The Canadian Investor - Online Gambling & What to do in Bear Markets

Episode Date: May 16, 2022

In this release of the Canadian Investor Podcast, we cover the following topics: How bear markets can create great returns over the long term Online gambling industry and how to get exposure to it Activision Blizzard arbitrage following the Microsoft offer Tickers of stocks discussed: PDYPY, DKNG,PENN, CZR, MGM, PYTCY, ATVI, MSFT, NVEI.TO, V, MA Check out our Portfolio and Patreon page at Jointci.com Our Website Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Check out the Yes We are Open Podcast from sponsor MonerisSee omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

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I am Brayden Dennis, as always joined by the great Simon Belanger. Simon, do you know who Mr. Beast is? beast is no i do not you don't know who mr beast is okay mr beast is the largest youtuber oh okay he has the most subscribers and like the highest view count and he makes these elaborate videos do you you remember I was, I think it was a segment on the podcast about how he recreated Squid Games, the Netflix series, and made it on YouTube? I don't. And had like hundreds and hundreds of millions of views.

I don't remember. It's okay. He just turned 23 years old. He makes absurd amounts of money, but he like gives it all away in the videos. He gives it all away and is very charitable. This kid really is good.14 views in his 23 years. He started YouTubing every single day, like a full-time job when he was 12 years old. He was going to school, but like was checked out. He was just obsessed with YouTube. Can you understand the scale? And the reason I'm bringing this up

is because I love YouTube as a business and one of my largest positions is Google. But can you take in the scale of that 13.2 billion unique views? Yeah. I mean, we're quite a few listens away to get to there, 13 point something billion away. But yeah, good for him. I mean, obviously, it's dedication. He has to be passionate to put that much time and do it so regularly. He's obsessed. Yeah, exactly. I was trying to use a better word, but yeah. Oh, no, that's what he says. Those are his words. Anyways, just random start of the show today. 13.2 billion unique views. This young man knows what he is doing and making an incredible

business about it. All right, let's talk about bear markets because every time we do an episode, the market continues to go lower. What's that CNBC segment again we talked about? Markets in turmoil. Oh turmoil oh yeah that's it markets in turmoil the ultimate sign for the bottom ran last week and you texted me today saying i bought more shopify or be prepared for it to drop even further yeah exactly i mean it was frustrating yesterday because i had to limit price which I exactly had enough money in my account for two shares for that limit price. And it went like $1 away. I missed it yesterday. Then I like, obviously, hit it today. So, I was pretty happy, but it will probably, with my luck, it will go

down. But again, we don't really care for short-term fluctuations. We're just looking at five, 10 years down the line. And I think it'll be a wonderful business 5-10 years down the line too. I want to position down 36% today. That's wonderful. Welcome to the club after Teladoc. I doubled my position this morning. Okay, let's talk about bear markets because if we look historically,

let's go over some historical data. These are bear markets tracked, you know, percent declines of over 20% in the S&P since the Great Depression. Now, the average bear market, I have some data here, was around 2.8 years since 1956. So every time there's been a big widespread market decline, you're looking at 2.8 years on average. And again, that may not mean anything. It doesn't tell you what's going to happen with this drawdown, with the next drawdown. It's just to give you some ideas about what historically has happened. And so in these 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15 declines since September of 1929, Things range from a three-month bear market to a 33-month duration and down from 22% to down 86%, which is just horrendous. And it goes through, sometimes you needed only half a year to break even.

Sometimes if you invested at the top right before September 1929, you basically needed 25 years to make your money back. And so it's very random and it's very impossible to know. Before I talk about what's happened recently in March 2020, any of this comes to mind? You see here, 07, 2008 with the great financial crisis that lasted 17 months, stocks were down 54.8% and you basically needed four and a half years to break even if you invested at the peak. Yeah. I mean, at the time, I invested a little bit of money when I was around like 22, 23,

