Chris DeMuth's State of the Markets November 2022 (podcast #145)
Chris DeMuth joins the podcast to discuss the state of the markets in December 2022 and what’s catching his eye in event driven land, including updates on ATVI, why pre-arb was so bad in 2022, and WLFC's proposed takeout.
This episode is sponsored by Visible Alpha.
While traditional consensus providers offer limited line items and forecast periods, Visible Alpha fills the gap by creating the deepest consensus data in the market, with more and higher quality sources and longer-term forecast horizons.
Through relationships with over 165 brokers, Visible Alpha sets a new industry standard for consensus data across all of a company’s and industry’s products, segments, geographies, and more. Rather than digging through financial models one by one, Visible Alpha extracts data from every line item across sell-side models so professional investors can save time and better understand analyst expectations on metrics beyond just revenue and earnings.
Try Visible Alpha for free by visiting visiblealpha.com/value
Please follow the podcast on Spotify, iTunes, or most other podcast players, as well as on YouTube if you prefer video! And please be sure to rate / review the podcast if you enjoy it, or share it with someone else who would enjoy it (more listeners is a critical part of the flywheel that keeps this Substack and podcast going!).
Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. The transcript below is from a third party transcription service; it’s entirely possible there are some errors in the transcript
Transcript begins below
Andrew Walker: All right. Hello and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could follow, rate, subscribe, review, wherever you're watching or listening to it. With me today, I'm happy to have my friend and the founder of Rangeley Capital, Chris DeMuth. Chris, how's it going?
Chris DeMuth: It's going great. Thanks for having me on, Andrew.
Andrew: Hey, thanks for coming on for the last podcast of the year.
Chris: I don't have any Yet Another Value swag, though. I love the hat.
Andrew: You're such a liar. You know it's in boxes right behind you. I know where you are right now. You can go get one later, yeah.
Chris: I wasn't gonna steal one, but anyways, I think the hat's really cool. I will wear one next episode.
Andrew: Well, thank you for that. The check is in the mail for that endorsement for getting people on the swag. Let's start this podcast the way do every podcast. First, a disclaimer to remind everyone, nothing on this podcast investing advice. That's always true but probably particularly true today. I think Chris and I have a list of like eight or so situations in stocks that we're going to jump through. Maybe we'll get to them all, maybe we won't but everybody should just remember this isn't investing advice. Please do your work, consult a financial advisor. So all that out the way, Chris, I'll just turn it over to you. Where should we start off today?
Chris: Well, we are flushed with liquidity with all sorts of things having kind of resolved themselves over the last few months. So looking for kind of new fresh ideas, we kind of took big swings, invested probably, I think, in that event fund with the most concentrated book I think we've had in years. But a lot of things are played out, so we're kind of looking for new ideas, some of which I'm not totally ready to talk about yet, some of which we can talk about. But it's a great time to kind of freshen up. I think my thought when I woke up this morning was no inventory bias. We happen to own some things, we happen to don't own things, but that shouldn't make the difference in terms of what we think about next, going into the new year, kind of just wanting fresh takes on everything.
So I've been thinking about merger arb, I've been thinking about litigation, I've been aware of the macro environment, but not something that I really liked doing virtually all of my thought kind of firm level, and just thinking about the dynamics for the kind of transactions that work in a changing environment in terms of interest rates in terms of market dynamics. So yeah, just thinking about all those things. How about you?
Andrew: So one thing, and we've talked about this a bunch on this podcast, offline, all that. Just on the last thing, you said, thinking about the things that work in an environment like this, the deals that were an environment like this, like 2022 was probably the worst year I've ever seen for you have a stock that's involved in a process, a company that's involved in a process. One of the things, when people do, is companies involved in a process stock goes from 50 to 60, event people are gonna do a bunch of work on it, and they're gonna say, oh, I think of a deal comes through, it's going to be at 70. I think there's four strategics. I think it's 80% likely to go through, downside 50, upside 70, markets got this price that is 50/50. I think higher possibilities go through, maybe higher odds, all this sort of stuff. This has been the absolute worst environment for that sort of stuff because the stock market fell so quickly, interest rates went up so quickly, findings fell so quickly that every deal broke.
