Chris DeMuth's State of the Markets February 2023 (Episode #153)
Chris DeMuth joins the podcast to discuss the state of the markets in February 2023 and what’s catching his eye in event driven land, with updates on TGNA, ATVI, AMC / APE, and MANU.
This podcast is brought to you by Daloopa.
Daloopa was founded by a former hedge fund analyst. He didn’t have a tool that he trusted to be 99.9% accurate, allowed him to pull updates directly into his existing models, and had the granularity in KPIs, Guidance, and non-GAAP adjustments that he needed. So, he built Daloopa. Daloopa is the fastest growing source for public company data, with data available for over 3,000 companies. Hundreds of AI algorithms collect and organize customized company historicals with an accuracy level and depth of data that is higher than anything achievable by other modeling tools. Each datapoint is auditable to the source. Daloopa’s Excel plugin is the first to allow you to update your models in your existing format. It’s simple and non-invasive—Daloopa will never #REF out your models. Daloopa clients are able to cover more opportunities and generate more ideas. No more data errors, no more Excel monkeying, just the fundamentals. See why equity investors are switching to Daloopa by checking them out at Daloopa.com/YAVP.
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: Hello. 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 it 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, Andrew. Thanks for having me on again.
Andrew: Thanks for coming on for the monthly appearance. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone nothing on this podcast is investing advice. That's always true, but probably particularly true today since we're going to go through probably 3, 4, 5, 6, a hundred bunch of stocks in situations, so, in other words, you just remember, please do your own work. Nothing on here is investing advice. Consult a financial advisor. And, yeah. That out of the way, it is February 2023. The shortest month of the year, but I almost feel like it's the most exciting month in terms number of events and just weird things happening in quite some time. I've got a list of tons of topics. People are lobbying with a bunch of questions. We can start wherever you want to start or I can just start walking down my list.
Chris: Fire away.
Andrew: Let's start. I guess the most topical thing, and maybe this is most topical because it's breaking as we speak. But we've talked a few times on this podcast about Tegna and Standard General. Standard General is a concentrated hedge fund. They do buyout companies. Almost a year ago to the day, they announced a deal to buy Tegna. On Friday afternoon, kind of one minute after the close, the FCC put out a press release that said, "Hey, we have serious concerns about this deal. We're the last regulator. We're not going to approve this deal. We think it's against the public interest." In general, when the FCC says, "We're not going to approve it," the deal is dead. In this case, Standard today, as we're talking here, we're talking Monday, February 27. Standard came out, put out a press release that said, "We have huge issues with everything they've said. We're going to try and pursue this deal. We're going to try and find a way to get it to close." So, we're just completely out into unprecedented territory as far as I know here. I'll just pause there. I've got some thoughts, but I'll just pause there. What's your overall thought of what's happening here? What's your overall thought on the go-for-path, everything?
Chris: There are half-dozen things about last week at the FCC that were unprecedented. The most formulaic thing to say is that this kills deals. It's historically a death sentence for M&A. Deals cannot operate quickly enough to get through an FCC procedure like this. In this case, it very explicitly would go well beyond the walk date but it would kill the deal historically. It's also unprecedented to have this come out from the Media Bureau without a separate vote from the FCC commissioners. It's also unprecedented generally, thematically, to have such a partisan FCC. Historically, I think DOJ, FTC, FCC in Washington, a city that can be driven by parties and ideology had a little bit more guardrails around those agencies. If you have 5 people, you have to work together in this many cases, sometimes only 4 at a time. You also have people who are, you could say, a cynical version or a benign version of the reality that people bounce back and forth constantly between the private and public sectors. I can tell you at a personal level, it makes it much smoother. These are people who might have some testy quote, the way two people are thinned to it may have a testy tweet and then go out for drinks afterwards.
These are all, generally, social friends and very frequently somebody who's interviewing you for a partnership at a big private law firm in a year and everybody kind of treats each other with that attitude. This has gone off the rails in terms of how people are behaving super aggressive, weaponized and the fact that the buyer was this caught off guard, you could come up with a benign or an ominous version of that. The benign version is, there's a lot left to do. The ominous version is, they've been interacting with staff a long time and staff does not believe these people, does not trust them, doesn't have any curiosity about the things they might offer, that's pretty bleak. It doesn't look to me like anybody's named issues that are solvable either through politics or through either legally or politically solvable. It looks kind of dead-ish. Fairly conventional thought, probably correct thought in this case. It's interesting to me that the buyers are still charging away at least now. They still have duties under the contract until the walk date. You want to be a little careful because if things bust apart, they can become contentious between a buyer and a seller. You might want to put in the effort at this point.
Andrew: That was great. We throw out a lot of things here. I just want to go into a couple of things you said because I think I've been working with you for 7 years and I don't consider myself a particular regulatory expert. But I've certainly like through osmosis, picked up a lot of these things. But I do think even for me who's been working with you for 7 years, you hear the stuff and you're like, "Oh, that's weird." You know it's a break but you don't understand why because I can in bound all the time and be like, "Hey, this seems fine. This is an antitrust. I can't still go through in court," and you say, "Well, this is dealing with media, FCC. This is license and stuff." The DOJ actually already proved this deal. This is not antitrust. This is completely different standards. I just want to walk through a couple of different questions that might be popping in people's mind. Let's start with the simplest one. Duties under the contract until the walk day, right? The walk date is about May 22nd, 2023 at this point. I think this is a simple one. Yes, Standard has duties. But I do think by putting out this press release and going after it, I think they're showing they actually want to close this deal because traditionally, I've seen if Tegna and Standard both saw this was going to ALJ and there was no shot of winning, they would both just shake their hand and say, "Alright, let's call it off at this point." Do you have any disagreements there? That's just a simple start.
