ticker TPB), worth $177MM; and

b. Net current assets (and no long term debt) at the holding company level as of 6/30/17 equal to $17MM.

 

This leaves a Net Asset Value (NAV) for SDOIA of $194MM, or $11.84/share based on 16.4MM shares outstanding. The underlying TPB shares could be shorted to hedge out market risk.

 

Thus, SDOIA currently trades at an 11% discount to NAV.

 

2. Viacom Inc. "B" Shares (ticker VIAB; see their SEC filings here), trading at $25.67/share: Viacom's "B" shares have the same economic rights as the company's "A" shares, which have the following value:

 

Viacom "A" shares (ticker VIA) - trading at $31.96.

 

Thus, VIAB currently trades at a 20% discount to NAV.  VIA shares could be shorted to hedge out market risk.

 

3. Pershing Square Holdings (ticker PSHZF; see their IR Site here), trading at $13.45/share: PSHZF is a closed-end fund that owns various publicly-traded securities with the following value:

 

PSHZF NAV as of October 24th: $17.92.

 

Thus, PSHZF currently trades at a 24% discount to NAV.  Shares of PSHZF's underlying portfolio could be shorted to hedge out market risk.

 

4. Softbank ADRs (ticker SFTBY), trading at $44.90/share: Softbank is a conglomerate (see IR site here) which owns the following assets: 

 

a. 746,998,571 shares of Alibaba (ticker BABA), worth $128B;

b. 2,071,926,400 shares of Yahoo! Japan (ticker 4689), worth $9.6B;

c. 3,346,443,454 shares of Sprint (ticker S), worth $23.8B;

d. ARM Holdings, bought this year for $31B;

e. Domestic Japanese Telecom subsidiaries, worth $60B (12X $5B FCF); and

f. Miscellaneous investments / Vision Fund, worth $10B.

 

These assets are offset by $108B of net debt, leaving a NAV for SFTBY of $154B ($262B - $108B), or $70/share based on 2.2 billion ADR shares outstanding.

 

Thus, SFTBY currently trades at a 36% discount to NAV.  Shares of BABA, Yahoo Japan and Sprint could be shorted to partially hedge out market risk.

 

There you have it: four arbitrage opportunities trading at discounts of 11%, 20%, 24% and 36% to NAV, respectively. If these discounts were to close (and if an investor were able to successfully hedge out market risk in the opportunities by shorting the underlying assets), these four arb plays represent potential upside of 12.8%, 24.5%, 32.3% and 56.1%, respectively.

 

Now don't say nobody ever offered you money for nothing (we don't even run display ads on this site!).

 

 

 

 

 

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