Dual Share Class Arbitrage with News Corp. (NWS, NWSA)
One overlooked corner of the investing universe is Dual Share Class arbitrage. Dual share classes frequently arise when a founder or family wants to maintain voting control over a company. So the founder's shares might have extra voting rights vs. the other class of shares. Many times, the economic interest in the company between the 2 share classes is identical (check the SEC filings to make sure!!!). For example, this is what we see when we look at News Corp. and their two share classes (NWSA and NWS) from the most recent 10k:
Dividends -Holders of shares of the Company's Class A Common Stock and Class B Common Stock are entitled to receive dividends when and if declared by the Board of Directors out of assets or funds legally available for that purpose. In August 2015, the Company's Board of Directors (the "Board of Directors") declared a semi-annual cash dividend of $0.10 per share of Class A Common Stock and Class B Common Stock
Voting Rights -Holders of the Company's Class A Common Stock are entitled to vote only in the limited circumstances set forth in the Company's Restated Certificate of Incorporation. Holders of the Company's Class B Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders
Liquidation Rights -In the event of a liquidation or dissolution of the Company holders of Class A Common Stock and Class B Common Stock shall be entitled to receive all of the remaining assets of the Company available for distribution to its stockholders, ratably in proportion to the number of shares held by Class A Common Stock holders and Class B Common Stock holders, respectively. In the event of any merger or consolidation with or into another entity, the holders of Class A Common Stock and the holders of Class B Common Stock shall generally be entitled to receive substantially identical per share consideration.
So what this tells me is that the dividends received are the same between the 2 classes, voting rights are different and in the event of liquidation, both classes with be treated the same.
Ok, so in my eyes the voting rights are the main difference. If I think about this logically, I would think that the voting shares deserve a very slight premium for that privilege. If you go to Yahoo Finance and click on Historical Prices, you can pull up the closing prices on (NASDAQ:NWS) and (NASDAQ:NWSA) going back several years. I just took a look at Jan 1, 2015 through today Feb 8, 2016. The weird thing is, the average spread ((NWS-NWSA)/NWS) has been -0.5%. What this says is that on average, the voting shares have traded at a discount to the non-voting. Sometimes you can see weird spreads due to liquidity differences between the two share classes, but I don't think that's the case here. If you have any thoughts on this historical spread, leave a note in the comments.
In recent days, the spread has swung to fairly wide levels (over 6%). The way to play this would be to short NWS, go long NWSA and close out the position when the spread collapses. Remember, the avg. spread has been -0.5% over the last year or so. You won't see huge gains from these type of trades; however if the spread moves from 6% to 3% over a month or two, then the IRR is more than acceptable.
What could go wrong?
Maybe the spread keeps getting wider. If that happens, you lose. Our margin of safety is that the spread has not been this wide in the last year or so. Also, even if the spread collapses, it could take time. Your capital is tied up as you wait.
Also, you still need to take into account transaction costs plus your cost to borrow. If those are significant, the potential return will suffer.
What else do I like about this situation?
One other thing mentioned in the 10k is regarding the buyback in place at News Corp. On May 10, 2015 the company announced a $500 million buyback. As of Aug. 6, 2015, $455 million was still authorized. What's cool about this is that they are buying back the 'A' shares, potentially helping close our spread further.
Where do you find out about these ideas? One place that I go is aqrfunds.com. There you can look up their Diversified Arbitrage fund holdings and scan it for ideas. Otherwise, if you've been around for a while, you'll start to come across these dual share classes occasionally.
Disclosure: I am/we are long NWSA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long NWSA, Short NWS in equal dollar amounts