Chris DeMuth's State of the Markets August 2022 (Podcast #121)

Chris DeMuth joins the podcast to discuss the state of the markets in August 2022 and what’s catching his eye in event driven land, including an update on TWTR, the IS / U / APP love triangle (which I wrote about here), and Rio’s “failed” bid for TRQ.

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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 rate, review, and subscribe wherever you're listening to it. With me today, I'm happy to have on my friend, my partner at Rangeley Capital, Chris Demuth. Chris, how's it going?

Chris Demuth: It's great. How are you, Andrew?

Andrew: It's doing good, doing good. Doldrums of summer is getting ready to wrap up. I think both of us have a little bit of vacations planned, which we're looking forward to.

Chris: Yup.

Andrew: But neither here nor there for this podcast. Let me start the podcast the way we do every podcast. First, a disclaimer to remind everyone— nothing on this podcast is investing advice. We're going to talk about at least three situations that I know of today. We could talk about a bunch more, so everyone should just remember, please consult a financial advisor and do your own due diligence. And then the second way I start every podcast, with a pitch for you my guest, this is about our fifth monthly state of the market review, so people can go listen to the prior four for all the pitches and everything.

With that out of the way, let's just dive in. Chris, August-- what's the date today? I don't even know what day it is. August--

Chris: Fifteen. Halfway through the month.

Andrew: Fifteen. Afternoon of August 15th, we're talking. What's on your mind today?

Chris: I don't want to sound like a broken record and overdue Twitter but when I try to pull back, I think about the number of things that have happened since we last spoke, and then I think there's a ton. So I think Twitter is hugely hard to get away from. I think it is not the biggest spread in the spread universe. It is the third place spread behind Iron Source which is behind Turquoise Hill Resources. I guess I have always liked big spreads. I mean, the bigness of spreads is arbitrary by itself. You have to think about the risk/reward obviously, but there is a certain appeal to something where lots and lots of different things can happen that are ties or wins. You don't have to have that much precision; you have to be directionally approximately right. You have this big target. A tight spread is like a little target. The only asset class I think I've ever totally eschewed, never owned, is like high grade corporate debt that's really three or four percent. It just seems like it's a weird topic. This one thing happens and you make a little money, anything else happens then you're screwed. It might not happen but like... And so, the field is big on the possible outcomes here but I think that Twitter Iron Source and Turquoise Hill are all interesting topics.

Andrew: Okay. Great. Which one do you want to start with?

Chris: Maybe Twitter.

Andrew: Okay, let's start with Twitter. So, again, we're talking August 15. If you've been following this podcast, there's been a lot of Twitter talk on this podcast. Obviously, we had right at the height of Elon trying to back out of this deal. I had Evan Tindell on and we talked about it. Just last week, we had compounds and Ann Lipton from Tulane on and we did a review.

Chris: She was so good. I don't want to sound fan boyish and simpering but she was really good.

Andrew: She was really good. And then, obviously, you and I have talked multiple times on kind of the state of the market about Twitter. But, look, the reason we're talking Twitter is because I will get messages from people all the time. As Twitter's kind of bumped up, like, "Oh, Twitter, you made such a good pace and I just missed it." I'm like, "Well, yeah. The stock has gone from kind of like mid to high 30s when we started talking about it to about 45 today." I'm like in that sense, yes, but if you think the downside to Twitter is 25, which I think is where the stock market is, I might screw it but where the market is and the upside is 54, 20.

The market's pricing in a 67% chance of this deal going through with that math, and everyone I talked to kind of thinks, I personally believe it's well over 90% Twitter win. So if you believe that it's like, "Hey, you can't say the stock was 30 yesterday. It's 45 today." No, it's still great odds. Anyway, I'll pause there. What has happened in your mind with Twitter?

Chris: There is less and less uncertainty. There's been a lot of dogs that haven't bark. There's been a lot of things. There's always some chance. Whenever I get down at the end of an alley intellectually, I always sort of pull myself back and say, maybe my mental model is wrong. Maybe I'm missing it for whole directions I hadn't even thought about. It still could be the case, but there were fewer and fewer other vectors that make it increasingly likely that we are talking about the right things, hopefully applying the right judgments, but as the process goes on...

One last comment about your last podcast which is, I always am very guarded listening to Elon because he sounds so much like what a marketer sounds like to me. I have to be also guarded when I listen to Ann because she sounds exactly what a smart legal expert sounds like to me, and I just like, she's just so much credibility in this, she's not involved. It's not motivated reasoning. I think she would say the opposite conclusions if the facts were opposite and it is just fun listening to this, clearly thought about these issues so much, who was an actual expert as opposed to me trying to just newly think through all of these things.