Chris: Well, the extent of the buyer really wants to do the deal that really demotes the significance of the walk date full stop, right?
Andrew: Exactly, yes.
Chris: The target should absolutely want to continue. The target, if you just look at comps, you look at the market, you look at the results they've put out, this is a very good price for the target. If Standard General wants to do this, they sure should.
Andrew: That was another question I've just had in my mind this entire time. Whenever someone would bring technology, I would say, "Yeah, okay." It was always like it was at 2024, if it goes through 16, if it breaks was like the rough math, so 50/50 issues how I thought the marked price. Whenever someone brings it up, I'd always be like, "Okay, I get that and I'm with you. I thought that the FCC would ultimately approve this," but they always look at me like, "Why does Standard want to keep extending this contract? Why are they so keen to do this deal?" They announced it about a year ago. If I look at their comps, Gray GTN is down 45% since the deal wasn't out. SPGI is down 40% that Sinclair Broadcast. Nexstar, who is ostensibly in the same industry but they are so much better run than everyone else, I don't know if you can consider them. Their stock is slightly up over the same timeframe. I look at Tegna and I'm like, "Hey, why does Standard want to pay? Why are they so committed to paying a big premium for this company when over the past year, interest rates have gone way up?" The industry were on the verge of recession. Advertising rates have come way down. Multiples have come way down. Cash flows have come way down. They're missing their projections like, why is Standard so committed to this deal?
Chris: It's a good question. There are possibly kind of sunk costs on the process but they seem to still want it, so I don't know. They're working harder on this than I might, and it would be pretty standard just to put out a release saying, "Hey, we mutually agreed to terminate at this point, the FCC." But it just shows, I think, that they have had less than the typical amount of productive back and forth with staff because even when you disagree with them. One thing I find is when I amassed a year-long regulatory process, I kind of more or less end up being friends with the people I'm interacting with even the nominal opponents. Just talking to these people all the time, I'm always getting paid to represent their side and you just see their perspective a little more. None of that seems to have happened here. They seemed to truly been caught off guard. They don't even seem to know what the FCC is talking about, which makes it to me look really political, like they want to project this fight as opposed to solve any particular problem. In that regard, it's consistent with what we've seen in regulatory bodies across this administration.
Andrew: Let me go to the next question. When you were operating it, you said, "Hey, how the FCC killed this, this kills deals." I think a lot of people might hear that and say, "Uh-oh!" We're going to talk about Microsoft Activision a second. Microsoft Activision, they're getting blocked and they're suing. Standard, they seem gung-ho do this merger, why can't they just sue and go to court and try to prove their case that way?
Chris: I think constitutionally and philosophically to me, that has a ton of merit. Nowhere in the federal government is there as much broad amorphous discretion as at the FCC, and nowhere has that kind of metastasized farther away from any statutory intent. They can ask for whatever they want and they can go deep, deep, deep into their own politics, the politics of a given administration. Frequently, when you are talking with staff, you have nothing to do with any telecom act. You have to do with DEI, or the environment, or employment, or newsroom policy, anything. You're at their mercy and it's a bid and an ask and you pay the mugger and you settle, and the subtle part hasn't happened here but it's very broad. When they say, "Let's check with us on whether we think this is legit or not," they're aware of the discretion they have but it's broad amorphous, almost completely non-falsifiable and there's a bigger constitutional philosophical stink. But that's not one that any company is well-positioned to attack.
Andrew: Then, I want to talk about the process for how they block this in a second. But let's just talk about, you mentioned they're blocking and the reasons they say they're blocking. I think the reasons they said, "Hey, this could raise prices for consumers, right?" You have a bigger company negotiating because, in this case, Tegna's not actually getting bigger but Apollo is providing some of the financings. If I remember correctly, they're saying, "Apollo owns other stations. Maybe Apollo and Tegna actually started combining their powers to talk to cable providers to get higher prices which will then get passed on to consumers." They're saying, "Higher prices for consumers." A big piece of this was localism, right? They were saying, "If private equity buys this, this is going to be - even though Standard's not typical private equity - Apollo's involved. There's going to be leverage." They're saying that could result in local people getting fired. When I was reading this, one of the things that shocked me and jumped out of me, if you just simplify it down there saying, "Hey, larger companies can raise fees on MB and can raise cable fees and private equity fires people." Both of these are against the public interest. If I just read that and I'm a media company, the FCC has just said, "Any deal that comes to us that has private equity backing, debt financing, or that involves two companies getting bigger, there's just no mergers and acquisitions in the space that can pass the FCC under that jurisdiction." Am I wrong or am I kind of taking that too extreme?
Chris: No, that's what it sounded like to me. I thought that the nominal antitrust points were pretty thin. It didn't sound like that's where their heart was in. I think that it was a shot across the bow of private equity. They define private equity and said, "Ha-ha! This is the scandal that we're against." I thought, congress could write a law banning private equity. But some folks that have jobs at the FCC seem like they've kind of taken on themselves to essentially do that. Nowhere is that in their statutory authority, but they interpret broadly both politically and legally and this is what they want to do with that.