You and I, we'd have deals where it was like, hey, the company turned down to 60 hoping for 65. A month later, the stock was 30 and the company is like what just happened? How did I miss out on this? So I had been thinking in 2023, is it a year where so much bad happened in 2022? Like, it's just going to be easier to get deals done and boys are going to be more accepting because they're gonna look in as soon as the debt window cracks open, they're gonna say, hey, if we could get to 45, forget that we turned down 60 or 76 months ago. Like, let's just get the heck out of here. Are we gonna see a wave of deals in this environment or do things get worse? I don't know. It's tough to put into words, but it's something I'm just thinking about.
Chris: A disaster for kind of pre-arb takeover candidates, as you say, for years and years thought a lot about the subtle differences in how Press Write about these and even the wordplay they do when they've actually kind of gotten deals market-checked when they kind of know something's about to be announced. In the best case scenario, the deal gets announced it typically has been a few dollars beneath what a lot of the kind of analyst community had pegged the deals at. In many more cases, it gets delayed and in many cases, it doesn't come to fruition even what I would have considered historically to be a pretty high quality, not just remortgage but market check deals like a lot of things fell apart this year at the five-yard line.
I didn't do this, sadly, but it would have been amazing kind of probably one of the better short categories this year would have been kind of deal prospects, the deal speculations, just a debacle. Then so many of them were not just traded down horribly. But even at that point, I mean, one of my heuristics and biases is that I take pretty seriously corporate buyers that have financing, have a regulatory route, it's a data point even if they don't specifically have their deal done. But it's not been a useful data point this year, a lot of things have traded down horrifically and then just kept like that initial are RPU which I'd normally scoff at as obviously, there were sellers. They weren't in this year. This year, a lot of that RPU was actually an okay sale price compared to what they did a week or a month later, and a lot of them haven't recovered since so. I mean, people who were looking at a decent number of stocks that were takeover candidates at huge premiums where they are now. If you look at their debt, they're kind of openly speculated to be questionable as going concerns. It's amazing that they were ever serious takeover candidates even a few months ago, or the markets have gotten wrong now or just things have changed really, super dramatically.
Andrew: Yeah, the two that popped to my mind are Cano Health, ticker there CANO, which two months ago was rumored to have a bid from CVS for like 10 to $12 per share. CVS fell through a couple of other strategic buyers said no, and now the stocks trading for like $1 per share. So what happened between two months ago, you had strategics. This is a very popular space for takeouts, you guys strategics that were looking at this and saying, hey, we think this is worth it and now it's worth $1. People are worried they can't refinance their debt/
Chris: The debt trading is super cheap too like all things are just a turnaround.
Andrew: Maybe CVS found something in their due diligence, right? Like I speculated about this on the blog, maybe CVS found something that was like, I hate to use the F word on this podcast, I'm not going to but maybe they found like accounting irregularities, or they found some type of stuff where they're like, we can't touch this, but that certainly didn't come out in the press. It just seemed like they were like, we were worried about the DOJ already investigating one deal. We don't want to do another.
The other one I look at is Kohl's, where they had a bid at 70 that I think they turned down and then they had a final bid at 50 that they ended up turning down. The bid at 50, there was pretty good reporting that a big piece of it was based on financing a lot of the real estate colts owned at 35 to $40 per share, right? That was kind of the implied value. Today, Kohl's stocks trade trades for $26 per share. So not only is it way below all the offers, but it's below the value that their debt was that their real estate was gonna get valued. And it's kind of like, hey, I've looked at that and say is that opportunity? Because yes, the near-term sales are going to suck. Everybody knows 2023 is probably a recession, retail is not in a good space right now. But if you're willing to look past nine months, especially for Kohl's, it's like, well, you're buying $35 of real estate for 26. There's an operating business with a long history of the brand. I'm sure the board knows that shareholders are not happy with how they handled the past year. As soon as markets open up, is Kohl's going to be for sale or something?