Andrew: I totally agree with you there but just on your point, the dog didn't bark. When we first started mentioning this, I mean, I think we've mentioned it before Elon tried to pull out and we were like, this is a pretty good contract. I don't see how he can pull out this quickly, and obviously he tried, he's trying but since people who say, "Oh, I missed it when it was at 37, now it's 45." It's like, okay, but when it was at 37 we hadn't seen Elon's complaint. We didn't even know Twitter with Zoo. My biggest worry had consistently been Twitter's board would just say, "Okay, Elon. Go ahead, walk away" and kind of they never wanted to sell so they just kind of walked away. But we know Twitter is suing, we've seen Elon's complaint. There was a big worry there'd be a Smoking Gun in there where some employee email Elon and Elon had a document that said, "Look, here's an employee W who said Twitter has been running a fraud on America for seven years going on now", right? All of that is gone, we haven't seen any of that. So, yes, the prices change but we've got a lot of facts, confirmatory facts, there's no smoking gun here or at least so far there isn't all that type of stuff.

Chris: And there isn't even much innuendo from most team. I think there's some reflexivity that in terms of potential negotiating dynamics heading into court, I think it's useful to either side to have a fairly open hand. I think that Elon would be well served by the stock being 20, and I think that Twitter would be well served by the stock being 45. So I don't think they would keep it a complete buttoned-up secret. I'm not sure Elon can keep complete buttoned-up secrets but I don't think he would if he had just this killer fact. I don't think professionally his lawyers would say kind of five silly arguments that they had one fantastic one that they're just about to lay on us tomorrow.

Andrew: Yeah. We can go to the lawyers in a second, but I think you're 100% right. From Twitter standpoint, it's one of the few scenarios where the stock price really does become reflexive, right? Because if their stock was at 30, their shareholders would be panicking, right? People would look at the stock and say, "Hey, your case is weak. The market selling your case is weak. You need to go to Elon with kind of hand in hat and say "Please, sir. Won't you pay us 3750 per share and let us out of our misery or something." Whereas with their second 45... and obviously, there's lots of different dynamics and everything, but I'm just saying in general all else equal. With their socket 45, they've got a shareholder base who's saying, "You have a really strong case in court, you cannot settle for 40 dollars per share. You cannot settle. You need to settle for nearly the full value of the share price, or else we'd rather just go to court." From Elon's perspective, the market, his lawyers, everything is saying "Elon, your case is not good. You are almost certainly going to lose if Twitter comes to you with a "hey, let's take the certainty 53 dollars per share. Sign on the dotted line right now. Save yourself the billion dollars and the headache and take that because in court, you're going to lose and you'll have to pay legal fees and all that type of stuff."

Chris: So, the thing that I've really been thinking about since last we spoke is trying to parse Musk's words, because there's so many to parse, and trying to reach a conclusion about how they affect his legal case. And in turn it back out of just repeating a view that it's mistaken, that it's going to lose, which I think he is mistaken and I think he is going to lose, but there must be more to that. So I'm trying to think about his different audiences and divide up the audience between Chancellor McCormick, who I believe is 99% of the legal battle. Maybe 1% is the court of appeals and so forth. But I think the court of appeals, if this is gone to an appeal, will have 140 characters or less decision within 30 days of her decision. I think it will be highly consistent with what she says. I'm thinking that she's 99% of the legal audience here. And that the richest guy in the world who has succeeded at all sorts of things and is not stupid is not appealing to her or even trying to appeal to her. But he is appealing to his audience he knows very well, his Tesla audience, and he plays them like a violin. It's mesmerizing to watch how he can change the tone of his followers and that he's really accomplished something here with this lawsuit, with the delay of Twitter, and how its impacted Tesla.

And so, just walking through those two things it's been amazing. I think I've mentioned before, I've been a witness and I've been to plaintiff in Delaware, and the first thing the lawyer says, and he says it very like tersely to me because I think I'm right. The judge is smart. Why don't I just chat with the judges? He's like don't volunteer anything; it gets taken out of context. Like the Miranda Rights, anything you say can and will be used against you in a court of law. The lawyers use this to their ends so you should give them as little material as possible to hurt you. And just the quantity of things, it makes me think that Elon has not been very engaged in the minutiae of the legal case. So I think I have a couple of here. "Anyone who uses Twitter as well aware that the comments are full of spam scam and a lot of fake accounts. It's beyond reasonable for Twitter to claim the number of real unique humans is about 95%, that's what they're claiming. Does anyone have that experience?" It's a quote from him.

His case requires his reliance on their bot claims. So it has to be fraudulent, it has to be material, and he has to have relied on it. And so, him in the middle of this blurting out that kind of implying that it was obvious that everybody knew, I believe is irreconcilable with the idea that he relied on their specific claim. If he was going to say that, I don't think the case has been brought the same way. And then, incidentally in an exhibit excerpt four, Twitter actually disclose their confidential MDAU auditing guidelines. So, he got the thing that he said that they didn't get and then he tweeted, "If they simply provide me the method, the deal should proceed on original terms." But there is a half dozen other claims that they made that he's then saying is not... I mean he almost said, he almost phrased it as if it was like a judge's decision, like he almost threw out his other claims. It's just a tweet but it's kind of amazing. Third and finally, and there's more of these, but there's the third one I'll mention here, is that the scope for disclosure was written by Wachtell, Lipton. So they have kind of form categories that they use and it's largely based on just how much leverage they have. They have to have an extremely timid, usual or extremely aggressive wording. In the disclosure they had their big version, the big ask. So this is a big ask from Wachtell on what a seller has to give the buyer.

