Chris DeMuth's State of the Markets September 2022 (podcast #127)

Chris DeMuth joins the podcast to discuss the state of the markets in September 2022 and what’s catching his eye in event driven land, including an aggressive anti-trust regime and the potential for a bump at Swedish Match.

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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, subscribe, review it, wherever you're 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 great. Nice to be here, Andrew.

Andrew: Great to have you on for our monthly talk. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. That's always true on this podcast, but probably, particularly true today because we're going to be hitting through a bunch of securities. People should just keep in mind, not investing, advice. Consult a financial advisor. Then the second way I start every podcast is with the pitch for you, my guest, but don't have to do that today. This is like our 10th, one of these, so if you can go back and listen to the first nine for a full pitch.

Anyway, it is September, today is September 27th, late September, September 26th. We're talking in the morning, lots going on in the markets. It has been pretty crazy out there, so I just want to pause there and ask, what's on your mind today?

Chris: I've been thinking a lot about antitrust over the past week. I've been thinking a lot about tobacco over the past week, which we were just chatting about a little bit. Those are probably two of my biggest thoughts. It's been an exciting week for companies that have chosen to go up against the government in court. We have a very aggressive regulators right now, and they've been suing to block deals.

One of the jokes I heard amongst the antitrust bar, is if we just all surge at the same time, they don't even have enough regulators. They don't even have enough litigators to block everything. We could just kind of bum rush them and see. Then we're talking about something's real if they really want to sue everything, but they'll run out of lawyers. But there were a couple of developments there, and then, as we were just talking about tobacco, which is one of my favorite industry topics.

Andrew: Great. Why don't we start in an antitrust?

Chris: Sure.

Andrew: So, you said last week, there were a couple of cases that were kind of setbacks to the government's, I guess, antitrust arguments. What don't you talk about what those are, and how they impact? There are quite a few antitrust cases out there for investors to look at, remaining. So, how are those impacts with the remaining antitrust cases?

Chris: Absolutely. So, a couple big speeches of both the head of the FTC and DOJ. I feel like the FTC chair has gotten a lot of press and attention and the DOJ AAG, the equivalent in the other agencies, has been kind of catching up a little bit. Kind of competitive speeches because even though these two are very aligned, the agencies are always in a little bit of competition. I would say that they are both very aggressive and kind of reminding everybody, they mean what they say. Both aggressive in terms of bringing their own ideological focused antitrust, and aggressive, in terms of not really worrying too much about the prospects in court.

The same kind of moderate voices that have historically been fairly bipartisan kind of measure their successes in wins and losses and courts. They're both pragmatic when they deal with companies, and then unsurprisingly, they also want to bring cases that they will win. They will frequently back off if they have a problem either way, either a problem often being convinced by their staff that they're right, or a problem prospectively in their estimates of the likelihood in front of a judge. These two are not that worried about either. They're more aggressive in their staff, which I think has never been the case before.

Typically, the staff likes bringing cases and even under Obama, you had a staff wanting to bring more cases than the - I usually say grown-ups - than the political appointees. This is the case where the staff sometimes says, "I don't know what you're talking about." They just bring something especially when it relates to industries that are important to them big time.

Andrew: If I could just jump in there, I mean, just to explain why. I think the staff, look, they're working. They've got a view. They joined this thing. You join the DOJ antitrust department because you want to enforce antitrust laws. So, you kind of get that, if you've ever been the manager of something, you've got your employees and they're always bringing you great ideas, and you kind of got to focus on the few. For the actual political appointees, they have to look at all these and say, "Hey, if we do this, we have limited resources. I'm kind of staking my career on it, right? Because if we go and bring a case and it gets rejected, boom, that's a lot of political capital. People are going to look at me as a little tainted.