Andrew: I was just very surprised by that. I've never seen some of these things. Again, the FFC, they can bring the public interest into play. That is technically within their purview. But it just looks to me if I was reading this and I was a private equity firm thinking about buying someone or I was a strategic company thinking about buying a competitor, I would just have to put that and say, "No, the FCC can block this unilaterally and it just seems like they don't want mergers. They don't want anything that could result in any fire and it did seem a little extreme to me." Let me walk through. Go ahead.
Chris: Quick point. I think I've mentioned this thought in the past, but I feel like this is in keeping, which is this is not the current president's beeps. This is not the current president's passion or what he ran on. He's more or less outsourced the regulatory personnel and direction to Liz Warren, and she's pretty vocal on this and boy, have her comments down the line. Not always in every deal that she says that she wants blocked. I once got a chat with GPT to form a letter for her because she just is against all of them. You can do this reflexively, but if you listen to her philosophy on capitalism, M&A companies and so forth, she's put her people in the top slots of each of these regulatory bodies, and their decisions have philosophically been very consistent with hers much more in keeping tool as Warren than historically, Joe Biden. He's just busy with other things at the moment.
Andrew: Let's see. The other thing I wanted to ask. You mentioned when you were talking about this, traditionally, the FCC goes to the full commission. In this case, the FCC use a bureau order. To simplify, a, this is a departure from president. As far as I know, this is the first time they've ever blocked a deal like this. Basically, it allows the FCC commissioner to block a deal unilaterally without going to the commission and putting everything before. I might have simplified that a little bit, but I'll let you talk about like, look. Standard General and the press release they put out today, they noted this. Clearly, they take issue with this and they think maybe there's a way around it. It does look like legally, the FCC is kind of, "Okay, it gives the commissioner unprecedented power for blocking deals but I don't know how you get around it." I've rambled. Tell me if I was wrong on any of that or if you disagree, agree, if you think there's anything else going on there.
Chris: I think this is a powerful annunciation of the chairman's power, and chairman has a couple house Republicans to deal with on the commission, which even if they can't outvote the democrats, they can make statements. They can be revealing and make it a two-way conversation. But I think that, if you look at the people running the Media Bureau, these are really the chairman's people and they're completely aligned. I don't think the deal gets done if you bring it to the commission. I don't think that the Democrats want 2-2 votes. Incidentally, there's a difference between license transfers in antitrust suits and that you need a majority for antitrust suits. If it's 2-2, they can actually even threaten settlements. You can actually get a deal done as is if you can, but you need an affirmative majority for the transfer, right? I don't really see what the company, in this particular case, has to gain it. I'm virtually certain, like 99% certain, that this is not a rogue bureau against the interests of the chairman. I think that'd be the least plausible explanation, but I think it's just carving out, it's just removing the role for any opposition. When I say opposition, I mean, even statement attacking it. It's the most conceivably unilateral farthest from statutory intent, least due process, least rule of law way of doing something to just kill something you want to kill.
Andrew: I guess, just last thoughts, where we go from here. This is probably a little longer than we normally talk about stuff, but nobody people like it. I don't know. I find it interesting. Tegna, as we talk, is trading about 1,750. When I do the math in my mind, I actually think that implies about a 10% chance that Standard General is ultimately successful in this appeal and gets it through somewhere between. People can argue. It could be 10%, it could be 20%, it could be 5%. But it's somewhere in that low but still possible outcome. I guess the two things I wanted to ask you are: Does the markets describing odd somewhere around there? Does that feel about right to you? Then, I'll follow up with one more question there.
Chris: It feels about right to me and it coincides with - and I won't mention the specific one - but it coincides with another thing we talked about recently that was a weird little bankrupt equity and it was similar in that. If I understand the situation correctly, the chance is closer to 0% than to 10%. But 10%, I think, is a reasonable odds for. This is such a weird situation with a half-dozen unprecedented things that only take one more unprecedented thing to put the deal back on track. I like to think about that as more of 10% than 0%. If I properly understand it, the deal is dead but so much is happening so fast. It would just take one more weird thing to put it back on track, so 10% sounds about right to me. In fact, that's just where I am.
Andrew: The odds of this going back, right? Standard put out a press release today saying they're going to fight for it, and notable in the press releases is they don't say how they're going to fight for it. They just say they're going to fight for it and what the commission did was unprecedented here. I mean, I think the 10% chance where this goes through, I think what it rests on, and again, tell me if I'm wrong, is Standard raises a fuss and contacts a bunch of down-the-middle representatives, senators, that stuff, and says, "Hey, agree with us, disagree with this, whatever. This is an unprecedented use of the FCC's power that's going to have a chilling effect on mergers, premiums, rule of law, all that sort of stuff. Maybe you agree, maybe you don't, but you really want," like, "Hey, if you're a senator Democrat, if the Republicans control the FCC and pull this, do you really want them just letting every deal go through by pulling the exact same thing here? If you're a centrist democrat, maybe you don't think this should go through, but do you really want one commissioner having the power to do this?" I think Standard raising that point and getting political pushback, it's actually pressure. There's no lawsuit they can do. It's actually pressure. Am I thinking about that differently or do you see a route where there's a lawsuit that gets this done at this point?