Andrew: Just to clarify, Wachtell is Twitter's lawyer.

Chris: Yes. So this is from the Twitter perspective on the contract and there's actually slightly different lawyers with litigation on contract they kind of commingle, they're working as a team. They can limit information in their reasonable judgment, and reasonable judgment is a torture chamber for proving somebody's violated. We've often been on the other side like, "hey, I want you to take the highest bid" and then I look at it and like it's your reasonable judgment. And me going to court saying you're not being reasonable, meaning you're not doing exactly what I want. A judge looks at it and says, "Reasonable can be wrong. Reasonable can disagree with some hedge-fund guy in Connecticut. Reasonable is this huge target for you to hit." Basically, you can't be taking wads of hundred dollar bills in a manila envelope. You can't be conflicted getting paid for like, no, you're taking that money, but just you and I disagree and you're on the board and I'm not. That's why some people are on the boards and some people aren't. I can get red in my face not liking your judgment, but reasonable is hitting the side of a barn. So, Wachtell put this in, their reasonable judgment if it might cause significant competitive harm. In the middle of all this, Elon says "oh and if this doesn't work out, I'm going to launch a competitor." So it's already this huge standard just saying, hey, that we need to be reasonable if it could cause competitive harm. He's like, "oh yeah, by the way, I am competitive harm."

Andrew: I could not believe. I mean, he's treated several times that he would start a competitor, right? In the proxy background, he's literally saying to Twitter's board in March and April when he's trying to get them to sell to him saying, "hey, if you don't sell it to me, I might start a competitor." But early in August over the weekend, while this case is getting filed, he literally said if Twitter deal doesn't happen I'll start a competitor on x.com during the middle of a court case. I just could not believe that during a court case he would put that out there like. The worst thing. The thing that says not more strongly than anything but specifically points you "Hey, Elon will really harm Twitter if he improperly walked away from this contract. This needs to be specific performance. If Elon try to break these contracts without just cause and he just tweeted out. He just tweeted the thing out. It was crazy.

Chris: And so, none of those things to me are designed to appeal to Chancellor Kathleen McCormick. All of those things seem to be almost like... I mean, I think I'm just playing with this idea so this is not a prediction and this is not the basis of our investment, but I don't feel 100% comfortable on Twitter side. And if I was on the case against Twitter on Musk's side, that this is going to go to a decision without some very pregnant commentary from McCormick from the bench. I mean, I think she has a lot of scope in discovery to move things along here in ways that could tip her hand and what she's going to do. When you have a standard like reasonableness based on the competitive landscape with somebody who says he might be a competitor, that's the kind of thing that she could comment on in a way that will give a very good sense in how she ultimately rule. So, what is he doing? He's not trying to appeal to her and I don't think he's listening to legal counsel-- and coming up with these things and it could to be because he's having fun he's saying whatever he wants.

But to the extent that it is a strategy, I think that it is a strategy that appeals to his base, his followers, his fans, surrounding Tesla because if the Twitter deal was going to go very fast in the environment that went between the deal announcement and his purported termination, where Tesla had gone from a thousandth share, 750 shares, he had to trade out of Tesla into Twitter. So he launched a deal thinking that this is going to cost him 21 million, Tesla shares, very quickly went from 21 to 28, which if you thought you were paying a very full price, like maybe you thought this is the moment of my maximum pain threshold. When he said it's not really economic, I think it is economic but he might have been saying "this is my final 21 million shares. That's all the shares of Tesla I'm willing to buy this for" and then you blink and it cost him 7 million more shares. I think he needed to slam on the brakes and just see if anything could change about the environment, and it did.

It changed about the environment in a couple of ways. One is the NASDAQ has roared since then. So, you've had Tech bounce back generally to you've convinced your followers explicitly that you're not going to sell more Tesla shares which helps sell Tesla shares. Thirdly, you changed teams a little bit on whether you were doing this for all out for Twitter or a break from Tesla. So I think it helps Tesla's share price recovered substantially that it looks like using it a lower price, a better price might cut, might walk, might not need to sell anymore, and of course he was selling more at a time where it went from 21 back to 28, and then it came back to 24. I would say it's even kind of creeping from 24 to 25. So, you have the price bouncing around but all of the things he was doing to cast aspersions on the finality of the contract with Twitter help Tesla shares, and also just the extra time help the environment recover a little bit. And so, I think he might be happier if you just think of his net worth and his overall situation better than the two companies and that audience is completely forgiving. I mean, it's forgiving to the point that his fans are almost like a PR agency or propaganda and that they seem very happy to read, interpret things he said in the past and endlessly forgive things like saying that he wasn't going to sell it and he did. I mean, it's just a superpower, but due to that audience, that's the audience he knows how to affect and he affected them for quite a lot of advantage, m.