when the market crashed for the great financial crisis. And I remember at the time it was like a panic. People, you know, I think Bear Stearn went bankrupt and then you had all these people thinking that basically the whole financial sector would go under. It was definitely a panic. And clearly looking in hindsight, it was a great time to buy. I ended up buying a few bank shares at the time, ended up doing pretty well, sold them a few years after that because I needed the money for something else. And obviously, I didn't know at the time what I know today in terms of investing, but I definitely knew that the Canadian banks were in pretty good financial situation. I've

read enough to know that at the time and they weren't in the same situation as a lot of their US counterparts. But it was scary for a lot of people, myself included, to put money in the market when you have those financials outlet with these headlines. I don't know if they had- Markets in turmoil, baby. Yeah, exactly. I don't know if they had the whole markets in turmoil back then. It was probably the world is ending or something like that. Right. Yes.

These sites, these news sources, they love it. Okay. So if we look at 2020, stocks fell a little over 30%, recovered a few months later. In fact, the NASDAQ 100 was back at all-time highs in one and a half months from the bottom. You blinked and it was back to all-time highs in one and a half months from the bottom. You blinked and it was back to all-time highs. You had to try to catch it on the way down. Today, the NASDAQ 100 QQQ is down 27% from the peak. I think the peak was sometime in November, which is quite a bit more than the S&P 500 in terms of down performance because it's so concentrated in

tech. And what's getting smashed right now, Simone? It's tech. Tech is getting absolutely hammered. So, it's a sobering reality, right? It's a sobering reality. People came in and they thought, oh my God, this is easy. I can stock pick my way to a fortune. And with enough patience, that's true, but you can't do it in just a year or two. But you know how I roll. There's a reason to flip this on its head and recognize that these periods are typically the greatest forward returns on fresh capital. Deploying capital in bear markets sucks, right? Because you deploy capital and the next day, your position is down 5%, right? Because you can't and the next day your position's down 5%,

right? Because you can't time it. It's impossible to time. It's not even worth time. It's not even worth trying to time it. And so that's why it sucks. However, even with that, your forward returns historically have been fantastic during bear markets. And another little indicator, okay? during bear markets. And another little indicator, okay, when companies drastically slow down stock buybacks is a great indicator to deploy capital as well. Contrary to what you would think, right? It is exactly the opposite way your brain would think. And so, it's really a testament to this is a skill with your stomach, not your brain in the short term. And this is me letting you know that typically during these periods, you have fantastic forward returns on fresh capital. Yeah. Yeah, exactly. The data shows it. It's very clear. You said it perfectly. It's not easy to pull the trigger because oftentimes you pull the trigger and it's going

to be down 5%, 10%, 15% within a short amount of time. And you can always doubt yourself. But I think it's also a great time to just do some self-reflection. I know we don't have the exact same strategies overall with the companies we own, but we're very fine with the strategies we have. We're very comfortable with them. And I think people listening to us, they need to understand how they react. Maybe a heavier dividend portfolio makes more sense for certain people because it'll be less volatile in these type of times and it'll prevent them from making some rash reaction versus a more growth-oriented portfolio, which for a lot of people would be hard to stomach and

rightfully so. It's not fun to see a portfolio being down 25-30%, right? I'm messaging back and forth yesterday at the close after hours with Adrian who works at Stratosphere. He goes, check out Unity. I'm like, okay, here we go. I'm like, yeah, okay. I'll probably buy some more tomorrow. Guidance sucked. The results were good, but the guidance is pretty terrible. Stock base compensation is pretty terrible. Thesis looks intact. He goes, dude, we need to do a brain scan on you when you see your stocks down that much because that is not normal to act like that. And I'm like, hey, well, it just comes down to maybe you've been there before. And I

think that that helps. So those scars make you a better investor over the long term. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email,

every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network.

You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. All right, let's switch gears to a segment that you, I think this is great, by the way. I'll let you take it away. Yeah, I wanted to do a segment about online gambling. I think we may have talked about it, especially when the Stars Group was being acquired by Fluttered Entertainment in the very early episodes.

