Market Fears May Give You a Guaranteed 15% Return

market-fearsFear of a failed merger puts this stock 15% below its buyout price.

Successful investors recognize market inefficiencies when they occur and rush to take advantage of them.  These are opportunities that often carry very little risk and offer 15% returns, and sometimes more, for those who see the big picture.  15% returns are what most people would kill for in any market.

The AT&T (NYSE:T) buyout of satellite television provider DIRECTV (NYSE:DTV) has created what I believe may be a slam-dunk opportunity to earn 15% with very little downside risk.  The buyout was announced a few weeks ago, in which DTV stock would be taken out at $95 per share.  Yet right now, the stock trades at $82.50 – about 15% below the buyout price.

What’s going on, and how can you earn that 15% difference between current and buyout price?

There are three concerns regarding the merger that are suppressing the DTV stock price.  I personally believe that none of them are going to come to pass, and the merger will go through.  By purchasing DTV stock now, or using options, you can pick up DTV stock at a discount.

Let’s look at the concerns:

Regulatory Concerns

The biggest concern that investors have regarding the merger is that the federal government will block it.  After all, the government killed the AT&T deal to buyout T-Mobile.  The government is regarded as a wild card, particularly in an Administration many regard as being anti-business.

The argument stems from the idea that T stock and DTV stock are both in the communications market, and that the market for high-speed internet, telephone service, and cable TV will become less competitive as a result of the merger.

However, T stock’s cable TV offerings only competes with DIRECTV’s satellite offerings in about 20% of US households.   While there are some concerns about fewer choices in those markets, the fact is that DISH Network would remain as a competitor.

This is also offset by the benefits customers would receive, such as AT&T mobile customers being able to access DIRECTV content on their phone, and DIRECTV customers being able to consolidate TV services with AT&T’s broadband service.

Ironically, this merger might also provide stronger competition against the cable behemoth created out of the pending Comcast (NASDAQ:CMCSA) – Time Warner Cable (NYSE:TWC) merger.

I think the concerns are overblown.  The government historically does not block mergers.  AT&T and T-Mobile was the rare exception, as both held gigantic market share in the same business.  There is no such overlap here between T stock and DTV stock.

NFL Deal with DIRECTV

A secondary investor fear is that the buyout is contingent upon DTV stock being able to negotiate an extension of its NFL Sunday Ticket deal with the National Football League.  This service provides substantial revenues for DTV stock that T stock wants to guarantee goes to the combined entity, and not to a competitor.

There is fear that somehow this deal will not go through, despite DTV stock having had this service for years.  While the NFL now has leverage – it can demand higher prices from DIRECTV because it knows the merger is on the line – it also cannot ask for the moon.  I expect the deal will be more costly, but the deal will close, nonetheless.

Shareholders Will Kill the Deal

I regard this final concern as being vastly overblown.  Many DTV stockholders may be upset that a very modest premium was paid for DTV stock, but that discounts the run-up the stock had when the rumor mill started churning.  The offer is a fair price.

Some investors think DTV stockholders will vote to block the buyout.  That’s just not going to happen.  It is incredibly rare, even for micro-cap stocks, for shareholders to vote down a merger.  People are happy to take their profit and move on to the next opportunity. Even Warren Buffet owns DTV stock and likes the merger.

How to Play Market Fears

I think you buy DTV stock here, at $82.50, or at any price below $95.  I believe this buyout will be consummated in the next 12 months.  For those wary, you can always purchase the stock and buy puts as a hedge, or buy the stock, and sell covered calls against it.

Don’t wait too long.  As each issue gets resolved, DTV stock will creep back up.

Lawrence Meyers owns shares of DIRECTV.

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