Andrew: More than one person has pointed out a lot of similarities between Donald Trump and Elon Musk, and it very much not to turn into political thing, but it very much reminds me of that where you can endlessly look at his statements and just as facts keep evolving you can just change the statement. So it always paints him in the best light and whatever he says, it appears to me like when Twitter is the best thing on earth then he's buying it and he's going to turn it into fortune. And then, when the bots are running through the company, it's going to be terrible. It's just very similar to me.

Chris: Very similar, and I don't know behind the scenes if it's just organic or if it's actually coordinated. But either organic or coordinated, it does seem like there's been a huge tone shift very recently, more recently than Musk's comments, more recently than legal filings on Musk fans worming to Twitter. Some of whom said "Oh, he's going to walk, he'll pay a billion. Maybe he'll wake up for 30." Now they're saying, "oh, he'll be cut in the 50s" and it's only been just people who were kind of low information, high allegiance to Musk, kind of flippant commentary of have gone from flippantly, Twitter's about to get annihilated in one form or the other. As we've always been saying, it's going to get done in about the way that it originally was and there's no, this massive change. I mean, I can massively change my view but I feel like I owe you an explanation for why. It's like, "oh I meant $30 higher" like why, and with no reference to it, just casually raising their confidence for some reason. So that's been interesting to see too.

Andrew: Yeah, nope, completely agree. Look, as we're talking, Twitter is just low 45. If you believe the downside is 25 and I kind of think the downside is a little lower but that's where the market has been consistently saying. It's priced 2/3 chance to Twitter wins, 1/3 chance Elon wins. You can disagree with me if you want but based on everything I've seen so far, that seems way off. Twitter has the best legal case of any MAA case I've ever seen. Twitter's certainly got that and MAA the history is that the seller wins. It's really hard to claim in MAA and I've seen nothing to change that.

Chris: I think it is original terms by year-end.

Andrew: Yeah. One other thing is people can say, "oh well, you're not factoring in the possibility of a pay cut or settlement." Well, yes, you can start running models on that but if you actually think about it, the pay cut odds should be based on each sides odds of putting in court, right? So you can simplify like I spent a lot of time with this. You can just simplify it to what are Twitter's odds winning in court and then you can build out different models with different downsides. But the most important thing is what are Twitter's odds of winning in court and what are the downsides. Those are really the only two factors that need and I think Twitter's odds are just way higher than two-thirds.

Chris: Yeah, it's the same conversation and so if I go 95 times 54 20, 5% times 15 20, you play with those numbers, it's the same as negotiating as going into court and saying, okay, a conversation that I think they ask would be 54 20, the bid would be high 40s. You can kind of end up with the number in the very low 50s just on the risk time and you push towards a settlement especially the worst externalities. So both sides say, "Look, this discovery can be really bad and it's going to be ugly for a court." I think Musk has offered a lot of innuendo on how terrible it's going to be for Twitter, and Twitter called his bluff and simply didn't hold back information that he thought he was threatening them with. So I think his game theory around the discovery hasn't worked. I don't know that it's failed the other direction though. We're seeing a lot of information requests that are going out from Twitter's lawyers to Musk's contacts. He's certainly valuable in the public and he's even more valuable with his friends. There might be something stuff that he doesn't want. T that would happen in this process. So, yeah, I'm kind of indifferent too as long as the conversation around settlement is similar to our conversation around the upside downside of probability. Yeah, you can net present value at any day you want.

Andrew: Cool. That's fine. Why don't we turn over to one of the stranger bidding wars I've seen in the markets which is...

Chris: IronSource.

Andrew: The IronSource-Unity at bidding war, love triangle, I'm not sure what it's called. But the tickers there are IS, U and APP. I'll just turn over to you. What's going on over there?

Chris: Sure. So this is an interesting one, this has now a bigger spread than the Twitter deal. Although there's a very funny thing you have to think about when it comes to dollars and percentages on stock or stock deals where there's a buyer that has a bid because you have to start at the end and work back. There's only ultimately one conclusion. When the bidder for the buyer goes away, the stock price presumably goes down at some point. So you can't take in dollar terms if you are the definitive deal target. You can't say, "oh, I get full credit for the premium that my stock that I would get in a deal would get it," right?

Andrew: Just to give some numbers to that. What happened here is IronSource and Unity have a deal to merge. It's about .11 shares of Unity for every share of IronSource. Last week, App came and said, "Hey, you, call off your merger with IronSource and we'll buy you instead, and you stock went from, to use round numbers, 50 to 55 right now." So, if you're using that 55 for your IronSource model, it has some premium built in from that. So you get super circular in terms of all the spreads and everything.

Chris: So it's like both of the math and just the dynamics on this are complicated but you can't say, "oh, we're getting six dollars of stock" because you're really not. So, nominally, it's $5.96 at the moment. It's a dollar thirty-seven spread, it's gaudy return if they can get the original deal closed by the year-end. But the interesting thing that happened, it was a somewhat interesting deal but then it became very interesting when you have this other bidder coming in over the top. Some things about it that are different than we normally see. So, it was a stock unsolicited bit more typically.