But I thought it was really fitting because it recently became legal in the States. And then obviously in canada i'm sure if people are listening to sports podcasts it's plastered all over the place whether it's ads whether you know mcdavid and his charisma and gretzky yeah gretzky gretzky's with bad mgm i mean i love mcdavid as a but man, is he not charismatic. Holy crap. Wow. These guys look like stones up there. They're so awkward. Remember we were texting.

I'm like, you know what's bad about this ad is like it's probably the best picture and it still looks like he's like hating his life doing it. Dude, what is with just in the press too? Like hockey players are so weird in front of the press. Yeah. I think it's changing. At least some are getting more comfortable. I think it's probably the culture. in the press too like hockey players are so weird in front of the press yeah you're just like yeah i think it's changing at least some are getting more comfortable i think it's probably the culture but anyways that was more of a you know i digress a little bit but for online gambling we're hearing a lot about it it's all over the place it became legal in canada for a lot of people they might

think online gambling is new it actually isn't it started back in 1994 when Antigua and Barbuda passed its Free Trade and Processing Act. After that, they started granting gaming licenses to companies that wanted to provide online gambling services over the internet. it actually started not too long after that but it gets uh it was more of a gray area let's just say it started back in 1996 with the establishment of the Kanawage Gaming Commission in Quebec which regulated online gaming activity from the Moloch territory of Kanawage and they issued their gaming licenses I'm pretty familiar with this one because a lot of the world's leading poker rooms actually started with licenses from the Cannawa Gaming Commission. By 1997, online gambling revenues reached $1 billion. And keep in mind, that's still at a time where a lot of the world did not have the internet. Just in Canada? world did not have the internet. Just in Canada? I believe that was worldwide. Yeah, I believe that was worldwide. And that's still pretty good considering obviously, you know, if you adjust

the money for today's value, it would probably be more in the realm of two to three billion if we just keep the money inflation adjusted. But again, it's pretty remarkable if you think at the time, a lot of people either did not have the internet or when they did they had the good old dial-up so it wasn't it wasn't necessarily the best online gambling experience and clearly it's grown very rapidly since then one of the big milestone was in 2005 when the first mobile-based casino software was launched by Playtech. And I will talk about Playtech a bit later on as well. Since then, most sites offer a mobile version of their online gambling site. And honestly, if they don't, they're definitely behind the curve.

And one of the biggest problems over the years is that there wasn't consistency in regulation. And honestly, there still isn't. But there are a lot of differences depending on where the site is actually licensed. There has been countless number of sites since online gambling started, and only a small fraction of them have stood the test of time. There has been a lot of scandal. I'm familiar with the poker scandal.

I don't know if I had talked about this before, but Full Tilt Poker, I used to have an account. I used to play on there quite a bit. And then the site got shut down because they were essentially using the poker funds for their own use. The US government cracked down on it. There was a whole settlement. They ended up returning money several years later because PokerStars bought the assets as part of a settlement with the Department of Justice in the States. But some of the example of the sides that have been operating for years are William Hill Casino, Triple Eight Casino, also has a poker room, PokerStars, Party Poker andGaming, and Betfair are some of the largest names. Obviously, FanDuel and DraftKings are pretty well-known as well. They're a bit more recent, but definitely have a pretty long track record, around a decade for each of them. I believe DraftKings was founded a bit after FanDuel, if I remember correctly.

You probably know these better than I do. Yeah, I've used both of them too. Well, you know I like fantasy sports. So, like daily fantasy gamblings, I find it more fun than just regular betting. Yeah. Yeah, I don't really bet. I've never played on an online casino aside from playing poker. And I've bet a little bit on sports. That's about it. Fair enough. Okay. Dude, I'm looking at this history and it's weird because the origins of it, the internet and the speeds and the accessibility, like the addressable market was so much smaller than it is today. And then now regulation has caught up to it.

