Yet Another Value Podcast - Chris DeMuth's State of the Markets December 2023

Episode Date: January 2, 2024

It's time to welcome back Chris DeMuth for his monthly state of the markets. For this December 2023 edition, Chris discusses what's on his mind at the end of the year, Merger Arb, $ROIV, $IMVT, thoughts on $SAVE, views on 2024 and lessons learned from 2023. For more information about Rangeley Capital, please visit: http://www.rangeleycapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Alphasense [1:46] Chris' thoughts, high level, for December 2023: merger arb [2:44] Roivant $ROIV [8:27] Immunovant, Inc. $IMVT [13:44] Thoughts on $SAVE, antitrust, merger arb implications when government blocks M&A [26:18] Views on 2024 and lessons learned from 2023 [36:23] CVRs [42:55] Final thoughts Today's episode is sponsored by: Alphasense This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the #1 rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities, like Smart Synonyms and Sentiment Analysis, provide even deeper industry and company analysis. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a Yet Another Value Podcast listener, visit alpha-sense.com/fs today to beat FOMO and move faster than the market.

This episode is brought to you by Alpha Sense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the number one rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities like smart synonyms and sentiment analysis provide even deeper industry and company analysis. Alphasense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit alpha dash sense.com slash fs today to beat

FOMO and move faster than the market. That's alpha dash sense.com slash FS. All right. Hello. Welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review it, wherever you watch or listen to it.

With me today, I'm happy to have on for the final podcast of the year. my friend and the founder of Rangy Capital, Chris the Muth. Chris, how's it going? I thought you were going to say final podcast with Chris DeMu. He's getting fired right on air. Actually, so I'm typing with one hand right now. And I almost said, when I was tweeting this out, I almost said the final podcast with Chris the Muth.

And I was like, oh, man, between Chris's health and my health, people are going to be thinking we're talking about way different things for this podcast. Yeah. But look, we're taping. It is Thursday, December 28th. We're taping our final podcast of the year. I'll just start the way I do every podcast, quick disclaimer, remind everyone, nothing to know this podcast is investing advice. Always true, but particularly true today. Because Chris and I don't even know what we're going to talk about. I had surgery 48 hours ago. We could get real looping here. But we're going to talk about a lot of different things. So please remember everything, nothing we say is investing advice. Please consult financial advisor, do your own work. And again, Chris, it is Thursday, December 28th. We're coming up on your end. What's on your mind right now? a lot of we're both alive and glad it's good to see you and been i don't want to be too redundant

with last time we spoke but i certainly thinking about a lot of litigation i feel like i've been reading a lot of lawyerly long documents between a merger arbitrage of litigation and other litigations that we're looking at um so that's been a big part of my life this past month biotech coming alive, banks and thrifts coming alive, kind of a lot of interesting things in the market there. But yeah, so I'd say merger R litigation. Let me just go through some of the things. I threw out on Twitter, hey, anything you want me to ask, Chris, and people threw out a ton of stuff, a ton of stuff that regulatory reasons we can't talk about for strategic reasons we can't talk about, but I do want to hit a few questions people ask. Let me start with Royvon. So

Roy, it's been really interesting. I know you focused a lot on it recently. This is a company, I don't even want to go into the full background, but it's up, it's down, it's crazy. I mean, it trades for kind of net cash. And I just want to ask, you know, the ticker there is R-O-I-V for people who don't know. But what's going on with Roy Vant these days? And as you kind of look into 2024, what do you see the path for them?

It is an interesting structure. So Roy Vance is in Roy, like the king of the Vance. The Vance are their kind of public, in some cases, private, in some cases, subsidiaries that they kind of spin or kind of cultivate. And some are flops and some are successes. Kind of the Benanza success so far has been immunovant, ticker IMVT. And that's one that looks like it is kind of fully kind of developed. for the public market, reasonably likely that they sell that this next year.

At least it's kind of gone through the whole cycle of Reuven's effort at cultivating. Another one, I'm a shareholder of Reuven. Another of their public subs is Arbutus, ticker ABUS, also on that separately and distinctly from the Revan exposure. And so that has been less dramatically successful so far and earlier in its life process. And then they have, I mean, the org chart looks like a kind of Rube Goldberg machine of overlapping interest of who owns what. And then another private subsidiary. But the cash is interesting, especially net of immunovant, if that's sold this year. I mean, they'll just be flush.