Obviously, if it's a private equity basically 100% at the time but usually, when you say if I'm interrupting the conversation you're having with somebody else, it needs to be a very crisp interruption. Andrew, I'll give you a hundred dollars a share, like that can get your attention. But the "hey, you're in this complicated situation. I'm going to complicate it with another complicated situation that I then have to explain including synergies and management and ownership stakes and what the stock offers worth, including the fact that it wasn't nominally a big premium", which is a little bit, again, you are sort of rudely interrupting a conversation with something that's nuanced itself, right? It's not nominally a huge premium. Usually, you want a splashy JetBlue coming in over the top in the frontier situation with splash. You tell shareholders like, "Hey, we're offering you a lot of money, you'll get a lot more money."

Andrew: The Spirit Frontier offer is for $22 per share in stock and you've got to worry about the stock heading into a recession and all this sort of stuff. Hey, Spirit shareholders, here's $33 hard cash right now per share. Like cash is cash.

Chris: And that was the offer. I really admired how JetBlue handle the situation the whole time. I felt like they were talking to me. I mean, when they were literally talking to me, I felt like they were listening. And when they were talking publicly I was like, "oh, I had this concern yesterday", and then they put out a press release answering. I don't know where to go other than with these guys because they are just like nailing the whole kind of perspective of a shareholder. This is not the case with App. So you have a small stock premium for a well-defended company. When you could hire a corporate defense and talk about how much if the board and management doesn't want it. Can they avoid it? And the answer with U is they really can't. It's not easy to take over this company coercively. And App didn't even have a pitch for "Hey, if you don't like this, we're going to come at you with this other route." So it's kind of weird to say it's unsolicited but it's not going to be followed up with a coercive, hostile offer. Even if they tried, it's not clear the route they would take to do that.

Andrew: The two weirdest things to me, you started with this is, hey, the initial U stock was at 50 the day before App came, and the App offer valued them somewhere between 55 to 60 depending on kind of where App stock was in an all-cash thing. In general, when you get an unsolicited bid, you tend to come with a much bigger premium. As you said, it's like grab everyone's headlines and get some negotiating table and really force your way in so that you can go say to shareholders, "Hey, U stock is at 50, we offered $75 per share cash. They're not negotiating because they’re conflicted. They've got all these bad things." But in this case it was a rounding error. It's the closing price, right, which was kind of surprising to me. So, it didn't grab headlines and then I'm sure we'll talk about in a second. I know we will. But App offered class A and class C stock in the U bid. The class A is normal voting shares, and then the class C was non-voting shares, and App just valued the class C shares like they were class A shares. There are no class C shares that exist. There are no class C shares traded, and a class C non-voting shares will be way more liquid than class A and not have a vote. So it's going to trade for a huge discount and I was just like, so you offered a nominally 10% premium and that includes no discount for shares that are absolutely going to trade for a huge discount? It's just a strange strategy. It was just strange all around me, keep making me think like what am I missing here almost?

Chris: It seems sloppy. And then, the two other factors in the moments after it's filed that I kind of thought through a lot on this one. I really have always been interested in bidder public shareholder perception and their stock price. I've always thought that's more or less the amount of leash that your shareholders are giving you to work with. And it's hugely unfair in my mind that management that's given a terrible hand that does really, really well in comparative term. So, in my mind, it's rational to give him a lot of credit but things are horrible and absolute terms. The markets doesn't like if you're losing money, there's this kind of binary on things are going down. Even if the person is kind of brilliant and their company should be losing 30%, they're losing 25, nobody cares. If they're terrible and their stock should be up 40 and they're at 35, they get a lot of praise even if they're not making high quality decisions. I don't think that's good, but I think it really affects corporate dynamics around transactions.

In this case, the market just didn't like the offer, so it's going to be hard for them to offer a lot more with their share price trading down. And then, the other thing that really affects dynamics is if especially in a tough having your credit market and they've been strengthening recently, but it's easier for huge companies to do small things than for similarly sized companies do things. And in this case, the bidder doesn't even have a bigger market share, doesn't even bigger market cap. And so, your first shot you fired is a lot of the shots you have to fire. It wouldn't be easy for them to pay all cash with a big premium. It wouldn't be easy for them to keep raising it in terms of their stock. So they kind of said much of what they have to say from the beginning and the target knew their level of interest. None of this was new. I mean, you knew all about App. It wasn't that this is a new thing so it really didn't favor them that well.

Andrew: One of the things that initially worried me and I guess still worries me is, I had kind of assumed that these are big companies. IS and APP were like each other's two biggest competitors and U merge with IS. So I'd kind of assume that you talk to App, just like throughout the testing waters. App in their call said, "Oh no, like obviously we've talked to you before, but you did not approach us about a merger. This is an unsolicited merger." So I was kind of wondering if there was a chance U thought like, "Oh, App isn't available. They just did a big deal, they're not available. We'd better strike while the iron is hot and move on IS". And then you would kind of get an offer from AbbVie[?] like, "oh now we've got options" because U is the prize of this love triangle with the project love triangle.