And it's like this thing that's just been looming in the background and then you know some of it's operating illegally some of it's operating legally and then the floodgates have just opened i mean here in ontario man the floodgates have opened and you're watching sports and it's like every single commercial is a competitor for online gambling yeah Yeah. And I think traditionally it's been licensed in kind of those countries that tend to be a safe haven for tax purposes and things like that. I know the Isle of Man was one, Gibraltar as well. They had a lot of gambling licenses there. But yeah, it's definitely evolving quite a bit. For those who weren't, who didn't know, in the States, actually, the Department of Justice went after these companies because of the way they were wire transferring the money,

not because of the actual gambling. And then in Canada, what happened is that it's always been kind of a gray area. That's why PokerStars and all these sites have been operating for years in Canada, and they weren't available for US players since, I 2012, if I remember correctly, or 2011. Man, we got to start a sports podcast because Pat McAfee got a four-year $120 million deal from FanDuel to be the exclusive advertiser of FanDuel for his podcast. Now his podcast and his show, it's great and it's very, very popular. But this guy's making 30 mil a year from FanDuel. Yeah. And I'll be talking about FanDuel a little bit here. So

there's different ways to invest in gambling companies. I'm sure people, you know, tuning to this podcast are looking to know, okay, I'm interested in this space. How do I invest? Well, if you're looking to invest, there's actually four ways, four main ways in my mind. I may be missing some of them, but these are the ones that I commonly found when I did my research. So you can invest in online casinos, pure plays. So basically, these are companies that offer gambling services to individuals. Brick and mortar casinos with an online gambling site. So these are some of the largest companies in terms of market cap. Gambling technology companies.

These are the companies that actually do the software, create the software for the various casinos. And you'll see that a lot of the times, if you're playing games on different sites, you'll have a very similar feel or almost identical games. That's the reason. And then payment companies that have an online casino or multiple online casinos as clients. So we'll go with the first category. And I took out some companies for each category so people can do their research and just get some ideas. The first one for online casinos, there's two big ones that are publicly listed that I could find. First one is Flutter Entertainment, ticker P-D-Y-P-Y.

It's Pink Sheets listed or F-L-T-R on the London Stock Exchange. They have a market cap of 18 billion, 6 billion in revenue in 2021. These are British pounds, free cash flow positive for over a decade. So they do generate a lot of free cash flow. It's not super consistent in terms of the amount, but they have been free cash flow positive for quite some time. And they own well-known properties like FanDuel, Betfair and PokerStars. So this is definitely the leader in the space if you're looking to invest in a pure play. They are established and they have the well-known brands and they definitely have deeper pockets than other

players like a DraftKing for example. DraftKing is well known for a lot of people, ticker DKNG, market cap of $5 billion, $1.3 billion of revenues for 2021. They did, however, burn $500 million in free cash flow in 2021. So it's not great when it comes to DraftKing. And history has shown that this category here is very competitive. We did talk about DraftKings, I think, a few months ago. And when they, I think, released their final year, the full year results, if I remember correctly. And one of the things they were saying is that there's a lot of competition in the space.

They have to do a lot of promotions. Their customer acquisition cost is very high. And they're seeing that customers are not necessarily very loyal to their site. So it is tricky. My personal opinion is if I were to invest in this space, I would definitely look at a Flutter Entertainment. I don't know the business in and out, but just the fact that they're well-established, they know what they're doing, they have name brands, and they have pretty deep pockets. Again, without having done a deep dive, I would definitely have a bias towards Flutter. I would have a bias personally towards the picks and shovels behind the tech that these services are using. Who is their eight who is running their apis who is the payments

providers like i didn't knew they that the tsx listing yeah that's their bread and butter is payments for these companies and so i'd be looking at picks and shovels play personally well yeah i was talking just specifically for online casinos fair enough i'll get to those categories um if i had that's why you kind of jumped the gun a little bit. I want to get to into your analysis here before you get to it. Giraffe Kings is now sub 5 billion in market cap. I just checked. It's 4.5 billion. It's down like almost 90% since the peak. I mean, it was a direct listing or maybe even was it a SPAC? I think it was a SPAC. Yeah, either a direct listing or a SPAC. I know it wasn't a traditional IPO. Yeah.