It's trading as if it's worthless, but they have, you know, some history of being able to cultivate these. What's by far in a way the most interesting to me, and sometimes whole reports are written, not even mentioning it, is that there is a litigation against Pfizer and Moderna. During the early part of the COVID response, the government was very clear, move fast, and break things. And boy, did these companies ever in terms of some of the slowest, the most bureaucratic processes were set aside to kind of rush a vaccine to market. And in the moving fast and breaking things, one of the things they broke was intellectual property that they had spent time trying to buy, trying to license, and then they kind of gave up and they just took it. And in this case, I think there is extremely valuable litigation against both Medina and Pfizer. What's interesting to me is whoever settles first, whoever ends up with probably a royalty relationship with these different raven companies will have this huge intellectual property value against each other. So, you know, Modern and Pfizer looking at each other with, you know, their own IP, they're huge companies.

Narbutus is tiny. I mean, Brutus is a $400 million company. Pfizer today is a $162 billion company. And Moderna is not that big, but it's a $38 billion company. A sliver of royalty, you know, my guess is a day that Arbutus doubles or triples, Medina and Pfizer wouldn't even necessarily be down. Like, it's just kind of an odd lot for them. But it's super valuable in terms of their intellectual property portfolio.

against each other and kind of at their scale. So it's kind of like if there was a world war or a potential world war, it's like having this little tiny ally that might not be that valuable in and of themselves, but it has like this key strategic, I'm trying to think of a risk analogy, but like it's the key strategic. It's like in risk, the board game, it's, you know, if you've ever played, everybody always tries to conquer Australia, right? Because you get Australia. And there's, it's because it's got that one land bridge and you get that and you can get a

protected position and move out. And it would be that one land bridge, right? Like in the grand scheme of the whole board, it's nothing, but it's like the most critical, it's the most critical strategic place. Let me ask you, so we're about so interesting because they come public through a SPAC, they've got all these different stuff. And I think. I am. So, Siam. Once you control Siam, then there's no other way to get to Australia.

Is that what I got. Okay. So, we've been so interesting because it comes to public through SPAC, the stock, you know, with all the SPAC goes straight down. And I think the two things that are interesting is these guys have exhibited, I would say, on some regards, incredible. capital allocation. And I mean this, I can't remember what the drugs mean, but they buy a derma drug for like basically nothing from Pfizer a year ago. And then they turn around and sell it for $6 billion or so, if I remember correctly, I'm doing this off the top of my head earlier this year. It was bottom. It was about no, it wasn't Fatima. Wait, do you remember

what Shrigo was? It was Vodema, wasn't it? Yeah. And it was, and it was basically more or less given. I mean, which, which looks to, uh, some, you know, investigative journalist, uh, could really do something there in terms of understanding exactly how that came about. But that looks to me almost related in some ways to the machinations around the liability and litigation and IP. It was very interesting why Pfizer would have done that, other than just the scale mismatch where it was very valuable to the one side and not that much together. But still, that was a curious.

I hear you on scale mismatch. So it was Televant. And they sell it for $7.1 billion. I don't think they get quite all of that $7.1 billion. But, you know, I hear you on scale much, maz, but there aren't many companies where $7.1 billion is a full rounding error as them. Like, I'm sure Pfizer would have been like, oh, if we could have sold this more $7.1 billion instead of zero, we would have taken it. But I guess we should do that. And Univant's been an absolute home run.

They've got these other things that have been just great home runs. So that's on one side. But on the other side, it goes public through a SPAC. The stock goes from, you know, every spec starts at 10. It goes from 10 to 3 and everything gets killed. And then they start issuing equity like kind of like crazy, right? I think they did secondaries this year and some of it was soft things on it, but some of it was them getting pricing like at the beginning of this year.

They did one at 7.50 per share. And they're kind of doing these at they've got literally billions in cash on the balance sheet. They're trading for net cash. So I guess the confusing thing to me about Royvant has been on the one side, you've got these guys who are making these great investments, these great capital allocation decisions, investments in pharma. And on the other side, they're like diluting almost like crazy at cash. at cash value, and I've had trouble, like, kind of squaring the two if that makes sense.

Absolutely. So Immunivant is the sixth most successful despaq equity in the history of the SPAC market. Not a lot of competition recently, but, I mean, it really was a spectacular in a class that is largely down pretty horrifically in the last few years. Boy, there are some big holders. So specifically. A soft bank was really bailed out by the enthusiasm around AI and a couple of things where they were close to getting a lot of trouble.

