Top Merger Stocks Held By Fund Managers, Mid-Q1 2019

|
Includes: ARRS, DIS, ESL, FOX, FOXA, IDTI, NTRI, ORBK, RHT, TRCO, USG, VVC
by: Special Situations and Arbs
Summary

Form 13F filings show fund managers' top arbitrage stocks.

Top M&A stocks of the 40 funds I follow.

Fox again the number one holding.

It is that time of the year again:the mid quarter period where all $100 million funds are obligated to post their holdings via Form 13F filings. I track the arb funds that specialize or at least are active in the strategy. This gives me insight by seeing what they are buying and what they are not buying in the world of M&A.

My rules:

  • I only count a stock if it is at least 1% of the fund's portfolio.
  • I only include stocks that are still actively trading.
  • I only choose funds where the majority of positions are merger-related.

Twenty-First Century Fox, Inc (FOXA) (FOX) is again the stock that is in the most portfolios. It is in 28 of the 40. FOX is in the process of being bought by Disney (DIS) in a cash and stock deal. The election merger is in the later stages though the companies are guiding to a first half close. In addition to cash and Disney stock (depending on election and proration), shareholders will also receive "New Fox" which will consist of the company’s news, sports and broadcast businesses. Approvals from Brazil and Mexico are still outstanding. Fox is the only repeat stock in the top 10, with the other nine from last quarter all having successfully closed its deals.

Red Hat (RHT) is in 25 of my funds. IBM is in the process of buying them for $190 per share in cash. Closing is expected in the second half of the year.

Top 10 Merger Arb Stocks held by Funds

1) Twenty-First Century Fox (FOX-A) Held by 28 Funds
2) Red Hat (RHT) Held by 25 Funds
3) ARRIS International (ARRS) Held by 23 Funds
4) Tribune Media Company (TRCO) Held by 20 Funds
5) Integrated Device Technology (IDTI) Held by 15 Funds
6) Esterline Technologies Corporation (ESL) Held by 14 Funds
7) USG Corporation (USG) Held by 12 Funds
8) Orbotech (ORBK) Held by 10 Funds
9) Vectren (VVC) Held by 9 Funds
10) Nutrisystem (NTRI) Held by 8 Funds

When a fund makes an arb stock its top holding, it signals a strong belief that the deal will ultimately close. 13 funds have Fox as its top pick as of December 31.

Top Positions among the 40 Funds

Twenty-First Century Fox Top Position in 13 Funds
ARRIS International Top Position in 3 Funds
Red Hat Top Position in 2 Funds

Oversized Holdings

Some arbitrage funds oversize their top positions. In the 20-plus years that I have been trading merger arb and tracking the M&A funds I haven't seen the percentages in the below chart.

USG Corporation 90% of a Fund
ARRIS International 86% of a Fund
Twenty-First Century Fox 43% of a Fund
Tribune Media Company 33% of a Fund

Conclusion

Plenty of deals have been closing so far in 2018, but not too many new ones have been announced. With uncertainly of trade wars, government shutdowns and the end of 2018 stock drubbing perhaps companies have been cautious in their M&A approach. In addition, China buying from the U.S. has ground to a halt. All we can do as arbs are trade the deals in front of us, a strategy that continues to be fruitful.

Disclosure: I am/we are long FOXA, RHT, ARRS, IDTI, USG, ORBK, NTRI. 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.