Chris: My guess is that anybody who had a hard year in 2022, thinking about a recession in 2023, has almost no time horizon to think about what something could be worth in 2024. And that's a huge opportunity for takeover candidates because a lot of these do really Retrade. And no, no strategic buyer should have been looking at something this year for something that is just a recession. I mean, if your strategic buyer gonna own it through a recession sooner or later, and just because one's gonna hit in the next year, it shouldn't have made the difference. I think if you have a long enough time horizon to see through the next 24 or 36 months, for any investor thinks they're going to be around in 24 or 36 months, these could be really good, as long as they're gonna be going concerned through a tough recession for low to mid-end consumers. And so you have to look at like leverage, you have to think about the cap structure, but if it's, if it can survive the next 12 months, probably a lot of these will retrace in the next 24 months.
Andrew: Perfect. I want to turn to some specific situations that I just want. I want to start with Activision. This year. There's ATVI and the reason I bring Activision up, in particular, is because we've talked about it several times on this podcast, and earlier this month, the FTC. I don't know if they've officially sued or not, but there was a report that said they're going to sue right so FTC is getting ready to sue to block--
Chris: They brought a case, and they brought it in front of an FTC-ALJ. So it's a little bit of a sneaky process. In my mind, I actually have constitutional concerns about whether that is legitimate. It's kind of plotting its way up through the Supreme Court. And that ruling might come not really soon enough for this deal necessarily. But I think it's a really suspicious process for an unelected executive agency to basically refer a case to itself to ask whether it thinks it's right. And something I think that these things should go in front of the judge, a real judge, and an administrative law judge is, is this sort of grandiose title for what these guys are? They're not real judges. They brought a case. The case was very, very similar to notes and thoughts brought forward by Sony's legal department. I mean, this was a Canadian competitor's view. The FTC had two Democrat commissioners immediately sign on. One had pulled to her conscience for a few hours, and then she signed on to it. So you have three Democrats. You only have one Republican there who proposed it but doesn't matter.
So they're litigating this And Microsoft has signed up to fight it. Now, Microsoft, I think they're gonna want to stick with this case. They could probably get out of with their extended walk date. We'll see. And it still comes down, we have not heard back from either the EU or the CMA, CMA being the worst procedurally. However, if you look at substantive gives from Microsoft, and I think Microsoft's been pretty sophisticated about this so far, they very much lined up with what the CMA has nominally said they're interested in. So if you listen to the CMA look at what they're offering in terms of the kind of reasonable use of their games, it does seem like it would line up pretty well with what the CMA is asking for. I've listened to a lot of the people at Microsoft talk about this at this point. Either very senior people at huge corporations or just kind of like persuasive charismatic guys, or they're really good, but I listen to them. I'm like, I really think they're kind of talking points on this are actually quite genuine in terms of what they're doing this deal for any kind of their interest in mobile and their interest in some of these games. I don't think they have this secret plot to screw over one of their platform competitors, I think it would be super dangerous in terms of their relationship with gamers.
I was just talking with my 14-year-old son, and they have various combinations of games they like in various consoles at different people's houses. And if one company said, haha, we're preventing this one combination, I think that'd be massive blowback amongst gaming customers. I think individuals who make the decisions that the companies would not really be incentivized to play that game to restrict a console competitor. And so I really don't, I think that I don't think that they are trying to do that. And I, if I were Microsoft. I think they have a jujitsu move. They haven't played yet. But they've offered what seems to be very, very reasonable, long, dated, comprehensive contracts for other platforms, especially Sony. And I also think there's some kind of jujitsu they could play that would harm other Microsoft competitors, kind of app store type situate, I think that they could end up with a settlement with the FTC that actually is hugely valuable to Microsoft. There's a shot the company outsmarts them here, but we haven't gotten to that yet. And at this point, a decent shot that they're not able to get through the regulatory process.