And then they ended up with some kind of enthusiasm in parts of their portfolio that made it less necessary for them to kind of fire sale things like Royven. Like they were close to needing to just like puke it and then didn't. Sumitomo can sell by February and they'll probably be a secondary for that. if Vivek is elected president or less improbably put in the cabinet, he would have to do a secondary to sell the rest of his right event. And so there are other big blocks that's kind of been an overhang. So maybe the market perception part of that might be that. But yeah, no, they're quirky. I mean, the senior people, certainly Vivek and other people,

early on were really more kind of finance and hedgeman guys than medical guys. But then in their subsidiaries, they're very much medical guys with very, very little at a financial focus. Generally, you know, at the market secondaries and just kind of like they want to continue on plugging away with their research with very little kind of per share value focus. So yeah, it's quirky. Some of it seems good. Some of it seems bad. But the net of it is that it trades what I think is super cheap. And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a yet another

value podcast listener, visit Alpha-Sense.com slash FS today to beat FOMO and move faster than the market. That's alpha-dash-sense.com slash FS. Yeah, it's just, I'm just looking at the history. Like, This is November 22, a huge secondary. Roy Vant sells 20 million, soft bank sells 10 million. And that was at $5 per share. And at the time, I think a lot of people were like, hey, you know, Muvant plus cash is worth more than that. So you're getting all the rest of the vans for completely free, which they're arguing are valuable.

And, you know, they're doing the secondary here. They do another one earlier this year. Like, it's just been weird because it's like, hey, they're having all the success. And MUNivant has been huge. And Royavant does, Immunivant does on the heels of having this great result with their, with their drug. Immunivant does a secondary, which actually makes sense, right? That's a pre-cash, one drug revenue, cash burning company. They do a secondary when their stock moon rockets after they have great results.

And Royvant does a secondary to fun putting money into the immune vons secondary. So it was just like, hey, I get it. But at the same time, you're trading for less than the cash in the stock and you're putting more money into Mavad and you're doing the second. It was just a weird. It's just been a little weird, I guess. It's a little funky to me. Yeah, fair enough. I mean, I like them.

I certainly like participating in them. And they've worked to this point well so far, but not nearly, but still just not nearly as well as it should, you know, it'll be interesting to see if the market, you know, we got through the Taliban sale in December, this month, earlier this month. a few weeks ago. And then if we get the immune event sale, I mean, the market will just have to start giving credit for this, I'd think, if it's a pile of cash plus a very promising litigation. You think they sell it instead of, because I've heard some people be like, do they sell it or do they take it? And you think they sell it. I think they sell it. I think so. Let's switch

to, well, I guess you might as well. Somebody said save is the new ATBI. So of course, we need to talk about that. Obviously, I did the wrap-up pod with Lionel. And, with MDC. But I guess let's quickly get your thoughts on save as, you know, it's possible we get a ruling before this podcast even goes live. But as we sit here, December 28, how are you feeling about spirit these days? Very sensitive to try to not think about this by analogy or like, you know, if A than B, if A than A and if B than B. And we can't extrapolate too much from kind of single-didge numbers of relevant recent precedents. It's a different judge, different facts, different situation. And so I try not to strain the analogies too much. ATBI worked. I expect

save is going to work, but they're very, very different situations in a lot of ways. And I'm far more humble about save than ATVI's antitrust issues were a joke. I think Spectre Brand's antitrust issues were a joke. Antitrust issues in this industry. are serious. I think the Northeast Alliance decision was probably right on balance in a lot of ways. And so I think this case is not a great theory, but it's a plausible theory. I think it was disappointing from the regulatory enforcement, kind of good government, good public policy perspective on how little they felt they needed to argue for and provide evidence for their theory.

They seem very comfortable and confident asserting. And if they win this, if it's just a blowout win for the government, if the judge basically endorses the government's view, then I think that will further emboldened them with this idea on a gross basis without any serious effort. at the materiality, if there is a nominal price increase as a result of the deal anywhere in an increment, we can block this. I think they're going to be very emboldened to just make assertions on things they don't like, and it can be politicized, it can be kind of progressive in the sense of we are reacting

rhetorically to a protected class of customers that we want to act on their behalf. So I think that it would be a huge impact for antitrust law for decades to come that the government wins cleanly because they just didn't prove anything. They didn't prove anything. They didn't fail to prove anything. They didn't act like they needed to. They have a theory, okay theory. You can say it with a straight face, better theory than some of the recent ones they've tried. But I think it's a pretty weak case.

