Chris DeMuth's State of the Markets June 2022 (podcast #114)

Chris DeMuth joins the podcast to discuss the state of the markets in June 2022 and what’s catching his eye in event drive land.

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Hi and hello. Welcome to the Yet Another Value Podcast. I’m your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review it, wherever you’re listening to, watching it, all that sort of stuff. With me today, I’m happy to have my friend, my partner at Rangeley Capital, Chris DeMuth. Chris, how’s it going?

Chris DeMuth: Good, Andrew. Great to be here.

Andrew: Great to have you on again. Let me start this podcast the way we do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. Chris and I are going to go through every security on the market. Please remember, to consult a financial advisor. We’re not your financial advisor. Please do your work.

Second, a pitch for you, my guest. We can skip the ditch because people go listen to it. This is a monthly segment. Chris is my partner at Rangeley. He’s coming on every month. We’re going to talk about what’s going on in the market. Proper focus on what’s going on in event-driven land.

Event-driven land tends to touch every land. All that out of the way, Chris, I’ll just flip it over to you. We’re talking late June 2022. What’s going on in the markets? What’s on your mind these days?

Chris: Well, markets have been weak and volatile. Armed spreads have been weak and volatile, and price discovery seems to be at some places in the market breaking for the first time, where things start to go from bad to almost any kind. When it’s bad, it makes you want to cry. Then when it gets bad enough, it makes you want to laugh.

The prices are just wrong and I think I’m pretty comfortable saying that. One of the places to look for that is the merger of spreads that have a kind of no discernible risk left even start to break and take a just kind of weird price movements that are not connected with financing or regulatory reviews or the buyer’s interest or anything like that.

One of my jokes in 2008 was, “Well we’re going to run out of ways to lose money because spreads would get wider and wider and wider”. But many deals would close, and many deals would close with dollars left in the spread, with delisting notices coming out.

I’ve been wary of that analogy for a while, but we’ve started to see that, especially this past week or so. That’s exciting because that’s when you can start pumping a lot of money to work.

One of the ways you can do that is, if nothing makes sense before, while, or after you buy a security, you can at least buy a late-stage merger arb spread that can do whatever it wants to do until it closes. If it’s right and it closes, maybe even close to this in the next month or two, you’ll make money.

Andrew: Yeah. It’s funny because we take our last podcast together, say the markets mid-May and at the time, markets had it rough. I think markets are down another 10% to 15% since then, which is a lot on top of 20% over the past six months or so.

As you’re saying, we start seeing. Things Chris is talking about are something like Citrix. The ticker there is C-T-X-S. Which I believe has a deal to get bought by a private equity firm.

People are always a little skeptical of private equity firms, but for about $101 per share, if I’m remembering correctly. Last week, the spread dropped out of nowhere from $97 to $90 per share.

If they could fund it and close, you would get over 10% gross. A tire on that would be, I believe, when you wrote it up online was approaching 100% higher on our internal rate of return.

That stuff starts happening because every arb is getting people called “then tap on the shoulder”. That’s when the margin clerk comes and says, “Hey, do you need to be leveraged? We’re margin call. Things have gone down so much”. If it’s not a margin clerk, it’s someone internal.

We saw that just across the board. Every spread was shocking out of the market. Which ones, in particular, are you looking at that you think, as we talk today, things have gotten a little better, but which one are you looking at, you think are particularly?

Chris: You mentioned Citrix. Just a couple of things about it, just even today. Fifty-four percent yield to $104 LBO. I know the buyers here quite well and like them. When I say I like them; I respect them for doing what makes sense to them. Liking them is not in the sense of, “Oh, they’re going to be generous or go above and beyond the call of duty for their ideal targets.”

I don’t think they’re going to be particularly ruthless about it. I think they’re going to do what makes sense. The cool thing about really wide spreads is there are a lot more ways to win, right? You can do “Okay”, in a re-cut when there’s a huge spread.

It’s harder when it’s tight spread, you know? When you’re talking about pennies; you’re relying on certainty. When you’re talking about dollars, you’re relying on just underpay in a basket of these. The winners pay for the losers.

The latter weighs far, but I prefer I don’t like making 99% probability bets on anything. How I spell my name or something, you can just be wrong. It’s a huge yield. The more serious way to think about it is not arithmetically quantifiable down to the penny. The important thing is the market’s implied probability.

You take a reasonably likely downside. You say, “Okay. Where did it come from?” Then, beat it up pretty badly for absolutely terrible sellers. You have a data point that the deal broke for some reason.

If it is a buyer-related reason or very specific to this financing environment, it might not be that bad. If you have something like a biotech deal that breaks with a buyer that has no regulatory issues and no financing issues, it probably broke for some horrible reason that’s target related. You can’t just say, “I get whatever was before the deal”.

If Pfizer walks away and doesn’t want to buy it, probably something horrible happened. You always have to have some sense that you’re allowed to lose all the money you invest in anyone’s security, especially if it is a concentrated portfolio or speculative type of company.

If you just say approximately something like CTXS, the mark implied probability was like two out of three; the deal gets done, that is very well. That is very low for something definitive with a contract. That is very low by 2008-2009 LBO standards where 80% or 90% of them are getting done.