You touched on something really important around user acquisition. In tech, it's always, what's your CAC? What is your cost of acquisition? Basically, how much money on average do you have to spend to acquire a new paying user? And the CAC for these businesses has become so high with all the competition that the unit economics completely disintegrate when it's not as sticky as they once thought. You can have a crazy high CAC if your software is extremely sticky. And you touched on two things there. It's gone too high that the unit economics don't really work. And two, there's just not that much loyalty to it. Whoever's going to give me the best odds, whoever's going to give me the best offer to sign up for their thing, that's where I'm going to probably go as a user, as a consumer.

So, there's a couple of investment thesis criteria that have been busted, I think, over the past like 12 months on these names. Yeah. And that's why a flutter is really interesting there. If you're looking at Strictly Pureplay Online Casino is because they can leverage their different properties. So, if someone's playing Poker Stars, it can be like, oh, do you want to be doing some fantasy betting and things like that? Why don't you go on FanDuel? So that's why I think they're a very interesting play if you're looking strictly an online casino.

And I would be very careful. I know there's some TSX Venture listed companies in Canada. I think those companies will get eaten alive. I really think they'll get destroyed. That's my personal opinion. I could be wrong here, but I think they'll be in for a hard time. Now, the next category that I want to talk about is the brick and mortar casino with an online gambling site. So there are some large players in the States here. I'll just go over three. There are some other ones here you're usually talking about companies that will have both a physical casino presence oftentimes with like almost hotel resort multiple actually physical casinos like that but they'll also have an online gaming

casino so three of the bigger names are penn national Gaming, ticker PENN, market cap of $5 billion, revenues of $6 billion in 2021, and they have been mostly free cash flow positive for the last decade. Second one is Caesars Entertainment, ticker CZR, market cap of $11 billion, revenues of $10 billion in 2021, and again, mostly free cash flow positive over the last decade. And then we're looking at MGM Resort International, ticker MGM. By the way, MGM almost went bankrupt during the financial crisis in 2008-2009. They have $15 billion market cap, $ 10 billion of revenues in 2021 and again same thing mostly free cash deposit over the past 10 years so really the advantage here is you're looking at companies

that you know if the online side is not going well oftentimes the physical presence will be doing much better the brick and mortar and vice versa. But the biggest disadvantage here is because they don't focus on the online side, a company like a Flutter Entertainment, for example, I think in my view have an edge because they specialize in that. Penn's become a bit of a hybrid, right? They bought Barstool Sports. And so it's been a rough ride for them recently for that stock. So sorry, Dave Portnoy, you've lost all your money, but at least you've been eating pizza. They have the score app as well. The score bet app, which is, you know, you can't watch a Blue Jays game without seeing that thing plastered all over the Rogers Center. And so they've kind of have a diversified portfolio of brick and mortar and online assets as well as well as a

fairly large marketing and media wing that kind of promotes the products as well yeah no that's a good point but these are categories that might interest some people there are some downsides and upsides and then the next category is the one i think that you seem to like a bit more are technologies companies that will typically offer software for games that you seem to like a bit more are technologies companies that will typically offer software for games that are licensed to online gambling sites and that's why you will often see like I said the same games on different site there are some privately a lot of privately held companies in this space one of the better known ones is micro gaming one of the only publicly listed companies that i could find i like did some research i tried to find and the one that just kept coming up for publicly listed

is playtech plc ticker p y t c y on pink sheets it's also listed in london it's relatively small company here 2.5 billion USD in terms of market cap. Their revenues are in euros. So 2021 was 1.2 billion. They actually generated a surprising amount of free cash flow over the years considering their revenues. Just for gauging here, 257 million in free cash flow for 2020 and 110 million in 2021. So not too bad considering the size. It's like a 10% free cash flow for 2020 and 110 million in 2021. So not too bad considering the size.

It's like a 10% free cash flow yield. Yeah, exactly. It's kind of an under the radar play here. You know, this is just a quick overview. It's not a deep dive. So definitely if it interests you, first of all, it's on the pink sheet. So liquidity may not be great. But second, make sure you dig in it. But definitely an interesting play from my perspective. And I think another thing I wanted to add, I couldn't really find a straight answer for that. But I believe that Flutter Entertainment, I think they build most of their own software. So I think they're that large in terms of a company.

