Yet Another Value Podcast - Chris DeMuth's State of the Markets August 2022

Episode Date: August 17, 2022

Chris DeMuth returns to the podcast to talk about what's on his mind in the markets this month, including updates on TWTR, the IS / U / APP love triangle, and Rio's "failed" bid for TRQ.0:00 Intro2:10 Overview3:45 What's happening with TWTR26:10 IS / U / APP love triangle45:00 Rio / TRQ

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with me today i'm happy to have on my friend my partner at ranging capital chris the mute chris how's it going it's great how are you ander doing good doing good uh you know goldrums of summer getting ready to wrap up i think both of us have a little bit of vacations planned which we're looking forward to but neither you Peter Nero there for this podcast. Let me start the podcast the way I do every podcast. First, the disclaimers remind everyone, nothing on this podcast is investing advice. We're going to talk about at least three situations that I know of today. We could talk about a bunch more. So everyone should just remember, please consults financial advisor, do your own diligence.

And then the second way, I start every podcast with a pitch for you, my guest. This is about our fifth monthly state of the market review. So people can go listen to the prior for all the pitch and everything. That out of the way, let's just dive in. Chris, August, what's the day today? I don't even know what day it is. August 15th, afternoon of August 15th, we're talking. What's on your mind today? I don't want to sound like a broken record and overdue Twitter,

but when I try to pull back, I think about the number of things that have happened since we last spoke, and then I think there's a ton. So I think Twitter is hugely hard to get away from. I think it is not the biggest spread in the spread universe. It is the third place spread behind Iron Source, which is behind Turquoise Hill resources. And I guess I have always like big spreads. I mean, bigness of spreads is arbitrary by itself.

You have to think about the risk award, obviously. But there is a certain appeal to something where, lots and lots of different things can happen that are ties or wins. You don't have to have that much precision. You have to be directionally, approximately right. You have this big target. A tight spread is like a little target. And so it's, you know, the only asset class I've ever, I think I've ever like totally issued, never owned is like high grade corporate debt that's like wielding like three or four percent. Like it just seems like it's just seems like weird topic like this one thing happens and you make a little money anything else happens

and you're screwed might not happen but like and so the field is big on the possible outcomes here but i think that twitter iron source and turquoise hill are all interesting topics okay great uh which one do you want to start with maybe twitter okay let's start twitter so again we're talking august 15th uh if if you've been following this podcast there's been a lot of Twitter talk on this podcast. Obviously, we had right at the height of Elon trying to back out of this deal. I had Evan Tendell on and we talked about it. Just last week, we had Compounds and Ann Lipton from Tulane on and we did a really- She was so good. I don't want to sound a fanboyish and a simpering, but she was really good. She was really good. And then obviously you and I have

talked multiple times on kind of the state of markets about Twitter. But look, the reason we're talking Twitter is because I will get messages from people. all the time, you know, as Twitter's kind of bumped up, they're like, oh, Twitter, you made such a good case and I just missed it. I'm like, well, yeah, like the stock has gone from kind of like mid to high 30s when we started talking about it to it's about 45 today. I'm like, in that sense, yes. But, you know, if you think the downside to Twitter is 25, which I think is where the stock market has it, I might disagree, but where the stock market has it. And the upside is 5420, the deal price. The market's pricing in a 67% chance of this deal going

through with that math. And, you know, everyone I talk to kind of thinks that I personally believe it's well over 90% Twitter wins. So if you believe that, it's like, hey, you can't say the stock was 30 yesterday. It's 45 today. I missed it's like, no, it's still great odds. Anyway, I'll pause there. What has happened in your mind with Twitter? And there is less and less uncertainty. There's been a lot of dogs that haven't barked. There's been a lot of things, you know, there's always some chance. whenever I get down at the end of an alley intellectually, I always sort of pull myself back and say, maybe my mental model's wrong, maybe I'm missing it for whole directions I haven't even thought about still could be the case, but there were fewer and fewer other vectors

that make it increasingly likely that we are talking about the right things, hopefully applying the right judgment. But as the process goes on, one last comment about your last podcast, which is I always am very guarded listening to Elon because he sounds so much like what a marketer sounds like to me. I have to be also guarded when I listen to Anne because she sounds exactly what a smart legal expert sounds like to me. And I just like, she has so much credibility in this. She's not involved. She's not, it's not motivated reasoning. I think she would say the opposite conclusions if the facts were opposite. And it's just fun listening to somebody who's clearly thought about these issues so much.

Who's an actual expert as opposed to me trying to just newly think through all of these things? I totally agree with you there, but just on your point, the dog who didn't park, you know, like when we first started mentioning this, I mean, I think we even mentioned it before Elon tried to pull out him. We were like, this is a pretty good contract. I don't see how we can pull out this quickly. And obviously, he tried, he's trying.