But based on the response today, it doesn't seem like U is all that interested in merging with App. It seems like they really want to go with IS. And then the other thing I was going to say is, it does seem to me what U stock was 180 in November, right? It's 55 as you and I are talking. It does seem to me like U, everyone involved there think that this is a killer company with insane amounts of upside, and that actually plays against App, right? Because if App came out and said, like App is much bigger than IS, if App just has to own more of the combined company. That works against them because if U thinks our intrinsic value is 200 dollars per share, then there is no real amount of cash App can throw into this deal that will make up for the fact that U has to dilute themselves more to get with App, and U ends up with less of the company and less exposed to that upside. So I just think these are two really interesting dynamics in this thing. I want to move on to the class C stock in a second but I just want your response on all of that.

Chris: Let me just threw in one sentence in there, too, which is it also paradoxically increases the flexibility for IS. Let's just suppose that IS knows that U is, strategically, a really good currency. I don't want to give away more than I have to, but it does give me in terms of just the "do we do something or not" flexibility if necessary on how to do something with U because we're getting really good currency.

Andrew: I mentioned when we were just laying over. App offered 1.152 shares of class A App stock and .314 shares of class C at stocks U, and class A stock is the normal publicly traded App stock that everyone can trade on the public markets. Class C would be a new non-voting, share. I'm just curious like I have one conspiracy theory. But why do you think App would come out and offer this clearly inferior non-voting stock in their offer for U? It seems crazy.

Chris: The conspiracy theory would be, I mean, it makes it harder on shorting App and hedging out App, I think.

Andrew: So, my personal conspiracy theory was IS and U have a merger, right? And it's very clear that you cannot go shot themselves in the merger. They can respond to a superior offer, but they can't go shop themselves. My conspiracy theory was U buys App by doing Class A and Class C stock, keeps the vote about 50/50, so App can claim even though U ends up with more of the company because it's 50/50 voting stock, App can clean that U is actually the seller here, right?

Chris: Yeah.

Andrew: Whereas if they went any higher and U ends up with, let's choose a number, 65 percent of the combined companies voting stock and App ends up with 35 percent, then IS could go in court and say, "Hey U, you broke the merger contract for this App deal. You're just buying a competitor other than us. You weren't allowed to go break our deal to buy someone else only to sell. You're not the seller in this transaction." I don't know because, you know, if I game it out like, do I think IS would actually win in that scenario? I don't know. I don't know if they'd win the case but I did think that was interesting and that was the only reason I could kind of think of with it.

Chris: Yeah, that makes sense. It's a tricky situation. One of the things that's hard for me thinking about it is, and my conclusion has been long IS not sized heroically has been if you're left out in the cold here, you lose the premium and it probably is legitimately a bad strategic environment to be the one left out of the three. If we're right on the deal and IS gets the deal with U, sure U loses the takeover premium it has from that deal. But I think you're the winner strategically in the environment where App is left out, and App's then might be reactive to this deal and flattering to this deal saying, "Oh gosh, they have the good thing going on. We need to ideally need to be the buyer, but we definitely need to screw around with this deal right now because this deal is a good one competitively against us.

Andrew: Yeah, no, I am with you. The other thing that's made this difficult is U is the clear price here, right? But IS and App would like to lead merge with U, there's clearly synergies here but U is a strategic target. If you go back to last year, there were leaks Facebook memos from two years prior that were like, "hey, we should go buy Unity" and everyone's talked before about how strategic this is. I can't claim to be an expert but everyone talks about how strategic U is with game developers and everything. So, the other big worry is that this whole thing has opened the Pandora's Box for Microsoft let's say, I'm just throwing the name out there, to come and say, "Oh, U is super strategic. We want to be more into games, we'll offer $75 per share cash, that's a 20-plus billion dollar offer which is huge, but it's a rounding error to us and there's massive synergies and all this sort of stuff." So I've really struggled with, hey, going long IronSource or going long to spread which would be long IronSource short Unity, go along that with the risk of what if we're right on U wants to merge with IronSource but we're wrong gone. Hey, Facebook comes and offers a hundred dollars per share or something.

Chris: Yeah. I'm staring at that every day not sure any U for that reason and that's a hard one. It's kind of like the opposite point on what we talked about Twitter. I feel like we're seeing the whole picture in Twitter at this point. I don't feel like we're seeing the whole picture at all on IronSource and my sizing really reflects that. We could have some announcements tomorrow. U halted for news would not be that shocking and I wouldn't be able to tell you if that happens why it's halted.

Andrew: It's just a break because when I go through the list of targets, there's not mammoth private companies that can go by Unity. Again, this is a $16 billion-plus company, that's a big check for anyone to write. So you have to start walking down the list of who can be the buyers. Facebook just had a $200 million VR--

Chris: Big enough in the antitrust issues.

