Yet Another Value Podcast - Chris DeMuth's State of the Markets June 2022 (podcast #114)

Episode Date: June 23, 2022

Chris DeMuth returns to the podcast to discuss the state of the markets in June 2022.Chris's May 2022 state of the markets episode: https://twitter.com/AndrewRangeley/st...Chris's golden age of arb posts: https://seekingalpha.com/article/4519...Chapters0:00 Intro1:50 What's on Chris's mind3:35 Wide spreads and CTXS8:15 PLAN's recut16:15 Do investors over or underestimate how much PE firms care about their reputation?22:45 How strong are bank financing agreements in rocky markets?26:40 Other golden age of arb candidates29:15 State of the energy market32:00 CLR's take private bid39:05 Updated TWTR thoughts50:40 Closing thoughts and crypto markets

Today's episode is sponsored by TIGIS. Understanding expert insights is table stakes for investors, and there's no better option than TIGS. I've been using them for almost two years to get up to speed on companies, and they've helped me immensely as an investor. TIGS also recently acquired BAM SEC, which adds a super fast way to access SEC filings and earnings calls and to incorporate financial data into my models. I run a monthly deep dive series sponsored by TIGS on the blogs. I'll include a link to my cable deep dive in the show notes, and I'd encourage you to follow the link if you're interested in how expert interviews

can help you learn more about a company. Currently, anyone who signs up for Tigis gets free access to BAMSCC as well. So check it out. All right, hello, welcome to the 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're listening to, watching it, all that sort of stuff. With me today, I'm had to.

Happy to have. My friend, my partner at Rangley Capital, Chris, the Mewth. Chris, how's it going? Good, Andrew. Great to be here. Great to have you on again. Let me start this podcast, the way to every podcast. First, a disclaimer to remind everyone, nothing on this podcast is investing advice. Chris and I are going to go through every security on the market. So please remember, you know, consult a financial advisor. We're not your financial advisor. Please do your own work. Second, a pitch for you, my guess. Actually, we can skip the pitch because people can go listen to it. This is a monthly segment. Chris is my partner at Rangely. He's coming on to every month. We're going to talk about what's going on in the market

with a real focus on what's going on in event-driven land. But, you know, event-driven land tends to touch every land. So all that out the way, Chris, I'll just flip it over to you. We're talking late June 2022. What's going on in the markets? What's on your mind these days? well markets have been weak and volatile arm spreads have been weak and volatile and price discovery seems to be at some places in the market breaking for the first time where things really start to go from bad to almost kind of you know when it's bad it makes you want to cry and then when it gets bad enough it makes you want to laugh like there are prices that are just wrong. And I think I'm pretty comfortable saying that. One of the places to look for that

is merger or spreads that have kind of no discernible risk left, even start to break and take just kind of weird price movements that are not connected with financing or regulatory reviews or the buyer's interest or anything like that. One of my jokes in 2008 was, well, we're going to run out of ways to lose money because spreads would get wider and wider and wider, but many deals would close. Many deals would close with dollars left in the spread with delisting notices coming out. And I've been wary of that analogy for a while, but we've really started to see that, especially this past week or so. And that's exciting because that's when you can really start pumping a lot of money to work. And one of the ways you can do that is if nothing makes sense

before, while, or after you buy a security, you can at least buy a late stage merger or Arb spread that can do whatever it wants to do until it closes. But if it's right and it closes, maybe even closes in the next month or two, you'll make money. Yeah. It's funny because so we taped our last podcast together, stay the markets mid-May. And at the time, I mean, you know, markets had had it rough, but I think markets are down another 10 to 15 percent since then, which is a lot on top of like 20 percent over the past six months or so. And we, as you saying we really start seeing. So like things Chris is talking about is something like Citrix. The ticker there is CTXS, which I believe has a deal to get bought by a private equity firm.

So people are always a little skeptical of private equity firms, but for about $101 per share, if I'm remembering correctly. And last week, the spread dropped out of nowhere from $97 to $90 per share. So you got, you know, if they could fund it and close, you would get over 10% gross. The IRR on that would be, I believe when you wrote it up online was over approaching 100% higher R internal rate of return. And that stuff starts happening because every ARB is getting people call it the tap on the shoulder. That's when the margin clerk comes and says, hey, you need to de-leverage.

Margin call. Things have gone down so much. Or, you know, if it's not a margin clerk, it's someone internal. And we saw that just across the board. Every spread was dropping out the market. But which ones in particular are you looking at that you think, you know, as we talk today, things have gotten a little bit better, but which one are you looking at that you think are particularly interesting? You mentioned Citrix, just a couple of things about it, just even today.

So, you know, like 54% yield to $104 LBO. I know the buyers here quite well and like them. When I say I like them, I respect them to do what makes sense for them. Liking them is not in the sense of, oh, they're going to be generous or go above and beyond the call of duty for their deal targets, but I don't think they're going to be particularly ruthless about. I think they're going to do what makes sense. The cool thing about really widespread, though, is there's a lot more ways to win, right? You can do okay in a recut when there's a huge spread. It's harder when it's tight spread. So when you're talking about pennies, you're relying on certainty. When you're talking about dollars, you're relying on just underpay in a basket of these. The winners are paid for

the losers, the latter way is far, what I prefer. I don't like making 99% probability bets on anything, like how I spell my name or something. You can just be wrong. So, yeah, so it's a huge yield. The more serious way to think about it, we really think about it is just it's not mathematically quantifiable down to the penny, but the important thing is the market's implied probability.