I think I feel much better. feel much better about this, just in a clean room. What would you decide, given this set of facts? I mean, I think that that's, I mean, I was going to say 90%. No, it was literally 100%. I would, I would side with the companies. And that's not an advocacy view. That's, I don't believe the government proved their case. I don't believe that they proved that there was harm. I mean, you might, for the sake of a decision, stipulate enough harm to construct a divest. package, but I think there's some shot that you would actually have a blowout for the companies that would even undermine the divestager package that they proposed.

If there's not harm proven, I mean, you probabilistically are saving yourself time and money by responding to a potential harm in offering a divestager package, but if a judge says there wasn't harm. The companies could pull their divestager offer. I think I would accept their offer. You could expand it. But there's lots of kind of nuanced middling grounds that this judge could pick. But I think the companies gave him far more language that he could use in a decision than the government did. The government rightly or wrongly, and I'm a little spooked by this, seems supremely confident. They don't need to budge an inch on anything. I just the things that in just reviewing all my notes and reviewing a lot of the transcripts that

the things that jump out to me is as you said the government seems supremely confident and I just think back to the start of trial when I think it was Jeff Lucio said hey look like this is the best year package that we put together we put together on our own with no input from the government like the government wouldn't even talk to best your package which seems so crazy to me and then you know I keep thinking about the government um in both their closing trial briefs and And even in response, there's this little, I can't remember the exact word for it. But after the, after the closed trial briefs are filed, the Illumina decision comes out, which I think has very good, very good language for JetBlue.

And JetBlue files, I guess it's like a post-post trial briefer or something saying, hey, or look at this Illumina decision. This is pretty good for us. And the government files a response that it's like taking all the Illumid decisions, words completely out of context or like skipping through. And I keep thinking about that. And then they grafted in their post-close trial brief, they grafted two different cases together. to get a standard that neither of the cases suggested,

keep looking at them be like, the government, they seem not to care, they seem not to care about rules or law. It's just like really weird to me. And I keep getting concerned, you mentioned Price, like maybe I'm just seeing my own shadow, but I do worry if,

again, judges only have antitrust cases in front of them maybe once in their career. This is an 80, this is an 80 year old judge who I think this is the second antitrust case that's been in front of him. I just keep worrying about, hey, JetBlue is going to raise spirits, like headline prices, right? Because they offered a bundled offering and they're going to

raise your heads on price. I just keep worrying about a judge seeing prices up, antitrust issue and ruling against this. But I'm with you. Like when I review the facts of the case, I don't think there's been really any harm proven. Maybe there would have been harm at the divesture gates, but those are getting divested. So I just don't know. And like, I'm trying to be, I don't know, humble because the market, it's come up recently, obviously, but the market's got this price that kind of, I would say, 40% for JetBlue, 60% for the government. I'm trying to be humble because when I read the facts of the case, I'm like 95% for JetBlue. When I like kind of think about some of the judges commentary and pricing going up, I'm like, okay, maybe 70%, but the judge seems very much to want to make a ruling with divestures.

I think that's where he's lean, but yeah, I'm just trying to be humble. But as you said, if they block this, I mean, who knows where it stops? The JetBlue makes the point, hey, you're basically allowing the government to choose protected classes. of protected classes of business, right? Like, hey, chain X wants to go buy 15, 15 store chain discount grocer. That's a block because that's a discount grocer. That's a protected business. Like, I can easily see that.

All of the elements of a flight have to get passed on to the consumers one way or another. And anything you improve will have costs. Anything that you slack in will have less. costs. And it's up to the free market and the free market participants to make that choice. Transferring that choice to the government and this kind of fourth branch of government, the administrative state and kind of putting them in charge of business models would be a huge change to our system. And saying it's a ratchet effect that if you ever do something, you may not raise prices as a result of a transaction. You can think of all sorts of.