That’s where monster spreads are kind of fantastic. It is not a value trap. This is one where you are right or wrong; you are going to make money or lose money, but we are going to be out of our misery in this one way or another shortly with deals probably going to close this summer. It is going to break, or it is going to get re-cut. We are not going to be trapped in something for years that we did not need today.

Andrew: Since your last podcast, there was one particular deal and I’m going to use a particular deal and then I’m going to shift it to just a discussion in general. The particular deal was a Plan. There is P-L-A-N if anybody cannot spell a Plan.

They were getting bought out by a software private equity firm. The deal is scheduled to close at the end of this month. Two weeks ago, they came out with an AK that just said, “Hey, because of issues with”. I can’t remember what AK said, but I’ve got the proxy. I can use the stuff this time.

They broke the merger agreement, but then kind of like a brake light-weight, right? As the merger agreement said, “You will not issue more than 30 million of stock comp in between signing in the merger closing”. They did 35 million, and it said, “You will not hire more than 200 people”, and they hired like, 220. The private equity firm looked at this and said, “Hey, that’s a breach of the contract”.

You can read the proxy. They went back and forth, and come said, “We think it is like an immaterial breach”, and eventually they agreed to a little tiny price cut. I want to ask you, I know the day Plan happened.

Every spread blew out because people said, “Oh my God, it’s happening.” The private equity firms are starting to re-cut deals that are already signed, right? I want to ask you about the Plan specifically and then we can pause there and I want to ask you for something more general.

Chris: Sure. I think the market very fully praises vivid and recent events. It kind of gets a little fixated on the last thing that happened and is also a little fixated on analogy. If A equals B and I always think, if A equals A, and B equals B, and these are almost all deals specific to people who are working on them unless things get pretty dramatic.

Admittedly, we’re in a situation that’s close to pretty dramatic in terms of our macro environment now. They’re just kind of toiling away in the thing they’re working on. A merger agreement is like a pregnancy test. It’s pretty damn binary and you’re in it or out of it. You can’t say, “Oh, I was just a little out of it in terms of giving optionality to the buyer once”.

These were very explicit numbers. In the case of Anaplan, I have a lot of admiration for Thoma Bravo. They are a great firm; I think that they do care about their reputation. They’ve done very well in this area. They’re good to deal makers and they put a lot of provisions in there that the target just kind of stuck their middle finger up at them and said, “What you want to do about it?”

Now, it’s true that the reason why they wanted to re-cut the deal was unrelated to the reasons why they cited for breaking the deal, but I still see that as deal-specific cause the target gave them an out. Why have a contract? Why put it on paper and have expensive lawyers argue over it if you don’t care what the minutiae set?

The minutiae were violated. The buyer took advantage of it. It’s a little like the situation with the Rent-A-Center a while ago, where there was the economics ideal that shifted pretty radically. Then for a reason unrelated to why, in that case, the target wanted to get out of the deal. They had an out, so they just took it. It almost would be a fiduciary violation if you thought about it from your limited partner perspective in this case or shareholder in the case of Rent-A-Center.

If you negotiated an out that you had and you didn’t take it, maybe it seems kind of unfriendly talking to the contract counterparty. Now confront your investment, and let’s say, “Is this deal optimal at its price today? No, not. Do you have a way to get out of intifadas about it? Yes, I do. Well, do you take it? Oh, I just wanted to be nice to these adults that signed the contract”.

That doesn’t cut it for the investors respective. They re-cut the deal. It was one of the smallest re-cuts we’ve ever seen. Typically, once you get within 15% or 10% kind of almost not worth the bother, it delays it; you used it, and so forth.

If anything, I thought it was fairly benign for that one. There still is a spread, not today as much anymore. There has been a spread after the re-cut when it was re-cut for a specific reason and that really blew out everything and especially blew out a sale. A second simultaneous deal targets the same buyer.

I think we both thought the sale was particularly an opportunity. I thought Plan was an opportunity, kind of added to that one, and just everything across the board. Just kind of gyrated wider, kind of wild, especially for that first day.

Andrew: Let’s stick with Plan B on specific, and when I ask something in general, you mentioned the re-cut. It was originally struck, if I remember correctly $66 per share, and the re-cut was down to $63.75.

You can go read the proxy agreement which remember is written by the company and I think you can read a little of saltiness into the proxy agreement into the proxy background because they have to update all this in the proxy, you can read it.

You’ll read some saltiness in it, but the company says, “Hey,” they tell Thoma Bravo, “We think if we take you to court, we will win in court that these breaches, even though we breached the merger contract, they were immaterial and we think the court would force you to close.” Thoma Bravo says, “You broke the merger agreement, like good luck. You got to take us to court”.

They take a cut, $66 to $63.75, which, as you said, is on the smaller side of price cuts. Does it show the balance of power? Because Plan stock would probably be in this market. I guess the downside without a deal would be $25 to $30. You’re talking. Both sides had a lot of leverage.

Thoma Bravo said, “You’re risking an awful lot if you don’t take this deal and give us a little cut”. The plan was saying, “Hey, we can force you to close”. They took $225 small on the face thing or $250 per share off the deal, small in the face thing. That’s hundreds of millions of dollars for Thoma Bravo, which has to help their IRR and everything.

Was it a small price to cut? Because I do think the price cuts, I can think of Louis Vuitton. Tiffany’s was like $135 to $131. That’s even smaller than this and that was the height of Covid. Now that was an ironclad agreement.

