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Twitter arbitrage bet could repay big for Pentwater Capital

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Amongst the large winners in Elon Musk’s agreement to follow through together with his deal to purchase Twitter is an activist hedge fund based in a coastal Florida city that was just wrecked by Hurricane Ian.

Pentwater Capital, a 15-year-old firm with near $5 billion in assets, bought a 2.4% stake in Twitter throughout the second quarter. The acquisition of 18.1 million shares cost Pentwater roughly $725 million.

At $54.20, the value Musk has agreed to pay for Twitter, Pentwater’s stake can be price about $980 million. The stock closed up 22% on Tuesday at $52, which continues to be below the acquisition price, signaling that Wall Street is not entirely convinced the deal will close.

The Tesla and SpaceX CEO said on Tuesday that he’d sent Twitter a letter informing the corporate of his intent to keep on with the terms of the April agreement after previously attempting to back out. The 2 sides were scheduled in court in two weeks, and a part of Musk’s latest proposal involved putting an end to the litigation. Twitter has said it received the letter and intends to shut the transaction at $54.20, but didn’t comment on the litigation.

When Pentwater jumped into Twitter, the social media company was in a holding pattern. The stock was languishing as Musk was putting out critical tweets concerning the company’s bot and spam problem, hinting at a way of buyer’s remorse. The stock dropped as little as $32.55 on July 11, just after Musk officially tried to terminate the deal.

Pentwater was profiting from what the firm saw as a transparent arbitrage opportunity. There was a signed contract on the table and a bunch of cash to be made so long as the deal reached its logical conclusion.

“In my 23-year profession doing this, I’ve never seen an acquirer walk away with none reason,” said Matthew Halbower, Pentwater’s founder, in an interview on Tuesday after Musk’s filing landed with the SEC. “The probability of him with the ability to walk away was very low.”

Halbower said the one two reasons that Musk would must tear up the deal can be if there was fraud in Twitter’s financial statements or if there was a fabric event that modified the worth of the corporate. Neither of those issues were at play, Halbower said.

Greenlight Capital also jumped in throughout the second quarter, paying a mean of $37.24 for the stock. In an investor letter, Greenlight’s David Einhorn said there’s was $17 per share in upside rewards if the deal closed and an equal amount in losses if it collapsed.

“So we’re getting 50-50 odds on something that ought to occur 95%+ of the time,” he wrote.

While Pentwater immediately made Twitter certainly one of its top holdings when it purchased shares within the second quarter, the firm hedged its bet with a hefty investment in puts in case the stock dropped in value. So a portion of the gains from its equity investment pays for the puts.

Pentwater has made other bets in and across the social media space. The firm is certainly one of the highest investors in Digital World Acquisition Corp., the special purpose acquisition company that is been attempting to take former President Donald Trump’s media company public, though the deal is being investigated by the SEC and the corporate recently missed a key deadline to carry onto $1 billion in funding. Trump’s app, Truth Social, was created after the ex-president was booted from Twitter following the events of Jan. 6.

Halbower said Pentwater has 44 employees, with just seven or so in its office in Naples, Florida. The firm also has locations near Chicago and in Recent York, Minneapolis and London.

The Naples office had its power restored on Sunday, 4 days after Hurricane Ian slammed into the west coast of Florida as a Category 4 storm. The office reopened on Monday, Halbower said.

Across the state, roughly 380,000 homes and businesses were without power as of Tuesday afternoon, down from a peak of two.6 million on Thursday, in keeping with PowerOutage.us. Collier County, which incorporates Naples, stays certainly one of the counties with probably the most outages.

Pentwater is not the only investor that is set for a giant payday should the Musk deal close.

Longtime shareholder Saudi Prince Alwaleed bin Talal owns 39.95 million shares, price $2.17 billion on the acquisition price. Jack Dorsey, Twitter’s co-founder and former CEO, owns 18.04 million shares, valued at near $1 billion. Amongst institutions, the one investors with a much bigger stake than Pentwater are Vanguard, BlackRock, SSgA and Fidelity.

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