sorts of perverse consequences. What if an airline was discounted because of lack safety standards, separate from any kind of regulatory issue, they just hired pilots that were, you know, only moderately successful in sobriety. Maybe in some ways that would that avoided a specific regulatory status? They were just tipsy. But if you were willing to hire tipsy pilots, you could get them at a discount. It was a very low ticket price. And then the buyers came in and said, we're going to have safer commercial air travel, and we're going to hire more sober pilots. But these sober guys, they want to get paid 5% more. You know, other airlines want to hire them. And people that have tighter standards for drunkenness in the cockpit will hire them. And we have to raise the

tax price by 5%. The government say, no, you can't do that. We have sanctified whatever business model has the lowest nominal price. A wee, tipsy airline has to maintain their practice of hiring only marginally sober pilots. I mean, that's just absurd. But that absurdity is what this would open up to. It's a great point. Or you know, you think about a hotel chain. Hey, like this other company's got great hotel, like great location hotels, but we think their services of standard. Like we think if we bought them and we improved the service, maybe refresh the rooms, we could increases the prices and increase our economic profits. And the government comes in and says, oh, no, absolutely not. Like, these hotels need to be run like, you know, basically slum

hotels because people want the cheapest possible saying. It's like, well, actually, like the free market should dictate that. And, yeah, I'm with you. I really like that, that analysis. What the shit in government people don't really get is these are, I mean, these are very intelligent people and probably sincere people. They're very good at sort of mechanistically looking at. And if you think about the work that we do on antitrust. A lot of it is looking at comps. A lot of it is kind of a very convergent on a view that is sort of based on things that have happened in the past. That's how they used to thinking. A lot of these businessmen don't necessarily want to say this, but they're winging it. They're

guessing. They're trying to make plausible guesses. But they're kind of cold reading the market saying, I don't know what these people want, some guesses. And then they try spirit. And it turns out, cold reading this market, spirit is not what people profit. one is a business model right now. So they're switching to JetBlue because the wild-ass gas of Spirit was less good than the wild-ass guess of JetBlue. And so that's kind of how markets work. It's very sort of sloppy and chaotic up front, probably very foreign to the government people who are not sloppy and chaotic. And these businessmen, you know, who sometimes say in hot documents they think or they're planning, they're just saying stuff. They're just trying

and they're largely going to make a decent guess and then be right or wrong and then try to be nimble and pivot quickly and not destroy themselves when they're wrong. So pivoting when they're wrong is a lot of what they do. It's a little humbling and embarrassing and I don't think they want to be under oath explaining how much that's the reality. I think it's a huge part of the reality and that they kind of converge on more or less what people want. And a lot of it's just operating quickly. So something like the Gates is really important to antitrust because it not just potentially protects incumbents, not just to be an antitrust problem, but it sort of is friction on this process of reacting to mistakes, wherein airplanes generally, other than the

gate restrictions, can do so within weeks. That's why I think one of the key parts of this trial, especially if JetBlue and Spirit Win, the whole real world commentary from the other ULCCs, which I want to say was 100% favoring the deal or close to it. The government had almost no real world. Some guy said, yeah, I'm the CEO of this airline and I'm going to come in and I'm going to take profitable demand-driven routes that these guys exit within weeks. I mean, maybe within a few hours that it takes the plane to fly there. And so I think that that sign really favored the deal, really favorite approval, and really was kind of indicative of how actual markets work.

I mentioned this on the Lionel pod, but this is one of the things I said. It was like, look, in order to rule for the government, like the government's case basically it to be like, ignore every industry witness who testified and rule for us, right? Like, the United CEO who said, we're bringing lots of basics on. The frontier CEO said as soon as Spirit exits these profitable routes once this merger comes through, it's going to be a feeding frenzy and we're going to take over all. Like, you have to ignore every witness and be like, hey, every credible witness was lying to you and you have to believe this theory of harm, which, again, I don't really think they proved time. Let me switch gears real quick. Another popular question we got

was just, hey, ask Chris about what his views of 2024 are and maybe any lessons he learned in 2023. So I'll just toss that one out at you. It's been a week year for M&A, the kind of volume in terms of deals and dollars generally. I think that the interest rate fluctuations, and deals can handle high rates, low rates, medium rates, but you just need kind of stability for a few months. And when things are changing rapidly, that makes it a little harder. Yeah, and if you're about to take a billion dollar loan out and interest rates are 3%, and then they're 5%. It's like, well, okay, that's an extra, you know, $20 million per year or whatever that we're going to have to pay an interest expense. Like,

that really changes the math on your deal. And you might have been talking about a $2 billion valuation that $20 million per year changes it to 1.7 and, you know, it just kind of freezes everything because the numbers are changing. Yeah. And in theory, the price system should be able to take on account and practice the kind of psychological heuristics that real world management and boards use, they tend to be a little self-serving and have, it just increases the bid-ask spread on deal prices, you know, that you can, there's a few different ways to look at it. Everybody looks at it the most self-serving way and makes it just harder to transact. I think one of the funny things about this year is how several times old saw views on

