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Summary

  • Paulson & Co has taken a large stake in DirecTV while Berkshire has reduced its stake.
  • AT&T has agreed to buy DirecTV for $95 per share but regulatory approval remains uncertain.
  • I believe Paulson & Co's move to buy is more important than Berkshire's sale.

In second quarter regulatory filings, it was revealed that Warren Buffett's Berkshire Hathaway (NYSE:BRK.B) has reduced its stake in DirecTV (NASDAQ:DTV) by about 11 million shares to 23.5 million shares. Regulatory filings also revealed that John Paulson's Paulson & Co has taken a 10 million share stake in DTV. These moves are interesting because it appears that two extremely successful, and well known investors, have different views on DTV shares.

AT&T Deal To Buy DirecTV

In May 2014, AT&T (NYSE:T) announced a deal to buy DTV for $48.5 billion or roughly $95 per share in a stock and cash transaction. The deal was announced just after Comcast (NASDAQ:CMCSA) agreed to a deal to acquire Time Warner Cable (NYSE:TWC). The deal is currently under review and the outcome remains uncertain. AT&T and DTV have argued that the deal is good for consumers as it would present a strong competitor to a potential industry leading Comcast/Time Warner Cable combination. However, concerns have been raised over the fact that a combination of DTV and AT&T would result in decreased competition in 22 states where both AT&T and DTV are offered. Sprint recently dropped its bid to buy T-Mobile due to regulatory issues. This has raised further concerns about whether the AT&T/DTV deal will ultimately receive approval. In addition to regulatory hurdles, AT&T could also call off a deal with DTV if the company fails to renew its exclusive Sunday NFL Ticket package with the NFL. Uncertainly surrounding the deal has led to a large spread between DTV's current price, about $84 as of this writing, and the takeover price of $95.

Paulson's Buy Is More Important Than Buffett's Sale

While John Paulson is perhaps most well known for his bet against the subprime mortgage market, it should be noted that Paulson & Co started as a hedge fund with a focus on risk arbitrage. One of the most successful risk arbitrage trades for Paulson & Co was Rohm & Hass. Paulson was successfully able to help force Dow Chemical (NYSE:DOW) to move forward with its deal to acquire Rohm & Haas despite a weakening global economy. At the time, many market participants believed that it was unlikely that Dow Chemical would make good on its offer to buy Rohm & Haas. Paulson & Co has executed many successful arbitrage trades in addition to Rohm & Haas including long positions in Sprint (NYSE:S) and Metro PCS. Unlike John Paulson, Warren Buffett is not known for his arbitrage abilities. Rather, Buffett is known a legendary long-term value investor. Buffett is likely selling some of his DTV because he wants to lock in the high price and does not want to speculate on the eventual outcome of the deal. Due to the fact that DTV is clearly an arbitrage situation, I believe Paulson's buy is more important than Buffett's sale. Clearly, Paulson & Co believes that a deal is likely to get done.

Conclusion

I believe the fact that Paulson & Co has taken a position in DTV is a bullish development. While there is still a considerable amount of uncertainty surrounding the deal, Paulson's vote of confidence is important. Buffett's sale is less relevant as he is not an arbitrage investor. Another reason why I believe a long position in DTV has become more attractive is the failed merger between Sprint and T-Mobile. If the AT&T/DTV deal is not approved then it is possible that DTV could merge with Sprint or T-Mobile. Furthermore, if the DTV deal is not approved it would also seem likely that the Comcast/Time Warner Cable deal would not be approved. If this is the case, DTV could consider a deal with Time Warner Cable.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in DTV over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Paulson Buys DirecTV As Buffett Sells: Why I'm Bullish