So, that's the traditional way, and here you've got the reverse, right? The staff were saying, "Oh, I don't think these are great cases because yes, they want to do antitrust, but they don't want to bring that antitrust or do work for cases, I mean bringing a case takes a lot of work. Do it for something that's going to get rejected, and here you have the political appointees saying, "I have a political view. I don't care if I lose. Expressing that political view is kind of what I'm here for. It might be helpful for me in some other ways." Am I kind of interpreting all that correctly?

Chris: I would say that's correct, and the other element I would bring in is that historical antitrust analysis, which has historically been fairly bipartisan based largely on economics and historical legal precedent, is kind of a skill set that these staffers have. If they're going to go on to a lucrative career, higher compensation career, in the private sector, they want their skill set to be kind of valid and used. This administration, they kind of called it the whole of government, which is, if we have any target we are going after, we are using all of the tools. These tools do not have to necessarily relate to their nominal purposes. Deal specific anti-trust reviews.

Now, they're pretty much telegraphing that if they want to go after a company, they're going to use whatever process that they have. If that's what's going to happen, it kind of gets far afield from what the staffers know how to do. They're not necessarily in it for anyone in the administration. They might have their proclivities on average, and they skew a little more democratic than the population overall, but they also have a lot more longevity than any political leader. So, this politicization of it is creating some conflict. I'd say, especially at the FTC, there's been a lot of turnover and there's been a lot of leaks from the civil staff on some of the things they're doing. Then losing in court, that's going to bolden companies, it's going to make the staff involved happy.

Andrew: So, I think, you said at the start, and you mentioned FTC going after companies that are targets and they're using every tool. I think to clear companies, you're thinking, here are all the big tech companies, right? Amazon and Facebook, whatever people call it these days, or especially in the cross shares, but you said at the beginning, last week was a bad week for the regulators, and I just want to go into that. I think the two things are United Health, One in Action, one in court DOJ, suits the block. Their acquisition of change healthcare, the DOJ got lost in court. Then the other was a sugar deal that I believe was the DOJ lost in court as well. So, I just want to pause there. What happened there, and how does that affect things going forward?

Chris: Two completely decisive devastating legal decisions where the judges were just completely one-sided against the government. I guess, I paid more attention to the change deal. I have a tiny position; should have been bigger. It wasn't a big spread though, the market kind of backed into this being the likely outcome. The two kinds of topics that were really under scrutiny were verticality in market definition. So, the first verticality in the United Health, the government's one; had a vertical theory that they failed to convince the judge on. The companies had what they thought was reasonable.

They litigated the facts. They said, "Here are the things that we would do," and then the government kind of tried to make the point they were making, and talking past the overture. The judge found overture completely solving the problems, so approved it with the most effects. That seemed pretty pragmatic, and I would say the judge sounded precisely like the DOJ themselves that have historically sounded on deals like this. We have talked about and expected there's going to be this kind of cascade of lawsuits, and this was kind of early on, and there could be others, but the judge kind of put things back in place.

When you look at US and European antitrust enforcement, there's this big difference. The Europeans can really just do what they want to do in both the EU and in the UK at the CMA. The US government has to bring their case. They're given some amount of deference, but they have to tell it to a judge. In this case, the judge was completely unconvinced.

Andrew: Yeah. So, I think we're going to talk about some specific examples in a second, but I just want to pull on one thread you mentioned there, like one of my worries. So, United change was I think exclusively US, right? I don't think there's any international business there, but a lot of the companies we're going to talk about something like Activision Blizzard. It really jumps to mind here, but that is international, right? You don't just need you US approval. When I talk to other ORBs and stuff, the focus is all on the US.

Generally, if you get the US you tend to get the EU. If you get the EU, you tend to get the US, but I do worry like everyone is focused on the US and saying "Oh, well this is great. If the US brings a suit, they're going to lose in court and the XYZ deal will go through. I do worry like, okay, maybe, but if the US brings a case and the EU Regulators or the UK Regulators just want to follow on what the US is doing, and everybody kind of doesn't like Big Tech in particular, won't the EU just bring something and kind of shut it down over there, where they've got a lot less kind of appeals process or legal ability to overturn it? What do you think about that?