financials were kind of backwards in terms of what world. is good for banks, bad for banks. A couple times seems like the market has kind of said new things, thought new things about what banking is after the bank blowups that were fairly one off. Or the biggest problems were not indicative of what most institutions were doing. But now that that settled down to some extent, I think you could have, I'm almost embarrassed to say, we can have more bank and thrift mergers,

because I always think that, and then it's been very, very low for a while. But I think we could have more bank and thrift mergers. I think we could have a particular transaction that looks the most arithmetically obvious to me that you can just solve for, that we could have hundreds or at least dozens if people think about it the same way I do, which is demutualizations has always been a huge. huge interest of mine. I happened to have one this morning that where you take a private institution and then typically a two-step go through a mutual hold co then upsell the whole thing to public investors can be lucrative for depositors, can be interesting. But a lot of these

very small financial institutions that for years and years and years, these transactions have gone well. We've got kind of no market demand for them after they were in public, traded down in many cases, and kind of have these orphaned mutual cold cos. Well, the easiest math is to remutualize them. They're halfway out to the public market. Just bring them back to the private market. You don't have to pay any kind of premium for a majority of the shares. So the dollar figures are tiny that you have to put to work to take them back to becoming fully mutual. You can pay these huge premiums for the public equity, the equity of public holders that are not public and get them for basically for free. If you look at just the remarking the portfolio after a deal,

the arithmetic on the remutualization seems like you could kind of take all of them fully private again, remutualize all the ones that the market decided that they don't like and are trading a big discounts to their tangible book value. So I think that if I was a banker, if I was going around trying to advocate for transactions. I mean, that's one that you can just pull in a whole industry on something that's almost a cinch. Financials generally, biotech. I think the second most interesting thing besides remutualization is the broken biotech activism-driven deals where you're saying, hey, if the market only wants to pay you 50 cents the dollar for your cash, I'll pay you 75 cents. And if you think, no, I shouldn't take 75 cents because of fortune honoring glory

that I'll have in the future that nobody gives me any credit for, including the regulators, including the market, well, guess what? I'll just give you whatever you get after that. Here's a CVR. And that just seems like a perpetual emotion machine. If you can get past the if you can get past the entrenchment of the board management. So I think there should be a lot of biotech deals, a lot of CVRs, a lot of activism there. And so those are two areas that are specifically interesting for me, but hopefully just generally a lot more deals. Yeah. Yeah. No, I agree. I mean, just on the CVR, we've kind of mentioned these, but, you know, it's going into, like, just last week there was, what was it, Theseus?

This is really small, and the deal's already been announced, but the ticker there is THRX. I think we do have a tiny position and it's just for the disclosure, but that was one where bail drug, trading below cash. I think they got multiple offers and ran like a mini process or something, if I'm kind of reading the T leaves correctly, but they did exactly what you're saying. We're selling for cash, plus you get a CVR for any proceeds we get. And yeah, it's just, you know, you look at some of these in like, I haven't followed it as close.

I don't want to call a specific one. I will just say, like, you look at some of them and they've traded below cash for years. And, you know, the issue is if you're below $100 million, if you're below $100 million, you've got all this cash on the balance sheets, like by the time somebody runs a process on you to remove the board and get you to do something shareholder friendly if you're not inclined to, like you've burnt so much of the cash that it's almost not even worth it. So you get these companies. And I've seen several where they take a shot and misses. They plow, you know, of their $100 million, they plow. 70 million into a new shot that misses, but guess what? They paid themselves 6 million in salary along the way. Now they've got 30 million. They find a new shot and it can just

become this perpetual motion machine of value destruction. And it's so sad to me. But like my heart bleeds every time there's a company trading for 50 million with 100 million in net cash. And they say, hey, you know what? We know better than the market. We're going to go try and buy some new drugs and do something like, oh, just return it to shareholders. Create the value. Create all the value. Two reading assignments for people listening and interest in this topic and event investing generally for this next year that I think are really elucidating. And then one regulatory slash good government governance change that I would do. Bouncing back to the antitrust case recently, and then it'll tie this into biotech, whenever somebody tries to quote something,

