$VMW VMWare Merger Arb

[Andrew Stepner]

$AVGO Broadcom rumored to be buying VMWare. Makes sense that VMWare is being shopped post spin off by Michael Dell/Silverlake wanting to get off the position and get liquid.

Rumors now but VMWare earnings Thursday so would think this could get confirmed by the companies pretty soon.

Deal is seemingly 50% Cash/Stock so any down move in $AVGO would translate to 50% less value for $VMW...

From locked tweet:

"A $140 headline number is worth *at worst* 135 today w/ $AVGO move last 2 days, won't trade <$120 on deal (huge $15 spread, 12% gross). $VMW has $12b of debt and $AVGO is raising $40B to finance this - assuming they refinancing that $12B means ~50% of the deal will be cash. $AVGO has fallen ~5% from Friday prices so $140 worth 2.5% less today or $136.50. Hard to see it not $120 by Friday."

I personally have sold off quite a bit and have a largeish cash position. So to me it seems like a decent temporary place for the cash to go long $VMW and short $AVGO for half the amount as a hedge. Upside is the deal gets more concrete and as uncertainty lowers and $VMW price goes higher. Then I can sell soon (I wouldn't want to hold long term and have to wait for it to close).

Risk is if deal doesn't go for various reasons. I suppose there is also broader market instability risk but I expect VMWare to be motivated sellers so by shorting $AVGO, I'm not sure there's that much risk I'm left exposed to.

Any views?

Stepner

[Richard M]

Thx for sharing.

Thoughts on the SAVE deal to ULCC? JBLU has gone public with a $30/share offer and SAVE is at $18.50.  the ULCC deal is $19.20 right now. Seems like one activist takes a stake and price goes up bigly.

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Richard Mordini

[Andrew Stepner]

I hadn't seen much on $SAVE previously, but I'll give my reaction...

Backdrop is a tough market environment (I see the bear market continuing, I don't see a bottom/capitulation yet thus have sold quite a bit myself). This seems to be widening merger arg spreads. Look at the interest Twitter acquisition. Some of the risk is unique to Musk's craziness but the general idea of ~renegotiations seems broadly applicable in a bear market. So I'm more hesitant about deals not closing than I normally would be.

And I also expect spreads to stay wider than usual until close and I don't necessarily want that medium term multi-month exposure. That's why the VMWare deal tempts me, because I think VMWare holders are motivated and I think it could have a relatively low risk short term bounce. (But I'm not certain).

Then with SAVE in particular it sounds like you have the unknown of anti-trust risk. I don't know why Spirit thinks the Jet Blue offer has much higher antitrust risk. JBLU is $3.3B vs Frontier $2B (and Spirit $2B), so I don't see a gigantic discrepancy there albeit Jet Blue is bigger. But maybe there is more geographical overlap with Jet Blue and thus more potential monopoly power?? Or maybe it's by another measure? Either way anti trust is hard for me to handicap. Plus there is the hostile tender by Jet Blue and I am not sure how to handicap that either.

To your point, sure there is the potential that the deal gets recut higher. Maybe Frontier gets pressured and is willing to up their bid to make the tender less appealing. But for all I know the whole thing is a crapshoot so I don't see where I have an edge to price it better than the market.

(I'll assume by your lack of comment that you have no view on $VMW.)

Stepner

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[Richard M]

only thing i saw on VMW was "deal could be announced thursday" so if that happens, yes you'll get a nice pop in 2 days. i put on a small trade.

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Richard Mordini

[Andrew Stepner]

Thanks. Yeah I'm still on the fence and may not pull the trigger. Unsure at the moment.

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