But, you know, since people who say, oh, I miss it when it was at 37, now it's 45, of them. This is like, okay, but you know, when it was at 37, we hadn't seen Elon's complaint. We hadn't seen, we didn't even know Twitter would sue. There was, my biggest worry had consistently been Twitter's board would just say, okay, Elon, go ahead, walk away and kind of, they never wanted to sell. So they just kind of walked away. But like, we know Twitter suing. We've seen Elon's complaint. There's no, there was a big worry. There'd be a smoking gun in there where some employee emailed Elon and Elon had a document that said, look, here's an employee who said Twitter's been running a fraud on America for seven years going on now, right?

Like, all of that is gone. We haven't seen any of that. So, yes, the price has changed, but we've got a lot of facts that, confirmatory facts, that there's no smoking gun here, or at least so far there isn't all that type of stuff. And there isn't even much innuendo from Musk's team. I think there's some reflexivity that in terms of potential negotiating dynamics heading into court, I think it is useful to either side to have a fairly open hand. I think that Elon would be well served by the stock being 20, and I think that Twitter would be well served at stock being 45. So I don't think they would keep it a complete buttoned up secret. I'm not sure Elon can keep complete buttoned up secrets, but I don't think he would if he had just this killer fact. And I don't think professionally

his lawyers would say kind of five silly arguments that they had one fantastic one that they're just about to lay on us tomorrow. Yeah. We can go to the lawyer's second, but I think you're 100% right. Like from Twitter standpoint, it's one of the few scenarios where the stock price really does become reflective, right? Because if their stock was at 30, their shareholders would be panicking, right? It would create people would look at the stock and say, hey, your case is weak. The market's telling you your case is a week. You need to go to Elon with kind of hand and hat and say, please, sir, won't you pay us $37.50 per share and let us out of our misery or something? Whereas with their stock at 45, and obviously there's lots of different dynamics and

everything, but I'm just saying in general, all else equal. With their stock at 45, they've got a shareholder base who's saying, you have a really strong case in court. You cannot settle for $40 per share. You cannot settle for, like, you need to settle for nearly the full value of the share price or else we'd rather just go to court. And from Elon's perspective, the market, his lawyers, everything is saying, Elon, your case is not good. You are almost certainly going to lose if Twitter comes to you with a, hey, let's take the certainty, $53 per share, sign on the dotted line right now.

Save yourself the billion dollars in the headache and take that because in court you're going to lose and you'll have to pay legal fees and all that type of stuff. So the thing I've really been thinking about since last we spoke is trying to parse Musk's words, because there's so many to parse, and trying to reach a conclusion about how they affect his legal case, and then trying to back out of just repeating a view that it's mistaken that it's going to lose, which I think he is mistaken and I think he is going to lose. But there must be more to that. So trying to think about his different audiences and divide up the audience between Chancellor McCormick, who I believe is 99% of the legal battle. Maybe

1% is the Court of Appeals and so forth. But I think the Court of Appeals, if this has gone to an appeal, will have a 140 character or less decision within 30 days of her decision. And I I think it will be highly consistent with what she says. So I'm thinking that she's 99% of the legal audience here. And that the richest guy in the world who has succeeded at all sorts of things and is not stupid, is not appealing to her or even trying to appeal to her. but he is appealing to his audience, he knows very well, his Tesla audience, and he plays them like a violin, he can just, it's mesmerizing to watch how he can change the tone of his followers

and that he's really accomplished something here with this lawsuit, with the delay of Twitter, and how it's impacted Tesla. And so just walking through those two things, and just been amazing the number of things that and like I think I've mentioned before, you know, I've been a witness and I've been a plaintiff in Delaware and the first thing the lawyer says and he says it very like tersely to me because I think I'm right. The judge is smart. Why don't I just chat with the judge. He's like, don't volunteer anything.

It gets taken out of context. It gets like the Miranda rights, anything you say can and you will be used against in a court of law. The lawyers use this to their end. So you should give them as well. little material as possible to hurt you. And just the quantity of things. And it makes me think that Elon has not been very engaged in the minutia of the legal case. So I think I have a couple here. Anyone who uses Twitter is well aware that the comments are full of spam, scam,

and a lot of fake accounts. It's beyond reasonable for Twitter to claim the number real unique humans is above 95% that's what they're claiming does anyone have that experience it's a quote from him um his case requires his reliance on their bot claims so it has to be fraudulent has to be material and he has to have relied on it um uh and so him in the middle of this blurting out that kind of implying that it was obvious that everybody knew, I believe is irreconcilable with the idea that he relied on their specific claim. And if he was going to say that, I don't think the case would have been brought the same way. And then, incidentally, in an exhibit, Exhibit 4, Twitter actually disclosed their confidential MDAU auditing guidelines.

