The Prof G Pod with Scott Galloway - Prof G Markets: Scott’s NJOY Stake, the JetBlue/Spirit Merger, and WeightWatchers Buys Ozempic Maker

Episode Date: March 13, 2023

This week on Prof G Markets, Scott gives the inside scoop on his early investment in NJOY, which will reap 30x in returns after Altria's acquisition of the vape company goes through. He also shares his thoughts on whether or not the JetBlue/Spirit Merger should be blocked, and takes a look at WeightWatchers’ move into the weight loss drug market. For more on Silicon Valley Bank’s collapse, check out our special episode from Saturday and stay tuned. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Welcome to Prop G Markets. Today, we're discussing three deals in M&A, Altria's acquisition of Enjoy, the Justice Department's suit to block JetBlue's merger with Spirit, and Weight Watchers' acquisition of Sequence, a telehealth platform to treat obesity. Here with the news is PropG Media Analyst Ed Elson. Ed, what is the good word? I'm pretty good, Scott. I just want to start by dispelling the rumors that I am your son. I've been seeing a lot of comments on Twitter and YouTube about that, accusing me of that.

So just to set the record straight, I'm not Scott's son. I'm not even remotely related. I'm just a white guy who happens to also shave his head. So there you go. So I just have one response to that. Search your feelings. You know this to be true. Anyways.

That was good. That was good. I've never heard that voice out of you. Right? Pretty good. All right, give us the headlines. What's going on here? Let's start with our weekly review of Market Vitals. The S&P 500 fell through much of the week on hawkish signals from the Fed.

The dollar gained on those signs. Bitcoin fell below $22,000. And while the yield on 10-year treasuries remained below 4%, the yield on two-year treasuries reached above 5%. That's the deepest inversion since 1981, when the Fed chair Paul Volcker brought down inflation with aggressive rate hikes and also put the economy into a recession. Silicon Valley Bank, one of the nation's largest startup lenders, collapsed on Friday after an old-fashioned bank run. On Wednesday, the bank liquidated $21 billion worth of investments in an emergency sale, which caused customers to panic and withdraw their funds. The stock fell more than 60% on Thursday, and a day later, regulators shut it down and took

possession of the lender. This is the biggest bank failure since the financial crisis. It's also a developing story. We'll cover it next week. Meanwhile, Silvergate Capital, one of the largest crypto-focused banks, is winding down. This comes after the FTX collapse forced Silvergate to sell off assets at a major loss. FTX and other Sandbank-man-freed companies accounted for more than $1 billion of Silvergate's deposits. Uber is considering spinning off its logistics arm Uber Freight in either a sale or an IPO. Uber Freight did $7 billion in revenue last year, but the company appears to be refocusing on cabs and food delivery. Ken Griffin's hedge fund Citadel is negotiating an enterprise contract to use ChatGPT. Griffin called ChatGPT, quote,

the fastest growing consumer application in the history of the internet. WeWork is in talks to restructure its debt of more than $3 billion and raise, wait for it, more cash. The company burned $700 million last year, but this fresh capital should keep the business running for the next few years. President Biden is proposing that the capital gains tax rate be raised to 40% for Americans earning at least $1 million. Currently, that tax rate is 20%. The unemployment rate rose to 3.6% in February. That's up from January's 53-year low of 3.4%. Still, though, employers added 311,000 jobs last month, a sign of continued strength in the labor market. And finally, in his testimony before Congress on the state of U.S. monetary policy, Fed Chair Jerome Powell said the central bank is prepared to raise rates even higher than

previously anticipated. That's going to mean either a 25 or 50 basis point rate hike next week. Stocks fell and yields rose on that news. See above market vitals. Scott, thoughts on that barrage of news? A lot going on here. So first off, with respect to interest rates, I'm still a believer that inflation is going to come down. Stocks don't go up straight up or straight down, and I don't think inflation is going to go straight up or straight down, although it's