Andrew: In many ways, it reminds me of AT&T Time Warner, the AT&T-Time Warner deal. Now, in AT&T Time Warner that was all domestic focus, only US, basically, because AT&T pretty much was only a US company, but it's not a perfect parallel but you had the DOJ coming out and saying, hey, what if AT&T buys HBO and HBO only gets sold on AT&T devices? AT&T's response was that makes absolutely no sense. You make Game of Thrones, it's a game of scale. Game of Thrones is going to cost 10 million per episode, no matter if we show it to one person or 500 million people. So we want to show it to the most amount of people to spread it over the most amount of things. Call of Duty is very similar in that. It's going to take $200 million to make a new Call of Duty, It costs the same no matter if you throw it on your platform or 100 platforms.
I think Microsoft saying, hey, not only does it not make sense for us to make these triple-A game titles exclusive... I believe the Sony offer as we'll give them a 10-year contract that says we can't make this exclusive. So it reminds me of that in a lot of ways. I don't know about you, but the thing that really stops me is the arguments I hear from event people on Activision, two things. One is the downside on Activision. So if it breaks, if Microsoft has to pay Activision, I think it's $3 billion at this point for a break fee. A lot of people say, hey, the markets got the downside on Activision at 60, I think it's 75. So you buy it here at 75-77, whatever it is, you're basically getting a free upshot of the deal going through. That's number one. Then number two, a lot of people think they will beat the FTC in court. I don't disagree with number two, I think they will beat FTC. I don't really know about number one, but the thing that scares me is number three. UK CMA, we've talked about it so many times. I don't know how you get past that risk. It seems like that's a stopping gate if Microsoft can't get that over the edge. I guess if you think the downside is nothing from here, then you're getting the free-up shot. Anyway, I rambled three things. I'll kind of toss it over to you.
Chris: I don't like the no-downside or human in a bear market. I think just the ability to hand off from ARB accounts to fundamental accounts, it was a bad month. But I think that in the next pie, that was kind of the last time there was something that was so big and liquid and well followed and well owned amongst people who thought it was probably going to get blocked. There was, in this case with Samer, a big Chinese regulatory delay, it looked like it was going to be in trouble. But it looked like the downside ultimately proved to be kind of cracked. But it was after the bad news. It's priced in, and everything's fine. Just the markets are not efficient enough at handling these between different kinds of accounts.
I've been in a few situations where it more or less worked out on lucrative deal breaks. But almost every time you actually have some unless you're huge. I think it's different for like prop desks or monster hedge funds that have to move around billions of dollars. But if you just have 10s of millions of dollars to move around in a position, you can actually get in on the bad news. We saw that with Elon's purported termination, right? Like you can actually be pretty patient and lazy about trading these things. If you think this that then another thing is going to happen. Look, now I'm really bad and then it'll all work out okay. You can wait. You don't need to set that up ahead of time.
Andrew: Yeah, and I'm just looking like, again, Activision was really struggling right there was there all sorts of issues with a bunch of their different divisions, but I'm looking at the stock price year to date.
Chris: Management, too.
Andrew: All sorts of issues. Activision stock here today is up about 15%. EA is down about 10% so far this year. Take-Two is down about 45%. The Russell 2000 is down about 22%. I look at those and I say yes, I get you. People like to point out, hey, I think they can do $4 in earnings next year. It's a $20 PV. I get you, but it's just hard for me to imagine based on those peers that there's no downside here.
Chris: I agree.
Andrew: Let's see, what else should we talk about? I know one thing you've been pitching a lot is strategics who own majorities of public companies taking up minorities. I've been pitching; I guess I'll just throw that out at you.
Chris: In a deal market this year where you are pinched between the financing problem of LBOs, it went from horrible to basically dead credit environment for syndicating deal debt. Even nominally LBO deals have gotten less and less leveraged. I mean, they've been more BOs than LBOs and banks have been hanging on to the debt. It's been terrible for deal finance. I don't think it's even a horrible credit environment today as much as additions change too much, you need to be able to kind of reset even if things just stabilize the current interest rates. I think we'll be able to do LBOs next year, but it will affect prices. So many things just stops that would have gone forward otherwise, those things were in flux. On one hand, on the other interesting music deals, you have a hyper-aggressive regulatory process. What's left?