Chris: That's not a lawsuit. Not a winner, and certainly, not going through the administrative process. You can use your imagination a little bit trying to come up with 10% on it, right? This would not be plausible to me if I was trying to explain 70% chance or something, but the two ways I would come up with, and neither of them sound right to me: One is, what if the buyer just so completely hammed this up so badly that they seem to be individuals in an organization that missed every normal political queue in Washington, D.C. for a year that fairly normal stuff that you give FCC staff? Maybe there's an incredible amount of hubris that you restore normalcy over the next month and they get some kind of settlement. That's conceivable. Single-digit possibility that things were so bad that they just make them normal now, and you can put this back on the rails. But the FCC would have hinted that the whole time. They would have brought another people. I don't think that happened, but I think that could be a few percent odds. Then the other thing, the big problem that anybody in D.C. has right now, if you are unhappy with the Liz Warren progressives that have so much energy, have a lot of influence with these regulatory bodies, is the inverse of these people who are anti-capitalist in a lot of ways or not. Chamber of Commerce, normal free-market, limited government capitalist. A lot of the maggoty, Trumpy people, hate the same companies, hate the same deal, are really happy to intervene and have absolutely no interest in the due process rule of law.
Let's just do things in a way to protect ourselves from when the other people are in charge better arguments. Now, one of the few people who do care about private equity and deals and not to get her into trouble, Kyrsten Sinema is actually a senator who's quite sophisticated and quite open to these things. You have, right now, another senator, Senator Manchin, who has been very quiet about whether he's still a Democrat and say, "Well, he's American. He hasn't left the democratic party, but he has not re-endorsed that label, at least, at the national level." If you have a huge amount of sensitivity about the razor-thin margin that the Democrats control the senate on, you have one person who's left, one person who has one foot out the door. Those two talk, the senator actually hears. You could imagine creating some political power, but like normal people who want due process and rule-of-law and want functioning markets. That's like the smallest minority in Washington, D.C. right now. You kind of have a weird left-wing populist versus weird right-wing populist with nobody who's going to take a bullet for private equity. I think that this looks to me like a political loser. It looks to me like a legal loser, but there's a sliver just brainstorming what might be 10% chance. I think I had put together, get congress to lean on them. I think that you add to that a, "Hey, let's make a new effort with staff if they've been arrogant and obtuse so far, maybe normal effort." But I think the staff wanted to get to this point. I think the Media Bureau wanted to get to this point, and we're not trying to avoid this. I think this was the plan.
Andrew: Just reading some of the fines, I can't claim to have read everything here. But reading some of it, it did not appear to me that Standard was. It's possible they were being obtuse but it appeared they were making normal concessions and everything. I think we need to move on to the next one, but it's just funny. As we're talking about how the FCC has maybe gone a little bit out there as we're talking, the IC's takeover of Black Knight is getting challenged. I guess that's two separate ones, but I just thought that was funny. Let's turn to the other one. The most common thing I get asked about, and it probably makes sense, but I get asked about when you come on this pod or whenever we're talking anything merger and event, is Microsoft Activision and they probably make sense, right? This is a $60 billion takeover, massive takeover, huge spread. It makes sense everyone likes to talk about it and everything. I just wanted to do an update there. I guess this month, we got all sorts of stuff. I guess I'll throw some questions, and thoughts out, but I'll just start either. As we're talking in February 27th, how do you feel about Microsoft Activision at this point in time?
Chris: I'm not sure the market price is missing a ton. When you turn it back into a standalone boof, I think procedurally, the deal is maybe not as doomed as Tegna is procedurally. But it has problems in the U.S., has bigger problems in the UK. I think since last we spoke, there's been new FOIA information out about how aggressively these American regulators are going after foreigners to help them enforce their preferences on American companies and American deals. It's very similar to what in the global war on terror we did with extraordinary rendition, which is to say, we have these inconvenient due process and rule of law problems. We want to do some stuff. Would you do them for us? We'll send some guys over, you do. It's like, "Hey, we have these American companies. We're going to send them. We're going to blindfold them, hoods on them, and send them over to you. We're not going to look. But if you do awful things, and that's what they're doing with these companies." I think that procedurally deals in terrible shape. I think that it's a little tricky to see where it would trade without it. I think it's probably trading largely broken. I think trade is down the day and the week that it breaks, but I think it's some kind of this no man's land at this point.
Andrew: I get to talk to you about Microsoft Activision a lot, and it's mainly for people who are bulls or what I would call like, 'bull curious.' They say, "Hey, look. I get it. Microsoft Activision, my issue, and we can go through it." I always say, "I don't really know how UK CMA goes, right?" Like, I don't see a path to resolving there if they decide to block. I feel great about Microsoft winning in court. I see no antitrust reasons Microsoft can buy this. Similar to what we were just talking about with Tegna, UK CMA has some pretty interesting powers and Microsoft is not going to close Activision and divest all of their UK division or something to get this done, right? That's not going to happen. I don't know the path with CMA. Then, a lot of the bulls will come out and say, "Oh, okay. That's fine". But I feel like we're buying Activision and getting the merger for free, right? The simple math is pierce trade for 18 to 20 times EPS. That multiple on Activision would basically get you to today's share price. Then you throw in, they've got like $8 to $10 billion of net cash plus I'll get another couple billion from the Microsoft break fee. That's like $15 per share of net cash for free. They're like, "Look, my downside on a fundamental basis seems higher than today's share price and if I get the deal, I get more than share price." They're like, "Aren't I free rolling?"