gone down seven months in a row. But I think we're exiting what will be seen as a historic anomaly, and that is essentially real interest rates that were negative. And while everyone's hair is on fire, and Senator Warren and business executives who are used to free capital bemoan Chairman Powell. The reality is you do need a cost of capital that rewards the people taking the risk and doesn't result in a level of kind of asset inflation that creates income inequality and promiscuity around investments and projects that leads to shitty tech companies being worth billions of dollars for no real reason. So if you look at where interest rates are right now, I would say that it depends on your perspective, and that is how far back you take the lens. But

they're not historically high by any means. I don't think we're going back to where we were, but I still think inflation is coming down. And I'm a huge fan of the chair. I think he's doing exactly for all the... Senator Warren said that this is going to cost tons of jobs and really hurt American households. You know what really hurts American households is runaway inflation. The thing I found most interesting here was President Biden proposing to raise the capital gains tax rate from 20 to 40% on Americans earning at least $1 million. I like this in the sense that the wealthy need to pay more taxes. And it's not class warfare. We need to have a progressive tax rate. And right now, we have a progressive tax structure up until about 98%, 99%, and then it

plummets. So we have made a concerted decision to transfer money from people who get the majority of their income from current income, that is salary earners, that is young people, to people who get the majority of their income from investments, capital gains, which is, wait for it, old people. And as a result, older people are 70 plus percent wealthier than they were 40 years ago, and younger people are 24 percent less wealthy. This isn't something that's a function of all these complicated issues, the illusion of complexity that the incumbents will always throw at us. No, these are concerted decisions. So I think this is a step in the right direction. We need to return to a progressive tax policy,

but I think the simpler way to do it would be to say we're going to have one tax rate. At the end of the year, you look at how much money you made either through sweat, working, your income as a lawyer, or how much money you made on selling a stock. WeWork, that's no surprise. But this isn't a bridge to a better business model. This is a peer. Unless they renegotiate their leases or declare bankruptcy and just have a better cap structure. This appears to be the business that just keeps on not working. It feels like at some point they take WeWork behind the shed and put a bullet in its head. I mean, enough already. Ken Griffin and ChatGPT, you brought up a few weeks ago that I believe Citadel made more profits

last year than almost the entire industry combined. They've always embraced technology. It'll be really interesting to see what they do with this. Uber spinning off its logistics arm. I'm wondering, are they trying to shed something to give the firm, the core firm, greater focus? Or is it a case where Uber Freight is a better business than the core business and they want to spin it out such that it gets its own day in the sun and gets its own multiple. And here's why you want to

do that. In conglomerates where you have disparate assets in different sectors, basically the markets don't like a conglomerate strategy because they just see you trying to diversify. And investors say, I don't need you to diversify for me. I can do that by buying different stocks. So they find the shittiest business and assign that multiple to the whole business. So case in point, the New York Times used to own about.com, which at one point was a really attractive digital asset that probably would have fetched a billion dollars. But instead, it got assigned a multiple on EBITDA, of which it had very little, and didn't add much to the New York Times company market capitalization. So occasionally,

when an asset is spun, it can be accretive to shareholders. I don't know if that's the case, or this thing just doesn't work, and it's weighing down the core business, and they want someone else to take their problem from them. Do you know anything about this, Ed? All I know is that it has been working really well. I mean, it's been their biggest growth vehicle for the past two years. But I'm just thinking from a sort of practical standpoint, when you initiate a spinoff, do you get to hold on to all of the shares in that company? Like, how does that work? If you're a big Uber shareholder, what happens to Uber Freight shares? Do you claim those? How do you divvy that work? If you're a big Uber shareholder, what happens to Uber freight shares? Do you claim those? How do you divvy that up? Well, let's just say just for purposes of our math,

say you own 1% of Uber's shares. When they do the spin, you get 1% of the new equity in the independent company. And you might decide to sell that stock, you might decide to hold on to it. But the idea is that the existing shareholders get rewarded for what might be a company that's trapped within another company where the true value of that company isn't being recognized. But what you're looking for, Ed, is you're looking for a different mark and a different valuation such that your shareholders recognize an appreciation in the value of their stock. Basically, this is an assumption that the whole is worth less than the sum of its parts, that if we break this thing apart, the individual parts will be worth more. And I just want to go back to the Powell comments. You've been saying

for a long time that this is sort of the recession that will never materialize. People had their hair on fire about recessions coming, and then the inflation data came in that inflation was sort of the recession that will never materialize. People had their hair on fire about recessions coming. And then the inflation data came in that inflation was sort of getting suppressed. And then people said, oh, maybe it's not going to happen. But it feels like this new data and Powell's latest comments, suddenly everyone's freaked out again.

