Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, recently revealed that his company has amassed a record $334 billion in cash and equivalents. This massive cash pile has raised questions about Buffett’s next potential investment target. One stock that has caught the attention of market analysts is Frontier Communications.
In September 2024, Verizon announced its intention to acquire Frontier in an all-cash deal valued at approximately $20 billion, or $38.50 per share. Buffett has a history of engaging in merger arbitrage, a short-term approach involving the purchase of stocks trading below their acquisition price. He has successfully executed this strategy with companies like Monsanto, Red Hat, and Activision Blizzard in the past.
The Frontier deal has cleared the initial hurdle, with shareholders approving the takeover in November. However, the merger still requires approval from state regulators in the 24 states where Frontier operates, as well as from national agencies. Verizon’s management is confident that the merger will benefit customers and ultimately gain regulatory approval.
CEO Hans Vestberg stated, “We are very confident that this will go through, but we expect the process will be thorough.”
As of this writing, Frontier stock trades at $36 per share, creating a spread of 6.9% from the acquisition price.
Buffett eyes Frontier acquisition arbitrage
This return is currently better than the 4% to 4.3% offered by other investments.
If the deal goes through, it will trigger a tax event for investors. The tax rate will be more favorable if the deal takes longer than 12 months to complete. A competing takeover bid appears unlikely, considering Frontier shareholders have already approved the Verizon deal.
If the deal falls through due to regulatory concerns, Verizon will likely be required to pay a $590 million breakup fee to Frontier. Buffett’s thoughts on merger arbitrage, as expressed in his 1989 annual shareholder letter, suggest that he engages in this strategy “only when we like the odds.” Frontier appears to check all of Buffett’s boxes for a worthy merger arbitrage play. Individual investors may find Frontier stock offers stability with a bit of upside in an otherwise turbulent market.
For those adverse to risk or bearish on the market in the short term, Frontier is a stock and merger arbitrage worth considering. Outsiders will have a clearer picture of Buffett’s official position when Berkshire Hathaway releases its next quarterly report. Until then, market watchers will continue to speculate about the Oracle of Omaha’s next move.
Image Credits: Photo by David Syphers on Unsplash