Alere, Abbott, Alere was a lot worse. That was $5 per share. Aside from that, I don’t remember lots of price cuts out there. Was this small? Or was this actually kind of big, given how immaterial the break is, and the leverage and everything?

Chris: I read the contract, the way the buyer did more than the seller and was using a low 30s per share standalone price in this market. The people who negotiated this for the target should probably feel pretty good. The people who gave them an out should feel pretty bad.

I mean one of the things you should do once you sign these things is just robotically to do what you say you’re going to do and be super careful about reps and warranties and your duties and just kind of picture the Seth Klarman standard of an unfriendly and intelligent observer. Just picture an unfriendly intelligent observer kind of going through this.

On that deal, my sympathies lie with the buyer. I think that the target negotiated under the circumstances fairly well. They took a pound of flesh. We think about a mark and a high probability for the overall deal. You can think about the delta’s mark implied probability delta for any significant shot of the buyer coming out on top.

Andrew: I was going to say the same thing. If you do the math, if you think the downside was $30, and the upside was $66, then the cut that they gave implied that Thoma was 5% to 6% to win in court.

Chris: Yeah. Maybe he tried enough.

Andrew: That would take us to the next thing. Maybe Thoma was 20% because they said, “Hey, if we go to court, there are reputational and firm-level factors we have to factor in, maybe we just take the 5% or 6% or whatever it is and walk away so that we don’t torture reputation.” This brings me to the next thing.

Private equity firms, in general. When things start getting rocky, you’ll hear two lines of thoughts. The first line of thought was people who will say, “Hey, the private equity firms across the board if things get rocky enough, they will walk”.

Look, if we go into a great depression 2.0, yes, people are going to start walking. In your run-of-the-mill recession, people will push back and say, “These guys, they’re not just looking at one deal. They’re playing a repeating game, right? They want to be doing deals for the next 20 years”.

Even if there’s a deal where they say, “Hey, the downsides widened, it’s clear with hindsight we were overpaying”. If the terms of the contract require them to close and the target hasn’t breached the contract or anything, the private equity guys, a lot of people say they will close because they’re always looking towards the next 20 deals, are going to do.

Where do you fall on that spectrum, like reputation versus just mercenary? Look at this deal. Oh, my God! The downside’s awful, let’s just break it.

Chris: I have an easier time thinking about rational, self-seeking computations that are short-term oriented with very limited resources, and once those resources become less and less. I think it would be rational and self-seeking for people to be increasingly long-term and reputation maximizing. You think about Buffett’s long-term reputation maximizing.

Amongst other things, his marginal dollar’s so diminished, what does he need another dollar for? It’s kind of nice to have people not hate you. I woefully overestimated that reputational cost in 2008-2009 in particular.

Just this idea, once you have a well-regarded big institution and your job is M&A, I mean, you could be a strategic buyer, towards your deal target and then say, “I’m a pharma guy. I don’t do it. So, I’m not okay with some terrible deals, but you can’t be KKR or Paulo and blacktails.

There were more mercenary short-term decisions when things were stressed. How do you know things are stressed? Yeah, I tend to look at the leveraged loan market just because there’s an index. It’s fairly convenient. It rhymes with kind of deal, bridge financing, that kind of thing.

You look at when that’s stressed; you look at when the banks are going to get hung with financing. They are responsible for, but they do fully anticipate, that they’ll syndicate the whole thing right away.

They said been wronged and overthinking. There’s this big reputation because people are going to be deeply beholding to these commitments. It’s that they have this like multivariable reputation and they are facing their banks, they’re facing their LPs, they’re facing their deal targets and screwing over the deal targets, screws over their LPs and banks less in some ways.

It’s not that clear-cut when there’s an out, that’s a kind of reference point. It kind of let you jump at something, and I think that Thoma Bravo and Anaplan had a reference point. It’s not that it’s optimal, but it’s something you can say, kind of it sounds rational enough, they’re going to do it.

If you have a deal that hasn’t been committed to, I think the difference between a definitive deal and something that is like a letter of intent or due negotiation is huge right now?

Andrew: Yeah.

Chris: It’s the one-two punch that we saw in Anaplan of a reference point and a gaping downside. If you have both, then the target’s in a pretty weak position. If you have one or the other, it’s scary, but probably okay. If you have, neither deal will still get done.

I was watching, and it was strategic deals get done, LBS get done. Some of the things that seem thematic to be clear, for reason specific to the deal, just deals get done anyway. In the middle of the great financial crisis, the tribune was probably one of the most L of LBOs and in marginal and set insensitive in all sorts of ways and they just closed, they just wanted to close. They closed Realogy, which was probably worthless and way less than the old price.

They closed all sorts of things just because they’d committed to it and there’s a certain amount of inertia with decision-makers that got themselves into the situation and all the high-priced helpers who were at least individually compensated well for going ahead with it. A lot of things get done that should.

Andrew: Let me ask another question. We talked about the private equity firms and like they have to play the game where they have to weigh their reputation versus, in the long run, all that matters for them is returns, right?

I do think there’s something, if Blackstone, the largest private equity firm in the world. If they’re in line to do a hundred million dollar deal, they might just close it to save their reputation versus if they’re in line to close a $40 billion deal.