You said you don't see it coming. Do you stand by that statement? I stand by the statement that neither I nor anyone else has any fucking idea. And the beauty of the economy and the markets is that no one person knows what's going to happen. No one could have anticipated 9-11, at least how it played out. No one anticipated 1.2 million Americans dying from a pandemic. And then no one anticipated this massive stimulus that would send stocks skyrocketing.

If someone had said to you, Ed, in late 2019, there's going to be a pandemic in the United States that's going to kill over a million Americans, and the entire nation is going to go into fairly severe lockdown. They're going to discourage people from leaving their homes. Schools are going to be closed. Malls are going to be shut, movie theaters totally shut down, restaurants, everything. Would you say, oh my gosh, stocks are going to skyrocket? I mean, A, you wouldn't have believed the scenario around the pandemic. And then there's no way you would believe, okay, wait, the pandemic is happening, but

stocks are going to skyrocket. So this is all a fairly random walk. I mean, the recession has been 30 days away for about 18 months. And show me an artist in their previous work, and I can better predict what the next piece will look like than what's going to happen with the economy. And to your point, every time the yield curve has been inverted like this, a recession happens. Every time we see an acceleration in interest rates like this, recession happens. And every day, there are first-time events that are historical precedents.

So who knows? The R-word, because so few young people have experienced it, is being held out like the last of us fungus. I mean, it's just not, I've been through several recessions and they're a natural part of the economic cycle. And it almost feels as if the anxiety and the unnatural acts around it are wreaking more havoc than an actual recession. I'm almost at the point where like, let's either stop talking about it or let's get on with it and have it. We'll be right back after the break with a look at Altria's acquisition of Enjoy. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin.

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Go to constantcontact.ca for your free trial. constantcontact.ca We're back with Prof G Markets. Marlboro cigarettes maker Altria has agreed to buy vaping company Enjoy for $2.75 billion. This marks a big turn in Altria's vaping strategy. In 2019, Altria bought a $13 billion stake in Juul, the world's largest e-cigarette company at the time. Last summer, though, the FDA ordered Juul to stop selling its products in the U.S. due to safety concerns.

And while that order has been suspended pending court review, Juul's valuation has plummeted. This month, Altria dumped its stake in Juul, which it last valued at just $250 million. That's down 98% from 2019. Now, with Enjoy, the strategy is a little different. One, Enjoy is FDA approved. And two, Altria is buying 100% of the business as opposed to a partial stake.

Now, the final detail of this story is that one of Enjoy's early investors is someone we know quite well. Yes, Scott invested in 2017 and is going to give us some of the inside scoop on the company. So, Scott, can you first start with telling us why you invested in Enjoy back in 2017? So, I have a 20-year-plus friend named Jason Mudrick, who is arguably the most talented distressed credit investor, you know, who has less than $10 billion under management. And he called me and I… Could you briefly explain what distressed credit is? So, Twitter. Twitter might be a distressed credit investment. The $13 billion that was loaned to Twitter, if they cannot continue to make their interest

payments, it becomes a distressed credit. And there's opportunity to come in, renegotiate the terms of that debt, turn it into equity, take over the company. A lot of companies go into bankruptcy. If there's still value in the company, they emerge with a restructured company that has renegotiated a lot of its debt and right-sized, and someone comes in and buys the company out of bankruptcy. And that's what happened with Enjoy here.

