Free 7-day Trial
All Articles and Columns »

Dual-Class Arbitrage Idea 3 – Viacom

October 11, 2011 | About:
Dual-class arbitrage trading is a simple three-step strategy.

1) Identify two publicly traded stocks of the same company at different prices.

2) Short the high-priced shares (X) and buy the low-priced shares (Y). Pocket X-Y.

3) Sell Y and buy X when the price of X and Y are equal.

Viacom (VIA)(VIA.B) fits the bill. Viacom's goal is to be the world’s leading branded entertainment company across television, motion pictures and digital media platforms.

My broker, IB, indicates there’s ample liquidity to short at least 1,000 shares today.

Viacom has 51.4 million A-shares and 520 million B-shares with equal cash-flow rights.

Viacom is buying back $4 billion worth of its B-shares.

Ticker Current price Voting rights Comment
VIA $ 51 1 votes Market cap of $ 29B.
VIA.B $ 42.7 0 votes


Historical spread of VIA versus VIA.B

-EDIT- new graph uploaded. Original was based on incorrect data.

Schermafbeelding%202011-10-11%20om%2021.

So why do stocks with identical cash-flow rights trade at different prices?

In the case of Viacom, from the 10-K:

In October 2009, NAI and its wholly-owned subsidiary NAIRI, Inc. converted a portion of their Class A voting common stock into Class B non-voting common stock and sold approximately $603 million of Class B common stock in connection with meeting certain requirements under its restructured indebtedness. In 2008, NAI sold approximately $114 million of Class B common stock. Although NAI has advised us that it does not currently intend to sell any additional shares, there can be no assurance that at some future time it will not sell additional shares of our stock, which could adversely affect the stock price.Also as part of a restructuring of NAI’s indebtedness, in May 2009, NAI advised us that it had pledged substantially all of its assets, including the shares of our Class A Common Stock that it owns, to secure those obligations. That pledge remains in place. If NAI defaults on its remaining obligations and the creditors foreclose on the collateral, the creditors or anyone to whom the creditors transfer such shares could convert such shares of our Class A common stock into shares of our Class B common stock and sell such shares, which could adversely affect the stock price. Additionally, if the creditors foreclose on the pledged shares of our Class A common stock, NAI will no longer own those shares and will therefore no longer have voting control of us.


Though there are examples of gaps persisting for decades, more often than not, a double-digit spread will close within a year. Research indicates the prices of all dual class shares will at some point reflect the underlying cash-flow rights.

Disclosure: This is not a recommendation to buy, sell or short anything. I had no position in any of the stocks mentioned at the time of writing.

Idea 1 - Lennar: http://www.gurufocus.com/forum/read.php?2,147502,147637#msg-147637

Idea 2 - Hubbell: http://www.gurufocus.com/news/147753/dualclass-arbitrage-idea-2--hubbell

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.1/5 (10 votes)

Comments

Adib Motiwala
Adib Motiwala - 2 years ago
Batbeer,

Just a little question. When you say double digit spread, are you referring in % terms ? If so, I would think the chart would be better shown in % terms as well ?

thanks

Adib
batbeer2
Batbeer2 premium member - 2 years ago
Just a little question. When you say double digit spread, are you referring in % terms ?

Yes.

You like the percentage ?

No problem, I can do both.



Sometimes with beaten down pairs you get huge spreads in percentage terms that are small (historically) in nominal terms.... so I changed the graph.

Drop me an e-mail

Batbeer AT hotmail
Adib Motiwala
Adib Motiwala - 2 years ago
Thanks this is useful. Are you generating this via GuruFocus? Looks like the spread peaked in June and then came down in July before spiking again to its current 18% spread.... Bat, can you add smaller intervals to the chart or alternately tell us how much the spread narrowed in July?

I think the difference in voting represents a constant 5-10% spread. However, an 18% spread looks quite wide. Interesting idea again!
batbeer2
Batbeer2 premium member - 2 years ago
Yes, the graphs are courtesy of Gurufocus.

To play around, you may want to go to tickertech.

http://www.tickertech.com/cgi/?a=chart&ticker=HUB.A

There, you can plot any two stocks. The default is percentage but you can plot the plain prices too.

If I'm not mistaken, you can download the closing prices and then do your own stuff if you like.

batbeer2
Batbeer2 premium member - 2 years ago
>> I think the difference in voting represents a constant 5-10% spread.

As a rule of thumb, I have found that the premium is usually for the liquidity, not for the rights. That is not the case here which is atypical.

Check out Tyson foods (yeah the chicken guys).They too have two publicly traded classes.

Mr. market usually prefers liquidity to voting rights.


>> can you add smaller intervals to the chart or alternately tell us how much the spread narrowed in July?

For now, I can't.

Adib Motiwala
Adib Motiwala - 2 years ago
Thanks!

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Hide