You have to weigh your reputation against, “Hey, is it worth taking a dink to my reputation for the small deal? Maybe not. But if this is the biggest deal I’ll ever do”, that’s all I think about, Elon Musk, right? If he was buying Twitter for $440 million, he probably just like writes it off as a tax break, but because it’s a $44 billion deal, the largest deal he’ll almost certainly ever do. He probably looks at this and says, “I can torch whatever I have over reputation, I can torch this because this is the largest deal I’ll ever do”.

I wanted to ask; we talked about the private equity firms’ reputation and we’ll probably talk about Elon Musk and Twitter in a second. What about banks? Because the easiest way for any of these private equity firms or at this point Elon Musk, to get other deals would be for a bank to go and say, “Hey, we signed a commitment financing letter for you”.

That’s no good anymore, right? Markets are too rocky, we don’t believe in that. I know a lot of people who have suggested that with Twitter in particular and just LBOs in general. I think they’re wrong, but I want to turn it over to you. What do you think about the bank’s commitment and funding in this environment?

Chris: Highly correlated in redundant with the buyers. Contractually, it’s often identical or very similar incentive-wise. It’s similar. You’re going to find yourself in a Delaware case whose name is only slightly different in terms of who the case is going after.

I don’t think it gives the buyer that much more flexibility. I just haven’t seen it historically and the banks get paid so well that I’ve been impressed historically with how well their business model is and how debacle deals substantively.

It’s not like they’re going out at 100 or zero, right? Like we might have to pay out at 90 or 70 something like that, but they’re getting so much in fees and so forth so consistently, that they make it back consistently.

Andrew: See, I agree with you, if a bank pulled financing, it would be the same as the seller would suing the buyer and the bank and it would look the same as the seller appointed bank. I think where I kind of screwed with you, and I don’t know if I was mishearing you or for saying the same thing.

I think the banks of what you’re saying they make so much money, and there’s the reputation does matter, right?

Chris: Yeah.

Andrew: Because lending is a commodity and if a bank ever, we can talk about Twitter specifically in a second. If a bank went to Twitter and said, “Hey, we gave a commitment letter to Elon but we are breaking the commitment letter. Elon didn’t pressure us. We’re doing it. We’re breaking the commitment letter”. If that happened, a) Twitter would sue every which way, b) every seller going forward when a buyer came to them.

Every seller would say, “Hey, lending is a commodity. We don’t take, I think Morgan Stanley’s providing the financing for Twitter. You can’t use Morgan Stanley. Morgan Stanley tried to break financing for no reason. Like you just have to go with someone else”.

In that case, the banks do have a reputation to protect. If they’re not doing the financing, they’re probably not getting the advisory work. They’ve got this massive reputation.

Again, for them, if they do a $13 billion financing and they have to get out of the bed, 90% afar. Okay, yes, sucks to lose a billion dollars, but they’re getting $300 million in advisory fees. I think reputation does matter.

Now that’s not, say, if Twitter was worthless they would not close, they could get out. I just don’t think they’re going to get out of it on technical. Do you disagree with my rambling?

Chris: No. They don’t have that aspect that I was saying about the private equity firms of these other audiences. You just are screwing over the outsider for yourself. I think that would, no; I think for the reasons you mentioned that would be, that would be a problem. I think it’s unlikely. I think that it’s very rarely going to be the marginal difference in the deal getting done or not.

Andrew: I use Twitter there many times but it applies to private equity firm suit, and we even saw it in Covid, one private equity firm tried to pull and say, “Oh, actually, our bank pulled so we can’t close this deal”. The seller sued them and said, “Hey, the bank wouldn’t fund because you told the bank don’t fund this deal”. It’s one thing I keep saying is you can’t mute through on financing.

You’ve written a lot about the golden age of Seeking Alpha. We talk Citrix; we talk Plan; we talk sale. You’ve written up probably like six. Any other jumping out to you we should be discussing a kind of like, the golden age firm?

Chris: Yeah, I think that things you can look for, let me think a basket of these. I think the winners will pay for the losers and then leave some money left over. I think you don’t need to have a view on a total credit meltdown from that would be a problem.

The difference between the market kind of bouncing along sideways and a big recovery, you might underperform on a relative basis in a really strong recovery. If you kind of were neutral or maybe a little bullish, you don’t have to have that much of a macro view from here. I think a lot of these are deals.

I think it’s interesting to look at ones that were announced recently. Announced in more stressed situations, ones that are likely to close in the near term, you don’t have to suffer from as much kind of time as investors to be scared.

The current antitrust risk is kind of whole another dimension, so the spreads are so wide. You can be super picky right now. I don’t want deals with a beginning trust rush; I don’t want deals that I think have legitimate financing problems.

The other thing I love is buyers with big stakes in this target already. I think that when you look at something where the buyer is taking out a minority there, whether the deal gets done, they’re not likely to want to crap all over the target and go out ugly.

Andrew: Yeah. Right.

Chris: Now, Elon Musk gets 9% of Twitter. If you have a situation where there’s like a majority owner, those can be super interesting right now because there are even times when you’d prefer to own a hundred percent of something, then slightly less than a hundred percent of something when it’s really bad times.

There’s at least one private equity, all I know of where they thought the target was a disaster and they were buying at a premium just to get it out of the public market and they kind of were a little coming to the end of one fund and they marked it down somewhat privately.

There’s this big difference in terms of how much price discovery there is. Sometimes you don’t want that price discovery cause that can be a good time for a minority to squeeze out opportunities too.