For me what's left this year has been public subsidiaries or minority positions in stocks with majority control or majority ownership, where they already have so many of the attributes of a public company that is unattractive and so many of the attributes of a private company that is attractive, you might as well just take them out. So the things I look for are a majority owner and no need for the public markets. Just having to deal with the public shareholders is kind of an annoyance. If you look at things that have worked this year, just a litany of publicly controlled MLPs, you have actually very interesting litigation on that from the lowest boardwalk case. So it just was overturned by the Supreme Court. So it's interesting to look at the advantages and disadvantages in this changing market, it's really changed for having public subsidiary MLPs. Then just generally, Turquoise Hill, Continental, and a lot of these kinds of big-money controllers just don't need or want the bother of the public sub. That's probably been one of the smoother categories this year. Of all the things that have been not smooth, those have kind of been working pretty well so far.
Andrew: No, I completely agree. It is one thing that if you own 67% of a company, if I remember correctly, it was about the Turquoise Hill-Rio Tinto thing, which we've talked about several times on this pod, having the other 33% out, especially if it's strategic, it's got synergies with your business, it just doesn't make sense. The public company costs are running 5 billion per year, you take it out, you save that company, you save the hassle, you save the headache. You save having to worry about getting sued for even if you are doing right by shareholders, like everything you do that you're gonna have to get somebody to kind of price it out at arm's length. You just save a lot of hassle just make a lot of money. Add that all in and you've got a market down 20%, a lot of these stocks are down.
Even if you pay a pretty big premium, you'll have happy shareholders because who doesn't like 30% pop in a down market? And you'll probably be pretty happy because I look at something like you mentioned the publicly traded MLPs, which all got taken up by their majority energy companies recently. Shell is the one that really pops. Shell went and borrowed at like 4% to get one of our tax-deductible debt at 4% to buy up $4 billion worth of Shell's minority shareholders who are going to get a dividend yield of like 10%. So they get taxed on that to go buy out this thing, they get the synergies from taken out, they lose the headache, like it just makes all the sense in the world.
Chris: When the first one did it, everybody else must have looked at it, and you're like, it's a layup. Those I think are very legitimate. You also have a little bit of accounting shenanigans going on with the prospect of sort of like rescuing the narrative on how you have gotten a situation if something's trading really badly. I mean, I have this a little while ago, but there was one kind of retailer that wasn't doing all that well with a huge public equity position in a fund that raise money in a new fund took the whole thing out, took it private again. Ten almost immediately, the next day marked it down like 50% and a fund that had another seven-year life but the old equity was funded right at the end of its life. So they were kind of very incentivized to make that look good. Wrap it up, have liquidity get themselves paid every which way and then and then kind of deal with the new problems later. And the new problems that end up being very big problems that you look at. I've seen a number of these where somebody already has a big position and they're kind of I mean, it's good money chasing after bad but it's but it can sometimes be rational from the agency perspective to just kind of clean up messes and the private market versus the public market. and not airing your dirty laundry in public. So that's their bad reasons as well as good with the public MLP is I think it's good. I think those are actually really good deals for the buyers.
Andrew: What you just said makes me think of... did you see the Weber BDT deal?
Chris: Yes.
Andrew: So for those who are following, this was Byron Trott, who's pretty well-known among value investors. I believe Warren Buffett once called him a value investors banker or something. He runs kind of a merchant bank now, and they took Weber, the people who make grills public in 2021. So outdoor grills are really benefiting from COVID stay-at-home, all these trends. They take him public. The stock's down like 90% since they took them public. A couple of months ago, he came in with an offer to buy them out for, I don't know, it was a pretty nice premium. But last week, he came in with a definitive offer that was a huge premium on top, and then they reported earnings, and the earnings were not good. And a lot of people were looking at it. They're like, why would you take this public? It might be a restructuring. I think a lot of people say well, he owns 90% of Weber. They made a massive, massive amount of money on the IPO. If you take them out way below the IPO price now, he kind of saves the face a little bit of having to restructure this thing publicly, right? I don't know. Maybe it makes sense. But to me, like it is a little bit of throwing good money out of that after bad I'd rather just go through the rational process. I don't know if I can make an investment thesis on that, but it did work really well for the people who played it.