I mean, it makes sense, right? Like that's going to be a huge impact on their margin if there's a take rate that, you know, would be on every transaction or every, you know, API call, stuff like that. It could get pretty expensive for these big boys. So there's probably an ROIC for them to make it in-house. Yeah. And especially too, where you have a client like PokerStars, right? It's unique. PokerStars is completely different from AAA poker or party poker. You won't see another side that behave exactly like PokerStars. Well, that was very interesting. I like the roundup. There's kind of different ways to play this. I wish I had more examples on the picks and shovels plays because for me that seems to be a good place to be

trying to pick winners here just seems so hard yeah well the last part is the payment companies right so the payment companies are the other way to play this so you did mention earlier nueve ticker nvei.to which gets about 25 of its revenue from online gaming according to its most recent capital markets day presentation only 25 i thought it was more i thought it was more as well and then yesterday i was doing my research and i'm like they must show somewhere where they get most of the revenue but it is the top sector so it is the top sector at 25%. But you also have you can have some other plays that are payment companies. I know Visa and MasterCard also have solutions aimed towards more gambling sites. They're slightly different than the usual payment rails, but they do have some solution.

But given that Visa and MasterCard, you know, they're such massive companies, it's probably just a tiny fraction of their overall revenues. So definitely, Noive is probably the publicly listed one where if you do want some exposure to online gambling, probably makes the most sense, at least as a Canadian. Yeah, no, that makes sense. I make sense. And this is why I like picks and shovels rails on GDP of the planet, $3.4 trillion in transaction volume on Visa's network. You can see where my brain goes immediately on like, okay, this is interesting. This is growing. Who's in the backend? Who's the B2B supplier? Who's the API running this show back here? I wish I had more examples to share with you guys, but that's kind of where my brain's going. I knew you would. So that's why I added those categories, but it made sense, right? It's just like, but it's always interesting

where you can kind of find different ways to get exposure to an industry. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call

or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network.

You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. All right, final segment of the day. We're going to have a fun little experiment. I see more. I thought about this the other day and like, let's do this. Okay. So we're going to talk about the Activision Blizzard merger. We've talked about it many times on the show, which is basically Microsoft's buying Activision Blizzard. Okay. But we're not going to continue to talk about that story. We've already done it a million times.

We're going to play a fun little game where Sion and I are both going to – we haven't told each other what our number is. We're just going to give a number of what the percentage we think that the deal goes through. Not necessarily because we think this is super interesting about Microsoft and Activision, but to talk about the example of merger arbitrage. The reason I thought of this segment was because Buffett announced, kind of like slipped out during one of the questions at the AGM that they're doing merger arbitrage on this deal. And it's not truly merger arbitrage, but they've done these deals. Like if you've read the essays of Warren Buffett or like Buffettology, the book, there's been countless examples where they've run merger arbitrage throughout the past several

decades. Like they love these deals. If they can think that they have like some sort of reasonable probability to put to it. And so that's what Seymour and I are going to do today. of reasonable probability to put to it. And so that's what Simon and I are going to do today. We're going to tell what we think is the probability of the deal to go through. I do not know your answer. I'm excited to hear it. But before we do that, Simon, let's take a step back, talk about this deal, and then what arbitrage looks like, what are the reasons the deal might not go through, that kind of thing. So merger arbitrage is basically when a company like Microsoft says they're going to buy Activision Blizzard at $95 a share. That announcement happened last year. Or was it this year?

I'm losing track of time. Was it late last year? I think it was early this year. Oh my God. I'm losing it, man. I'm losing it. this here. Oh my God, I'm losing it, man. I'm losing it. So until the deal goes through between when the announcement happened of this corporate event to it going through, ATVI does not trade on fundamentals. It trades as a completely different type of equity.