always take the time just to read the whole context, at least the several paragraphs before and after, just to make sure that they're saying what they really said and didn't take something out of context and make sure that you can trust the credibility of the quotar that, in the case of spirit, I think, really hurts the credibility of the government using sophistry. They're just using rhetorical kind of junior high school debating tricks to say things that were not meant by the precedents. They were meant by them. They just have this theory, and they're trying to put it in the mouths of other judges in the past that did not say what they said. And then in the case of the biotech deals, I tend to find fairness opinions by financial advisors to be hot

garbage, almost worth, I mean, I read them. But I think, boy, like, it's amazing how much money these guys get. If that's really the work they do. But the background section is always fascinating. And it's particularly fascinating when there's a CPR. Because the CVR is largely a placeholding mechanism for an egotiation where say, hey, look, it's not better than X, it's better than Y. Can we just set that aside? Usually you can split the difference and just pay cash or stock. But every once in a while, there's something that truly is unknown at the time of the transaction. So it lets you just kind of defer that information to later and then have the price accordingly. But the CVR background section is fascinating to see who was pushing.

Because there's a couple different versions of this that once they play out, you look back in hindsight and think, oh, that was almost certainly going to get paid or bar more frequently, almost certainly not going to get paid in something where you have probably the biggest agency problem in all of the capital markets, which is you are being managed by the people who are supposed to pay you. And that has been bad. And if you think about kind of Charlie Munger and incentives, as much as I think about that and worry about that, I understated how bad that was even though I would have that as a caveat to any CVR I've ever owned, it's a bigger deal than but you look at the background section and sometimes it's something that is advocated by

the people getting paid and they say, look, we think this is going to happen. We're selling it to you, but we think it's going to be really good and that it's more and more or less their version in a highly competitive process with lots of bidders and one bidder pays it or other times. And this was a crushing mistake on my part, but one where the buyer failed on something. And when they failed, they were like, totally, we never thought you were going to get that manufacturing thing up in time. We thought you were crazy. You were super optimistic. See, we're paying you nothing. And if you listen to their tone in that, it was kind of a calling the bluff of a deal target CVR. And sometimes you need to talk to them. Sometimes it's not.

clear until too late, but sometimes it kind of comes out in the background section, kind of who proposed what the bid and ask spread was, what was the nature of the CVR. And if you really understand that, you can get a much better perception in terms of what it's worth. And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit Alpha-Sense.com slash FS

today to beat FOMO and move faster than the market. That's alpha dash sense.com slash FS. You know what it reminds me of? Did you, there's been this argument between, I think it's Shell and a U.S. LNG supplier, right? And they had an agreement. It was, hey, as soon as the LNG is online for commercialization, we'll buy the LNG from you at $5 for LNG or whatever, right? And the LNG was coming from the U.S. to Europe.

And the supplier, the plant came online, but, you know, European NAC gas prices were 100, not five. So the supplier said, hey, the plant isn't fully commercialized. And the agreement said we sell once it's fully commercialized. So the supplier was selling, taking all this LNG and selling it at $100 in the spot market. And Chevron Shell, everybody said, we have an agreement for $5. I rambled a lot. But so the basics is, you know, nag gas prices went crazy in Europe. There was a, this company had a contract to sell for $5 for LNG.

and said, they said, hey, we're not fully commercial yet. So we're going to go sell in the spot market for 100. And Shell and all these guys are like, wait, you're selling all the LNG, but you're just saying you're not fully commercial yet. And Matt Levine had a funny point where he was like, look, the company should like not paint the last rivet until the moment that the spot contract is below what their fixed prices. And then they should paint the last revenue and say, all right, contracts on.

But CVRs in many ways remind me of that, right? Like you've got the, you've got the people, you're selling to them. And then they completely determine what they, when they pay you out. And like, we've seen over and over and over again. the one I know the other one you're thinking of, but the one I'm thinking of is the Bristol-Myers SWIB CVR where it got, because of some COVID delays, you know, it should have been approved by the whole thing timed out at the end of 2020. If it wasn't for COVID, everything would have been approved by 2019. There would have been no, no rush, right? Like getting a drug on the market

a year earlier is completely worth paying the CVR out. But because of COVID delays, Bristle Myers, if they could just push approval by one or two weeks, they could avoid about $6 billion worth of CPR payments. And, you know, in my opinion, based on everything I've seen. I think there's a court case that will decide if this is sure or not. But in my opinion, they pushed approval by a couple weeks just so they didn't have to pay this $6 billion CBR completely inside of their incentives. But, you know, again, when the counter is the person who's also paying you, it can create