So you take a reasonably likely downside. you say, okay, where did it come from? And then beat it up pretty badly for ARBs will be terrible sellers. You have a data point that the deal broke for some reason. If it is a buyer-related reason or very specific to this financing environment, it might not be that bad. If you have something like a biotech deal that breaks with a buyer that has no regulatory issues and no financing issues, it probably broke for some horrible reasons.

that's target related. So you can't just say, I get whatever was before the deal. You know, if Pfizer walks away and doesn't want to buy it, probably something horrible happened. And so you always have to have some sense that you're allowed to lose all the money you invest in anyone's security, especially if it's a concentrated portfolio or speculative type of company. But if you you say approximately something like CTXS, the market pie probability was like two out of three the deal gets done, that's very low. That's very low for something that's definitive with a contract. That's very low by 2008, 2009 LBO standards where, you know, 80 or 90 percent of them were getting done. And so that's where monster spreads are kind of fantastic. And it's not a value trap. This is one where

you're right or wrong. You're going to make money or lose money, but we're going to be out of our misery in this one way or another shortly. The deal's probably going to close this summer and, you know, or, you know, or it's going to break or it's going to get recut, but we're not going to be, we're not going to be trapped in something for years that we didn't need to be. Let me start. Since your last podcast, there was one particular deal. And I'm going to use a particular deal, and then I'm going to shift it to just a discussion in general. But the particular deal was a plan. The ticker there is PLA, if anybody can't spell plan.

And they were getting bought out by a software private equity firm. The deal is scheduled to close at the end of this month. And two weeks ago, they came out with an 8K that just said, hey, because of issues with, I can't remember what they say, but I've got the proxy so I can use the stuff at the time. basically they broke the merger agreement but in kind of like a break lightweight right like the merger agreement said you will not issue more than 30 million of stock comp in between signing in the merger closing and they did like 35 million and it said you won't not hire more than 200 people and they hired like 220 and the soft the private equity firm looked at this and said hey that's a breach of the contract and the company you can read the proxy they went back and forth and the company said

we think it's like an immaterial breach and eventually they agree to a little tiny price cut. So I want to ask you, I know the day plan happened, every spread blew out because people said, oh, my God, it's happening. The private equity firms are starting to recut deals that are already signed, right? So I want to ask you about plan specifically, and then we can pause there, and I want to ask you something more general. Sure. I think the market very fully prices in vivid and recent events, so it kind of gets a little fixated on the last thing that happened. And there's also a little fixated on analogies, if A equals B. And I always think if A equals A and if B equals B, and these are almost all deal specific, the people who are

working on them unless things get pretty dramatic. And admittedly, we're in a situation that's close to pretty dramatic in terms of our macro environment now. They're just kind of toiling away in the thing they're working on. A merger agreement is like a pregnancy test. It's pretty damn binary. and you're in it or out of it. And so you can't say, oh, I was just a little out of it in terms of giving optionality to the buyer. And these were very explicit numbers.

So I am, in the case of Anna Plan, I have a lot of admiration for Toma Bravo. I think they're a great firm. I think that they do care about their reputation. They've done very, very well in this area. They're good deal makers, and they put a lot of provisions in there that the target just kind of stuck their middle finger up at them

and said, what do you want to do about it? Now, it's true that the reason why they wanted to recut the deal was unrelated to the reasons why they cited for breaking the deal. But I still see that as deal specific because the target gave them an out. I mean, why have a contract, why put it on paper and have expensive lawyers argue over it if you don't care what the minutia says? And so the minutia was violated. The buyer took advantage of it. It's, It's a little bit like the situation with Renta Center a while ago, where there was a, the economics of the deal had shifted pretty radically. And then for a reason unrelated to why, in that case, the target wanted to get out of the deal, they had an out. So they just took it.

I mean, it almost would be a fiduciary violation if you thought about it from your limited partner perspective in this case or shareholder in the case of Rentz Center. if you negotiated an out that you had and you didn't take it, maybe it seems kind of unfriendly talking to the contract counterparty, but now confront your investor and they say, is this deal optimal as its price today? No, absolutely not. Do you have a way to get out of it? Yes, I do. Well, did you take it? Oh, I just wanted to be nice to these adults that signed the contract. You know, that doesn't really cut it from an investor perspective. So they recut the deal. It was actually one of the smallest recuts we've ever seen. Typically, once you get within 15 percent or within 10 percent, it's kind of almost not worth the bother. It delays it. You know, and so forth.

So if anything, I thought it was fairly benign for that one. But there still is a spread, not today as much anymore, but there has been a spread after the recut when it was recut for a specific reason. And it really blew out everything, and it especially blew out a sale, a second simultaneous deal target of the same buyer. And I thought, I think we both thought sale was particularly an opportunity. I thought plan was an opportunity. We kind of added to that one. And just everything across the board just kind of gyrated wider, kind of wildly,

especially for that first day. So let me ask, let's stick with the plan deal on specific and then I want to ask something in general. But you mentioned the recut. So this was a deal. It was originally struck, if I remember correctly, $66 per share. And the recut was down to $63.75. And I think, you know, you can go read the proxy agreement, which remember is written by the company.