Andrew: Perfect. Let’s see, a couple of other points I want to jump around. I know I’ve talked a lot about energy recently and markets. We saw it’s kind of funny. They’ve just screamed higher recently, right?

They’ve screamed higher since the start of the year, but they’re an awful lot over the past couple of months. From April to May we saw Natgas go from like 5%, it was trading for 8% or 9% for a while, and then it’s come back to around 6% or something. Like they’ve screamed higher, but they’re still up a ton.

I think in the public markets, a lot of stocks don’t reflect the curve at all, but I just want to toss it over to you. What are you seeing in the energy market right now?

Chris: Equities in many cases that pre-Ukraine invasion levels. I mean, just like you have commodities that had been ultra-strong, and it seems maybe I’m just like an equity guy, I feel cursed and the world feels unfair to me. It seems like the kind of under-react to the commodity price strength, and overreact to commodity price weakness.

We think about market high probabilities and deals and say like, “Okay, don’t get too granny on this”. You can’t do this to the right of the decimal point, if you think about a just kind of betting odds, is it 1 out of 2? 3 out of 4?

You can kind of start to organize your thoughts about marking implied probability. What do you think approximately the true odds are? Similarly, you can kind of think about the equity prices kind of mark implied probability of the future curve run like commodities.

You can get to really big retracement, the commodities prices and still justify, more than justify equity prices here. We’re not a commodity, I guess you could call this tourist. We’re not kind of oil and gas investors, but you can just kind of play with the numbers.

It seems like it’s giving the equities tons of space to be, at least, okay if not good at much lower prices and then spectacular if the prices kind of holdup. Some of the things, at least geopolitically, seem to be durable right now.

I think in terms of the kind of deglobalization and war, feels like a war in Europe right now. I think you could have a lot more of that before, in a lot less. A lot of the kinds of geopolitics seem to me that we’ve just gotten a foretaste of it.

Andrew: Yeah, last week Continental Resources, the tickers there are CLR that’s owned by the Hamm family and he got a bid to take. The stock was trading at around 65%. They got a bid to take this company out for, take the company private.

I believe the Hamm family owns about 80% of the company. They got a bit to seek the company up for 70% as you and I are talking right now. The stocks that are around 66%, now oil, energy prices pulled back a little over the past week, too.

It’s all circular, but people are looking at this in two ways. Way number one would be if you look at the history of the Hamm family. They tend to top tick and bottom tick the cycle. This is a pro-cyclical company that’s offering to go private at the top is the way one people, one set of people look at it, the other way people look at it is, and Hamm family said, “Hey, we can’t be public right now because Wall Street won’t let us drill and like, energy prices are so attractive. You know, Natgas is $5 next year. It’s $5 the year after that”.

If you had told people this, these prices two years ago, or a year ago, they would have been like you need to throw everything you can and they’re saying, “Wall Street won’t let us drill. We want to go private so we can drill and take advantage of these opportunities”. Both sound reasonably incredible to me. Where would you kind of fall on that thing and do you read anything into the CLR? Go private?

Chris: I guess I could start with my conclusion to say that I own some shares here, but I’m conflicted about it. We’re talking about how good it is to have a definitive contract, and this is just an offer typically.

If things have been more consistent throughout, you’d have kind of bit of a sort of sham semi-independent committee kind of negotiating with the boss the $70 offer and it may be raising a few bucks then close it at $75 or something.

In this case, he could pull it in anytime. We just have a proposed cash tender offer, on the other hand, I love minority buyers. I love being on the side of the table; it doesn’t cost you that much money.

You have no reason to want to screw us over because you have a lot more shares than I do. Mixed small position, I’m fascinated by this guy. I don’t know if you recall; it was a kind of made the circuit in seven years ago; he had a divorce, and he wrote out the check for $974 million. That was the check written out by one hand and given to his wife by an amazing character.

I think they’ll probably stick with it and you’ll probably get it done as a data point, for arb. I think it’s good to see deals getting done is a data point for my interest. It’s mixed.

My interest in equities and energy equities, I would say more bullish in that the prices currently reflect underinvestment in a lack of interest for whatever, even could save the ESG focus, or it’s the farthest thing from thematic investing or investing for kind of the future to want to invest in oil and gas, maybe cold might be even worse.

It is under-capitalized on the margin right now. There’s going to be this kind of air pocket between when we could realistically get done, our political and social goals of green energy, and so forth, and where we are today.

They don’t connect by like decade or decades. We need a lot more oil and gas if I could do so I would just deregulate everything right now to let everybody drill and produce as much as possible and not have everything gummed up for years where it’s impossible to build a refinery, it’s impossible to build a pipeline.

We may not ever have more refineries and the prices reflect that typically these loudest voices at disliking when the prices go are the same voices that restricted supply this whole time. They don’t like the effect of the causes. So yeah. You can read it both ways. I think of it as a bullish data point for oil and gas activities.

Andrew: Yeah. The other thing is, it’s tough because, in history, the two things that we have under-invested in that are the best in investing is, number one, people trying to, we talked about this last week and we might talk Twitter a little more, but anytime there’s a company trying to claim material adverse effects it should almost just be, “Nope, you can’t get him with you all, adverse effects unless cockroaches running through clean rooms as we discuss it like”.

Bet on companies that the buyer is trying to get out on a material adverse effect cause that is just really hard to claim in Delaware. That’s number one.