And the reason for that is because it's all pinned to the buyout price of 95 and what the probability the market is willing to price in based on when the deal is going to close, what the risks are of the deal closing, like what the probability of the deal actually going through and three, like, yeah, I guess that's tied to the first one. Like how far out is it? Because you're taking like time value for money. I would never do this deal if I can make $20 a share, but it closes in 2040. There's no return there. The return is just too far out.

And so it trades relative to the $95. Today, this puts a 23% upside on the price of activision blizzard shares anything to add there before i go through real reasons typical acquisitions don't go through no no it's all yours i'm just listening i've talked so much about gambling so it's fun to talk about non-money gaming. Yes. Okay. So, in these types of deals, what are the risks that an acquisition doesn't go through? Okay. There's a long list of them, but just some off the top of my head. Okay. So, the takeover goes from friendly to hostile with the people involved.

Sometimes that ruins the deal. Financing falls through. Regulators and antitrust concerns. This is quite common, especially with big tech, right? Like, sorry, you're too big. You're already too monopolistic. And so, this is probably the largest risk with Microsoft and Activision, given they already own the hardware system with Xbox and they're already one of the largest gaming companies in the world. So in terms of gaming, I mean, video gaming, now we've completely switched the definition of gaming or the terms change and some parties no longer have. There's some random corporate shit that could go down,

right? No, there's other complications that can arise, but this is what I can think of. And I'm not an experienced M&A banker. So, I'm surely missing a long list of jargon of stuff that can happen. And so, okay, let's do this exercise now. Do you want to go first? I know I have my number written to myself here on a Slack DM because I have some weird feeling when I was doing this that we're going to say the same number or something. I don't know. It's going to sound all cheesy. So, if it's the same number, I can share my screen and show you that I DMed myself at

1.44 PM on Slack. I mean, it's going to be a rare occurrence if that happens, but I just have some weird feeling. Okay. Do you want to go first? Yeah. I mean, it's going to be a rare occurrence if that happens, but I just have some weird feeling. Okay. Do you want to go first? Yeah, I don't know. I don't have the same feeling, but I'm going to say, and I'll just say a few reasons why. So I'll say there's about a 61% chance. Okay. It's not the same. It's not the same. Okay. I was going to say, yeah, 61% chance. The first reason is that I feel likerosoft probably did its homework at least a

little bit they wouldn't have gone through and made that offer if they didn't have a reasonable chance of the deal going through and being accepted by the federal trade commission that's going to be their biggest hurdle but again i'm sure they did their homework but you still don't know and the current commissioner, her name is Lena Kahn. She did oversee the blocking of the NVIDIA acquisition of Arm Holdings that happened, I believe it was last year. I'm not exactly sure, late last year. Yeah, that was like $44 billion deal too, right? Yeah, exactly. And the reason why I'm above 50% is because if the deal goes through, Microsoft would become the third largest gaming company by revenue behind Tencent and Sony. So it's not like they would be the top dog. But again, they would become a very powerful player in the space. And granted, Microsoft also have a lot of other levers that they can leverage to help that business. Microsoft also have a lot of other levers that they can leverage to help that business.

And apparently, I don't know this lady quite well, but what I read is that she's very strong on the competition aspect of things. So all in all, I think it's slightly better than 50%. So I went with a little funky number and decided to say 61%. But I think they did more homework at least than Canadian National Rail did when they did that offer on KSU. Ah, you had to have the zinger at the end. I like it. Okay. So, you said 61? Yeah. Okay. All right. So, I'm significantly more optimistic. I'm not optimistic. I don't know

if that's the right word, but I'm significantly more convinced that it goes through okay yeah my number is 82 which is quite high and probably at that probability i should probably get long the arbitrage just based on what i think okay and again i was thinking to myself i'm like i think it's somewhere between like you know high 70s and 85% just off feel. And so, then you can't say 80 because then you're just a chump. Like that's too, that sounds like not calculated enough, right? 82% baby. Okay.

So, my main reasons are, and I agree. Let me preface this way. I don't think it should happen. If it was up to me, I think it's more anti-competitive than you'd think. It's just a regular schmuck. That's what I think. And so, if you look at the deal, one, Microsoft has a long history of just absolutely blindfolding themselves. The regulators blindfold themselves every time Microsoft makes a deal. Two, I don't think that they will recognize how anti-competitive I think it is.