Mudra Capital led this company's emergence from bankruptcy. And Jason called me and said, this is a consumer company. We had worked on other deals together before. Would you be interested in co-investing and going on the board? And one, I was super interested because I wanted to work with Jason. Two, to be blunt, I'm a capitalist. I saw an economic opportunity here. But also, I was very drawn to this because tobacco had a vice-like grip on my household

growing up. I remember one of the few times I went to the doctor, I had a lung infection and the doctor said, you cannot smoke at home to my parents. So they rolled down the windows in the car on the way home so they could smoke on the way home in the car. And then when we got home, they told me to wait outside because they wouldn't put out their cigarettes while walking in. And they got a wet towel and put it in the crease of my door and put me in my room so they could continue to smoke. I mean, you want to talk about an addiction, and ultimately, tobacco ended up taking my mother's life. So, I have never smoked a cigarette,

and it is the number one preventable cause of death in America still. And I had two close friends who had quit smoking using this product called Enjoy. And I want to be clear, if you're under the age of 25 and you don't smoke cigarettes, you should not vape. But in the United Kingdom, the equivalent, I think, of the FDA here or the UK health ministry, I think it's called, will actually give you an ENDS, which stands for electronic nicotine delivery system, to try and get you to stop smoking. So the tagline for ENJOY is make smoking history. So I was very drawn to it for the economic opportunity, the chance to work with a friend, and because I had a vested interest in smoking cessation. It's something that I

had some personal experience with. How much did you invest? I invested, it was a significant investment for me. I invested two and a half million dollars. And what was your return? So it still has to close. It still has to go through regulatory approval and FTC approval, but it's, Andrew only has about a 3% share. So it looks like there's a decent likelihood the deal will go through, but based on the terms announced, I'll get somewhere between $60 and $80 million for my stake. And other than my own companies, it's kind of the best investment I've ever made. Take us through what it's like to make $60 million. So it feels surreal. Hearing you talk

about it, I feel as if you're talking about someone else. I read about it in the Wall Street Journal. I left the board several years ago, so I didn't have any access to any insider information. So I read it along with everybody else. The deal hasn't closed yet. So there's still some probability or some chance that it doesn't go through, but it looks as if it's going to. My life-changing moment came when I sold L2. I'd always done well, but that was the first time where I thought, wow, I just don't need to worry about money. And my whole life, I'd just been so, it was like a one-year exhale. I didn't have to worry about how I was going to take care of my

dad. I didn't have to worry about my kid's college. And I still feel like an imposter. I feel like I'm the guy that starts companies and they don't work and makes bad investments. That's the real me. And so when they work, I feel like we're talking about someone else. I mean, your returns have been insane over the past few years, I think. I mean, when I hit 40, I didn't have a lot of money. I mean, I had more money at 30 than I did at 40 because I didn't recognize that the market is bigger than any individual. And when 2000 with the dot-com bomb came along, I was entirely in e-commerce and I got the shit kicked out of me. And then it happened, I clawed my way back, 2008 great financial recession, got the shit kicked out of me again. And where I've been smarter this time

is I'm much more diversified. But yeah, it feels, yeah, you feel, I don't know what the term is, you feel very fortunate, but you don't. The sensation was a little bit different because whenever I've had a big win like this, my selfish lizard brain goes, well, what can I buy now? Or what can I invest in to make even more money and be even more awesome and more attractive to strangers whose affirmation I'm desperate for? And this was the first time I thought, I really like where I live. My kids are doing really well. I can go wherever I want. Pretty much, I get to do what I love, which is the ultimate option. I get to say no a lot,

which is another huge luxury. So it was the first time I thought, what could I do with this money that might help someone other than me, me, me? Yeah, it sounds better on us. You already feel secure about your position in the world, and then you get this extra sweet, which just makes it even, it's almost like less anxiety than you sell your company. It's like, holy shit, how am I going to change my entire life? What's going to be different? I mean, maybe you have a conversation with your wife or your kids. Things are different now.