Chris: I think it's a very valid concern. Correct, in the case of United Health change it was just HSR, the US process. So, everybody knows you're going to have to take it to a judge. When I say, everybody knew, that affected, not just the government's leverage, but affected how the companies negotiated us, right? So, if you were United Health, I think at this point, you'd be very happy with how your antitrust lawyers gamed this out. They used the flexibility you have and they won. In the case, which just jumps off the page, in the case of multiple jurisdictions is Activision. I mean Activision is the biggest, the most important case that has a US review. It has to go through HSR. They will have to take it to a judge. It is a vertical case. It rhymes with United Health.

Also, just to bring in for a sentence or two, the sugar deal that was economically unsupported narrow market definition that fit what the government wanted to say. If you can control the denominator, you can say whatever you want to say about anything. If you can say, here is the geography, I mean, you're always a monopolist of your own product. So, you have to expand it to what is economically relevant, in terms of real price discovery, and an economist can do that. There's an answer to the question, what's the geographical market? Something like sugar, it was not as specific to the Southeast US as the government wanted to claim. The econometrics weren't there. It was just what they wanted to say.

I think that in the case of Activision, you have to really ask, what the right market definition is? You have to ask, are there real foreclosure issues? Two problems with that. One; judges are much less likely, it's much more subtle to bring a vertical case. Secondly; it's much more fixable, right? Like, if at the last minute Microsoft could make overtures and say, fair and reasonable access. There are ways contractually to fix a lot of the things you could come up with. So, in any event, it's a case that would be tricky in front of a US judge, but the issue is what you raised, it's especially relevant to the UK CMA. Historically, they have been closely aligned with the US DOJ, and they could carry water for the Americans. When the CMA
blocks something, you are blocked. It is dead, deader or deadest.

In this case, you have one side that might want to block it, and the other side that has the tools. So, could there be a regulator on regulator quid pro quo? I think it's highly possible, and that would tell me neither be exposed now nor would it be a perspective opportunity the day that it tanks, the day that the CMA moves forward. Now, the CMA has actually been bringing some slightly different concerns recently there. Their very recent verbiage on what they're focused on has not matched up with the DOJ. So, in terms of, I don't know, all the conspiracy theories because it's true, but in terms of cynicism about people using the tools they have for the purposes they say that they're using them for that, that is the risk that could be real deal rest for Activision.

Andrew: Yeah, and just so, we jumped right into Activision, but just so people understand why we're talking about Activision. Activision is under contract to get bought out by Microsoft. The headline price there is $95 per share. As we speak, Activision's trading at about 75. So, you're talking about a 27%, what should be market neutral return 27%. I think I've got it set to close. In March, if we get a DOJ lawsuit, maybe it's next September or something, but if it closes inside of a year with 27% gross IRR, that's something people are going to find very attractive, obviously.

Chris: Exactly.

Andrew: So yeah, and over the weekend I believe there was a Microsoft CEO, had to pull in Bloomberg that said, "We're very confident about obtaining all approvals." You have to think like you go into this. Like, they entered this deal earlier this year, they knew who the regulators were. One thing I always think about is, companies know who the regulators are. They don't have their head in the sand and they pop them say, "Oh my God, the DOJ doesn't want Big Tech companies merging together." They understand that, and they enter the merger and agree to a 2.5 billion dollar break fee, which is a pocket change for them, but they agree to that, knowing what the environment looks like. So clearly, they think there's some chance they'll get it through, but I'm rambling a little bit, but it is certainly a very interesting situation.

Chris: Yeah, I would just add to that. One thing nice about widespread is, it's less sensitive to timing risk. Like, if we're having a conversation and you and I don't have this conversation, a lot of mergers or funds do, "Hey, let's do a 5% IRR between now and the second quarter of next year." You have to be extremely precise about timing because a 5% yield that takes twice as long as you think becomes really a bad investment. The nice thing about this case with a 52% IRR if it closes by the second quarter is even with the delay, you're probably fine setting it up here. You might have a terrific opportunity kind of the day that the US brings suit, as long as they're not coordinating with the CMA. The CMA is really the deal killer here.