some pretty perverse incentives and some pretty reverse outcomes. And that's just one example. And again, there are dozens of others with CBRs, which is why one of the reasons I think these things get discounted so heavily, I do think they're an interesting area, but they can be It's tough. I think I've mentioned in this podcast before. One reform I'd love to see in corporate transactions would be a buyback line as an alternative to every buyer proxy on every M&A. Because it stipulates when I say, hey, I'm going to pay 40% premium for this other company that I have that much flexibility with my balance sheet to pay cash. It's that good deal to pay

stock. But every shareholder of a buyer should get to say, yes, I agree that strategically that deal is so wildly valuable that it's better than paying me a premium for my stock that I already owned that you can do conveniently. And as an ARB, I think that would, M&A volume would go down by 90% if that was reality. But I think it would be a good reform. My equivalent in biotech should be, hey, I'd like to raise all this equity capital from you. I have the specific thing I'm planning on doing. But every subsequent year, when you're going to reelect the board, there's a liquidation line in the proxy. Hey, do you want your money back?

Key line be more. Another great thing, but if I'm wrong, you get back. Close Zen funds would be another great place for that, right? I know we probably have underdone close end funds, but that's a great one. Hey, we've got this. I love every time somebody goes to activists on a closed end fund, and the closed end phone comes out and says, hey, don't let these short-term activist take away from the long-term value your shares.

It's like, hey, guys, you own like Apple and Vindia. you own $100 million worth with them and your stock trades for $90 million. Like, what are you talking about? Liquidate this damn thing. Like, the only reason you want to keep it going is because you want that gravy training of fees to keep rolling. But I'm with you on the, on that many, like I'll talk to companies all the time.

And I'll be like, hey, you know, you trade for five times EBIT off, right? And they'll be like, yeah, and we can't wait. We're going to go out. We're going to buy people. We're going to buy them for six times EBITs. It's going to be great. I'll be like, okay, let's stop. Like, why are you, why are you going out and buying companies?

for six times EBDA. Why is that creating value versus buying your own stock for five times EBITL. And a lot of times they'll pause and obviously they're saying it, but a lot of times they'll pause and they'll be like, well, we we don't buy back stock. We're a growth company. I'd be like, okay, but let's talk from a share. Like, what would shareholders be better at? Would we be better if you were buying back stock or if you were going and buying back, going and buying out these companies? And a lot of it's like drool on the drool coming out of their mouth on the other ends. They just don't understand why I'm not so excited about them going and buying companies for multiples above where they trade.

Or, you know, you can apply to a lot of the fiber companies these days. They're like, hey, we're going to go out. We're going to build fiber at, you know, $2,500 for homes pass to grow the company. Be like, okay, cool, but your stock trades for $1,800 per home pass. So how is, like, just walking me through the math of how it's a better investment to go build new fiber versus buy your stock back. And maybe it is, but just like walk me through that math. And very few of them can.

So, anyway, the amount of demonstrable skill in corporate transactions of justifying premiums is pretty hard to find. It's in very specific situations and it's very, very rare. The most hard to justify will have it. I think I won't say the name, but founder CEO, management-led buyout effort where a very highly compensated person for a very small company has been trying to buy out the minority investors at a discount to tangible book value. And so I'm looking at that situation saying, man, you've taken a pile of assets and you make it worth less alive than dead. You'd like to

pay a price less alive than dead. And you want to get paid millions and millions of dollars every year for the role since it's beginning in making it worth less alive than debt. How can all those things be true? Either you should get a 90% pay cut or you should get a massive increase to what you're offering, but it can't both be right. And I think that part of the fund of my reforms, but the reason why it'll never happen is it's just too revealing in the lack of skill in corporate transactions. They're not paying 40% premiums and then creating something worth the 60% premium.

they're largely destroying value. Any last thoughts for 2024 or anything else you want to talk about? More deals, especially biotech and financials, and go play some good outcomes and a handful of antitrust things. And then I think we'll know more about Spirit next. And then that will have big ramifications in terms of how we think about Albertsons and I-Robot and others. Cool. Okay. Well, hey, Chris, again, the one rule for 2024, forget I, you and I between my arm and your knee. No more injuries for 2024. When we're doing this in 12 months, we're going to be the healthiest, fittest people on Earth. You're going to be climbing mountains again. I'm going to be squatting big numbers, and we're going to go from there. I hope so. Great talking with you, Andrew.

Thank you. Hi, Chris. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work. and consult a financial advisor. Thanks.