Andrew: Exactly. So if they came with an $80 per share offer, you would have to consider but I think they would reject it because it's going to get blocked on antitrust. Microsoft is buying Activision Blizzard. The market is saying that deal is about 50/50 to go through. I don't think Microsoft's going to risk the $50 billion acquisition over the U thing which has antitrust risk. I don't think you would consider that. Google, I think that's a no-go. You keep going down the list. The only one somebody said to me that might make sense is Adobe, but I can't claim to know enough about Adobe's business and the synergy there. But even Adobe, if you're in Adobe shareholder, are you going to be super happy with "Hey, we're going to go by this U business that's projecting 250 million in EBITDA in 2024. We're going to go buy it for 25 billion. We're going to pay 100x tear out EBITDA and that's before stock comp when our stock trades at, I don't know, 30x this year. I don't know, Adobe is a big company. I can't claim to know the synergies. It's just scary to me.

Chris: You know, when the JetBlue got their deal with Spirit Frontier was really the winner that day, and I think the market is kind of relieved that there is not the winners curse on a multi bidder auction like situation where the winner does tend to overpay a lot. I don't think that's going to be the dynamic this time. It'll be interesting to see what happens to whoever does end up with the deal, but I don't think, you know, if somebody came in over the top, say U was halted, what does App do while we're waiting on U news. If App doesn't get halted, I don't think that's directionally obvious what happens to that, if somebody comes in over the top for them. Also, these huge companies are looking at everything. I feel like the kind of it's in play now so these other companies will look at it. I mean, these are such huge companies we're talking about if somebody looking at everything. So it's not like they didn't know this was happening.

Andrew: Yeah. I've heard a lot of people like, "Oh, Adobe is going to come in, Facebook is going to come in, all this for U. And yes, some people are saying that but if you go back to last week before the App merger came in, nobody thought U-IS was even in question, right? So, what changed between now and then App has come in, but that doesn't mean Facebook is going to come in with a $75 cash bid. And even if they did, again, I'm no expert here but U-IS, nobody thinks that's not synergistic. If somebody's going to risk antitrust, U probably just want the whole prize, right? You want U and IS together, that wouldn't apply to Google but for anyone else, I would think that applies. So, yeah.

Chris: Agreed.

Andrew: We've been going on an hour but I know you want to talk about TRQ which had this really interesting situation, which kind of came to that, kind of knocking heads with Rio Tinto this morning. So I'll just flip it over to you there.

Chris: Sure. So, two things I like about the situation and then lots of other things I don't. I'm generally very interested in just the dynamics around public minority stocks that when you have a majority when you have a large strategic shareholder, kind of public subsidiary. First of all, just a ton of these things get taken out. Every time they get taken out I'm like, "Gosh, we should have an intern, just the public subsidiary intern who just is the ax and all of these because there's not that many of them. You can kind of keep track of all of them. So, Rio, Turquoise Hill, they had a process while the process was ongoing, it wasn't definitive. Nobody owed anybody anything and the equity markets are getting weaker. The credit markets were getting weaker. The commodity markets are getting weaker and copper especially was getting weaker. A lot of that is you have the supply dynamics, the demand dynamics. Chinese economy is getting weaker. You have kind of the demand side worry about recession, about economic growth.

My view on how much that should affect corporate transactions is a lot of these buyers are longer-term than spot markets. They can get it done. And so small changes shouldn't matter, right? Like small changes like Pips shouldn't matter, you know, matters to the spot price. But whether it's something up or down, 30 Pips in a day, you can run that down to zero on whether it even comes up at the board level. But when it's 30%, then it's a 100% chance it comes out. So, at some point there, they're affected by these markets. You have a bidder that I always feel it's like a little bit of Kabuki. When you say like you own the vast majority of my economics and so forth and you say, "hey, let's have this harm-like thing, we'll have this process." Like, "sure, boss, anything you say. Well, I have this arm-like process, I'll get my guys." But you can't have a double-blind situation dealing with your controller, right? So, I think these strategic reviews with a special committee tend to be kind of "Okay, I'll take these. You want me to be online with you? Yes, sir. Yes." And you go back and forth and it is sort of ritualized, they usually get done.

In this case, they haven't yet and in this case, the target that seems to me have the weaker hand. The stock price has been weaker. The commodities have been weaker. They need capital, they will have to go begging to the public market at a very bad, poorly timed raise. With all of that, they seem like they're being the blustery ones with the bidder saying, "Oh no, we made this good offer. It's a premium. It's makes sense for you." They don't seem like they're pushing their weight around, the target does.

What I see from that so far is the raise in a game of chicken, if everybody can point to a reference point to say, "hey, the raise is the thing that would be the maximum pain point that if you can avoid raising money in the teams or whatever, then we should split the difference on that upside." And so, if you're fixated on that, the process is a little artificial and premature for being the thing that is the real deadline. And so, maybe they're putting on a brave face before then, I don't know. The market is looking at the downside, looking at the raise, looking at the standalone price, looking at the comps, and taking very seriously the process is over with the stock down hugely at least this morning and then still now.

