×

Kaminsky's Call: Why Voting Shares are Big-Swim Territory

My friend and co-host David Faber concluded yesterday's show by asking me, with tongue firmly planted in cheek, "What did I learn today?"

Stock shares
Tom Grill | Ionica | Getty Images
Stock shares

After pondering our discussion about Discovery Communications, I gave what I considered to be a straightforward answer; "I don't know!"

Thankfully, my friend, Steve Eick, who ran Avery Partners for years, does.

A little back story here. My confusion centered on the discrepancy in value between voting and non-voting shares for a number of media companies, but more specifically Viacom and Discovery.

In theory, each share should be just as valuable, but they are not: in the case of Discovery, the A-class shares trade at a significant premium to the non-voting shares. So naturally, I wondered, 'Why does this spread exist, and how can I profit from it?'

First, it is important to understand why voting shares exist at all. The reason's actually quite simple: Separate share classes preserve voting control for families or other controlling parties.

The perceived extra value of the so-called voting-stock causes investors to bid those shares up, and as a result, they tend to trade at a premium to the shares that don't confer voting rights, even though in theory, they should be just as valuable.

Guys like Steve Eick love these situations. Through the financial alchemy of risk arbitrage, Steve is hoping to profit off this pricing discrepancy by shorting one entity and buying the other. Seems simple enough, but it still sounds dangerous to me.

My "Call-to-Action" is to stay away from these types of opportunities. While it's a fascinating topic, this is purely big-swim territory.

There is always the danger one class of shares could get acquired, which would throw the relationship out of whack. There are also liquidity issues as well. But biggest reason for me is the notion that if something seems too good to be true, it probably is.

So, thanks for the explanation, Steve. Now you, along with me, can tell David Faber what we have learned!

Related News:

Programming note: "The Strategy Session," hosted by David Faber and Gary Kaminsky, airs weekdays at Noon ET on CNBC.

DISCLOSURE:
Gary Kaminsky does not hold any equity positions.

DISCLAIMER:
The content of this blog is published in the United States of America and persons who access it agree to do so in accordance with applicable U.S. law.

All opinions expressed in this blog are solely the opinions of Gary Kaminsky and do not reflect the opinions of CNBC, NBC UNIVERSAL or their parent company or affiliates, and may have been previously disseminated on television, radio, internet or another medium. You should not treat any opinion expressed by Mr. Kaminsky as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Mr. Kaminsky’s opinions are based upon information he considers reliable, but neither CNBC nor its affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Kaminsky, CNBC, its affiliates and/or subsidiaries are not under any obligation to update or correct any information provided on this website. Mr. Kaminsky’s statements and opinions are subject to change without notice. No part of Mr. Kaminsky’s compensation from CNBC is related to the specific opinions he expresses.

Past performance is not indicative of future results. Neither Mr. Kaminsky nor CNBC guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed on this website or on the show. Strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned on this website or on the show may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this website or on the show. Before acting on information on this website or on the show, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.