Chris: One of my favorite things about these situations is people who for years and years have really positive spins on how they're doing. And so they always have kind of language in the quarterly call. That's very promotional. And then whenever you're in a management-led buyout, or in a situation where the shareholders, the target shareholder events really imperil these funny random acts of management kind of like talking down in many times their tenure and the value of the company and, and it usually kind of being very nerve-racking in terms of their description of like, all the uncertainty in the future, it's like, Hey, do you want to own this, here are all the terrible things that could happen. You never know about the market and so forth, and not how they ever normally sound but you never really hear them that negative on it, other than when they're trying to buy it and take it private themselves.
Case that I'm looking at right now, Willis Lease, finance, has a position on WLFC. It's a great business. It's a kind of multi-generational kind of founder family kind of controller, with the name on the door very much for better and for worse treated as if it's their company. Leases, aircraft, engines, they pretty much every year, tried to take it private. They've had a number of offers. This one, though, is much more structurally serious, and they put together a consortium. They lobbed in a $45 bid; it's trading at 56. Right now, I don't think the market certainly doesn't expect it to get done at 45. But they've offered 110% of tangible book value in the past. And so that would be kind of closer to 70 if they did a deal there.
It's really interesting in terms of how they value their inventory. They are super sharp; they know this business really well. They're always doing something clever in their purchases right after the kind of 737 max. Whenever there's kind of macro general worries, they're always kind of scooping up things for super bargains and then leasing them out, their stock did really badly right at the beginning of COVID that kind of has bounced back pretty well it kind of 60 down to 20, something like that. They've tried to buy it several times.
This time, they're the most serious; I think it'll probably be something close to 70. Maybe a little bit less than that. But the interesting thing is in terms of book value, in terms of how they do all their accounting, they take the lesser of appraisals, which are generally pretty low, or a depreciation schedule, which always goes down even in markets where because just because of supply and demand, a lot of these prices actually in the market go up for the first five years and eventually they go to zero. But for a few years, if you have a bunch of engines that people can't get OEM same-day delivery, there'll be trading like it like twice the value of what they say they're worth. I think if they were trying to like raise equity next, they would be describing their book value at well over $100 a share. There's a lot of different ways. I mean, totally, it's legitimate. It's just like the most bearish, least promotional. It's just the lowest possible way you can get any outsider to value this company.
Andrew: I haven't looked in since the new offer came out, but I've got lots of notes. My favorite thing about this is I think this is the third time they've tried to take it private. And in this letter, they just said, like, hey, bring the old special committee back together from our last few times. Just throw it back together. They've got the rhythms of how to try to take privates down because they've tried it so much. I've never seen anyone just be like, hey, put the committee together again, bring the whole gang back. I really liked that. And as you said, I do think it's interesting. This time, they've got a consortium; where's the privacy times? If I remember correctly, I don't believe they had committed equity partners. They were just trying to do it on their own. So it does seem like when you get a committed equity partner, it does seem a little more serious because you probably shop and talk around to a couple of people. So it does seem a little more serious.
Chris: I think. So I think they really want to own this. I think it should be a private company. They don't need that equity market for anything. And I just think that they're constantly good bargain hunters. They're good bargain hunters when it comes to their substantive business. So I think they think about their stock very rarely. And when they do, they're like, hey, I'll buy it for a ton less than it's worth if you want to sell it to me, I think that's true on individual shares there. They're good at buying back shares. I think that's true. It'll be interesting to see how open the consortium is to current public holders who might be able to roll over equity into a private company. I think several might be willing to do that. So that's a really interesting one.