So he got the thing that he said that they didn't get. And then he tweeted, if they simply provide me the method, the deal should proceed on original terms. But there's a half dozen other claims that they made that. he's then saying is not, I mean, he almost said, he almost phrased it as if it was like a judge's decision adverse to all the other claim. Like, he almost threw out his other claims, not just a tweet, but kind of amazing that, so that, and then third and finally, and there's more of these, but just the third one I'll mention here, is that the scope for disclosure was

written by Wachtell-Lepton. So they have kind of form categories that they use, and it's largely based on just how much leverage they have. Do they have to have an extremely timid, usual, or an extremely aggressive wording? And in the disclosure, they had their big version, the big ask. So this is a big ask from Wachtell on what a seller has to give the buyer. Just to clarify Wachtel is Twitter's lawyer. Yes. So this is from the Twitter perspective on the contract. And there's actually slightly different lawyers that are designed with litigation with the contract, but they kind of commingle, they're working as a team. They can limit information in their reasonable judgment. And reasonable judgment is a torture chamber for proving somebody's

violated it. And we've often been on the other side. It's like, hey, I want you to take the highest bid. And then I look at it's like, it's your reasonable judgment. And me going to court and say, you're not being reasonable, meaning you're not doing exactly what I want. A judge looks at and says, reasonable can be wrong. Reasonable can disagree with some hedge fund guy in Connecticut. Reasonable is this huge target for you to hit. Basically, you can't be taking wads of $100 bills in a manila envelope. You can't be conflicted, getting paid for it.

Like, no, you're taking that money. But just you and I disagree and you're on the board and I'm not. That's why some people are on the board and some people aren't. and I can get red in my face not liking your judgment, but reasonable is hitting the side of a barn. So Wachtell put this in. The reasonable judgment, if it might cause significant competitive harm, in the middle of all this, Elon says, oh, and if this doesn't work out, I'm going to launch a competitor. So it's already this huge standard, just say, hey, that we need to be reasonable if it could cause competitive harm. He's like, oh, yeah, I'm in the way. I am competitive.

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

It was crazy. And so none of those things, to me, are designed to appeal to Chancellor Kathleen McCormick. All of those things seem to be almost like, I mean, I think I'm just playing with this idea, so this is not a prediction and this is not the basis of our investment. But I don't feel 100% comfortable on Twitter side. And if I was his, excuse me, on the case against Twitter, on. on Musk's side, that this is going to go to a decision without some very pregnant commentary from McCormick from the bench. I mean, I think she has a lot of scope in discovery to move things along here in ways that could tip her hand in what she's going to do. And when you have

a standard like reasonableness based on the competitive landscape with somebody who says he might be a competitor. I mean, that's the kind of thing that she could comment on in a way that will give a very good sense in how she'd ultimately rule. So what is he doing? He's not trying to appeal to her. And I don't think he's listening to legal counsel in coming up with these things. And so to the extent that, and it could be because he's having funny, saying whatever he wants, but to the extent that it is a strategy, I think that it is a strategy that appeals to his base, his followers, his fans surrounding Tesla, because if the Twitter deal was going to go very fast in the environment that went between the deal announcement and his purported

termination, where Tesla had gone from 1,000 a share to 750 share, he had to trade out of Tesla into Twitter. So he launched a deal thinking that this was going to cost him 21 million Tesla shares. Very quickly went from 21 to 28, which if you thought you were paying a very full price, like maybe you thought, this is the moment of my maximum paying threshold. And when he said, it's not really economic, I think it is economic, but he might have been saying, this is my final 21 million shares. That's all the shares of Tesla. I'm willing to buy this for. And then you blink, and it cost him seven million more shares. I think, He needed to slam on the brakes and just see if anything could change about the environment.

And it did and it changed about the environment a couple ways. One is the NASDAQ has roared since then. So, like, you know, you've had tech bounce back generally. Two, you've convinced your followers explicitly that you're not going to sell more Tesla shares, which helps sell Tesla shares. And thirdly, you've kind of... changed teams a little bit on whether you were doing this for All Out for Twitter or a Brock focused on Tesla. So I think it helped Tesla's share price recover substantially that it looked like

he was going to get a lower price, a better price, might cut, might walk, might not need to sell anymore. And then, of course, he was selling more at a time where it went from 21 back to 20, went from 21 to 28, and then it came back to 24. And I would think it's even kind of creeping from 24 So you have the price bouncing around, but all of the things he was doing, the cast aspersions on the finality of the contract with Twitter helped Tesla shares. And also just the extra time helped the environment recover a little bit. And so I think he might be happier if he just thinks of his net worth and his overall situation net of the two companies.

And that audience is completely forgiving. I mean, it's forgiving to the point that his fans are all. almost like a PR agency or propaganda and that they seem very happy to reinterpret things he said in the past and endlessly forgive things like saying that he wasn't going to sell it than he did. I mean, it's just a superpower. But given that, that's the audience he knows how to affect and he affected them for quite a lot of advantage. More than more than one person has pointed out a lot of similarities between Donald Trump and Elon Musk. And it very much, not to turn into political thing, but it very much reminds me of that where

you can endlessly look at his statements and just as facts keep evolving, you can just change a statement. So it always paints him in the best light. And whatever he says is how it appears to me like when Twitter is the best thing on earth, then he's buying it. He's going to turn it into fortune. And then when the bots are running through the company, it's going to be terrible. And it's very similar. Very similar. And I don't know behind the scenes if it's just organic or if it's actually coordinated. But either organic or coordinated, it does seem like there's been a huge tone shift very recently,

more recently than Musk's comments, more recently than legal filings, on Musk fans warming to Twitter, some of whom said, oh, he's going to walk, he'll pay a billion, maybe he'll re-cut for 30. Now they're saying, oh, he'll recut in the 50s. And it's only a bit just people who were kind of low information, high allegiance to Musk, kind of flippant commentary have gone from flippantly Twitter's about to get annihilated in one form or the other to, as we've always been saying, it's going to get done in about the way that it originally was. And just no, and there's no, this massive change. I mean, I can massively change my view, but I feel like I owe you an explanation for why. It's like, oh, I meant $30 higher. Like, why? And no reference to it.

