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Buffett v Musk
Almost every day, Tesla’s (TSLA) Elon Musk offers zany new takes on his Twitter (TWTR) deal. It's fun and strange and completely unclear what exactly will happen with the target’s shares. Will we get paid? What will we get paid? When?
Need a break from drama? While Musk says things for all sorts of reasons – to promote his stock, to get deposits on amorphous promises of future self-driving technology, or just because he’s bored and can’t sleep – Buffett says things because he thinks they are true. When he says he's going to pay you $848.02, he is not lying or joking or making a reference to marijuana.
Merger Arbitrage
It's time to put money to work. Merger arb spreads are wide. Here’s one you can buy today with no drama.
Who?
Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is buying Alleghany (Y), one of the most Berkshire-like public companies. Each rate among the best public asset allocators.
What?
Shareholders get $848.02 per share in cash. The deal secured both US antitrust and the target’s shareholder approval. The go-shop period expired without competing bids. That wasn’t a surprise as Berkshire has always been the obvious home for Alleghany. There's a litany of remaining approvals, but non present deal risk or much timing risk. They need approvals from the EU, Brazil, Canada, Israel, Japan, South Africa, UK, Luxembourg, Gibraltar, Paraguay, Australia, Canada, and Bermuda. Domestically, they need state insurance approvals from Delaware, Nebraska, New Hampshire, New York, Wisconsin, and they need to notify Vermont. In a weakening credit environment, this is a deal that Buffett can afford out of his petty cash drawer.
When?
You will get paid by December, 2022.
Where?
Alleghany operates around the world, which is why it requires so many regulatory approvals.
Why?
Berkshire Hathaway deals typically run into only one problem: Target shareholders are often reluctant to sell to Warren Buffett. If he thinks it's worth buying, then why is it worth selling? But in this case, the vote has already been secured, so it's no longer an issue. He has never had financing problems. There are no substantive regulatory issues. He rarely overpays, so the deal price is a good proxy for what the shares are actually worth.
Target | Ticker | Parity | Spread | IRR |
Alleghany | (Y) | $848.02 | $16.01 | 4% |
Buffett’s word is his bond and the resultant merger arb spreads are tight, but safer than a bond with a similar yield.
Conclusion
Barring a global thermonuclear war, Buffett will do what he says he will. And if he has any issues with Alleghany, he won’t tweet about it. This one follow’s Buffett’s rules of investing.
The first rule of an investment is don’t lose [money]. And the second rule of an investment is don’t forget the first rule. And that’s all the rules there are.
- Warren Buffett
Caveat
It's a tight spread. Want something hotter, then please read this (but risk only what you can easily afford to lose).
TL;DR
Buy Y.
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