Oh, yeah. The first time I had a really big hit, it was like, okay, beach house, plane. Those are like the first things that popped into my mind, being the douchebag that I am. And now it's different and it feels really good. But also, I still am worried about money. It makes no sense rationally. I'm still worried about it. I'm still like, oh, I could lose it all again. If the market's some crazy black swan event, I'm still very insecure about money, thinking about how I diversify it, how I be smart about it. But I'm still, it's just weird. I think that financial anxiety you have as a kid growing up, I just

don't think it ever leaves you fully. Do you worry about it in any rational way, or is it just this looming feeling of... My fears are that I'm going to fuck it up. Because I have before. I've made some stupid decisions. I wasn't as smart as I should have been around money several times, or I wasn't as disciplined as I should have been. Dumb shit. I lost 70% of my net worth in a divorce. That hurt. The great financial recession and a couple events just put me in a bad spot. And so I worry that some sort of market event or some sort of self-inflicted wound will take me back to that place of financial anxiety. And some of that's probably healthy, right? And also, I think I enjoy money

more than a lot of people who are born into wealth because not having money for a long time, I got to be honest, I know how gross this sounds, I just fucking love spending money. I love it. I absolutely love it. When I go somewhere and buy something really nice or I'm able to give money away, it just feels awesome. A few of my favorite things, spending the Benjamin, I just absolutely love capitalism. Everyone talks about making and spending money. Oh my God, I'm touching myself. It is so much fun and there's nothing wrong with it as long as you're a good person and you give money away and you tip well and you really enjoy it. I can't tell you how many rich people I know that don't know how to spend their money. They go on shitty vacations, they live in tacky homes,

and they drive stupid fucking cars and they dress like shit i'm like dude aren't you rich what's the point what is the point so yeah i'm just saying about it my greed glands are going like like the facial expressions look of like elation and disgust at the same time i i you know? I just bind to this whole capitalism thing. I've been poor, I've been economically secure, and I've been uber economically secure. And it gets better and better. It's worth working for.

And it's very rewarding and a ton of fun. And anyone who isn't, I think, in touch with that and doesn't enjoy it is going to be frustrated by our society. What's been your biggest takeaway from this investment? One, that I'm lucky. There's a lot of basics here around investing, and then we're writing in our book. The first is you have to have the capital to invest. I worked hard to put myself and was very lucky in a position

where I could make good money. And then for the most part, I've always lived below my means. And that gave me the capital to invest in something like this. Two, fairly soon after, I made my biggest investment. I invested twice as much in a health tech startup because I was super excited about that. It had all these famous people involved, incredible backers, fantastic concept. I'm passionate about the intersection of technology and healthcare. That company looks like it's going to get sold. And that investment is going to be, I'm going to lose, I mean, there's some opportunities for earn out and different things, but I'm going to lose 80% of my original investment. So enjoy up 30X, more excited about the health tech investment made around the same time that I've lost 80% of my money. And here's the learning. You don't know. As smart as you are, as much access as you might have, you just don't know. So what do you do? You diversify. You never put all of your eggs into one basket. Some people are forced to when they're younger in terms of

investing in themselves or in their own startup. But if you have third-party investments, you never put all of your eggs in one basket because you just have no idea. The other thing is time. I made this investment, it's now seven years ago. The greatest thing you can have in investing is patience. I had several opportunities to sell the stock to other people. I didn't, I just held on. I knew it would take a while. And seven years later, it's paid off hugely.

And you know what? It sounds basic. Some people never invest in anything with that kind of time horizon. They just can't imagine it. And guess what? That seven years has gone really fast. So it goes back to some basics. Nobody knows the market. A lot of this is bigger than you.