The other thing is we've had these horrific situations of deals busting and buyers walking. But in this case, you're just kind of on the same side of the table, and the buyers in these public subs don't really want to like crap all over the thing and have the whole thing implode, they don't want to go trade down 50%. Even if they don't need the public market, I don't think they want the price to go to 25 bucks again or something like that. In a tough macro environment, you have a little bit of a less kind of brutal back and forth in terms of bidding. Even people who don't want $45 probably think there should be a deal. Even people who want to get a great bargain as a buyer or a member of the kind of going private group probably can understand that, okay, this is gonna take at least tangible blood values, probably some premium especially given the way they account for it is so on the very low end of what you could say this is worth. I think it's worth over $100 per share. I think they will capture a lot of it, but it's the kind of situation that I really love right now.
Andrew: In these takes, privates, I generally like things like the airline lessor, everything, where you can point to a hard book number and say, hey, the book is 70, and these things that you trade at 1.1 times one book because you generally don't get under book. I haven't seen anybody. You can, but it's really tough to make a fairness opinion, say, hey, we're worth less than the value of our tangible book whereas if you're doing something more earnings base, you can sandbag the earnings by running a bunch of expenses, the year into it, or you can say, look, we think we should trade towards the low end. Saying we should trade for eight times earnings where everything else goes for 10, nothing wrong with that. But going and saying, we think we should trade for below book, it's just harder for you to pull one over on a special committee on the courts all that when you're doing that.
Chris: Especially when they're the decision-makers, I would compliment them as very, very good decision-makers, they should be worth some kind of premium. This book is a book they put together because they thought they were buying bargains and leasing them out. There is an active market for each of these things. It's substantively what they do; I would say that their pride in the arithmetic and then the association of the value they add is the premium over the book value that they deserve. If the market doesn't notice that the market is wrong, I think that's why we own the stairs. It would be overly humble of them to say we are worth less than the book value that we put together. We deserve a discount in normal times other than when they're the buyer, it'd be hard to get them to I think they'd be the last people who would make that claim.
Andrew: I just want to go through one more. We got a couple of questions on iRobot Amazon. IRBT is the ticker there. Amazon's trying to buy the people who make Roombas and everything, if I remember correctly. I think there's a lot of investigation. So I just want to toss that over to you because we got a lot of questions on that.
Chris: Yeah, no position, no interest. It's getting to be a more interesting question as it trades down. When it was announced, it was briefly trading really close to the deal price, just beneath $60 a share. We're dealing with a $61 cash takeover, currently a $13 spread, which is a monster IRR if they can get this done anytime soon. I think that we're just dealing with regulators that are just throwing everything at the wall and will not be willing to turn down a hook to go after Amazon. So I think it has all of the difficulty that Activision has in terms of a hook to go after one of the big tech companies. When you look at the kind of speeches of the antitrust authorities right now, they really are very fixated on tech and healthcare, probably even especially tech. So I think that it's hard to only hear it gets better and better as it gets closer to almost back to the pre-deal price was trading kind of 46 right before the deal was announced. So better at 48 than 59, but I really am not stepping before any of these big antitrust risks right now. Glad I haven't so far. Probably should have shorted it; I'm just on the sideline kind of waiting on a suit.
I just don't understand the antitrust argument. One of the arguments that have been thrown to me with iRobot is they make Roomba, and Amazon's gonna take the data from the Roomba that shows the size and shape of your permit and use that for? I really don't understand the antitrust argument there. There are plenty of other competitors like automated vacuum makers, out there. I just don't understand. It doesn't seem like knowing the size of my apartment, doesn't seem that valuable. I don't get it here.
It's very ripe for a kind of unbranded competition. It is not a traditional antitrust case; it is a hook for agencies that want to pursue other things with big tech companies. Looking at the history of these, if you really were to succeed in bringing the antitrust cases against any of these, I think iRobot might be even dumber than Activision. But if you really didn't bring all these cases, one of the things that you do besides making a mockery of the point of antitrust and just benefiting the competitors, as opposed to benefiting even conceivably benefiting the customers. You tend to lock in that moment, industrial organization. Throughout the history of these tech platforms, there have been dozens and dozens of different moments in history where it's been very hardware dominant, or software dominant, consolidated, or separate, or startups or private Republic. The free market is changing these things all the time, and nobody really knows what comes next. But if the agency is saying, we're just gonna freeze everything as it is right now. It's like, why now, if they had this power ten years ago, they had a first at that moment?