Just kind of just casually raising their confidence in that for some reason. So that's been interesting to see too. Yeah. Nope. Completely agree. Look, as we're talking again, Twitter is just below 45. If you believe the downside's 25 and I kind of think the downside's a little lower, but that's where the market has been consistently saying like this, it's price two-thirds

chance Twitter wins, one-third chance Elon wins. And you can disagree with me if you want, but based on everything I've seen so far, like, that seems way off. Like, this Twitter has the best legal case of any MAE case I've ever seen. Twitter's certainly got that. And, you know, M.A.E, the history is the seller wins. It's really hard to claim in MAA. And I've seen nothing to change that. I think it is original terms by year end.

Yeah. And look, you know, one other thing is people can say, oh, well, you're not. factoring in the possibility of a pay cut or a settlement and stuff. It's like, well, yes, you can start running models on that. But if you actually think about it, the pay cut odds should the pay cut should be based on each side's odds of winning in court. Right. So you can simplify, like I spent a lot of time with this, you can just simplify to what are Twitter's odds winning in court? And then you can build out different models with like different downside stuff. But the most important thing is what are Twitter's odds of winning in court and what are the downsides? Like those are

really the only two factors that need. And I think Twitter dots odds are just way higher than two-thirds. Yeah, it's the same conversation. And so if I go 95 times of times 5420, 5% times 15, 20, you play with those numbers. It's the same as the negotiating name. It's going into court and saying, okay, a conversation that I think the ask would be of 5420, the bid would be high 40s. you can kind of end up with the number in the very low 50s just on the risk time. And you push towards a settlement, especially the worst externalities are. So if both sides say, look, this discovery is going to be really bad and it's just like, it's going to be ugly for a court, I think Musk has offered a lot of innuendo on how terrible

it's going to be for Twitter. And Twitter called his bluff and simply didn't, uh, didn't, uh, didn't, hold back the information that he thought he was threatening with. So I think his game theory around the discovery hasn't worked. I don't know that it's failed in the other direction, though. You know, we're seeing a lot of information requests that are going out from Twitter's lawyers to must contact. He's certainly valuable in the public. If he's even more valuable with his friends, there might be stuff that he doesn't want that would happen in this process. So, yeah, I'm kind of indifferent to as long as the conversation around settlement is similar to our conversation

around the upside down and probability. Yeah, you can net present value at any day you want. Cool. That's fine. Why don't we turn over to one of the one of the stranger kind of bidding wars I've seen in the markets, which is iron source, the iron source, unity, at bidding war, love triangle. I'm not sure what's called, but the tickers there are IS.

U and APP at and U was just the letter U. And I'll just turn to interview you. What's going on over there? Sure. So this is an interesting one. This has now a bigger spread than the Twitter deal, although there's a very funny thing that you have to think about when it comes to dollars and percentages on stock for stock deals

where there's a buyer that has a bid because you have to start at the end and we're back, there's only ultimately giving me one conclusion. When the bidder for the buyer goes away, the stock price presumably goes down at some point. So you don't get, you can't take in dollar terms if you are the definitive deal target. You can't say, oh, I get full credit for the premium that my stock that I would get in the deal would get. right so just to give some members to that so what happened here is iron source and unity have a deal to merge iron source will get it's about 0.11 shares of unity for every share of iron source and last week app came and said hey you call off your merger with iron source and we'll buy you instead and

you stock went from to use round numbers 50 to 55 right now right so if you're using that 55 for your iron source model it has some premium built in from the app so you can like super circular in terms of all the spreads and everything. So it's like both of the math and the just dynamics on this are complicated, but you can't say, oh, we're getting $6 of stock, because you're really not, even though. So nominally, it's $5.96 at the moment. It's $1.37 spread.

It's, you know, a gaudy return if they can get the original deal closed by your end. But the interesting thing that happened, it was a somewhat interesting deal, but then it became very interesting when you have this other bidder coming in over the top. Some things about it that are different than we normally. normally see. So it was a stock unsolicited bid more typically. Obviously, if it's a private equity, basically 100% of the time, but usually when you say, if I'm interrupting the conversation you're having with somebody else, it needs to be a very crisp interruption. Andrew, I'll give you $100 a share, right? Like that can get your attention. But like the, hey, you're in this complicated

situation. I'm going to complicate it with another complicated situation that I then have to explain, including synergies and management and ownership stakes and what the stock offers worth, including the fact that it wasn't nominally a big premium, which is a little bit, again, you're sort of rudely interrupting a conversation with something that's nuanced itself, right? Like it's not nominally a huge premium. Usually you want a splashy jet blue coming in over the top in the frontier situation was splashy. You tell shareholders like, hey, we're off. for you a lot of money. You'll get a lot more money. The spirit Frontier offer is for $22 per share in stock and you've got to worry about the stock heading into a recession and all this

sort of stuff. Hey, spirit shareholders. Here's $33 hard cash right now per share. And that was an offer. I really admired how JetBlue handled the situation the whole time. I felt like they were talking to me. I mean, when they were literally talking to me, I felt like they were listening. And when they we're talking publicly, it was like, oh, I had this concern yesterday, and then they put out press release answering, like, I'm like, I don't know where to go other than with these guys because they're just like nailing the whole kind of perspective of a shareholder. This is not the case with the app. You know, so you have a small stock premium for a well-defended company.