And I think you can read a little bit of saltiness into the proxy agreement if you into the proxy background because they have to update all this in the proxy. You can read it. You can read some saltiness in it. But the company says, hey, they tell Tom Bravo, we think if we take you to court, we will win in court that these breaches, even though we breached the merger contract, they were immaterial, and we think a court would force you to close. And Tom and Brabos says, you broke the merger agreement, like, good luck, you got to take us to court. So they take a cut, 66 to 6375, which as you said, is on the smaller side of price cuts, but for something like, you know, it shows the balance of power, right? Because plan stock

would probably be in this market. I guess the downside without a deal would be 25 to 30. So you're talking like both sides had a lot of leverage. Tom Brava said, your risk. an awful lot if you don't take this deal and give us a little cut. And a plan was saying, hey, we can force you to close. So they took $2.25, small on the face thing, or $2.50 per share off the deal, small in the face thing. But, you know, that's hundreds of millions of dollars for Tom and Bravo, which has to help their IRA and everything. So I just wanted, on that small, was it, was it a small price of cut? Because I do kind of think, like, the price cuts I can think of, Louis Vuitton Tiffany's was like 135 to 131.

That's even smaller than this, and that was height of COVID. Now, that was an ironclad agreement. Alir Abbott, Alir was a lot worse, and that was $5 per share. Aside from that, I don't remember lots of price cuts out there. Like, was this smaller? Was this actually kind of big, given how immaterial the break is and the leverage and everything? I read the contract the way the buyer did more than the seller and was using a low 30s per share, a standalone price in this market.

So I think the people who negotiated this for the target should probably feel pretty good. The people who gave them an out should feel pretty bad. I mean, one of the things you should do once you sign these things is just robotically do what you say you're going to do and be super careful about reps and warranties and your duties and just kind of picture the Seth-Clarman standard. of a unfriendly and intelligent observer, just picture an unfriendly intelligent observer kind of going through this. So I think that, so on that deal, my sympathies lie with the buyer. I think that the target negotiated under the circumstances fairly well. So, I mean, they took a pound

of flesh, but just like we think about a market implied probability for the overall deal, you can think about a change, the Delta market implied probability delta for any significant shot. of the buyer coming out on top, I actually think, I was about to say the same thing. Like, if you do the math, if you think the downside was 30 and the upside was 66, then the cut that they gave implied that Tama was 5 to 6% to win in court. Yeah. And that would actually take us to the next thing. Like maybe Tama was actually 20%, but because of they.

said, hey, if we actually go to court, there's reputational and, like, kind of firm level factors we have to factor in. Maybe we just take the 5% or 6% or whatever it is and walk away so that we don't torture reputation, which brings me to the next thing. So private equity firms in general, you know, when things start getting rocky, you'll hear two lines of thoughts. The first line of thoughts will people who will say, hey, the private equity firms across the board, if things get rocky enough, they will walk. And look, if we go into Great Depression 2.0, yes, people are going to start walking. But, you know, you're running the mill recession. People will push back and say, these guys, they're not just looking at one deal. They're playing a, they're playing a repeating game,

right? They want to be doing deals for the next 20 years. So even if there's a deal where they say, hey, the downsides widen, it's clear with hindsight we were overpaying. If they're, if the terms of the contract require them to close and, you know, the target hasn't breached the contract or anything, the private equity guards, a lot of people say they will close because they're always looking towards the next 20 deals they're going to do. So where do you fall on that spectrum? Like reputation versus just mercenary, look at this deal. Oh, my God, the downside's awful. Let's just break it. I have an easier time thinking about rational self-seeking computations that are short-term oriented with very limited.

resources. And once the resources become less and less, I think it would be rational and self-seeking for people to be increasingly long-term and reputation maximizing. You think about Buffett, clearly long-term reputation maximizing. Amongst other things, his marginal dollar is so diminished. What does he need another dollar for? But it's kind of nice to have people not hate you. I woefully overestimated that reputational cost in 2008, 2008, in particular, but just this idea, once you have a well-regarded big institution and your job is M&A, I mean, you could be a strategic buyer, torch a deal target, and then say, I'm a pharma guy. I don't really do, oh, no, okay, you say I'm terrible deals, but you can't be KKR or Apollo and bad at deals.

And so I think that there were more mercenary short-term decisions when things are really stressed. And how do you know things are really stressed? I tend to look at the leverage loan market just because there's an index. It's fairly convenient. It rhymes with kind of deal, you know, bridge financing, that kind of thing. And you look at when that's stressed, you look at when the banks are going to get hung with financing that they are responsible for, but they do fully anticipating that they'll syndicate the whole thing right away. I think that they're, to the extent I've been wrong

and overthinking, oh, there's this big reputation cost. People are going to be deeply beholden to these commitments. It's that they have this like multivariable reputation and they are facing their banks, they're facing their LPs, they're facing their deal targets. And screwing over the deal targets, screws over their LPs and banks less in some ways. And so it's not that clear cut. When there's an out that's kind of a reference point, it kind of lets you jump at something. And I think that Toma Bravo and Anaplan had a reference point. It's not that it's optimal, but it's something you can say. It kind of, it sounds rational enough. They're going to do it if you have a deal that hasn't been committed to. I think the difference between

a definitive deal and something that is like a letter of intent or negotiation is a huge difference right now. Yeah. And I think it's the one-two punch that we saw on Anna Plan of a reference point and a gaping downside. And I think if you have both, then the targets in a pretty weak position, if you have one or the other, it's scary, but probably okay. And if you have neither deals will still get done.