If you can get comfortable enough with that, I think that this would be one where the companies have a good probability of winning in court. Unlike so many other deals right now, you might have a little bit less of a catastrophe with this target. They've been doing fairly well. It was interesting that Berkshire Hathaway was buying shares right before the deal was announced, and convincingly it was not a deal check, He was pretty adamant about. He wasn't kind of whipping this around on deal reverse. So, at least some intelligent players think that it was
okay price before the deal premium after which they've been performing well. I've been asking around if you can expense call of duty, as a research expense for tax reasons, but it's a cool target. It is an acqui-fire.

In Silicon Valley, they have acqui-hires when you buy the company to get the CEO. This is one they're buying the company to get rid of the CEO. The CEO had problems, and they said, "Well, let's hire such and such to run the place." They can come up with something and they'll be part of Microsoft and that'll smooth over some of the problems they had before the deal was announced.

Andrew: So that's Activision. I mean, look, there's a lot of things out there with antitrust risk as you said, because people are affected by a much more aggressive antitrust. Are there any other antitrust risk companies that you're really interested in, or thinking about right now?

Chris: I'm interested in how far they will go just on the buyers identity versus the deal specific issues. I mean they have gone to ­- all these new Meda in alphabet -I think it's like an old man's problem that once they know some things, they're just going to stick with it forever. So, Facebook was told, "Hey, we'd really like you to get pre-notification to us, not just HSR, but we want you to kind of bring us into your room when you're doing any kind of deal, whatsoever." So, the outlook of this current FTC and DOJ is so new and so different, but the fact that they recently blocked a kind of small VR fitness app that the Meda Facebook was buying really shows that they might just block everything. I mean they might just kind of say [crosstalk]

Andrew: That was like a 100 million dollar acquisition or something, right? So yeah, you say small, Facebook said, multi 100 billion dollar company. Like, you're talking about literal pocket change. Like that's approaching acqui-hire in a market that is still pretty much yet to be defined. For them to block that, it's like, and you're basically saying, Facebook cannot do deals by blocking.

Chris: It is that, and it really, the two deals the government lost this past week, both come into play, both in terms of the super narrow mind. If you're taking it to a judge, the market definition, I mean, especially you're talking to an older judge, you're going to have to explain to him that this industry exists and that this company exists, and that they are monopolizing it. I think there's a real question on market definition, right? Because you're going to have to have this incredibly narrow market definition, and then you have the vertical issue. Again, tricky to litigate.

So, maybe they're just going to go after everything, and then if you say, "What is everything, include?" Well, Amazon, buying iRobot. Amazon, buying One Medical. Maybe they're just going to attack Amazon with the issues or process, and kind of brainstorming what they could do next. That's up there. Neither of those would be as good a case as Activision, which I think you could bring with a straight face of iRobot and One Medical, those are going to be as real tricky.

Andrew: iRobot is such a strange one because this sounds familiar, iRobot makes the Roombas, right? Yeah, everybody knows the Roomba that goes around the house. It's like what is Amazon monopolizing by buying them? It's such a strange one because you can't say they're monopolizing vacuums, like anybody can get a vacuum cleaner. I think in part - I can't remember specifically - but I think in part like all the antitrust, there was a tweet thread that went viral. I think that almost the government's response to a tweet thread like, "What is Amazon going to monopolize?"

I believe the theory here is Amazon's going to use the iRobot to take the measurements of your house and use that." But I don't know where the monopoly problem with them buying a vacuum cleaner is. Now, I also don't know why they'd really want to buy a vacuum cleaner, but they want to take a billion and buy a vacuum cleaner; that's their prerogative, so yeah.

