A purchase of the AT&T broadband eligible notes is an extraordinary arbitrage opportunity. There are 8 issues of broadband eligible notes, which all trade on the NYSE, but I will focus on the 7% Notes due 5/15/05 (the 7% Notes). AT&T, as a condition to its sale of AT&T broadband to Comcast, is tendering and seeking consents for these notes. Pursuant to the tender offer (and at current interest rates), at least 65% of the 7% Notes tendered will be converted into 8.42% Comcast Notes due 2013 (the “New Comcast Notes”) at an exchange ratio of 1.048. In other words, if you tender $1,000 of 7% Notes, you will receive at least $681 of the New Comcast Notes. The balance of $350 of the 7% Notes will remain outstanding. I say “at least” $681 because if fewer than 100% of the 7% Notes tender, the New Comcast Notes will be prorated. Thus, if only 90% of the 7% Notes are tendered and you tender $1,000 of the 7% Notes, then you will receive $752 of New Comcast Notes and $278 of the 7% Notes will remain outstanding. The tender offer expires on November 1.
Comcast currently trades at 410 basis points over the 10 year. If the New Comcast Notes trade consistently with existing Comcast securities, the New Comcast Notes have a market value of 101 5/8. Let’s be conservative and assume that you will be able to sell them for only 99. Let’s further assume that 95% of the 7% Notes are tendered. By purchasing $1,000 of the 7% Notes at 96.25 (where they are currently offered on the NYSE) and selling out the New Comcast Notes at 99 (upon receipt), you are effectively buying $315.8 of 7% Notes at a price of 80 or a YTM of 17.1%. 10 year AT&T notes trade at 550 basis points over Treasuries. If we assume that 2 year AT&T notes will trade at 500 basis points over Treasuries (not unrealistic, given that the 10 year notes trade at 550 basis points over), then the post-tender 7% Notes will be worth around 99. Not bad, for a purchase price of 80.
The tender offer for the ATT notes expires on November 1. These notes should trade to their appropriate levels shortly thereafter.