I mean, I kind of have just been watching, you know, strategic deals get done, LBOs get done, and some of the things that seem thematically to be clear for reasons specific to the deal, you know, just deals get done anyways. I mean, in the middle of the great financial crisis, Tribune was probably one of the most L of LBOs and marginal and sensitive in all sorts of ways. And they just closed it. They just wanted to close it. They closed it.

They closed rheology, which was probably worth way less than the old price. I mean, they closed all sorts of things just because they'd committed to it. And there's a certain amount of inertia with decision makers that got themselves into the situation and all the high-price helpers who are at least individually compensated well for going ahead with it. So a lot of things get done that shouldn't. Let me ask another question. So talks about the private equity firms and like they have to play the game where they have to weigh the reputation versus in the long run, all that matters for them is returns. Right.

So they do have. And I do think there's something if, you know, Blackstone, largest private equity firm in the world. If they're in line to do a $100 million deal, they might just close it to save their reputation versus if they're in line to close a $40 billion deal. like you have to weigh your reputation against, hey, is it worth taking a dink to my reputation for the small deal? Maybe not. But if this is the biggest deal I ever do, which kind of, you know, that's how I think about Elon Musk, right? If he was buying Twitter for $440 million, he probably just like writes it off as a tax rate. But because it's a $44 billion deal, largest deal he'll almost certainly ever do, he probably looks at this and says, I can torch whatever I have over reputation.

I can torch this because this is the largest deal I've ever, I'll ever do. Like this is what Anyway, I'm off of tech. I wanted to ask, so we talked about the private equity firm's reputation, and we'll probably talk about Elon Musk's Twitter in a second. But what about banks? Because the easiest way for any of these private equity firms or at this point, Elon Musk, to get other deals would be for a bank to go and say, hey, we signed a commitment financing letter for you.

That's no good anymore, right? Markets too rocky. We don't believe in that. I know a lot of people who have suggested that. I, who have suggested that with Twitter in particular and just LBOs in general, I think they're wrong, but I want to turn over to you. What do you think about the bank's commitment and funding in this environment? Highly correlated and redundant with the buyers. Contractually, it's often identical or very, very similar. Incentive-wise, it's similar. You're going to find yourself

in a Delaware case whose name is only slightly different in terms of who the case is going after. So, see, I don't think it gives the buyer that much more flexibility. I just haven't seen it historically. And the banks get paid so well that I've been impressed historically. historically how good their business model is and how debacle deals substantively. It's not like they're getting out at 100 or zero, right? Like they might have to, you know, Peter out at 1980, 70, something like that. But they're getting so much in fees and so forth so consistently that they make it back

really consistently. See, I agree with you. Like if a bank pulled financing, it would be the same at like the seller would sue the buyer and the bank and it would look the same as the seller pulling. bank. But I think where I kind of screw with you, and I don't know if I was mishearing you or if we're saying the same thing. Like, I think the banks, to what you're saying, they make so much money and their reputation actually does matter, right? Because lending is a commodity. And if a bank ever, like, we can talk Twitter specifically in a second,

but if a bank with Twitter went to Elon and said, hey, or went to Twitter and said, hey, we gave a commitment letter to Elon, but we are breaking the commitment letter. Elon didn't pressure us. We're doing it. we're breaking the commitment letter. If that happened, A, Twitter would sue every which way. But B, every seller going forward, when a buyer came to them, every seller would say, hey, lending is a commodity. We don't take, I think Morgan Stanley's providing the financing for Twitter.

You can't use Morgan Stanley. Morgan Stanley tried to break a financing for no reason. Like, you just have to go with someone else. So I think in that case, the banks actually do have a reputation to protect. And again, if they're not doing the financing, they're probably not getting the advisory work. Like they've got this massive reputation. And again, for them, if they do a $13 billion financing and they have to get out of

a bet 90% of par, okay, yes, it sucks to lose a billion dollars. But, you know, they're getting $300 million in advisory fees. They've got all this other stuff. Like, I just think, for them, I think the reputation does matter. Now, that's not to say if Twitter was actually worthless, obviously they would not close. They could get out. I just don't think they're going to get out of it on technicalities. Do you disagree in my ram?