You can all have corporate defenses talking about, like, how much if the board and management doesn't want it, can they avoid it? And the answer with you is they really can't. Like, it's not easy to take over this company coercibly. And Apt didn't even have a pitch for, hey, if you don't like this, we're going to come at you with this other route. So it's kind of weird to say it's unsolicited, but it's not going to be followed up with a coercive, hostile offer.

And even if they tried, it's not clear the route that they would take to do that. The two weirdest things to me, you started with this is, hey, the initial use stock was at 50 the day before app came. And the app offer valued them somewhere between 55 to 60, depending on kind of where app stock was in an all-cash thing. And like in general, when you get an unsolicited bid, you tend to come with a much bigger premium, as you said, to like grab everyone's headlines and get to the negotiating table and really force your way in so that you can go say to shareholders, you know,

you know, hey, you stock is at 50. We offered $75 per share cash. They're not negotiating because they're conflicted. They've got all these bad things. But like in this case, it was a rounding error. It's the closing price, right? Which was kind of surprising to me. So it didn't grab your headlines.

And then I'm sure we'll talk about it in a second. I know we will. But app offered Class A and Class C stock in the U bid. And the Class A is normal voting shares. And then the Class C was non-voting shares. An app just valued the class C shares like they were Class A shares. There are no Class C shares that exist. There are no Class C shares traded.

And a Class C non-voting share will be way more illiquid than Class A and not have a vote. So it's going to trade for a huge discount. And I was just like, so you offered an anomaly a 10% premium. And that includes no discount for shares that are absolutely going to trade for a huge discount. Like it's just a real, it's just a strange, strange strategy. It was just strange all around. and it kept making me think, like, am I, what am I missing here almost? It seems sloppy.

And then the two other factors, just like in the moments after it was filed that I kind of thought through a lot as one, I really have always been interested in bitter public shareholder perception and their stock price. And I've always thought that's more or less the amount of leash that your shareholders are giving you to work with. And it's hugely unfair, in my mind, that management that's given a terrible hand that does really, really well in comparative terms. So in my mind, it's rational to give them a lot of credit, but things are horrible in absolute terms. The market just doesn't, like, if you're losing money, like, there's this kind of binary on things are going down.

And even if the person's kind of brilliant and, like, their company should be losing 30%, they're losing 25, nobody cares. And if they're terrible and their stock should be up 40 and they're up 35, they get a lot of praise, even if they're not making high quality decisions. And I don't think that's good, but I think it really affects corporate dynamics around transactions. And in this case, the market just didn't like the offer. So it's going to be hard for them to offer a lot more with their share price trading down. And then the other thing that really affects dynamics is if, especially in a tough equity or credit market, and they've been strengthening recently, but it's easier for huge companies to do small things than for similarly sized companies do things. And in this case, the bidder doesn't even have a bigger market chip, doesn't even have a bigger market cap. And so your first shot you fired is a lot of the shot that you have to fire.

You don't have, I mean, you can't pay, it wouldn't be easy for them to pay all cash with a big premium. It wouldn't be easy for them to keep raising it in terms of their stock. So they don't, they kind of said much of what they have to say from the beginning. And the target kind of knew their level of interest. Like none of this was new. I mean, you knew all about that. I mean, it wasn't that this was a new thing. So it was kind of, we really didn't favor them that well.

One of the things that initially worried me, and I guess still worries me, is I had kind of assumed that these are big companies, IS and app are like each other's two biggest competitors, and you merge with IS. So I'd kind of assume that you talk to app, you know, just like throughout the testing waters. And app and their call said, oh, no, like obviously we've talked to you before, but you. You did not approach us about a merger, like this is an unsolicited merger. So I was kind of wondering if there was a chance you thought like, oh, app isn't available. They just did a big deal. They're not available. We better strike while the iron hot while the iron's hot and move on IS.