So I think it's horrible for technology and innovation and just general dynamism and understates how much people like money and are doing smart things to make it and take share from incumbents in all sorts of structures that nobody really knows about. I can't even tell you who's doing it or how or why. I just bet you somebody is and because it's happened dozens of times, not just with specific companies coming in and going but dozens of times, the whole structure of that industry changing. So when people say tech, they imply that it's like these companies now and will be forever, but there's no point in history where the ones that were presumed to be dominant, even were relevant, necessarily a few years later. I mean, one of the big things that they were concerned about a number of years ago was that in-dash nav systems were going to be this antitrust dominance, like the railroads crossing to the west. TRis was just right before everybody had nav systems in their phones. I have older vehicles that don't have very sophisticated new dash nav systems. And I always thought when I got them, like, I'm really going to want the new technology in the dash, I don't even care anymore. So use my iPhone for ways, and so they never seem to foresee Did they look at technology? They're skeptical of the technology. But they're very obtuse about just the idea of dynamism. The whole thing changes.
Andrew: Look at the stock prices of all the fangs this year; look at Google; everybody knows how great Google's moat is. But until a month ago, I don't think people were thinking about ChatGPT, and then ChatGPT came out, and people were like, oh my god, this is the greatest threat to Google of all time. I think as it is now, it's a little overstated, but now you can see a credible thing. When these things spread, ChatGPT was the fastest hit 1 million users thing ever. It did in like five days or something. These things spread, and they spread like wildfire. That's why when people say Google trades for 15 times earnings, Coke trades for 20 times earnings. Google is growing quicker or has better cash flow dynamics, like, Yeah, but Coke got 100-year history. I guess it's Lindy, as the kids say these days, but yeah, Google, when things split MySpace at ten times earnings in 2006 or whatever, the earnings went to zero like that, whereas Coke or something, even in a bear case scenario, you're probably getting the tobacco path right where people start really taxing sugar or all that type of stuff.
Chris: In this, FTC would be adamantly out there defending, locking in MySpace, locking in Netscape, locking in whatever the dominant company was of the day, and would have not ever thought of ChatGPT, which I think is just unbelievable. I've been messing around with it so much. I just think it's spectacular.
Andrew: Just two quick questions on iRobot. So on top of US approval that has EU and UK CMA, especially CMA, is that as big a concern for iRobot Amazon as it is for Activision-Microsoft?
Chris: I have a great contact who's in front of the CMA on another matter, not this. I don't believe they're actively coordinating, or there's been lots of contact between CMA and the US on this yet. So I don't have any base of information; there's not that specific worry. Based on judgment, it always makes things a bit trickier if you're going to have some huge bet that they were going to be able to see their way through a tricky regulatory process because there can always be trading between the US agencies and CMA. The CMA and the EU are very, very close, thick as thieves almost always, and the Brits are kind of in a weird situation. They've kind of replicated all the worst things about the EU in terms of their deal regulator but still have now a separate process. So it's been really lousy for them.
So, no, I don't have a specific reason to think that this case has the same problem in practice in theory. Well, I'm very happy waiting and being out of this one. If you were huge, if you were taking the existential firm risk that you knew this was gonna get done because you had a theory about antitrust, you'd always have to, in the back of your mind, worry that there are games these regulators can play. I even think the FTC referring something to the ALJ is a bit of a game. I think that's where the process becomes the punishment and could be even more with the CMA review.
Andrew: Perfect. Okay, cool. Well, hey, Chris, it has almost been an hour. I'm getting over the flu, so I think I'm gonna wrap it up here, but I hope you have a great holiday. Looking forward to talking to you before then, but looking forward to having you on again in January and we'll talk to everybody in the New Year.
Chris: Merry Christmas. Happy New Year. Hope you feel better soon.
Andrew: Thanks so much. See you soon, Chris.
Chris: Bye-bye.
[END]