The Twitter arbitrage bet could pay off big for Pentwater Capital

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Among the big winners in Elon Musk’s deal to follow through on his deal to buy Twitter is an activist hedge fund based in a coastal Florida town that was just devastated by Hurricane Ian.

Pentwater Capital, a 15-year-old firm with nearly $5 billion in assets, bought a 2.4 percent stake in Twitter during the second quarter. The purchase of 18.1 million shares cost Pentwater about $725 million.

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

The CEO of Tesla and SpaceX said on Tuesday that he sent a letter on Twitter informing the company of his intention to honor the terms of the April deal, after previously trying to back out. The two sides were scheduled to go to court in two weeks, and part of Musk’s latest proposal included ending the litigation. Twitter said it received the letter and plans to close the trade at $54.20, but did not comment on the appeal.

When Pentwater joined Twitter, the social media company was in a holding pattern. The stock languished as Musk fired off tweets critical of the company’s bot and spam problem, hinting at a sense of buyer’s remorse. The stock fell as low as $32.55 on July 11, shortly after Musk formally attempted to end the deal.

Pentwater was taking advantage of what the company saw as a clear arbitrage opportunity. There was a signed contract on the table and a lot of money to be made while the deal reached its logical conclusion.

“In my 23-year career doing this, I’ve never seen a buyer walk away for no reason,” Pentwater founder Matthew Halbauer said in an interview Tuesday after Musk filed the SEC filing. “The chance of him being able to get away was very small.”

Halbuer said the only two reasons Musk would have to dissolve the deal would be if there was fraud in Twitter’s financial statements or if there was a significant event that changed the value of the company. None of those issues were at play, Halbuer said.

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

“So we have a 50-50 chance of something that should happen 95%+ of the time,” he wrote.

While Pentwater immediately made Twitter one of its top holdings when it bought shares in the second quarter, the company hedged its bet with a heavy investment in sales in case the stock fell. So a portion of the profits from her stock investment will pay for the sales.

Pentwater has made other bets in and around the social media space. The firm is one of the lead investors in Digital World Acquisition Corp., the special-purpose buyout firm trying to take former President Donald Trump’s media company public, though the deal is being investigated by the SEC and the firm recently missed a key deadline to hold $1 billion in funding. Trump’s app, Truth Social, was created after the former president was launched by Twitter following the events of January 6.

Halbower said Pentwater has 44 employees, with only about seven in its Naples, Fla., office. The company also has locations near Chicago and in New York, Minneapolis and London.

The Naples office was restored to power Sunday, four days after Hurricane Ian slammed into Florida’s west coast as a Category 4 storm. The office reopened Monday, Halbauer said.

Across the state, about 380,000 homes and businesses were without power as of Tuesday afternoon, down from a peak of 2.6 million on Thursday, according to Collier County, which includes Naples, remains one of the counties with the most outages.

Pentwater isn’t the only investor set for a big payday if Musk’s deal closes.

Longtime Saudi shareholder Prince Alwaleed bin Talal owns 39.95 million shares, worth $2.17 billion at the redemption price. Jack Dorsey, co-founder and former CEO of Twitter, owns 18.04 million shares, worth nearly $1 billion. Among institutions, the only investors with a larger stake than Pentwater are Vanguard, BlackRock, SSgA and Fidelity.

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