And then you would kind of get an offer from app and be like, oh, now we've got options, you know, because you is the prize of this love triangle. It's the prize of this love triangle. But based on the response today, it doesn't seem like you is all that interested in merging with app. It seems like they want to, they really want to go with IS. And then the other thing I was going to say is it does seem to me, look, you stock was 180 in November, right? It's 55 as you and I are talking. It does seem to me like you, everyone involved there, think that this is a killer company with insane amounts of upside. And that actually plays against app, right? Because if app came out

and said, like app is much bigger than IS, if app just has to own more of the combined company. And that works against them because if you thinks our intrinsic value is $200 per share, then there's no real amount of cash app can throw into this deal that will make up for the fact that you has to dilute themselves more to get with app and you end up with less of the company and less explicit that upside. So I just think these are two really interesting dynamics in this thing. And I want to move on to the class C, the class C stock in a second, but I'll just certainly respond to all that. One one sentence I'd throw in there too, which is it also paradoxically increases the flexibility for IS. Let's just posit that IS knows that you use like this

really good strategic deal, a really good currency. You can actually, I mean, I don't, I'm an IS shareholder. I don't want to give away more than I have to, but it does give me in terms of just the, do we do something or not, flexibility if necessary on how to do something with you because we're getting really good currency. Let me, so I mentioned when we were just laying, overview. App offered 1.152 shares of Class A app stock and 0.314 shares of Class C app stock to you. And Class A stock is the normal publicly traded app stock that everyone can trade on the public markets. Class C would be a new non-voting share. And I'm just curious, like, what do you, I have one conspiracy theory, but why do you think app would come out and offer this like

clearly inferior non-voting share, non-voting stop in their offer for you. It seems crazy. A conspiracy theory would be, I mean, it makes it harder on a shorting app and the hedging out app, I think. So my personal conspiracy theory was

IS and you have a merger, right? And it's very clear that you cannot go shop themselves in the merger. They can respond to a superior offer, but they can't go shopped themselves. And my conspiracy theory was you, by app, by doing Class A and Class A and Class C stock keeps the vote about 50-50. So App can claim, even though you ends up with more of the company, because it's 50-50 voting stock, app can claim that you is actually the seller here, right? Yeah. Whereas if they went any higher and you ends up with, let's choose a number. 65% of the combined company's voting stock, and app ends up with 35%, then IS could go in court

and say, hey, you, you broke the merger contract for this app deal. You're just buying, you're buying a competitor other than us. You weren't allowed to go break our deal to buy someone else, only to sell. You're not the seller in this transaction. I don't know, because if I game it out, like, do I think IS would actually win in that scenario? I don't know. I don't know if they'd win a case.

but I did think that was interesting, and that was the only reason I could kind of think up with it. Yeah, no, that makes sense. It makes sense. It's a tricky situation. One of the things that's hard for me thinking about it is, and I've, I mean, my conclusion has been long IS not sized heroically, has been, if you're left out in the cold here, you lose the premium, and it probably is legitimately a bad strategic. environment to be the one left out of the three. If we're right on the deal, NIS gets a deal done with you, sure, you loses the takeover premium it has from that deal, but I think you're the winner strategically in the environment where app was left out. And App's bid might be reactive to this deal and compliment, flattering to this deal, saying, oh gosh, they have the good thing going on. We need to, we ideally need to be the buyer, but we definitely need to screw right.

with this deal right now because this deal is a good one competitively against us yeah no i'm with you the other the other thing that's made this difficult is like you is the clear price here right but i s an app would like to me merge with you there's clearly synergies here but you is a strategic target like if you go back to last year there were leaked facebook memos from two years prior that were like hey we should go by unity and everyone's talked before about how strategic this is is they, you know, I can't claim to be an expert, but everyone talks about how strategic you is with game developers and everything. So I, the other big worry is that this whole thing has opened the Pandora's box for Microsoft, let's say, I'm just throwing a name out there

to come and say, oh, you super strategic, we want to be more into games, we'll offer $75 per share cash, which is a, that's a 20 plus billion dollar offer, which is huge, but it's a rounding error to us and there's massive synergies and all this sort of stuff. Like, I've really struggled with, hey, going long to iron source or going long the spread, which would be long iron source, short unity, going along that with the risk of, what if we're right on you wants to merge with iron source, but we're wrong on, hey, Facebook comes and offers $100 per share or something, you know? Yeah, I'm staring at that every day, not short any unisource, not short any you for that reason. and that's a hard one. You know, it's kind of like the opposite point

on what we're talking about Twitter. Like, I feel like we're seeing the whole picture in Twitter at this point. I don't feel like we're seeing the whole picture at all on Iron Source and my sizing really reflects that. We could have some of the announcement. Tomorrow you could have you, like you halted for news would not be that shocking.

And I wouldn't be able to tell you if that happens, why it's halted. It's just a break, Because, you know, when I go through the list of targets, like, there's not mammoth private companies that can go by Unity. And this is a $16 billion plus company. That's a big check for anyone's right. So you have to start walking down the list of who can be the buyers. Like, Facebook just had a $200 million VR app.

And then you get big enough in the antitrust issues. So if they came with an $80 per share offer, you would have to consider it. but I think they would reject it because it's going to get blocked on antitrust down. Microsoft is buying Activision Blizzard. Like, I don't, the market is saying that deal is about 50, 50 to go through. I don't think Microsoft's going to risk a, you know, $50 billion acquisition over the U thing, which has antitrust risk. I don't think you would consider that. Google, I think that's a no go.