Number two is just the majority owner trying to take the company private. They generally have the best view of value. You generally get a little bump like those are the two best places, let’s say, historically just on average for him to play.

But with CLR, I was talking to Jeremy Raper the other day. I’m of two minds because number one, you’re paying right now $66, there’s a $70 bid, it’s an insider. He can easily finance it and he probably has to bump it a little.

At the same time, if you like me think, “Hey, every energy company right now is trading way below the strip implied”. You could also make the argument CLR is the worst of both worlds, right? Because the strip goes way higher, he gives you a token bump, and you get taken out.

If the strip goes way lower, he just walks away from the deal, right? You almost get inverse convexity or something. I’m not sure. But I just have two minds about it. It’s a very strange situation.

Chris: Yeah, I wouldn’t want it to be my only energy exposure. We have more just kind of pure, sort of generic ways to play energy that we’re also doing and then more vaunty ways.

It’s sort of situationally sensitive to volatility and has a positive expected value. It’ll probably get done with a bit of a bump, and it’s a rare time to be able to own something like this, less than the offer. Usually, the market is looking at this and you have to pay something for the bump.

Andrew: it’s very rare to have a majority owner come out and say, “Hey, I’ll buy this for $100. I’m offering $100 per share”, and the stock is not straight above $100 per share". Because everybody says, “Oh, it’s a majority owner”.

The special committee will go. They’ll negotiate the higher very expensive lawyers. They’ll treat themselves to some dinner and then they’ll take a 5% to 10% bump and call it a day. We can go anywhere. I did want to touch on Twitter real quick. We last talked about it in May and they just filed the second prelim proxy this morning and I tweeted this out.

It’s so funny because there’s been so much drama and so much analyzing of Elon’s tweets over the past month or six weeks or whatever it is. The Twitter sum that all up in one paragraph.

The new prelim proxy, which said, “We’ve been in talks, we’ve given to you all the data, we’re committed to close”, it’s tough to remember what we said then what we say, what’s new since then, but I just want to turn over to you. How are you thinking about Twitter, Elon Musk, and everything going on there these days?

Chris: I love Twitter. I think it is an archetypal widespread where there are lots of ways to win or at least survive. It’s a very tight spread you need to deal with closing on terms on time.

That would be a hard bet to make right now. The shares cost $53.20 or something, $54. Here, all of a sudden, a mark implied probability of just over 50% and probably call it low 20% is the downside.

The market says we don’t know if we’re going to close, complicated by the fact that the market has other things going on, like a re-cut. A widespread, a position that you could hang on to that you didn’t need to puke into the other puke.

You could even say this has always been an under monetize asset, it has so many eyeballs on it. There are lots of people who will come in and they’ll be a higher bar for monetizing it in some way for running it for value, it might not be a disaster, or in the next few years from here be standalone because it will not go back to what it was before.

This is a valuable franchise. They could do something else with that. A re-cut from now would be horrible and you have this contract. You still have what I think has had such cavalier, casual kind of arb tourists saying, “Well, probably won’t get done or we know it won’t get done at the current price”.

Why is that so much the commentary, just backfills solves the market price and acts as if that’s dispositive? Just as well, we know it’s not gonna happen because the price is really low and my answer is well. We know that’s what the market is saying, but if you don’t have something to say independently of that, you’re just, it’s completely circular.

It’s funny that you can be that circular and still show up on TV or write articles for newspapers and stuff. A lot of the commentary has been dumb. I think that the buyer has the biggest delta we’ve ever seen between the kind of casual chitchat on tweets and converses, and so forth.

What he legally committed to do, I think, is the biggest difference and culturally, certainly, most retail investors, but even just amongst a lot of commentators that superficial levels have taken seriously.

Maybe I don’t take it seriously enough, and I just kind of fall back in doing my job and trying to analyze the contract. If there was an early funny comment, probably by Matt Levine saying, “If you’re parsing the merger agreement, you’re doing it wrong”.

Well, it was a great comment, and it was pressing at the time, but I’m doing it wrong. I think there’s still a contract. I think it has not been violated. I think that the buyer could get the deal done, finance, and so forth.

The target is doing precisely what I would do. Where are they? Which is putting my head down, doesn’t match the tone, which is very easy to do. Somebody says something crazy. You see, in politics all the time, this seems crazy.

You kind of say something proportionally crazy in the other way. It’s kind of just the natural cadence. Don’t do that, don’t engage, don’t take the bait. Just do your freaking jobs and get this deal. Don’t do it in Anaplan given the actual out.

They’ve been just marching through the regulatory reviews. They’ve been marching through the SEC process. I think they’ll get SEC clearance shortly. They’ve already gotten Hart-Scott-Rodino, probably faster than there are no issues, so they should have gotten it.

They probably got it faster than the market thought they would. And this deal could close this summer. I mean, they just need to race through some nominal foreign approvals, but there’s no substance there, voting close before Labor Day.

Andrew: Yeah. Buried in the proxy, I can’t remember the exact age, but if you look, I know you look. This is for the listeners. If you look, they gave an update on all regulatory approvals and it was all good, right?

I’m trying to find it but they said, “We submitted the UK briefing paper on May 16th. CMA has not notified the parties of anything”. They’ve got all sorts of things. The steps here are, you get all the regulatory approvals, you get the shareholder approval, and then you go to Elon and say, “Close or go to court”.