I get it, but my response was like, "Look, nothing in investing is ever quite that easy, right?" This is a video game company. If you and I have been sitting here a year ago and talking about Activision, we would have been saying, "Broken company, sexual harassment scandals." Call of Duty, their last release was a disaster. They can't release anything on time. Blizzard is up in arms. World of Warcraft is losing people. It's like, in a year, all that seems to have turned around. Now, Activision is the best executing video game company out there, but all the other ones are awful. It's like these things can turn really quickly. It's hard to assign 20 times earnings a video game company with that much cyclicality and execution risk. Maybe we're all playing video games in the metaverse in 2 years or everything's on Roblox. I don't know. Then, I always come back to you, of course, you do. NXPI, in 2018, event investors will remember. This was a semiconductor company. Qualcomm was buying it for $135 per share. There was this big event bull case where it was, "Hey, if the Qualcomm deal breaks, NXPI's value is higher than the Qualcomm deal. Well, guess what? The Qualcomm deal broke and 3 months later, NXPI was trading for $70 per share. Not over $135.
Chris: No. In fairness, that was a pretty rough December, I'd say.
Andrew: It was a rough December, but even after it broke, NXPI's fundamentals did not do well. It was a rough market, but it could be a rough market when Activision emerges. I just remember that precedent. I'm just a little scared. I'm rambling. I'll turn it over to you, but that's kind of where I get scared with this one.
Chris: Handing over shares from arbs to fundamental owners tends to be a really sloppy process. Especially, in a generally bearish market. Bad news is bad news. You can buy later lower. I've never felt the need to step ahead of this on a potential break-in deal, and it looks potentially breaking. I really like how Microsoft has handled everything so far. They have some great executives who I find holy compelling. Activision, separate from the Microsoft effort, has some really feisty calms people who have just been laying into this in a way that wares don't even let you and that's been fun. I like the people on both sides here of this deal. I think they expected a big fight. Whether Standard General and Tegna were caught off guard, Microsoft and Activision have not been caught off guard. I think that they thought, "This is about where we could be," which also shows they really want to do this deal. I find them holy compelling and economically plausible that what they want to do this deal for is not any of the conspiracy theories that their competitors have whispered in the ear of the regulators, but it really comes down to Sony and Nintendo and other players. There's this little glimmer that you could settle on, which is, I don't think Microsoft can do anything structural. I don't think the regulators would want to do anything they call, 'behavioral.' I would put everything that's contractual within the behavioral category, but this CMA sometimes makes that just rhetorical distinction between behavioral fixes and contextual fixes. I've been just thinking about it. If the competitors really wanted to grab the best possible deal and not just kill this. Hey, buddy. Look at it right behind you.
Andrew: He just have to roam actually for people on the video. Let's give you [inaudible]. I told the people on video that.
Chris: That's going to make no sense to people listening in audio. Dog just walked into the camera. Sorry, guys. If you could take out the competitor opposition, you'd also got the case on the U.S. side in terms of witnesses, that would help quite a lot. I assume they're trying to kill the deal, they're just trying to hurt a competitor. But I think you're dealing with a very competitive market. There are competitors there to complain about it, and you're dealing with a restraint of well-functioning markets with collusion between regulators to kill this and the tawdry process of Americans using foreign regulators to kill a review that even though they're largely worldwide markets, the American regulators aren't. If this was a private entity, the U.S. government, you could bring an antitrust case against them and a tortious interference case against them because they are totally disrupting review that they're not a party in Europe and they're clouding and, I think, hurting the market and making a lot less dynamic than it would be otherwise. That really comes down to the competitors. They probably are pretty happy with their accomplishing. I read it at face value, but if they wanted to take the best possible deal they could get, they might get a better deal for themselves in a settlement.
Andrew: When you say the competitors, Nintendo already got, I believe, a 10-year commitment for Microsoft to put pretty much everything. That's actually a good deal from them because I think a lot of the previous Call of Duty and stuff haven't been on. If you're a gaming person, the Nintendo Switch is a lot lower powered than Xboxes and PlayStations. I think Activision generally doesn't release on Switch, or they release lower-powered games. Activision promised, "Hey, we're going to release our stuff on Switch and it's going to be about the same as everywhere else." I think that's actually a pretty nice win for Nintendo, especially because people buy Nintendo for Zelda and Mario, not for Call of Duty. But I think the real thing is Sony here. I guess, the two questions, I want to go through everything that the regulators have. It gets vexed up, but I guess the question is like, what is Sony playing part here, right? Is it just, "Hey, we don't want Microsoft to own Activision," or is there some give Microsoft can write? I don't think Microsoft can give them a pile of money. They can't say, "Hey, here's $2 billion to go away and stop complaining." But is there a give that Microsoft actually can? Because they've already offered Sony, I think, 10 years of game access as well. What else can Microsoft really offer Sony?
Chris: They've said they're not going to do it permanently, and that wouldn't even be really an appropriate thing to offer. When they said that, that sounds holy reasonable to me. I think they've sound sort of a little bit of at their wit's end because I think they've kind of thrown things against the wall trying to not negotiate against themselves. I don't believe they've had an ask from Sony. I think they've had concrete bids and have been fairly open about discussing that. I don't know. I don't think Microsoft knows. If you're rational and self-seeking and profit-motivated, you should always have an ask for everything, including how to fix this deal.
Andrew: Let me go through. I think the governments, and there's overlaps in all of them, but let me just go through. I read through the overview of everything the governments are asking or complaining about to Microsoft here. Let me just go through them with you and see what you think or if there's a solution. The first problem that governments have with this deal is they say, "Hey, Microsoft could withhold Activision's games from rivals." They're not going to release Call of Duty on Sony, on the PlayStation. They're not going to release it on the Switch. Again, I think that's been pretty much solved. We can talk about the commitment issue here, but I think that's been pretty much solved. But what do you think about what governments are saying there?