Like, you keep going down the list. The only one somebody said to me that might make sense is Adobe, but I can't claim to know enough about Adobe's business and the synergy there. But even Adobe, like, if you're an Adobe shareholder, are you going to be super happy with, hey, we're going to go buy this U business that's projecting $250 million in EBDA in 2024. We're going to go buy it for $25 billion. We're going to pay 100x two-year-out EBITA, and that's before stock comp when our stock trades at, I don't know, 30x this year? Like, that's a, maybe, I don't know, Adobe's a big company. I can't claim to know the synergies. It's just scary to me.

You know, when the JetBlue got their deal with Spirit, Frontier was really the winner that day. And I think they're like, the market kind of was relieved that there is not the winner's curse on a kind of multi-bitter auction-like situation where the winner is, does tend to overpay a lot. I don't think that's going to be the dynamic this time. Like, it'll be interesting to see what happens to whoever doesn't end up with the deal. But I don't think, you know, if somebody came in over the top, like say, you was halted.

What does APP do? What does app do while we're waiting on you news? If app doesn't get halted, like I don't think that's an obvious, I don't think it's directionally obvious what happens to that if somebody comes in over the top, over the top for them. Also, these are huge companies. they're looking at everything, I feel like the kind of, it's in play now, so these other companies will look at it. I mean, these are such huge companies we're talking about. They have somebody looking at everything. So it's not like they didn't know this was happening. Yeah, and look,

you know, you're starting, I've heard a lot of people be like, oh, Adobe's going to come in, Facebook's going to come in, all this for you. And yeah, some people were saying that, but if you go back to last week before the app merger came in, like nobody thought UIS was even in question, right? So what's changed between now and then app has come in? But that doesn't mean Facebook's going to come in with a $75 cash bid. And even if they did, like, again, I'm no expert here. But UIS, nobody thinks that's not synergistic. If somebody's going to risk antitrust, like you'd probably just want the whole prize, right?

You want you and IAS together. That wouldn't apply to Google. But for anyone else, I would think that applies. So, yeah. Great. We've been going on almost an hour, but I know you wanted to talk about TRQ, which had this really interesting situation, which like kind of came to know it. it kind of not came to head with Rio Tinto this morning. So I'll just flip it over to you there.

Sure. So two things I like about the situation and then lots of other things I don't. I'm generally very interested in just the dynamics around public minority stops. When you have a majority, when you have a large strategic shareholder kind of public subsidiary, First of all, just a ton of these things get taken out. Every time they get taken out, I'm like, gosh, we should have an intern who's just the public subsidiary intern who just is the acts in all of these because there's not that many of them. You can kind of keep track of all of them. So Rio, Turquoise Hill, they had a process. While the process was ongoing, it wasn't definitive.

Nobody owed anybody anything. And the equity markets were getting weaker. the credit markets were getting weaker, the commodity markets were getting weaker, and copper especially was getting weaker. A lot of that is, you know, you have the supply dynamics than the demand dynamics. Chinese economy is getting weaker. You have kind of the demand side worry about recessions, about economic growth. My view on how much that should affect corporate transactions, a lot of these buyers are longer term than spot markets. They can't get it done.

And so small changes shouldn't matter, right? Like small changes like bips shouldn't matter, you know, matters to the spot price. But whether something up or down 30 bips in a day, you can round that down to zero on whether it even comes up at the board level. But when it's 30%, then it's 100% change. it comes out with the borderline. So at some point, they're, you know, affected by these markets. And you have a bitter that I always figure that it's like a little bit of kabuki, you know,

when you say, like if you own the vast majority of my economics and so forth, and you say, hey, let's have this harmling thing. We'll have this process. It's like, sure, boss, anything you say, we'll have this arm length process. I'll get my guys. But like, you can't. I mean, you can't have a double-blind situation dealing with your controller, right? So I think these strategic reviews with a special committee tend to be kind of, okay, I'll pick these. You want me to be armed like with you, yes, sir, yes. And you kind of go back and forth and you kind of get a bum, but it's sort of ritualized. They usually get done.

And in this case, they haven't yet. And in this case, the target that seems to me to have the weaker hand, their stock price has been weaker, their commodity's been weaker, they need capital. They will have to go begging to the public market at a very bad, poorly timed raise. With all of that, they seem like they're being the blustery ones with the bidder saying, oh, no, we made this good offer. It's a premium. It's, you make sense for you.

Like, they don't seem like they're pushing their way to. around. The target does. What I see from that so far is the raise, in a game of chicken, if everybody can point to a reference point to say, hey, the raise is the thing that would be the maximum pain point that if you can avoid raising money in the teens or whatever, then we should split the difference on that upside. But that is there. And so if you're fixated on that, the process is a little artificial and premature for being, um, um, um, um, um, um, um, um, um, um, um, um, um, uh, the thing that is the real deadline. And so maybe they're putting on a brave face before then.

I don't know. The market is looking at the downside, looking at the raise, looking at the standalone price, looking at the comps, and taking very seriously that the process is over with the stock down hugely, at least this morning and then still now. Yeah, it's just, it's really fascinating because you've got on one side, Rio owns 60 plus percent of these guys, right? So taking minorities out makes tons of strategic sense if you believe in the asset. You get full control of the cash flows.