No, no, no. No, no, no, I think, and they don't have that aspect that I was saying with the private equity firms of these other audiences, you'd just be screwing over the outsider for yourself. And I think that that would, no, I think for the reasons you mentioned, that would be, that would be a problem. I think it's unlikely. I just, and I think that it's very rarely going to be the marginal difference in a deal getting done or not. Yep. So. And again, like, I use Twitter there many times, but it applies to the private equity firm. firms too. And we even saw it in COVID. One, one private equity firm tried to pull and say, oh, actually, our bank are bank pulled so we can't close this deal. And the seller sued them and said, hey, the bank wouldn't fund because you told the bank don't fund this deal. So it was one thing I keep saying is you can't nuke your own financing. Let's see, you've written a lot about the golden age of our, about all this moment seeking out. We talk Citrax. We talk plan. We talk sale. You've written up probably like six. Any other jumping out to you, we should be discussing kind of like the gold age of arm. Yeah, I think that things you can look for, I mean, I think a basket of these, I think the winners will pay for the losers and then leave some money left over. I think you don't need to have a view on, I mean, a total credit meltdown from now would be a problem. But the difference between the market kind of bouncing along sideways and a big recovery, you mean, you might underperform on a relative basis in a really strong recovery. But if you kind of were neutral or maybe a little bullish, you know, you don't have to have that much of a macro.

review from here, I think, on a lot of these Arb deals. I think it's interesting to the ones that were announced recently, so announced in more stress situations, ones that are likely to close in the near term, so you don't have to suffer from as much kind of time for investors to be scared. I think the current antitrust risk is kind of a whole other dimension. So spreads are so wide, you can be super picky right now. I can say, I don't want deals with big anti-trust risk. I don't want deals that I think have legitimate financing problems. The other thing I love is buyers with big stakes in this target already. I think that when you look at something where the buyer is taking out a minority, whether or not the deal gets done, they're not

likely to want to crap all over the target and go out ugly, right? Now, Elon Musk owns 9% of Twitter, but, you know, if you have a situation where there's like a majority owner, I think those can be super interesting right now because there are even times when you'd prefer to own 100% of something than slightly less than 100% of something when it's really bad times. There's at least one private equity deal I know of where they thought the target was a disaster and they were buying it a premium just to get it out of the public market. And they kind of were a little bit, you know, coming to the end of one fund.

And they actually marked it down somewhat privately. But, I mean, there's this big difference in terms of how much price discovery there is. Sometimes you don't want that price discovery. And so that can be a good time for a minority squeeze out opportunities too. Perfect. perfect let's see a couple other places i want to jump around i know you and i've talked a lot about energy recently in energy markets you know we we saw it's kind of funny like they've just screened higher recently right but they're they've screened higher since the start of the year but they're

actually off a lot over the past couple months and they're kind of like from april to may we saw nat gas go from where's my model i'm trying to pull up a model from april to may we saw nat gas go from like uh five to it was trading for eight or nine for a while. And then it's come back to around six or something like they've screamed hard, but they're still up a ton. I think in the public markets, a lot of stocks don't reflect the curve at all. But I just want to talk to over to you, what are you seen in the energy market right now? Equities in many cases at pre-Ukraine invasion levels.

I mean, just like you have you have commodities that have been ultra strong. And it seems maybe I'm just as an equity guy. I feel cursed and the world feels unfair. to me, but it seems like they kind of underreact to the commodity price strength and overreact commodity price weakness. But you can start to kind of like we think about market imply probabilities and deals and say like, okay, don't get too granular on this. You can't do this to the right of the decimal point.

But kind of if you think about just kind of betting odds, is it one out of two, three out of four, you can kind of start to organize your thoughts in relation to market-and-ply probability, but you think approximately the true odds are. Similarly, you can kind of think about the equity prices, kind of market-and-ply probability of the futures curve on the commodities. And you can get to really big retracement in the commodities prices and still justify more than justify equity prices here. So I don't, you know, we're not commodity, I guess, you could call us tourists. We're not, we're not oil and gas investors, but you can just kind of play with the numbers. It seems like it's giving the equities, tons of space to be at least

okay, if not good at much lower prices, and then spectacular if the prices kind of hold up. And some of the things, at least geopolitically, seem to be really durable right now. I mean, I think in terms of kind of de-globalization and war, I mean, I think if you look at war in Europe right now. I think you could have a lot more of that before and a lot less. And so a lot of the kind of geopolitics seems to me that we've just gotten a foretaste of it. Yeah. Last week, Continental Resources, the ticker is there is CLR that's owned by the Ham family. And they got a bid to take, you know, the stock was trading around 65. They got a bid to take this company out for, take the company private. I believe the Ham family owns about 80% of the company. They got a bid to take the company out for

70. As you and I are talking right now, the stock's at around 66. Now, oil, energy prices actually pulled back a little bit over the past week, too. So it's all circulated. But I know people are looking at this in two ways. Way number one would be, if you look at the history of the Ham family, they tend to top tick and bottom tick the cycle. So, you know, this is a pro-cyclical company that's offering to go private at the top is the way one people, one set of people look at it. The other way people look at it is the Han family said, hey, we can't be. public right now because Wall Street won't let us drill. And like, energy prices are so attractive, you know, NAC gas is $5 next year. It's $5 the year after that. If you had told people this,

these prices two years ago or a year ago, they would have been like, you need to drill everything you can. And they're saying, Wall Street won't let us drill. We want to go private so we can drill and take advantage to these opportunities. Both sound reasonable, incredible to me. Like, where would you kind of fall in that thing? And do you read anything into the CLR go private? I guess I could start with my conclusion to say that I own some shares here, but I'm conflicted on it. We're talking how good it is to have a definitive contract, and this is just an offer. Typically, if things have been more consistent throughout, you'd have kind of a bit of

of a sort of sham semi-independent committee kind of negotiating with the boss, the $70 offer, and he'd maybe raise it a few bucks and then close it at $75 or something. but in this case, you could pull it at any time. So, you know, we don't have, you know, we just have a proposed cash tender offer. On the other hand, I love minority bias. Like, I love being on the side of the table of it doesn't cost you that much money. And you have no reason to want to totally screw us over because you own a lot more shares than I do. So I think mixed, small position.