Chris: Contractually solvable with a kind of fair and reasonable access contract companies do all the time. I also think if you were in front of an impartial judge in the US, which is not going to be decided in front of that, I think that there's pretty easy econometrics case against that. I don't know the proof of this, but I think I would be very surprised if a lexicon-type economics couldn't put together a case that's just the math doesn't check out. I don't think the government has econometrics seeing that it does check out. I think it's just a theory. It's something one can say.
Andrew: As I look at all these, they all come back to that. I look at them all and I'm like, this might be the more libertarian side of me coming out, but I look at them and like, Microsoft really excluded like, "Hey, who says we have a God-given right to have a video game system?" Microsoft really is good. Sony's got plenty of exclusives on Sony that are awesome. You've still got Nintendo, like Mario's exclusive on Nintendo. I'd love it if Mario was everywhere, but nobody's been able to get Nintendo to open up Mario. I don't know. It just seems crazy.
Chris: I think it's absurd. I think it's some sort of a couple grounds. One is these companies routinely fail their customer in some ways, and they look to me just like vicious competitors who do absolutely anything to beat their rivals and to beg for the happiness of their customers, right? They make successes and failures all the time, but I have little kids, including kids that play all sorts of games at different people's houses on different platforms. One of the things that I think that's super important is that the content can flow fairly seamlessly between different hardware, and I think you would alienate these kids if one person's house, then this company made it really hard to operate. I think that that gravitational issue would be really big, number one. Number two, it's just not feasible to me to say that when you create content - if you've made a painting, halfway through painting, you're a monopolist who is monopolizing that one thing. It just seems to be a stupid idea that it's not part of our society's infrastructure. It's this thing that wouldn't exist other than you making it. It seems like you're deciding where it goes, kind of seems just rational. You're always monopolizing everything with a narrow enough definition that you made that we would have any of it without you having made it. It seems like a dumb point.
Andrew: That's always why I think the history of anything intellectual property when it goes in front of antitrust, it basically gets destroyed in court, right? Because there's so much competition for entertainment. It's like if Microsoft had built Call of Duty internally, Sony, I think God of War is a really popular Sony franchise. They built that completely internally. Nobody's got a problem with them having God of War exclusive for PlayStation. What's the difference between that and Microsoft going out and buying Call of Duty or something? It's just one of the reasons. Again, Nintendo has Mario and I haven't seen any calls from the DOJ for Nintendo to make Mario open access and allow everyone to get Mario games. It just seems to interest me. Anyway, there are two. Look, we talked about Microsoft Activision every pod because, again, it's the largest spread out there. Everybody wants to know. We always get questions on it. But there might not be any updates on that in March. We'll see. The next state is, I think, CMA reports due April 26th. There are two smaller special situations out there that I think a lot of people ask about, that I think you and I are looking at. I thought it might be worth talking about. The first one of those is AMC8. This is like, just today, we got news that it appears the AMC8 vote is going to happen on March 14th but then the results of the vote, they'll get tallied. But if it's yes, it appears there's going to be a preliminary injunction hearing on April 27th that's going to determine if that vote actually matters or not. I'll just turn it over to you. What do you think is going on with the AMC8 situation?
Chris: I think they will hold the vote, and I think the vote will pass. I think it will be helpful for the company to actually have the voted hand with whatever happens after that. They'll establish this representation, and the delay is a huge problem. It's a situation where having read the case point by point, it seemed plausible but barely. It's interesting that the companies agreed to this solution versus fighting out over TOL, which I thought had a decent shot of getting rejected and then we'd be done with it. Either they made a mistake or if they were doing something clever, it would be to define the class, to find the representation, get the vote in hand, and then being a better situation to settle after mid-March. You could go back to the representation in the shoulders and say, "This thing's worthless otherwise." This is like, in my knowledge, it's like if there was a fireman and he knocked on your door with an ax, but the house was on fire and going to burn down. Will you sue them for wrecking the door? The counterfactual is that it would be even more wrecked. You have business judgment rule, which can kind of drive us nuts generally because you're allowed to be stupid, you're allowed to make mistakes. But you're really allowed to do all sorts of things when the alternative is zero. What are these guys supposed to do? They're doing something creative, they are supplying securities to people who demand the securities, and they're keeping the company out of bankruptcy. Maybe you get it down to kind of a one-on-one conversation with the vote in hand and are able to settle after that. But it looks like it's probably going to take longer than it was without the suit.
Andrew: I guess, two questions. The first is, I've got some theories on why they would agree to the TRO here in April 27th and just hold it on March 14th. But ignoring that, I can't remember too many times where you've had a lawsuit and the companies have gone in settlements that, "Hey, we'll just have the vote 6 weeks ahead of when we'll decide the lawsuit. We'll have the votes, we'll know the results of the vote, and then we'll have the lawsuit 6 weeks after to decide if the votes matter or not." Most of the situations I've seen that are kind of analogous to this, they would just delay the special meeting and then they'd have the lawsuit, or as you said, they would have had the hearing on - it was like March 10th or whatever - and then the judge could have said, "No, we're throwing the suit out," or, "Yes, we're going to delay this meeting for 60 days while we figure out this ruling." I've never seen a company be like, "We'll have the vote and if the judge decides that we did something wrong, the vote just won't matter." It just seems a little strange.
