LMCA/LMCK share class arbitrage

LMCK shares have no voting power while LMCA shares do.  In theory, LMCA shares are worth more than LMCK shares and should therefore trade at a premium.  Right now, the opposite is true.

Class A:  Ticker symbol LMCA.
Class B: Ticker symbol LMCB.  These shares have the most voting power.  These shares are highly illiquid.
Class C: Ticker symbol LMCK.  Non-voting.

In theory, you can arbitrage these shares by shorting LMCK and going long LMCA.  I would not recommend that particular trade because I’m not a fan of share class arbitrage in general.  But if you enjoy risky arbitrage trades that may take years to work out, there are better share class arbitrage opportunities out there.  For example, the spread is dramatically higher with LEN and LEN.B (18.7% versus 0.6%).

In the case of LMCA/K, I think that the spread should resolve eventually.  I am guessing that Malone would love to make the LMCA shares convertible into LMCK shares on a 1:1 basis.  He would love to have his voting power increased without having to pay for it.

Historically, Malone has always demanded a premium on supervoting shares.  He values control and has often paid or received a premium for supervoting shares.  He swapped 745,816 LMCA shares for 678,015 LMCB shares, received a premium when converting class B DTV shares into normal DTV shares, etc. etc.

If you own LMCK shares, it may make sense to sell them to buy LMCA shares. Note that this trade is not risk-free.  (Though I would characterize the “risk” as very low.)  It is sometimes the case that supervoting shares may sell at a ~20% discount to normal shares.  Usually the explanation is that investors pay a premium for liquidity.  The spread between share classes could move against you dramatically.

*Disclosure:  Long LMCA, no position in LMCK/LMCB.  No position in LEN/LEN.B.

EDIT (8/8/2014): One big risk in this type of spread trade is the underlying stock going up.  If the stock doubles, then the spread will also double… leading to mark-to-market losses for the arbitrageurs.  The margin requirements will also more than double.  In the case of IDT and IDT.C, the stock went up several times.

5 thoughts on “LMCA/LMCK share class arbitrage

  1. Glenn –

    One reason LMCK trades at a premium could relate to the spin-off terms that holders receive (a) 5 LBRDK shares and (b) 4 rights to purchase LBRDK at 20% discount for every 20 LMCK shares owned. Would expect the premium to reverse post the LBRDK spin-off.

    Do you agree?


  2. Pingback: LMCA and LBRDA valuation spreadsheets | Glenn Chan's Random Notes on Investing

  3. Pingback: Thoughts on the Charter / Time Warner merger | Glenn Chan's Random Notes on Investing

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.