I'm fascinated by this guy. I don't know if you recall. It was kind of, it made the. circle circuit in uh seven years ago he had a divorce and he wrote out the uh check of 974 million uh 974 million dollars that was the check that he wrote it out by a long hand who gave to his wife um but kind of kind of an amazing character um but uh so yeah I think I think they'll probably stick with it and they'll probably get it done as a data point for ARB, I think it's good to see deals getting done, is a data point for, for my

interest, so it's mixed, but for my interest in equities and energy equities, I would say more bullish in that the prices currently reflect under investment and a lack of interest for whatever, you know, you could say the ESG focus or just the, it's the furthest thing from thematic investing or investing for kind of the future to want to invest in oil and gas. I guess maybe coal might be even worse. But I think that it is undercapitalized on the margin right now. And I think that there's going to be this kind of, there's this kind of air pocket between when we could realistically get done our political and social goals of green energy and so forth and where we are today.

They just don't connect and they don't connect by like a decade or decades. And so we need a lot more oil and gas. If I could do so, I would just kind of really, you know, just deregulate everything right now to let everybody drill and produce as much as possible and not have everything gummed up. for years where it's impossible to build a refinery. It's impossible to build a pipeline. We may not ever have more refineries. And the prices reflect that. And typically, the loudest voices at disliking where the prices go are the same voices that restricted supply this time. So they don't like the effect of the causes. So yeah, so I think it's, I think you can read it

both ways. I think of it as a bullish data point for oil and gas equities. Yeah. And then the other thing is, it's tough because I think in history, the two things that we have underinvested in that I think are the best invest in is, number one, people trying to, we talked about this last week, and we might talk Twitter a little more. But anytime there's a company trying to claim material adverse effects, it should almost just be, oh, nope, you can't get a material adverse effect unless literally cockroaches running through clean rooms, as we discussed. So like bet on companies that the buyer is trying to get out on a material adverse effect

because that is just really hard to claim in Delaware. So that's number one. And number two is just majority owner trying to take company private. Like they generally have the best view of value. You generally get a little bump. Like those are the two best places that say historically just on average for us to play. But with CLR, I was talking to Jeremy Raper the other day. And I was like, I'm of two minds because number one.

one, like, you know, you're paying right now 66. There's a $70 bid. It's an insider. He can easily finance it and he probably has to bump it a little bit. But at the same time, like if you like me think, hey, every energy company right now is trading way below the strip implied. You could also make the argument, CLR is the worst of both worlds, right? Because if the strip goes way higher, he gives you a token bump and you get taken out. And if the strip goes way lower, he just walks away from the deal. right? So you almost get like inverse convexity or something. I'm not sure, but I'm just have two minds of it. It's a very strange situation.

Yeah, I wouldn't want it to be my only energy exposure. I mean, we have more just kind of pure sort of generic ways to play energy that we're also doing and then more eventy ways. But I think you, yeah, you know, you, yeah, you, it's sort of situationally sensitive to the volatility. And I think it has a positive, expected value. I think it'll probably get done.

I think it'll probably get done with a bit of a bump. And I think it's a rare time to be able to own something like this at less than the offer. I mean, usually the market is looking at this and you have to pay something for the bump. Now it's nothing for me. It's very rare to have a majority owner come out and say, hey, I'll buy this for $100. I'm offering $100 per share and the stock not. to trade above $100 per share because everybody says, oh, it's a majority owner.

You're going to get the special committee will go. They'll negotiate the higher very expensive lawyers. They'll treat themselves some dinner. And then they'll take a 5 to 10 percent bump and call it a day. Let's see. I guess last thing, again, we can go anywhere. But I did want to touch on Twitter real quick. We let us talk about it in May.

And they just filed the second pre-lim proxy this morning. And I tweeted this out. It's so funny because there's been so much drama and so much analyzing of Elon's tweets over the past month or six weeks or whatever it is. And Twitter summed that all up in one paragraph in the new freelance proxy, which said, we've been in talks, we've given to Elon the data, we're committed to closed. But, you know, it's tough to remember what we said then, what we say, what's new since then. But I just want to turn a review. How are you thinking about Twitter, Elon Musk, and everything going on there these days?

I love Twitter. I think it is kind of an archetypal widespread where there are lots of ways to win or at least survive. I mean, I think that at a very tight spread, you need the deal to close on terms, on time. And I think that is a, that would be a hard bet to make right now if the shares cost, you know, $53 and 20 cents or something, or $54. But here, all of a sudden, you know, a market-and-ply probability of just over 50%, probably call it low 20s down. side. And so, you know, market says we really don't know if we're going to close, complicated by the fact that the market has other things going on like a recut. A widespread, you know, a position that you could hang on to that you didn't need to puke into the ARB

puke. You could even say, this has always been an undermonetized asset. It has so many eyeballs on it. There are lots of people who will come in and there will be a higher bar. for monetizing it in some way, for running it for value, it might not be a disaster over the next few years from here as a standalone because it will not go back to what it was before. There are other, this is a valuable franchise. They could do something else with it. A recut from now wouldn't be horrible.