Chris: Some of the privacy concerns that you could imagine somebody might have with both of these deals, with Amazon getting your medical information, or Amazon getting the dimensions of your home, as soon as people start complaining about it, what do they say? "Well, I'm not going to buy that anymore. I'm going to buy one of the many other things I can do." In both cases, the customer complaints implied a normal free market response from a customer, which is, if you don't like it, and for some reason, you don't like the identity of the buyer, you go somewhere else, and they can and they will.

Andrew: Now, I want to go back to one thing you said and then I want to ask you a couple of deals. One of the things we joked earlier was, "Hey, the discussion among like basically buyer antitrust is, "Hey, let's just all file these at once and certify and make them kind of pick." They can't try to block 100 of them, so make them pick the 5, you want to go after the 95 out there.

Chris: That also would be an antitrust conspiracy between the law firms, too.

Andrew: Yeah, that would be good, but just that, and I think Lina Khan had a quote where she said, "Look, we're committed to bringing difficult cases, but we're outgunned by these companies. We have 350 fewer people at the FTC than we did in the 70s." Look, I know you're no fan of Lina Khan. I think both of us think regulations, especially on antitrust are a little bit overstated, but it does strike me as concerning like, you get these companies. It's the old argument, like the world wasn't designed for companies as big and as powerful and as cash rich as Amazon, Facebook and these guys. If they can just outspend their way, it just does seem like there is a problem where the regulatory agencies are just outmatched by some companies. Do you read anything into that?

Chris: I'm open to the idea that our regulatory apparatus is antiquated. I think where I would overlap the most with the kind of progressive wing of the antitrust bar called the hipster, and I trust people with that idea that the current rules don't fit well, and do not contemplate this kind of company. I think when we diverge it, they say, "We'll. we just use the rules we have and just apply them outside. Their intent in mind would be, "Okay, let's pass new laws and have congress address this, and see how." I think on that grounds, there's a ton of bipartisan interest, but these are big powerful companies whose reach exceeds what the antitrust law contemplates which doesn't fit well, and concerns people across parties and ideologists.

In some ways, it concerns me less. I love the idea, and I'm still surprised how frequently, with all of the concerns about how ingenious their data mining is, I'm astonished how frequently I see ads that are demographically incoherent with me. That is seeing something for pharma things for diseases that I can't get whether it's just for women, or for something like that. I'm surprised that they don't do this better, if the deepest darkest conspiracy theories about what they do are true.

Some of the accusations against Twitter, something we've been thinking about a lot, I found we're so lame in terms of, if they have all this information, they're going to be able to discover your phone number. That's not nearly as sophisticated when we kind of delve in because of litigation on to some of the things that they're doing. On ads, I find evidence at least anecdotally, but it's not super savvy. Yeah. So, it's new and different than the antitrust authorities I used to deal with. Lina Khan's solution is just to kind of force it, and hope the judges are convinced.

Andrew: Obviously, there's an election coming this November, and right now, I think the markets got it priced. I'm just looking at, predict it, which I'm sad that's going to weigh in next year, but it's a nice thing for quickly seeing what market pricing is. It's got Dem. 60% to hold the Senate; Republicans 75%, to take the house. Look, the FTC and DOJ's budget comes from the congress approves and then president. So, they do get their budget from here. It affects confirmations of all that sort of stuff. So, when I say Dem 60%, Republicans 75%, do you think Republicans are basically flipping the house? Does that do anything to the regulators? Does it change more like, you get a Republican sweep? Does that change how the regulatory outlook looks?

Chris: Well, appointments are Senate heavy, budget, both matters, but it's really interesting because a lot of the direction of the Republican party in the past half decade or so, has become much more suspicious of Big Tech. So a lot of the most conservative members and most involved in antitrust are actually kind of Lina Khan curious, or at least she can say some things because of the identity that people she's going after and get applauded on both sides. So, I think what really matters is the kind of Chamber of Commerce, old-style Republican party and more business-friendly Democrats, kind of Blue Dog Democrats, kind of what is their relationship with the opponents on both sides of their party at the more kind of the wings of the progressives and the populists? But she might be okay with the progressives or the populist because neither of them like Big Tech.