You don't have to do the public reporting. You get some synergies on the cost and everything. And like now seems to be a nice time to do it. Obviously, both you and TRQ think intrinsic values a lot higher. A lot of minority shareholders have come out and said intrinsic values a lot higher. But then on the other side, like TRQ, as you said, there's a lot of capital that they need to get this to get this mine online. and Rio Tinto's got a lot of leverage over, hey, take our bid or else we're going to dilute the crap out of minority shareholders and we'll own more and like we'll be in more control. And then there is the argument like, hey, every minority shareholders saying this offers way too low.

This offers way too low. It's like, well, there's a stock price and the stock price has always been a lot lower than the offer. So like, if you believe that, just go buy more shares and push the stock price over the offer. It's just so fascinating because I saw people who I respect and who I know are sharper mining saying, is the dumbest thing Rio's ever done. The stock is going to be up 4x in the next year. It's going to come online and it's going to be worth a fortune and they're going to have to pay through the nose to take this thing private. And then I also know people who I respect you said minority shareholders and TRQ are way overplaying their hand. Rio is in complete control.

They will dilute the crap out of shareholders in order to get this equity raise that the company must do to bring their mind online. They will dilute the crap out of shareholders. And in four months, shareholders are going to come hat and hand and say, please, please, Rio Tinto. we want the original bid, give us the original offer. And like, I just don't, I just don't know the answer. You know, it's just so strange. I don't know the answer. I do know that when I've seen deals get done or not get done based on very confusing dynamics

where there's this huge range and valuation on the target side, um, There have been deals that have gotten done or gotten broken based on a huge part of the vote controlled by people who have other interests, right? Like who are really throwing the economic benefit to, say, a preferred class that they have or so forth. But in this case, it's just logic and facts and different conclusions and different judgment about what it's worth.

There's really no, I don't think there are other than the. strategic value to Rio. I don't think there are different incentives on the minority side. I think there's different views. And that should be reflected correctly in the stock price. I mean, not to like every second say, oh, it's perfectly efficient. But like if they don't get a deal done, the price goes down. If they have to raise equity in the public markets, the price goes down. You want to get the best deal you can. But this is the best. SDLA and because it's a majority there's no other bidder that's going to come like there's no this is it this is the conversation so rhetoric early sure uh that being indicative in what

happens at the end that would be unusual for that to not be worked out um i made i don't think you love this analogy but i made earlier today the analogy to nielsen just saying that the windacre role was like the bold turquoise holder in as far as a really audacious ask in a weak market. The weak market can actually help smooth things a little bit because you kind of blink at some point. But in the Windacre Nielsen case, you could also for at least part of their shares, bring them in on the buyer's team.

So I always thought like if you're this fanatic supporter of the deal and you're the buyer, he's like, okay, you can come out of the debt. But the whole point in this case is it's a strategic deal for Rios, that I don't think they're going to want to have a minority partner anymore in anything. Yeah, and just like, like, honestly, I think the Nielsen guys wouldn't have minded getting out of the deal. It was this weird thing where they struck it in a market that was so much higher. Yeah.

Or if a minority share of a tank the deal, I don't know if they would have been like, oh, no, like, we can't do this deal. That's clearly overpriced at this point. But yeah, no, I don't know. Just at some point, you have these dynamics. I mean, amongst the names you have your LPs are watching this whole thing. You can't really afford to have, I mean, emotionally, I get it when you have this feeling of pick. Like, I want more than, but the kind of, I always think the role of becoming an adult is the point where you have to admit that it's all about comparative advantage.

It's all about, you know, just like, okay, you have to ignore, is irritating it is. you have to ignore some costs. And in this case, it's comparing the deal to no deal, not the deal to what you think it's worth. That really doesn't matter right now. I just, I know a lot of minority shareholders were saying 34 is not the right price. It needs to be higher. And clearly the company believes it. Like, I would have been surprised. Another difference between this in Wendacre Nielsen is there, there was one shareholder who had to cave. And like, if they did not cave. I think the stock would have gone way, way down, which would not have been great for their LPs. And they would have explained, like, here, it's not even to the LPs. It seems like

it's the chair of the special committee, the chair of the board, everything for turquoise, which does suggest they see value a lot higher. But, you know, there's no offer. And I just, it's just a very strange process. The rule does send to be minority stakes are made to be taken out by their majority controller. And when you have a minority state that takes a lot equity capital, but like it's just very hard to invest in front of a majority-controlled company that needs to raise. It's at least 650 million of equity by the year end. That is, that is a lot of equity. Even in last year's market, 650 into a copper miner was a lot of equity. A copper miner in Mongolia. In Mongolia. Yeah. Cool. Cool. Well, this has been fun.

Thanks, Andrew. Chris is going to a, sorry, it's BJJ. I can't remember. Jiu-jitsu. Chris is going to a jujitsu camp next week. I'm going to on vacation with my wife in Greece the week after that. But Chris, looking forward to seeing you after Labor Day in person and on the Zoom. And we'll chat then. See you in September. Thanks, Andrew.