And you have this contract. You still have what I think has had such cavalier, casual kind of arb tourist, saying, well, you know, probably won't get done or we know it won't get done at the current price. Why is that? So much the commentary just backfills solves the market price and acts as if that's dispositive. It just says, well, we know it's not going to happen because the price is really low. And my answer is, well, we know that's what the market's saying, but if you don't have something to say independently of that, you're just, it's completely circular. And it's funny that you can be that circular and still show up on TV or write articles for newspapers and

stuff. But I think a lot of the commentary has been really dumb. I think that the buyer has the biggest delta we've ever seen between the kind of casual chit chat on tweets and conferences and so forth and what he legally committed to do. I think it's the biggest difference. And I think culturally, certainly amongst retail investors, but even just amongst a lot of commentators, that superficial levels really take in seriously. Maybe I don't take it seriously enough, and I just kind of fall back on doing my job and trying to analyze the contract. And so where there was an early funny comment, probably by Matt Levine saying, you know, if you're parsing the merge agreement, you're doing it wrong. It was a great comment, and it was pressing at the time,

but I'm doing it wrong. And I think there's still a contract. I think it has not been violated. I think that the buyer could get the deal done, finance and so forth. And the target is doing precisely what I would do, were I they, which is put my head down, don't match tone, which is very easy to do. Somebody says something crazy. You see it in politics all the time. Somebody says something crazy.

You kind of say something proportionally crazy in the other way. it's kind of just the natural cadence. Don't do that. Don't engage. Don't take the bait. Just do your freaking jobs and get this deal. Don't do an anna plan and give an actual out. So they've been just marching through the regulatory reviews.

They've been marching through the SEC process. I think they'll get SEC clearance shortly. They've already gotten Hart Scott Redino probably faster than, I mean, there's no issues. So they should have gotten it. but they probably got it faster than the market thought they would. And this deal could close this summer. I mean, they just need to race through some nominal foreign approvals, but there's really no substance there, vote and close before Labor Day.

Yeah, and buried in the proxy, I can't remember the exact page, but if you look, I know you look, so this is for the listeners, but if you look, they gave an update on all regulatory approvals, and it was all good, right? right? I'm trying to find it. But they said, let's see, we submitted UK briefing paper on May 16th. CMA has not notified the parties of anything. They've got all sorts of things. But, you know, all this needs to my, what the steps here are, you get all the regulatory approvals, you get the shareholder approval, and then you go to Elon and say, close or go to court. And I feel like Elon probably says go to

court, but I feel very confident in the Twitter case. And it seems like we're getting, we're going full speed to head to that date. I guess the other thing, you know, we talked about with price cuts. Like, look, the stock is at 38 as we speak. The deal is at 5420. Everyone seems to think there's going to be a price cut. And I think, as you said, it's circular. But again, Anoplane was a decent size price cut. And that was an actual breach of the merger agreement. And they agreed to something that it implied the Tom of Bravo was 5% to winning court. Now, if Elon's claims on bots are true and stuff, yes, it gets a little hairy. But, you know, at 30, you can take a pretty big price cut

and you can still make a really decent sum and I don't know where people like everyone I see Elon obviously loves mean numbers and everyone I see says oh 4420 that's the next mean number that's what the cut to I don't see the rationale for a cut from 5420 to 4420 but the nice thing is like with this as you said big spreads make up for a lot

the spread is so big even if they got that price cut which I think would be insanity to take a price cut that big but even if that's where it went you do pretty well from here. Yeah. I forget apologies to listeners if I had mentioned this in our last one. I'm a little unclear. I don't think a huge part of my analysis has really shifted since last we spoke. That's the issue with doing these every month. It's like, I know we talked about this. And Chris and I talk offline about the time. What did we say? What have we said offline online? But an idea that I sort of have thought about independently, but I will give Matt Turk credit for this is I think it would be a better

contractual arrangement to have challenges and especially bad behavior get alternatives worse than the original deal. The $10 million legal bill is traumatic for me, but I think it's fun for Elon Musk. I mean, you look at somebody like, you look at somebody like Mark Cuban, one of the few people just to go head to head in trial with the SEC, it's like, yeah, that's great. He can perfect his rights and he won. a billionaire, and so he can afford the process. A lot of government enforcement is, really explicitly, the process is the penalty. They know that they can push people around because it's so

scary. I'm scared, just for rational self-seeking reasons. I can't just have the tape rolling 24 hours a day on teams of lawyers that get paid millions of dollars each. But Elon can. I think he likes it. And so he has this amazing kind of game theory where the worst possible thing that can happen to him is fun plus the thing he originally said he would do. And for him, not only is it fun, for him apparently fights like this are fun, not only is it fun, but it drives extra eyeballs to Twitter. So by doing it, he actually gets more users, more engagement from Twitter. And, you know, I'm with you because the downside, Elon, if you're a rational actor, you say, oh, I overpaid, with the benefit of hindsight, the market's fallen apart, I'm way

overpaying for Twitter at these prices. You do everything you can to break the contract, make them sue you, go to court and close. The downside is you pay 10 million in lawyer fees on a $44 billion deal. The upside is you threw a Hail Mary and you got lucky and you get out of the deal and you save yourself $25 billion in losses or, you know, you get Twitter to agree to a recut because they're so scared. So, like, the upside downside is so skewed. I'm with you. There needs to be, if we sue you for specific performance, like every day that goes by is, you know, the cost of the deal goes up by 12% or something. You could have, if we, we'll buy you for 50. So we'll cut the price to 50. But if you violate any terms, including non-disparagement,