Andrew: Yeah, no. I mean, the one thing I know we both listened on to Twitter much sharing a couple weeks ago. The one thing that really jumped out to me was, "Hey, I didn't hear anything that made me scared for Twitter. It's scary as an overall thought, but there was nothing that jumped out to me as [inaudible] but the thing that really jumped out was I think it was Lindsey Graham said, "Hey, Elizabeth Warren and I are working together on a new agency to regulate Big Tech." I was like, "Lindsey Graham and Elizabeth Warren working on a big Tech?" That just tricked me.

All right, so that was the microsense on the regulations, but there was microsense I wanted to jump into, and that's TEGNA, and TEGNA owns a bunch of local TV stations. The stock price is about 21, rate as we speak. They're under a deal to get bought out for $24 per share, and that is held up at the FTC level, I believe. I was just wondering, we've seen deals for regional TV stations fall through before, but with some confirmations on the FTC, with the potential change in Senate and the house, does that affect one way or the other, how the TEGNA deal was going to go? Or, you can say, you haven't been following it that closely since I know we haven't talked a ton about it.

Chris: I have been following it. Do you think it matters the Democrats got in? They have a majority. There's not going to be a Senate problem. It doesn't really matter where there are open seats, right? If everybody gets kind of like playing musical chairs, if you lose the Senate, you're stuck. You got to go to war with the Army you got; the army you got is the Army you have before you lose the Senate. Historically, both parties have kind of worked with the other side, certainly about picking your own guys.

So, you really have to convince your party leader in the Senate of which individual you want. But in this case, the Democrats really do have good working control of the FCC, in addition to normal antitrust issues which should be surmountable here, you just have the sensitivity especially in the Liz Warren kind of progressive side, but a fairly general sensitivity on local control of papers in kind of trying to hang on to local journalism, and fight against aggregators that in many cases, have just tried to squeeze out whatever remaining cash flow they can from newspapers in their dying years.

Andrew: The other two things, I think you mentioned the top two you said, make a hard shift away from antitrust regulatory is, the first was tobacco. I think the specific one you were kind of thinking of was the Swedish Match. So, I'll just flip it over to you there.

Chris: So, I'm very interested in tobacco. I've never used it at all. Shoutout to credit bubble stocks, that is kind of I think, it's one of the best newsletter blogs out there, on the idea that society is under nicotine. That we've had this history with tobacco that's gone back for such a long time and over the last century or so. Nicotine is going way down. Sure, to use is going way up has not been a good trade-off. That the big health devil is cigarettes themselves is the combustion and tar. That, if you took out nicotine, it's intuitive that huffing smoke into your lungs is not good for your lungs, and to Horace is bad. But that nicotine has kind of been condemned because of this association.

Well, Philip Morris, their history, I mean, they say, "Our history and our present is in cigarettes, but our future isn't." They came in, and put this bit in there for Swedish Match that I think has some of the most innovative and promising kind of cigarette delivery devices that I think is the greatest health care innovations since penicillin. I think that it saves lives, and that it is something that should be encouraged, or very least, a matter of open inquiry. I'm not a user. I am a shareholder. So, I guess, I've talked about i in my book, but I think that it's a really open question of what nicotine does, especially when you get rid of cigarettes.

Andrew: Yeah. So, Philip Morris loves... I don't know. I'm still trying to get over the stuff, this news, or whatever being the greatest innovation in health care since penicillin.

Chris: I'm baiting. I'm sure I'm baiting with that a little bit.

Andrew: But look, Philip Morris, I think a couple months ago, they entered a deal to buy Swedish Match. I think it's 106 SEK, S-E-K per share, and right away, you get a bunch of shareholders coming out and say, "Look, Swedish Match has this killer product. It's taking on the share; has grown rapidly. This undervalues the company that undervalues the future. I believe Elliott recently crossed the 5% stake. So, I just wanted to focus on the deal here and say like, what do you think happens here? How do you think this plays out?