A lot of it is luck. You want to diversify. You want to live below your means such that you have the capital to invest. And you want to take a long-term outlook and recognize that time is your ally. And that is you want to invest with a long-term horizon. And daddy's buying a jet. Hello, ladies. Hello. But to be fair, you're going to give a lot of this away. Can you talk about your philanthropy plan? Yeah, I'm really excited about this. The things I'm really passionate about are the struggles that young men are facing in America, the fact that we're not generating

enough skills and vocational certification for young people that foots to the Main Street economy. There's huge opportunity in the Main Street economy because the core economy continues to be very strong, and anyone who's tried to get a plumber or an electrician or have their solar panels installed knows that this is the case. And also, I have been very concerned about this rejectionist culture at universities where they take pride in turning away more and more young people. And this all adds up to a lot of young people who don't have the same on-ramps to the middle class that people like I had back in the 80s. I call it the unremarkables, that America needs to fall back in love with the unremarkables. So two years ago, I began conversations and brainstorming with the chancellors of Berkeley and UCLA, Chancellor Chris and Chancellor Block, who are both super impressive people,

all led by a friend of mine who's the chief innovation officer at Berkeley and used to be the dean of the business school, Rich Lyons, and said, could we take the resources and infrastructure and brands of Berkeley and UCLA and pull them together and create vocational programs that had much lower or no admissions criteria other than like the Navy SEALs, you show up and you do your best and do things like a 12 or 24-month certification or a degree in cybersecurity or specialty construction or solar panel installation. There are just so many jobs out there, so many good jobs out there, and so many good young people who are not cut out, are one of the two-thirds of American youth that are not cut out for a traditional four-year degree. I just know, Ed, that a 12- or 24-month training from the world-class faculty

at Berkeley and or UCLA in cybersecurity, that there's going to be a line of employers trying to hire these kids. So I'm hoping that some of the proceeds from this deal anchor this program, but also I'm hoping that inspires other public universities and their alumni to brainstorm and launch similar programs. Is this becoming like a regular practice for you, that is philanthropy, when you cash out on your investments? Yeah, and it's about time. Up until the age of 40, my total philanthropy was zero, or the only time I did anything

philanthropic was so I could go to a cool party with other attractive people. I mean, it was just, I was the least giving person you knew. It was all about me. And I'm finally in a position where I can start nodding back to some of the great attributes of our society that have been so rewarding for me. So this is not a story of lifelong giving. This is a story of someone trying to catch up. And also, I don't even think of it as giving. I enjoy it. I enjoy talking about it.

I enjoy brainstorming about it. It makes me feel important. It makes me feel masculine. I think my kids will be really proud of me someday about this. So yeah, I love this stuff. It's very rewarding. And I also recognize that there's a lot of people that aren't in a position to do it, and they donate with their time and their talent. But yeah, I'm doing more of this, and I'm just enjoying the shit out of it. We'll be right back after a quick break with

a look at the DOJ's attempt to block JetBlue's acquisition of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life. So, tune into AI Basics, How and When to Use AI,

a special series from Pivot sponsored by AWS, wherever you get your podcasts. Hello, I'm Esther Perel, psychotherapist and host of the podcast, Where Should We Begin?, which delves into the multiple layers of relationships, mostly romantic. But in this special series, I focus on our relationships with our colleagues, business partners, and managers.

Listen in as I talk to co-workers facing their own challenges with one another and get the real work done. Tune into Housework, a special series from Where Should We Begin, sponsored by Klaviyo. We're back with Prof G Markets. The U.S. Department of Justice is suing to block JetBlue's acquisition of Spirit Airlines, citing concerns about lack of competition. JetBlue agreed to buy Spirit last year for $3.8 billion after it won a bidding war with Frontier Airlines. Interestingly, Spirit initially rejected JetBlue's offer. They said the deal was unlikely to get

regulatory approval. It was only after JetBlue offered a $400 million reverse breakup fee that Spirit finally accepted. Now, that fee looks like a prescient addition. The DOJ said JetBlue and Spirit are, quote, two of the most significant rivals today, and that they have, quote, JetBlue shares fell 3% on the news. So, Scott, let's start with this. Do you think that antitrust intervention here is justified? For the most part, I really like this. So,

sort of the DOJ and the FTC have been asleep at the switch for 30 years, and we've seen just too many transactions go through that have resulted in monopolies. Facebook should not have been allowed to acquire Instagram. Google should have been blocked from acquiring YouTube or I think it was DoubleClick. And what we have is companies that essentially engage monopoly abuse. And I'm a big fan of aggressive FTC and DOJ action. And when I look at the airline industry, I see it as something that's pretty concentrated. So I kind of defer to their judgment on this, but I think it's probably a good thing.