Chris: It is strange. They must have thought they were getting something better than the TRO or just a company plays fast and loose, and they tried something and they thought they had it. They were caught dead to rights and that would have a TRO, so it was neutral. But they must have thought they were getting something better than neutral. I think it's just that you go back after the vote because there's no delay until after that. This suit is then what's squaring the process. Maybe even if you look at the marked market security prices on that day, it's an easier case to make to a shareholder say, "Look, here's the situation immediately. Not net present value, not all the weirdness about the difficulty on the short side to capture the spread with AMC." Say, "Look, this is what it's costing you immediately. You can fix it immediately." They might think if they're doing something at all sophisticated - and I'm not at all convinced that they are - it would be improving negotiating dynamics and simplifying after the vote.
Andrew: My skeptical reading is that I think if you read through a lot of the AMC, they don't have a ton of preferred shares left. But I think if you read through a lot of the contracts around this, as long as they have the vote, they can start issuing preferred shares again. They don't need to have the deal closed, if that makes sense. I think a skeptic would say, "AMC is so desperate for financing right now that they could just go have the vote, and then they could start issuing preferred shares while waiting on the lawsuit to play out." But even that strikes me, a, I'm not sure if I've read all the contrast, right? Because AMC, at this point, is a very convoluted company. But, b, like if they went and issued shares between March 14th and April 27th with this lawsuit out there, and then the lawsuit won or lost or whatever it was, I would think maybe they don't care because they're bankrupt, but I would think they would have some trouble. I would think the banks that offer their securities would be in trouble. Yes, I know they can caveat all sales every which way, but I think that would raise a lot of issues. I don't know. I'm being very speculative and spitballing a little bit.
Chris: That could be part of the negotiation, though, with the plaintiff. Do not do that.
Andrew: With the plaintiff, it does strike me as it would be pretty good taxes from AMC to go hold the vote and then go to the plaintiffs and say, "Vote's done. We've got this approve. We're going to beat you in court. What would it take for you to walk away?"
Chris: How many props do you want me to issue while we're having this conversation?
Andrew: But if I was anyone else who was in to see plaintiffs group, I'd be like, "Hey, that's preferential treatment." I just don't know. Then, I guess the other thing it comes back to is, I don't even know. The other thing comes, as you said, reading the lawsuit, you read through the lawsuit and, I mean, AMC issued 8 shares to the AMC shareholders. The whole lawsuit presumes that the AMC shareholders were disadvantaged. As you said, if they don't issue these 8 shares and they don't raise the equity capital, the whole thing's a zero. It's like they gave the shareholders the shares and they issued more. I'm not sure how AMC shareholders were harmed. The company didn't go bankrupt and they got their shares. Where was the harm there?
Chris: The key to come in stock ownership is that you're treated in common and they all got this. They are the ones that issue these products. It doesn't seem like a great point to me.
Andrew: Strikes me pretty crazy. Real quickly, the other situation I think we wanted to talk about was Manchester United. Again, we're talking February 27th. It's a very active situation. If it takes me 2 days to get this podcast uploaded, the company might have sold for a fortune or the shareholders might be unhappy and they might have called the whole deal off. But I guess Manchester United, it's a solely French-soccer franchise. You've got a controlling shareholder group who's not super-liked by fans. I think it would be fair to say you've got two bidders in there. The Qataris allegedly bid $4.5 billion or $5 billion. You've got the market is very skeptical. Is this sale going to happen? Are the Glazers going to take minority capital to retain control? Is somebody only going to buy the majority controlling shares and leave minorities out there? I guess I just want to turn it over to you and see what you were thinking these days.
Chris: It's hard to think about this as a kind of a traditional value investment using some kind of market metrics for what it's worth as a standalone or what somebody might want to pay. It's different than that. I'm trying to think of the last one that was analogous. I think that it's a $5 or $6 billion toy. If you are wealthy enough to buy something like this, it's hard to care about something that is a full order of magnitude or beneath the marginal thing that you're able to buy that your peers can't, and that's sports teams. People love owning them. If you think about just the supply and demand of sports teams, it's been incredibly valuable. It's what these people want. It is what they can marginally afford. It has all sorts of tax shenanigans and benefits. It is one of the situations where a very wealthy private party has the best leverage against all types of government revenue authorities, but you can get all sorts of good deals when you own a sports team. All sorts of social benefits and all sorts of benefits if you come from an autocratic routine, and you can get out. If your jet makes it out of the airspace, you still are left with this valuable asset in the first world.
It's kind of kiting and attacking shenanigans and social cachet and what people care about at that rarefied sliver of society. You can buy whatever plane you want. Nobody really cares about your $100 million plane if your peers all can buy the same one, but maybe just you get not only because the cost but also because of the nuance to kind of winning these things. Not only is it just the supply and demand in terms of the numbers the team is numbers of multi-billionaires, but they just don't come up that much. Whatever I'm thinking about a purchase decision, I try to say no to all the obvious no's and yes to all the obviously yeses and then all of my close calls are to the most reversible decisions. That's usually saying no to something, but putting in a good bid on every continuous property tool land I always already own is something I just do formulaically. My next-door neighbor's house goes on the market, put it in a bid. Why? Because it's easier to change my mind. I just want to be in a situation where I give my future self the most options. In this case, if you ever want to do it, got to do it now because somebody might hold onto this thing for the next 25 years or 50 years or forever.
Andrew: I've used this analogy a lot, but as you said with Trophy Properties, they call it once. One of the bidders here, Jim Ratcliffe, is apparently a lifelong Man U fan. I know soccer less than basketball, but if you're a Knicks fan and the Knicks come for sale, the last time the Knicks were for sale were in the late '80s or early '90s. You get one shot to buy the Knicks. Yes, you can start building out business cases for buying sports franchises and stuff. But ultimately, it comes down to if you had $20 billion and you're a lifelong fan of the Knicks, your dream has always been to own the Knicks. If Forbes says they're worth 7, and you spend 10, 12, or 8, what do you care when you're achieving your lifelong dream? If you're a 20 billionaire in New York, you are an important person. There's no doubt about that, but people probably don't know who you are.
