Why would anyone pay a 30% premium for a stock destined to be cashed out at the lower price?
It’s a question that could have a billion-dollar answer for Silver Lake or the hedge funds that bought up Endeavor Group stock.
About a year ago, private equity giant Silver Lake struck a deal with sports and media conglomerate Endeavor to take it private for $27.50 a share plus a one-time dividend of 24 cents. Trading in Endeavor stock was normal, hovering around the $27.74 total value, until September. Starting then, Endeavor shares consistently began trading over that price, spiking to $35.92 in February.
It’s not unusual to see a stock trade over a proposed buy-out price when traders suspect a sweetened deal offer will come. But that’s when a majority of shareholders have the ability to reject the bid or choose a better offer from another bidder.
In the case of Endeavor, there’s no such possibility: Silver Lake controls the majority of the voting stock, so it can make the deal happen on its terms. For example, Silver Lake rebuffed Endeavor management’s suggestion that $31.50 would be a fair price, according to a disclosure of the negotiations made in a Securities & Exchange Commission document last autumn.
Representatives for Silver Lake and Endeavor declined to comment for this article, but the run-up of Endeavor shares appears to be a bet by hedge funds that the take-private deal would fall apart or Silver Lake would offer—or be forced—to pay more. By the end of 2024, shares had steadily climbed to be trading close to that $31.50 mark.
Around then, according to SEC filings and a report from market data provider Bloomberg, hedge funds that like to take risks on challenging merger and acquisition deal terms piled into shares. Among them were billionaire Israel Englander’s Millennium Management and Matt Halbower’s Pentwater, the latter best known for making perhaps $300 million by correctly guessing Elon Musk would be forced to pay more than he wanted to take Twitter private.
February’s spike up to near $36 a share came as it appeared certain Silver Lake was taking Endeavor private at the announced price. That suggests at least some hedge funds had to unwind short sales—when shares are sold on a bet that the seller can buy them back at a lower price, pocketing the difference as profit. To exit a short position, shares sometimes need to be repurchased at a much higher price than sold because of a lack of stock to buy.
“Endeavor Holdings shares are trading far above the $27.50 [per share] cash privatization offer. We believe much of the activity driving up the share price has been risk-arb-related short covering,” David Joyce, an analyst at Seaport Research Partners, wrote in February.
According to data from S&P Global Market Intelligence, 11.7 million shares of Endeavor were sold short, meaning it would take almost seven days of normal trading volume to see that many shares available for sale. February’s trading likely was a short squeeze, where funds rushed to cover their bets, probably exacerbated by other hedge funds that seek to punish short sellers and grab their money as share prices spike.
But there also appears to be another factor at play: hedge funds gambling they can appeal to the courts to get a better price, even if the Endeavor deal closes as planned on March 24.
To protect minority shareholders from being forced out of a stock by a majority shareholder at an unfair price, courts can award a better price if the deal is challenged. In Delaware, where Endeavor Group is incorporated, this ability is called the right of appraisal. Shareholders had until Feb. 4 to claim their right of appraisal, according to Joyce.
In his February note, he explained, “In the event there are other investors still in [Endeavor] who did not submit their exercise of appraisal rights, we advise not holding on to hopes for an increase in deal terms.”
In a note last week, he said, “No sweetener should be expected before the announced 3/24/25 closing date.”
Plenty of shareholders are holding on, though. According to Joyce, two-thirds of the freely traded shares in Endeavor filed for appraisal. That could be as many as 149 million shares, based on data suggesting the number of shares freely available to trade is 223 million. That figure excludes shares held by Silver Lake, management and other insiders who don’t trade.
Why do so many shareholders seem confident they will be awarded more money? Endeavor controls TKO Group, the parent of UFC and WWE. Hedge funds appear to believe that control of TKO, which has a market cap today of $24.3 billion, will convince a Delaware judge they deserve more money. According to Seaport’s Joyce in his March note, including TKO’s market value in a sum-of-the-parts valuation of Endeavor suggests Endeavor is worth $37.70 a share.
Joyce’s estimate of value and the percentage of shares seeking appraisal rights implies Silver Lake could be on the hook for more than $1.4 billion, if a judge settles on valuation around $37.70. On top of that, Silver Lake would be required to pay interest on the awarded premium, a rate of 5% over the Federal Funds rate, for a total current interest rate of 9.5%. It will take months and perhaps more than a year for a judge to decide on Endeavor, so with interest, it’s a potential billion-dollar-plus bet between Silver Lake and hedge funds.
Silver Lake is playing hardball. It announced last week it will close the Endeavor deal at the announced terms, but won’t pay out any money to shareholders who have challenged the price in court. Typically, companies pay out the announced price to shareholders and await a judge’s decision on any excess value that may be awarded. By not paying anything now, Silver Lake puts financial pressure on the funds even as it opens up the possibility of having to pay 9.5% annual interest on the $27.50 shares as well as any extra shareholders might be awarded.
“It has been reported in the press that large blocks of shareholders have arbitraged the deal in order to demand appraisal,” Silver Lake said in a press release on March 3. “Silver Lake believes that the pervasive trading by these hedge funds … caused an artificial increase in the stock price. Against this backdrop, Silver Lake hereby advises all dissenters that it does not intend to pay them any merger consideration at closing—nor at any time until there is full resolution with respect to such appraisal claims.”
Endeavor shares have fallen since, but continue to trade above the merger price, closing at $28.73 Tuesday.