Well, one of the things that the CEO of JetBlue said that I found interesting is, obviously the argument against the merger is that it would reduce competition. But JetBlue's CEO said, quote, customers deserve a competitive airline marketplace and we will pursue this merger to ensure that they get it. And he's basically saying that this is actually going

to inject competition into the airline market. And his argument is that there are these big, what's called the big four US airlines, Delta, United, American, and Southwest. And they control around 80% of the domestic US air market. And if JetBlue and Spirit merge, granted, this is coming from JetBlue's press people, but if they merge, they would control 9% of the market, which is less than each of the four biggest players. So my question is,

do you think that that's a fair assessment here? Do you think it's possible that this merger could actually increase competition? It's sort of like the argument that Bezos always makes, that we're only 4% of retail. Well, okay, but they're also 50% of all e-commerce. They've soaked up the vast majority of new market capitalization of any retail concept. But I would bet that it's not about whether you have 9% of the overall industry, but the consolidation would create dominance in certain markets. Both of these companies were, I think, doing quite well on their own. So it's not as if, like, when the grocery guys, I think it was Kroger and Albertsons announced a merger,

I was sort of on the side of letting that go through because I thought, these are businesses that really do need to compete against Amazon. And they're not great businesses on their own. They need more scale to compete against Walmart and Amazon. Both of these companies are doing pretty well on their own. And when you've just seen what's happened with airlines recently, just how bad the service has been and the fact that they continue to make money despite offering such a shitty product, it smells of an industry that's become too concentrated to me. So for example, the DOJ found that when Spirit flies a route, average ticket prices drop 17%. When they stop a route, prices go up 30%. So does JetBlue just come in, brand it all JetBlue, and effectively raise prices 30%? I get the sense that this would

be good for the combined shareholders, but bad for consumers. And my guess is the economists of the FTC are going to make a pretty compelling case here. Yeah, ultimately, that's what antitrust is about, right? It's just about protecting the consumer so they don't have to pay high prices and Spirit is the cheapest ticket. But just an interesting note that we were looking at, JetBlue's market cap is $2.6 billion. They're buying this company for $3.8 billion. I was initially kind of confused by that, looked at their balance sheet. They only have $1.6 billion in cash. How are they going to do this? It turns out what they're doing is they're just getting a loan. They're getting $3.5 billion in financing. And it's basically an LBO. And I

hadn't really thought of this before, that a regular company can do the job of a private equity firm and just take on a load of debt and then use the financing to acquire another company. Have you ever seen this kind of deal before? It's a really interesting observation. So Jeff Bukas, a friend and a mentor, talks about the deal when I think News Corp approached him about acquiring Time Warner and offered him a small premium to the current stock price. And he said, well, how are you going to finance this? And he said, well, we're going to borrow the money. Why am I letting you buy my company with my money? And his attitude is, if Spirit Airlines has a robust enough business that you could borrow against it and acquire it, why does

Spirit need JetBlue? So yeah, you're exactly right. It's a company coming in and basically using the markets to finance it as opposed to their own stock, which says that Spirit has a great business. So my guess is they went to the banks and said, we want to finance this deal and combine this is going to be the profits and cash flows to support the debt for the acquisition. And by the way, the cash flow is going to be much better than it is now because of the savings and the synergies we'll recognize. What's interesting is that part of the deal terms that ultimately determined the winner, JetBlue, was the level of breakup fee. And Frontier, who was also bidding, was willing to go as high as $250 or $300 million breakup fee. And JetBlue ultimately agreed to a $400 million breakup fee. So this is

sort of no lose for Spirit because if the DOJ or the FTC comes in and blocks this thing, they just keep on trucking and get a $400 million parting gift. So JetBlue has a lot of interest in closing this deal. And Spirit is kind of sitting pretty. It's just sort of heads they win, you know, tails they win. Okay, our final acquisition story. Weight Watchers has agreed to buy Sequence, a subscription telehealth service that offers consultations and prescriptions for various weight loss drugs. One of those drugs is Ozempic, a weight loss