Okay. Another one here is Microsoft has a good track record, good public opinion compared to a Facebook, for instance. I don't know how valuable that is in this deal, but I think it will. for instance. I don't know how valuable that is in this deal, but I think it will. There's been a lot of issues at Activision that regulators could be convinced that it's a good switch up. It's good for people there. And again, I'm no M&A banker. I don't know how much they weight that in terms of like, it's been not a good story there, right? They had sexual harassment issues. The CEO wasn't liked, even though Kotick has grown the company like 100x since he started there. Do I have any other good reasons? Oh, Microsoft can pay for it, dude. Microsoft has like there's

every kind of concern that goes into these deals is mostly around financing. Does financing fall through? Or are the deals now at risk because of the financials of said company and the company they're acquiring? Microsoft can pay for it. They got, what, $130 billion worth of cash on the balance sheet? That's not a concern at all. So all of those dry up. I think it's going to go through, man. I think it's going to go through. I guess you're saying that you probably think it will as well at 61. Yeah. I think, well, that's why I mostly focus on the regulatory concerns because that's, I think the other ones are almost non-issues for me. So yeah, that's why I focus on that one. And I think the other reason why I'm a bit lower is that I cannot see other tech companies.

I'm thinking Meta or Facebook here, not lobbying the government, feeling like, okay. What's got to give? Yeah, exactly. Like you guys are going to approve this and you nix every single deal, no matter how small we try to make it, that we try to make. Same thing for Google. I can see other big tech companies lobbying the government and the FTC hard to make sure that it doesn't happen. Or I think the third alternative we didn't really discuss is maybe it happens, but they have to divest a part of the business.

I'm not sure how that would work, but i feel like it would be a possible outcome it's like okay you can have this but not blizzard you get activision only yeah i mean it's i think it's gonna happen i think so too yeah that does it for today's episode guys we really appreciate. See, when we get a thousand ratings on Spotify, a perfect 5.0 rating, I have never seen that. I listen to a lot of podcasts. I've never seen that. I've seen some good

reviews, but I have not seen a thousand ratings, let alone a thousand five-star ratings. Hey, people, thank you. We appreciate you. We love you. Keep giving those ratings.

Special thank you to my mom, who I'm sure put the five-star and your dad probably did it as well. Yeah. Oh, yeah. Oh, some of the most loyal listeners right there. I'm pretty sure my dad's not using Spotify. He's an Apple podcast kind of guy. Okay, okay. There you go. I think my mom too, actually using Spotify. He's an Apple podcast kind of guy. Okay, okay.

There you go. I think my mom too, actually. I think she's an Apple podcast. Yeah, Spotify. It's too new age. All right, guys. Thanks so much for listening. We really appreciate it.

And hey, that's a good reminder. If you're on Apple podcast, fire off a review. It actually is probably the most important platform for us in terms of growing the podcast is on Apple Podcasts. So if you can launch a little rating in there and write something nice, it always makes us feel good. JoinTCI.com is the place to find Simone and I's Patreon. We have our monthly update, our monthly portfolio updates on there. It's going to be, it's going to be a good one for next month because in these drawdowns, we like to get active. We like to deploy more. I'm looking around, I'm looking in every couch cushion for an extra dollar.

Well, I think it'll also provide people with some comfort that, you know, our portfolios are also down. So, you're not the only one. I'm also getting hammered. Yes. Okay. That's a good point. No, but I'm seriously shaking every couch cushion. It's got to be an extra buck I can deploy in the market here. Stridesfairinvesting.com. Dude, we just launched. You can type in a ticker and you pick which metric you want to see on a 10-year view. I think I sent you a video of it. Yeah. Yeah, yeah. It's really sweet.

It's really cool. And it's free. So go check that out, stridesfairinvesting.com. We'll see you in a few days. If you're new here, Mondays and Thursdays, we release shows on Mondays and Thursdays. Talk to you soon. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice.

Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.