The bets on Wall Street are stacking up in favor of David Ellison in his battle against California Attorney General Rob Bonta, On The Money has learned.
We’re talking about a subset of the trading community known as the “arbitrageur,” or arbs for short. These aren’t the meme touts who get their research from Reddit posts and have gotten slaughtered rolling the dice on speculative stocks while embracing weird conspiracy theories about dark forces tanking their inept investments.
Rather, these are the smart money types at hedge funds and on Wall Street trading desks who make bets based on reliable sources. The wagers are largely around the outcomes of mergers – whether deals will survive investor pressure or regulatory challenges, as in the case of Ellison’s bid to buy Warner Bros. Discovery and merge it with Paramount Skydance.
These so-called “merger arbs” have grown increasingly confident in recent weeks that Bonta will soon settle with Ellison, rather than using the nuclear option of taking him to court before what appears to be a lefty, anti-deal federal judge who could rule against the merger and add another level of uncertainty to its future.
Scary stuff for Ellison, though not so scary according to the arb community, which have recently bid up shares of the target company back nearly to levels when the deal was announced.
Recall, Ellison agreed to pay around $81 billion, or $31 a share, for Warner Bros. Discovery. Trading desks bid up the stock – pending federal and foreign regulatory approvals – to $30 a share since it didn’t officially close yet.
The Trump antitrust cops saw no monopoly potential in a merger of two struggling companies that face various existential threats: cord cutting and movie attendance that never recovered from pre pandemic levels. Throw in the new competition for entertainment eyeballs from Big Tech and you know why the deal also was OK’d by overseas antitrust cops.
Enter Bonta and his merry band of leftist (and antitrust law challenged) state AGs, including New York’s own Tish James, and the stock began to tank. Between the time Bonta began making noise and the time he finally filed his lawsuit, shares tanked more than 16% to around $25.
You can see why: Bonta seemed to reject settlement overtures from Ellison, whose lawyers signaled they weren’t confident they could win before the federal judge that has the case, a progressive Biden appointee. Indeed, they were gearing up to litigate to the Supreme Court if they have to. Bonta suggested he wanted massive structural changes to the deal that would negate the reason for doing it in the first place.
That’s a lot of uncertainty and the stock acted accordingly. Then something changed. Warner Bros Discovery shares began to inch up after Ellison threatened to move Paramount Skydance out of California – taking potentially thousands of jobs with him to Nashville or Austin – unless Bonta began settlement discussions by Oct. 1.
The state’s more sane lefty Democrats – namely Gov. Gavin Newsom and Xavier Becerra, the favorite to replace him – began calling for a settlement, presumably on more favorable terms to Ellison. As we reported, even normally liberal Hollywood execs – a major source of campaign cash for the state Democratic Party – began to sound off.
That’s because they know doing similar deals is the only way the industry can survive and if this one can be blocked by a bunch of state AGs, then no deal is safe and neither is the industry.
Shares are now comfortably about $28 as this piece goes to press, still below the merger price but reflecting the belief Bonta will come to the negotiating table.
But what if he doesn’t? On Thursday, Bonta told CNBC that the antitrust allegations were “black and white” and that settling the lawsuit would require “robust structural remedies.” Shares of WBD sank but not to levels that would suggest the street is changing pro-settlement sentiment.
To be clear, this is a pol looking to kiss up to the progressive wing in the party. What better way to do that than throttle a merger? Note that David Ellison’s dad, Oracle co-founder Larry Ellison, is both the money behind the transaction and a close friend of President Trump.
Well that’s why the arbs are still not bidding this close to $30 so stay tuned.
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