I feel like Elon probably says go to court, but I feel very confident in the Twitter case and it seems like we’re going full speed ahead to that date. I guess the thing we talked about with price cuts, look; the stock is at $38 as we speak.

The deal is that $54.20, everyone seems to think there’s going to be a price cut and I think, as you said, it’s circular. Anaplan was a decent-sized price cut, and that was an actual breach of the merger agreement and they agree to something that implied that Thoma Bravo was 5% to win in court.

Now if Elon’s claims on bots are true and stuff, yes, it gets a little hairy. At $38, you can take a pretty big price cut and you can still make a decent sum, and I don’t know where people are.

Everyone I see, Elon loves mean numbers and everyone I see says, “Oh, $44.20. That’s the next mean number. That’s what the cut too”. I don’t see the rationale for a cut from $54.20 to $44.20.

The nice thing is, as you said, big spreads make up for a lot. The spread is so big, even if they got that price cut, which I think would be insanity to take a price cut that big, but even if that’s where when you do pretty well from here.

Chris: Yeah, I forget, apologies to listeners if I had mentioned this in our last one. I’m a little unclear. I don’t think someone shifted a huge part of my analysis since last we spoke.

Andrew: That’s the issue with doing these every month. It’s like I know we talked about this and Chris and I talk offline. What do we say? What if we said offline, online moment?

Chris: An idea that I sort of have thought about independently, but I will give Matt Turner credit for this. I think it would be a better contractual arrangement to have challenges and especially bad behavior, and get alternatives worse than the original deal, right?

Andrew: Yeah.

Chris: Ten million dollar legal bill is traumatic for me. I think it’s fun for Elon Musk. You look at somebody like Mark Cuban. One of the few people just to go head-to-head in trial with the SEC.

It’s like, yeah, that’s great. He can perfect his rights and he won, but he’s a billionaire and he can afford the process. A lot of government enforcement is explicit, the process is the penalty. They know that they can push people around because it’s so scary. I’m scared.

Just for rational self-seeking reasons, I can’t just have the tape rolling 24 hours a day on teams of lawyers that get paid millions of dollars each. Elon can, he likes it. He has this amazing kind of game theory where the worst possible thing that can happen to him is fun, plus the thing he originally said he would do.

Andrew: For him, not only is it fun for him, apparently fights like this are fun. Not only is it fun, but it drives extra eyeballs on Twitter. By doing it, he gets more users and more engagement on Twitter.

I’m with you because of the downside to Elon, if you’re a rational actor and you say, “Oh, I overpaid with the benefit of hindsight, the markets falling apart. I’m way overpaying for Twitter at these prices”.

You do everything you can to break the contract. Make them sue you, go to court, and close. The downside is you pay 10 million in lawyer fees on a $44 billion deal. The upside is, you threw a Hail Mary, and you got lucky and you get out of the deal and you save yourself $25 billion in losses or you get Twitter to agree to a re-cut because they’re so scared.

The upside and downside are so skewed. I’m with you like there needs to be. If we see you for a specific performance like every day that goes by, the cost of the deal goes up by 12% or something.

Chris: If we will buy you for $50 so we cut the price to $50. If you violate any terms, including non-disparagement, including non-disclosure, and the price goes from $50 to $60. I think that would be a good $10 bet or a CVR that was Elon violates non-disparagement like a CBR for that. That would be fantastic. That would be a good investment. The likelihood that he violates that’s like 100%.

Andrew: It is funny to bring it back to the contract like Elon’s arguing Twitter breached the contract by the bot disclosure issue that he’s talking about and we talked about this last, so we don’t. Elon is in breach of the contract every single day because the contract says you will not spare Twitter and Chris is saying you can re-cut and put that into the next contract.

Get to see the arms up, he’s in breach every single day, and because he knows that Twitter’s downside is 20%, and the upside is they get him to close. He’s like, look, they can’t do anything to me for breaching the contract. There need to be penalties for this. There needs to be some type of contract that addresses like the buyer is just so rich, nothing matters, risk.

Chris: I think it’s a huge part of his identity and behavior that he does violate every non-disparagement he’s ever agreed to. I think that he gets fixated on these constraints and when he had it with the SEC when he had them there he was like, “I said I wasn’t going to say this”. I must say it right away on Twitter in public just to comfort myself that I’m not in any way constrained by anything.

Andrew: I can be the same way I know my wife would be like, “Andrew, you probably had enough to drink. Or you probably had enough ice cream today,” I’ll be like, “I’m going to eat three more pints and do 17 shots. Let’s go.” I hate having constraints put on.

Chris: My wife is always concerned if I see something I think is funny that she thinks is offensive, how funny she should pretend she thinks it is because if she thinks she’s not the right audience, she knows I’m going to go in search of another audience for my joke. It’s just like I think it’s the right amount of funny that says it once was just right. That was just the right amount of time to say, but you don’t need to say you laugh.

Andrew: It was perfect timing. Perfect moment. Never say it again because it never topped how funny it was at this moment. Let’s see, there’s a lot of other stuff I know we’ve been talking about.

I know we’re always bouncing ideas off and forth, but we’re kind of at the hour mark and it shows you which we had hit about hit or anything you want to get out before. We’ll do one of these next months. Anything you wish we wanted to get out before then.