Chris: You have the three perspectives. You have the buyer, the seller and the seller shareholders. The sellers management seemed to acquiesce to this pretty quickly and complacently. The buyer seems very committed especially, they don't say, "This is a one-off financial deal." They say, "this is our future, like we were tobacco, and we're going to go into this" I think it's a huge strategic commitment for them. It's completely affordable. The numbers just stayed approximately. There's a fairly surmountable downside, I said, that Activision was one that you could size with a somewhat knowable and limited downside. We think the Swedish Match calls it, "You'll lose money, if Philip Morris walks, but I think that shareholders are emboldened.

This is not a situation where you're bluffing; they're emboldened. One shareholder, not one of their biggest, but certainly one of their most vocal and well- followed, John Hampton said that he thought it was worth 175 to a private equity firm. So, presumably worth even more than 175 Swedish Krona[?] uh, I have two strategic buyer, but I think the likelihood that you could get a substantial bump out of Philip Morris to get this done is really quite good.

Andrew: So I think there's a couple other things to argue, and we can talk about it in a second. But, the one thing that always strikes me in these situations is, "Hey, you've got a management team. The stock the day before - I'll use round numbers - the day before that Philip Morris offer was around 75 or 80, if I remember correctly. So, you've got a management team. They look at their stock. The shareholders are freely trading this well below 106. They take a big premium deal from a strategic well-capitalized buyer, pretty much certainty of closing here. Then all of a sudden shareholders wake up and say, "Hey, no, this is worth..." I mean, 175 is more than double what the stock price was trading the day before the Philip Morris.

So, I think the two push backs would be like, "Okay, well why weren't shareholders appraising this rosy future before the deal, number one? Then number two, management should have the best line of sight into the value what the company's worth of the growth prospects and everything, and management took this deal. So, you combine these two together and you're like, "Hey, aren't you guys, just kind of arguing and saying, "Oh this is worth much more now, but you're putting on rose colored glasses on the day before. Maybe you had more neutral glasses and Philip Morris is just actually paying you the strategic premium. Does that make sense?

Chris: It does make sense, and I would just break it down into three reasons why something might break. The most dramatic caution is if it breaks because the buyer walks because he sees something new and the target is problematic, So, if you break a deal because of a material adverse effect, you don't have the deal, but you still got the material adverse effect. So, there's something wrong with it, then that pre-existing deal price might be invalid because you don't get it anymore. It's much worse than that. So, you imagine Biotech deals with one product and the commercial Pharma company walks away because the product doesn't work, you don't get the pre deal price. You get maybe nothing.

The middle category is just there's a bit in us; you don't close the difference. It doesn't trade. In this case though, I think there's actually a benign break scenario where this set of shareholders don't want this deal. Philip Morris doesn't bump enough. I think they will, but maybe I'm wrong. The management then becomes under scrutiny from Elliott, another holders say, "You have to do something progressive now. We were this thing, but you have to reveal this value that we see. We see this future, that's not matches. It is not cigarettes, but you have these different products. So, they look to unlock value in some other way. I think that the likelihood there that it breaks to say, 90 and not 80, even if it breaks down, I think is a substantial probability that it's kind of a particularly benign break that it's drawn attention in the process with holders to see more value than the management does.

Andrew: Sorry, I was on mute there. No, again, you said the shareholders now, they come in. They see more value there. They've got more pressure. Like management kind of opened themselves up for that license, right? Like one of the things is at 80 before the PMI deal versus today, you had a sheet slip your shareholder base. They weren't focused. They saw the long-term value, but maybe they didn't need to, whereas now, this deal breaks. You've got Elliot in there. You've got a more aggressive set of shareholder bases that are, as you said, going to hold people's ceasefire.

