Carlson Capital’s Black Diamond Arbitrage Partners generated a net return of -0.91% for the second quarter, bringing its first-half return to -1.52%. The fund’s special situations and other event-driven investments drove the loss, detracting 84 basis points. Its merger arbitrage positions detracted 24 basis points from the quarterly return.
Twitter offer unlike any other deal
In his second-quarter letter to investors, Carlson’s Event-Driven chief Jesse Ho comments on Tesla
The Carlson fund started building a position in Twitter during the second quarter, but its sizing and hedging reflected its base case assumption that litigation was inevitable. Now that the litigation phase has commenced, Jesse believes the facts and law will “conspire” to force Musk to honor his commitment to buy the social network.
However, he also expects Twitter to accept a price cut, reflecting its desire to avoid a trial, although Jesse believes it would be heavily favored to win the case if it went to trial. He pointed out that litigation is always risky, but if Twitter is going to face off against Musk in court, he thinks it “should be thrilled to do it in Delaware.”
Ho’s base case for Twitter
Ho describes Delaware’s Court of Chancery as having “a well-developed body of business law and extremely experienced and capable judges.” It also has a reputation for enforcing contracts. Ho believes that if Twitter and Musk do not settle before trial, the case could be one of the most important, if not most-followed contractual disputes in the history of Delaware’s Court of Chancery, which was established in 1792.
Given the stakes, he believes any judge will be careful and look to past precedent, which would favor Twitter given the heavy burden of proof Musk must carry to prove that it had breached their agreement. Ho’s base case assumption is that Twitter will accept a modest price cut to avoid the time, uncertainty and risk associated with a trial.
He recalled that the steepest price cut on such a case in recent memory was the 18% price cut Simon Property Group
Biggest holdings, contributors and detractors
As of the end of June, the Carlson fund’s top merger arbitrage holdings were Meggitt / Parker-Hannifin
During the second quarter, the Carlson fund’s largest contributors were Swedish Match / Philip Morris, Meggitt / Parker-Hannifin, SciPlay / Light & Wonder, Biohaven / Pfizer, and Coherent / II-VI. On the other hand, its largest detractors were Avast / NortonLifeLock, Glatfelter / industry hedges, Vonage Holdings
Michelle Jones contributed to this report.