Chris: In the intervening time since last we spoke, The Anaplan was the real event. There are a lot of things that I think are super interesting but have been for a while. I think that merger arb was a real area to be able to put a lot of capital to work in right now.

I’m looking for the big drive whole I’ve had, I think, is that looking for a kind of explicit investor blow-ups. The people who’ve been blowing up their stuff that I still don’t want at stake. There hasn’t been. It’s not like they’ve been like a value shop with a really good special sit portfolio.

They don’t have a bunch of like really unliquid things that they’re painfully getting out of that I can see. I haven’t seen a one-for-one correlation on here. Something that we never ask about now is down 20% because of this structural thing.

If you look at the ladder, that kind of VC-based or kind of hybrid VC and hedge funds there are in a lot of trouble this year. I think it’s amazing how much they’ve marked down their public portfolios and how little they’ve marked down their private portfolios.

Anybody says the bad news is my public kinds of stuff is down 50% but the good news is my private stuff is down only 5%. I think that down 50% and half the portfolio is the least of the worries of the investors at this point.

Andrew: Yeah.

Chris: It’s interesting but not that actionable for us. Crypto is interesting but not that actionable for us. I think RPS is super actionable. I’ve been kind of going crazy publishing on it just because I think there are so many ways to play it right now.

Andrew: Crypto, I knew you and I were back in the old podcast days. We did one on bitcoin and I don’t know. There’s Bitcoin and Ethereum, which are like the grade-A crypto stuff`, and maybe there’s a difference.

I have been just disappointing myself. I took all of these things so seriously because people were making so much money on them, right? We can set Bitcoin and Ethereum to the side even though they do somewhat fit in this bucket.

People are making so much money. I was taking all of these things so seriously and investigating them. Now, in the hindsight, so many of them have just gone to zero.

Andrew. This was I’m just like sad. I didn’t sound the alarm harder because, like, “Hey, these things are offering 20% annualized returns for staking all this sort of stuff.” Yeah, of course, they were all. I don’t want to use the f words.

Yeah, of course, if something’s offering 100% annualized to blend into it for a week or something. A hundred percent annualized per week, it’s probably a fraud, it’s probably a Ponzi.

I was taking it too seriously because we were making too much money and I feel like I’m just disappointed I didn’t sound the alarm and yeah; I don’t know.

Chris: I think the world is starting to make sense kind of in this abrupt, jarring way in 2022. Not to say that value investments haven’t been beaten down with it and I think maybe, especially in the past week, I feel like it was less differentiated.

I think it was more of a correlation to one. I think that for the most part, over the years, kind of flailing around to making sense. For my part, I was pretty beat up in terms of short ideas or skepticism just because, at some point, being early is convincingly wrong. You just feel like I can’t unsee what it is, but I’m completely missing something.

My inability to value NFTs properly, my inability to value any number of things that today look like, sound like, and are treated like they’re just nonsense. A year ago, I was certainly less brave than I should have been, boy.

It had been so consistent for so long and there were so many examples in a world of no opportunity cost of your time or money, zero interest rate, and Covid, but that was the weird thing. I think what we’re dealing with now is the kind of reversion to making sense.

Andrew: Yeah. Maybe we’ll do better for both of us, the .com bubble was a little before both of our times. Maybe we’ll do better, like 20 years from now when we were doing this and we’re both like old men.

We’ll be able to remember this little better and like hammered home harder because these bubbles do come every 20 years. Last year, if you forget how scary it was when the mean bubble was really blowing up in like every short was going up 10x and people who are gonna get their faces ripped off.

I’ve looked at something. This is not crypto, like lemonade, you know? Like it’s cool. It’s got pennies pen insurance. I love it as a product. It was so obvious. It was an insurance company with really bad underwriting and when the stock went to a hundred; it was really hard and people sound like geniuses and now it’s come screaming down and I’m not saying short or long.

It’s just another example of something where I’m like, “Oh, this is something”. You could have raised the alarm a little higher, harder, you could have been more skeptical, you could have been more cautious, and we never had a fresh squeeze of lemonade, but I just used that as another example.

Chris: I was just traumatized, and it’s obvious arithmetic that everybody knows but living through the reality that if your portfolio’s doing, okay? Even a day like today, hopefully, was doing fine. There are blow-ups within individual positions.

One thing about a blob of alongside is before long, they’re very small positions, and a few days later, a few weeks later, your nose isn’t necessarily rubbed in a bad outcome in a long position.

A year or two ago, a short position that even just a relatively small position that starts to know very quickly becomes a very large short position and you have to deal with it. You have to think. You can rarely think about anything else. It forces having a portfolio ever forced the topic is horrible. If you’ve been through that a bit at some point, you just kind of throw in the towel.

Andrew: And with short positions that don’t take much as you said, you normally think “Oh, it’s a one percent position. It’s not that”. You’ve got a 1% position that goes up 10%, and suddenly your entire portfolio it’s that thing. Cool. Chris, it has been an hour. This has been a ton of fun for listeners. We’re going to do another one.

I’m going to include a link to one of Chris’s Golden Age of ARB Things in the note so people can go find that and you’ll be able to find all this stuff on so you can see that. We’re going to do another one next month. Probably I hope markets will be a little better than but who knows what the world will throw at us? Chris, thanks so much for coming on and we’ll chat soon.

Chris: Thanks, Andrew.

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