A hedge fund in Florida might earn almost $200 million on a large arbitrage wager on Twitter

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Last Updated on October 9, 2022 by Bitfinsider

An activist hedge fund situated in a Florida coastal city recently devastated by Hurricane Ian is one of the major beneficiaries of Elon Musk‘s decision to go through with his plan to acquire Twitter.

In the second quarter, Pentwater Capital, a 15-year-old firm with close to $5 billion in assets, acquired a 2.4% interest in Twitter. The acquisition of 18.1 million shares by Pentwater cost around $725 million.

At the price Musk has agreed to pay for Twitter, $54.20 per share, Pentwater’s holding is worth approximately $980 million. Tuesday’s closing price of $52 was 22% higher than the acquisition price, indicating that Wall Street is not totally certain that the acquisition will be consummated.

The CEO of Tesla and SpaceX announced on Tuesday that he has written Twitter a letter telling the firm of his intention to adhere to the terms of the April agreement, despite having previously attempted to withdraw. The parties were slated to appear in court in two weeks, and Musk’s latest proposal included a resolution to the dispute. Twitter has stated that it has received the letter and plans to close the transaction at $54.20, but has not commented on the lawsuit.

Prior to Pentwater’s entry into Twitter, the social media company was in limbo. A sense of buyer’s remorse was hinted at in Musk’s harsh tweets about the company’s bot and spam problem, which caused the stock to decline. The share price reached a low of $32.55 on July 11, shortly after Musk formally attempted to terminate the contract.

Pentwater capitalized on what it perceived to be an obvious arbitrage opportunity. There was a signed agreement on the table and a lot of money to be made if the deal is carried out to its natural conclusion.

“In my 23-year career, I’ve never seen an acquirer walk away for no reason,” said Matthew Halbower, founder of Pentwater, in an interview Tuesday, after Musk’s SEC filing was received. The likelihood of him being able to escape was quite low.

Halbower stated that the only two instances in which Musk would be required to void the agreement would be if Twitter’s financial statements contained fraudulent information or if a major event altered the worth of the firm. According to Halbower, neither of them were relevant.

During the second quarter, Greenlight Capital paid an average of $37.24 per share for the stock. David Einhorn of Greenlight stated in a letter to investors that there were $17 per share in upside rewards if the acquisition succeeded and losses of the same amount if it failed.

“Therefore, we have a 50/50 chance that something will occur 95 percent of the time or more,” he wrote.

When Pentwater purchased shares in Twitter in the second quarter, it immediately became one of its largest holdings. However, the firm hedged its risk with a substantial investment in put options in case the stock’s value declined. Therefore, a percentage of its stock investment gains will be used to pay for the puts.

Pentwater has placed other wagers in and around the social media industry. The firm is one of the largest investors in Digital World Acquisition Corp, the special purpose acquisition company that has been attempting to take former President Donald Trump’s media company public, despite the SEC’s investigation into the deal and the company’s recent failure to meet a crucial funding deadline. Trump’s app, Truth Social, was launched after he was banned from Twitter on January 6 due to the events of that day.

Halbower stated that Pentwater employs 44 employees, with around seven in its Naples, Florida office. Additionally, the company has locations near Chicago, New York, Minneapolis, and London.

Sunday, four days after Hurricane Ian blasted into the west coast of Florida as a Category 4 storm, power was restored to the Naples office. The office reopened on Monday, according to Halbower.

According to PowerOutage.us, approximately 380,000 homes and businesses remained without power as of Tuesday afternoon, down from a peak of 2.6 million on Thursday. Collier County, which contains Naples, continues to be one of the counties with the highest number of outages.

Pentwater is not the only investor who stands to profit greatly if the Musk sale goes through.

Saudi Prince Alwaleed bin Talal, a longtime shareholder, controls 39.95 million shares, which are worth $2.17 billion at the acquisition price. Jack Dorsey, co-founder and former CEO of Twitter, holds 18,04 million shares worth close to $1 billion. The only institutions with a larger investment than Pentwater are Vanguard, BlackRock, SSgA, and Fidelity.

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