The one other thing that jumps out to me here, actually two things. The smaller thing is, "Hey, this is worth 175 to a financial buyer." That might be true, but this is a 15 billion dollar tobacco company with the high-growth tobacco. Like the pool of financial buyers who can buy a 15 billion dollar tobacco company is not that big. All of them do have, I think rightfully, ESG concerns not in the business, not in the ESG. I do think they have, "Hey, we go by a tobacco company," and all of a sudden all the pension funds who are a core customer won't invest into our funds anymore, or they call somebody, and say, "What the hell? Like we can't own a tobacco company." So, you almost have, "Yeah. We could make a lot of money on this deal, but we're sacrificing our franchise for all of the potential financial buyers there."

Chris: It sends them out quickly. It really does, and the ESG thing, if you look at the assets under management of the firms that have been sold out to this, it's just the hugest firms, right? So, you're really limiting the potential bidders.

Andrew: I couldn't even see a Berkshire or something, buying this company. I don't know if that's right or something, I believe Buffett's invested in tobacco in the past, but I just don't know if in today's day and age, I could see him buying a tobacco company and saying, "Hey, let's deal with all of that headache for a 20 billion dollar deal, which is still very small by the grand scheme of things, but let's deal with all this regulatory scrutiny." I think [crosstalk]

Chris: Even if it's 2% of your upside, it's going to be 20% what you have to think about and talk about responses for the rest of your life.

Andrew: The other thing I wanted to make is, we were emailing about this this morning, but anybody following financial market news that the US dollar has been on just an absolute rampage this year. It does strike me, this deal is priced in Swedish krona, and I believe two thirds of Swedish Match's revenue, and more than two-thirds of their value comes in US dollars. So, I just wanted that FX mismatch right there could argue for a bump because they've been taking in cash flow. If two-thirds of the value in USD that's going up versus the share bid just on that FX mismatch. So, I just wanted to ask you, how does that FX mismatch playing to the thought process here?

Chris: I frequently get this backwards because I first think about the arithmetic, and then it tends to be a cross purposes in terms of the business impact of selling back to the US, right? So, sometimes it's easier in this case. Sometime it's easier not only buy something, but then, the thing you're buying might be worse off or vice versa, right? So, it's not always the secondary impact sometimes negates or softens the primary. Primary, one in this case is it'll be easier for PM to pay more. They could bump substantially if they want to.

Andrew: Yeah, I agree though, because then you start getting in, "Well, interest rates are way higher today than they were a couple of months ago." So, yeah, you get that FX, but do you get the, "Hey, if we were financing this on, I'm pulling the number; 2% debt and now that's 4%. Does that mean we've got less room to go because the synergies are 4 years out to realize, and all the values in the terms of [inaudible] and blah, blah, blah. Anyway, it's so interesting, but yeah, I'm with you. It's just, it's strange when you get this mismatch of long - not mismatch - but this match of long-term value shareholders, plus a more aggressive activists all coming out and say, "Wow! This strategic deal undervalues this target company. It's a really interesting combination. Obviously, strategic deal. Strategic deals, you can pay up because there are synergies, it's the future, all that type of stuff. So, very interesting.

We talked, tobacco; we talked, antitrust, anything else you want to talk about here, or should we wrap it up and save it till a spooky Halloween episode?

Chris: I think that's a wrap until Halloween, and then we'll have Halloween topics and other things.

Andrew: The one thing we didn't talk about, which we've talked about almost every podcast we've done this year so far, is Twitter, but I do think you and I talked so much about Twitter elsewhere.

Chris: We'll have so much more next time.

Andrew: I don't think there have been a lot, but I don't think there's been groundbreaking news since the last one. The next podcast we do, the Twitter trial will happen.

Chris: Yeah. That'd be great.

Andrew: So, we actually had quite a bit to talk about there. So we'll, I'm just teasing the next podcast. Yeah. So, people can look forward to the next podcast. Chris, thanks so much for coming on.

Chris: Thank you for having me.

Andrew: I'll be talking to you before then, but looking forward to our podcast next month.

Chris: I look forward to it. Nice talking to you, Andrew. Bye, bye.

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