Andrew: Yeah. It's just really fascinating because you've got on one side, Rio owns the 60-plus percent of these guys, right? So, taking minorities out makes tons of strategic sense if you believe in the asset. You get full control of the cash flows. You don't have to do the public reporting. You get some synergies on the cost and everything and now seems to be a nice time to do it. Obviously, both U and TRQ think intrinsic value is a lot higher. A lot of minority shareholders have come out and said intrinsic value is a lot higher. But then on the other side like TRQ as you said, there's a lot of capital that they need to get this mine online and Rio Tinto's got a lot of leverage over "Hey, take our bid or else we're going to dilute the crap out on minority shareholders and we'll own more and we'll be in more control." And then there is the argument like, hey, every minority shareholder saying this offer is way too low. This offer is way too low. Well, there's a stock price and the stock price has always been a lot lower than the offers.

So if you believe that, just go buy more shares and push the stock price over the offer. It's just so fast because I saw people who I respect and who I know are sharp in mining saying, "This is the dumbest thing Rio has ever done. The stock is going to be up for X in the next year, it's going to come online and it's going to be worth a fortune, and they're gonna have to pay through the nose to take this thing private." And then, I also know people who I respect said "Minority shareholders and TRQ are way overplaying their hand. Rio is in complete control. They will dilute the crap out of shareholders in order to get this equity raise that the company must do to bring their mine online. They will dilute the crap out of the shareholders and in four months, shareholders will come hand in hand and say 'please, please Rio Tinto, we want the original bid. Give us the original offer." I just don't know the answer. It's just so strange.

Chris: I don't know the answer. I do know that when I've seen deals get done or not get done based on very confusing dynamics where there's this huge range evaluation on the target side, there have been deals that have gotten done or gotten broken based on a huge part of the vote controlled by people who have other interests, right? Like who are really throwing the economic benefit to say a preferred class that they have or so forth. But in this case, it's just logic and facts and different conclusions and different judgment about what it's worth. There's really no-- I don't think there are-- other than the strategic value to Rio, I don't think there are different incentives so I think there's different views and that should be reflected correctly in the stock price. I mean, not every second says "oh it's perfectly efficient" but if they don't get a deal done, the price goes down.

If they have to raise equity in the public markets, the price goes down. You want to get the best deal you can, but this is the best deal now and because it's majority, there's no other bidder that's going to come. This is it. This is the conversation. So, rhetoric early, sure. That being indicative of what happens to the end, that would be unusual for that to not be worked out. I don't think you love this analogy, but I made earlier today the analogy to Nielsen just saying that the Wind Waker role was like the bold turquoise holder in as far as a really audacious ask in a weak market. The weak market can actually help smooth things a little bit because you kind of blink at some point. But in the Wind Waker Nielsen case, you could also, for at least part of their shares, bring them in on the buyer's team. So it's not like a few of this fanatic supporter of the deal, I know the buyer is like, okay, you can come up with that. But the whole point in this case is it's a strategic deal for Rio. So I don't think they're going to want to have minority partner anymore.

Andrew: Yeah. Honestly, I think the Nielsen guys wouldn't have minded getting out of the deal. It was this weird thing where they struck it in a market that was so much higher.

Chris: Yeah.

Andrew: If a minority shareholder take the deal, I don't know if they would have been like "Oh no! We can't do this deal. That's clearly overpriced at this point." But yeah, no, I don't know.

Chris: At some point, you have these dynamics. I mean, amongst the dynamics you have your LPS watching this whole thing. You can't really afford to have... I mean, emotionally I get it when you have this feeling of pick, like, I want more than, but the kind of... I always think the role of becoming an adult is the point where you have to admit that it's all about comparative advantage. It's all about like, okay, you have to ignore, as [inaudible] is, you have to ignore some costs. And in this case, it's comparing the deal to no deal, not the deal to what you think it's worth. That really doesn't matter right now.

Andrew: I know a lot of minority shareholders were saying 34 is not the right price, it needs to be higher, and clearly the company believes it. Like I would have been surprised. Another difference between this and Wind Waker Nielsen is there there's one shareholder who had to cave. If they did not caved, I think the stock would have gone way, way down, which would not have been great for their LPs. Here, it's not even to the LPS, it seems like the chair of the special committee, the chair of the board, everything for Turquoise, which does suggest they see value a lot higher but there's no offer. It's just crazy. It's just a very strange process. The rule does seems to be minority stakes are made to be taken out by their majority controller. And when you have a minority state that takes a lot of equity capital, it's just very hard to invest in front of a majority-controlled company that needs to raise its at least 650 million of equity by the year-end. That is a lot of equity. Even in last year's market, 650 into copper miner was a lot of equity. A [inaudible] in Mongolia. Yeah. Cool. Cool. Well, this has been fun.

Chris: Thanks, Andrew.

Andrew: Chris is going to a... sorry, it's BJJ. I can't remember.

Chris: Jiu-Jitsu.

Andrew: Jiu- Jitsu. Chris is going to a Jiu-Jitsu Camp next week. I'm going to be on vacation with my wife in Greece the week after that. But Chris, looking forward to seeing you after Labor Day in person and on the Zoom.

Chris: Absolutely.

Andrew: And we'll chat then.

Chris: See you in September. Thanks, Andrew.

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