injection that's been dominating the headlines this year. Why? Well, this is the first weight loss drug that appears to actually work. Research shows that after 68 weeks of use, patients lose on average 15% of their body weight. It's already a huge hit. Over a million Ozempic prescriptions were written in December alone. Weight Watchers will pay $106 million for sequence in a combination of cash and equity. And Weight Watchers stock rose, get this, 70% when the news broke. Scott, I get the feeling you're going to like this deal, but what are your initial reactions? Yeah, I think this is really, I mean, recurring revenue and addressing a market that, no pun intended, keeps getting bigger and bigger. I mean, Sequence, $25 million

annual run rate business, they paid 106, so about four times. I mean, that's not huge. It seems to me that Weight Watchers got the better side of this deal here. But Weight Watchers has always been a great business. It's got three and a half million subscribers. You know, this is a $50 billion market by 2030. And the CDC estimates that 70% of Americans are obese or overweight. The weekly number of prescriptions written for Ozempic is growing at almost 80% year on year as of January. I mean, Ozempic is one of those brands I'd never heard of, and now it's everywhere.

And then it's a Dutch company that produces Ozempic. And no shocker, its stock is up 40% over the past year versus the S&P over the last years down. Going meta here, I think obesity is a big issue. I think on the far right, they politicized vaccines for some reason en masse. And on the far left, we politicized obesity. And that is, we didn't want to have an open and honest conversation around the fact that the majority of people admitted to the hospital with a novel coronavirus had some sort of comorbidity that was directly related to their obesity or body mass index. I think this is something that is a real scourge in America. And if you really want to look at

kind of a conspiracy here, you have the industrial food complex, which has figured out a way to get you addicted to this 98-point-plus margin products of sugar, seed oils, processed grains, and they get you fat, and then they hand off all those profits to the industrial medical complex, specifically the diabetes complex that then has a customer that's going to be worth tens or hundreds of thousands of dollars. So when a mayor of New York tries to put in restrictions around the sugar bomb and pre-pre-diabetes that is a big gold drink, constituents say, no, we like America fat and sick. But I would like to see a concerted effort to give people the resources. Shaming people doesn't work.

This is a really deep, complex problem that involves culture, economics, access to the right diet. It's not just a decision people make. And the reason I like pharmaceuticals here is as someone who worked out a long time and then did a cycle of creatine, which is legal and just found, Jesus Christ, you can put on five to seven pounds of muscle with a cycle of creatine. I thought, there's probably pharmaceuticals that can aid you in weight loss. Anyway, I think we need an honest and open conversation and to talk realistically about pragmatic solutions. But I would argue it's one of the biggest problems facing America right now. Okay, thanks. Let's take a look at the week ahead. We'll see earnings from BuzzFeed, Adobe, and FedEx, and all eyes will be on the Consumer Price Index

and the Producer Price Index. Those two inflation reports will heavily inform the Fed as it makes its next rate hike decision next week. Scott, do you have any predictions for us? So my prediction is that Spirit Airlines cashes the cleanest, highest margin $400 million check in their history when this deal is blocked, or they just decide the lawyers from JetBlue decide to give up and they have to pay the breakup fee. I think that, one, the concentration of the market will lend itself well to a lot of expert witnesses who are economists. And in addition, I think there's going to be public support for not having these airlines merge because I think the government or the FTC and the DOJ will be able to pretty easily link concentration in the industry with a lack of competition and the types of meltdowns that literally ruined millions of people's holidays. I think a lot of Congress people are going to get calls saying, look, this shouldn't go through. And I think the judge who ultimately presides over this

will be very sympathetic to the government's case here. So anyways, my prediction, Spirit Airlines just got 400 million bucks. That's all for this episode. Our producers are Claire Miller and Jason Stavers. Benjamin Spencer is our engineer and Drew Burrows is our technical director. Special thanks to Catherine Dillon and Mia Silverio. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Profiting Markets from the Vox Media Podcast Network.

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