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 (NASDAQ: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.
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