Maybe showing buildings, going up there. But James Dolan, people know who he is. People hate him, but people know who he is because he owns the Knicks. Not only your spending money to achieve your life-long dream and the Qataris case, I think there's been a lot of evidence. If you buy sports franchises, you can really, I think people call it sports washing these days. You can sport swash your reputation by owning a sports franchise. You get more famous, sport swash your reputation, politicians have to deal with you because you control Manchester United. You've got this built-in base. You can build a business case for it, but there are a lot of non-business things that would never be in a spreadsheet that do come up when you control one of these teams that have to go into play. Again, you've only got one shot at it. I think right now, the share price ran from 13 to ultimately 25 on the Glazers announced a strategic alternative, and as we started getting info bits coming in. Now, it's down to about 20, as people have gotten skeptical. How do you think this ultimately will play out?
Chris: What else you're going spend $5 billion or $6 billion on? You can buy an aircraft carrier. There are not that many things, in that case.
Andrew: The Qataris could, because I guess they are a nation. But if sir Jim Ratcliffe went out and bought an aircraft carrier, a couple of governments might have a problem with that one.
Chris: Maybe it seems like a good idea at the time but then the next day you wake up, you're trying to explain to your wife that you bought this thing. You need to find a place to park it. There are all sorts of trouble with it. I'm very skeptical of glass during auctions with multiple bidders. I think most press is motivated in leaks and people buying one and pay less, people selling and want to get paid more. If there's really two at this point, I think it'd be much more dynamic situation where there are three decently likely that the bidders are communicating, if not colluding. I would want to make clear. Normally, you would say things to push down the price if you were bidding and push up the price if you're selling. But if I was selling, I would want it out there. We might not sell it all. We might do a different arrangement.
Because if I said, "Hey, I'm going to take the high bid but definitely between the one of two of you," that could lead to a bad outcome for the seller in terms of coordination or communication or them splitting it, putting on some guardrails in terms of avoiding the bonanza scenario, which I think is still possible. It doesn't look like today that we're going to get it if somebody just paying too much. Sometimes, I don't even remember the Belmond auction. There were like 150 bidders or something. Just like every rich person got enthused by that. Again, it was not sports teams, but it was hotels and stuff that rich people care about socially and separately from the economic value, and it was a pretty lively process. We could have some motivated press out today, even though this is pushing down the prices that could be from the seller's side. But I'm just skeptical of almost everything I hear at this point because there are so few players. Their interests are so clear and they've got to be talking to press about this. It could be legit, but it could be not.
Andrew: I've talked to a lot of the people about this. I hear some people who are just really distraught. I'm not sure if that's because they wrote it from 25 to 20 or if they're actually really analyzing the situation. I've heard some people a bit. The things keep coming back to us. The Glazers did announce the strategic alternatives process, right? Do you think they were serious about selling it? On the negative side, I think they want to sell this because they have to put $1.5 billion into upgrading Man U stadium. A lot of the reporting has indicated there is financing for them to do that. They don't have to put that money themselves. Maybe they wanted to avoid that 1.5. They found the financing, they were like, "Look, we love being some of the most hated people in England because fans do not like the Glazers. We love being some of the most hated people in England. We'd love to raise more financing to this." I mean, 100% possible, especially if they think Man U will double in value over the next 3 years or something, right? Look at the path of sports, it seems it's not unquestionable that could happen.
The other thing I keep coming back to is, as you said, you get one chance to buy this. What else are you going to do? You sports wash your reputation. A lot of this seems like it could be leaks from the Glazier saying, "Hey, if you wanted to buy this, we have other alternatives." Even if there is enough three people to drive, they're bidding crazy. "You don't hit our number, we're going to walk." I keep thinking like, again, the one shot to do this, what is $5.5 billion versus $5 billion to the Qataris? I don't know. I don't want to write checks for other people, but it does seem like a lot of this is the Glaziers and the press ain't. We'll pull this trigger. We'll keep it if you don't hit our price. I just keep thinking, every time I've seen one of these guys go for sale, that price tends to get hit and it does tend to get bid. Maybe I'm focusing too much on basketball where over the past 4 years, there have been a lot of teams where the seller says, "I'm reluctant to sell, but I'm putting the team up for sale." Then 3 months later, they said, "We got the big check. Let's do this thing. We're vainer crafters. Any last thoughts from you on this?
Chris: The only thing that matters is what the Glazers want and what the couple bidders want. If they qualitatively want to do something, it's not going to come down to dollars or cents in the margin. It's going to be a pretty simple process with a pretty high price. I would summarize. It's going to be in a chunkier cruder increment than if you reduce several zeros. If you took the scale down to like mere multi-millionaires to have a little bit more normal upside and downside, a little bit less self-indulgent. I think it's a self-indulgent process. I think it's going to trade, and I think it's going to trade for a high price that seems less likely today than it did a few days ago, perhaps. But that's still my expectation.
Andrew: Perfect. Well, it is February 27th. I think we'll know the results of the high price or not for Man U for next month's podcast. It'll be interesting for all there. But either way, Chris, thanks for coming on.
Chris: Thanks, Andrew.
Andrew: I'm looking forward to talking to you soon.
Chris: Awesome. Talk to you later. Bye-bye.
[END]