including non-disclosure, the price goes from 50 to 60, I think that would be a good $10 bet or a CVR that was, Elon violates non-disparagement, like a CVR for that? Like, that would be fantastic. I mean, that would be a good investment. I mean, the likelihood that he violates that's, like, a hundred percent. Because, like, it is funny, but, like, to bring it back to the contract, like, Elon's arguing Twitter breached the contract by the bot disclosure issue that he's talking about. And we talked about this last episode. We don't know. But, like, Elon is in breach of the contract every single day because the contract says you will not disparage Twitter. And Chris is saying you can recut and put that into the next contract, get a CBR and stuff.

But like, he's in breach every single day. And because he knows that Twitter's downside is 20 and the upside is they get him to close, he's like, look, they can't do anything to me for breaching the contract. There do need to be penalties around this. There needs to be some type of contract that addressed for like the buyer is just so rich, nothing matters risk. I think it's a huge part of his identity and behavior that he does violate every non-disperagement he's ever agreed to. I think that he gets fixated on these constraints. When he had it with the SEC, when he had it in terms, I said I wasn't going to say this. It's really important that I say it right away on Twitter in public just to comfort myself

that I'm not in any way constrained by anything. I can be the same way. Like, I know my wife would be like, Andrew, you probably, like, if my wife says, Andrew, you've probably had enough to drink. You've probably had enough ice cream today. I'll be like, I'm going to eat three more pints and do 17 shots. Let's go. I hate having constraints put on.

Yeah. My wife is always concerned if I say something that I think is really funny that she thinks is offensive, how funny she should pretend she thinks it is because if she thinks she's not the right audience, she knows I'm going to go in search of another audience from my joke. And she's like, I think it's the right amount of funny that saying it once was just right. That was just the right amount of time saying it, but you don't need to say it again. It was perfect timing, perfect moment. Never say it again because you'll never top how funny it was in this moment.

Let's see. There's a lot of other stuff I know we've been talking about. I know we're always bouncing ideas up and forth, but we're kind of at the hour mark. Anything else you wish we had hit about hit or anything you want to get out before, you know, we'll do one of these next month. Anything you wish you wanted to get out before then? You know, I think in the intervening time since last two spoke, I think the ANA plan was the real event.

There's a lot of things that I think are super interesting but have been for a while. I think that Merger Arb is a real area to be able to put a lot of capital to work right now. I'm looking for, the big dry hole I've had, I think, is that looking for kind of explicit investor blowups. but the people who've been blowing up own stuff that I still don't want to own. So, like, there hasn't been, it's not like there have been, like, a value shop with a really good special sit portfolio that own a bunch of, like, really illiquid things that they're painfully getting out of that I can see. So I haven't seen, like, a one-for-one correlation on here's something we want to own now. It's down 20% because of this structural thing. If you look at the lot of the kind of VC-based or kind of hybrid VC and hedge funds,

they're in a lot of trouble this year. I think it's amazing how much they've marked down their public portfolios and how little they've marked down their private portfolios. I mean, I think anybody who says the bad news is my public stuff's down 50, but the good news is my private stuff's down only 5%. I think the down 50% and half the portfolio is the least of the worries of the investors at this point. So that's not that, it's interesting, but not that actionable for us.

Crypto interesting, but not that actionable for us. So, yeah, so I think our chaos is super actionable. So I've been kind of going crazy publishing on it, just because I think there's so many ways to play it right now. Crypto, I know you, you and I back in the old podcast days, we did one on Bitcoin. And I don't know, crypto, like, so there's Bitcoin and Ethereum, which are like the grade A crypto stuff. And maybe those are different.

But I have been just like disappointed myself. There were, there were so, I took all of these things so seriously because people were making so much money on them, right? So we can set Bitcoin and Ethereum to the side, even though they do somewhat fit into this bucket. But people were making so much money. I was taking all of these things so seriously and like really investigating them. And now with the, the hindsight of so many of them have just gone to zero.

It's like, Andrew, this was, I'm just like sad. I wasn't sounding the alarm parter because it's like, hey, these things are offering 20% annualized returns for staking and all this sort of stuff. It was like, yeah, of course, they were all, I don't want to use the F words. But yeah, of course, if something's offering 100% annualized to lend into it for a week or something, 100% annualized for a week, it's probably a fraud, it's probably a Ponzi. And I just don't feel like I was like, I feel like I was taking it too seriously because people were making too much money.

And I feel like I, I'm just disappointed. I didn't sound the alarm. And yeah, I don't know. I don't know. I think the world is starting to make sense, kind of in this abrupt, jarring way in 2022. And not to say that value investments haven't been beaten down with it. And I think maybe especially this past week, I feel like it was less differentiated.

I think it was more of a correlation to one. But I think that for the most part, the year is kind of flailing around to making sense. But for my own part, I was pretty beat up in terms of short ideas or skepticism just because at some point being early is convincingly wrong. You just feel like I can't enunciate what it is, but I'm completely missing something. My inability to value NFTs properly, my inability to value any number of things that today, look like, sound like, and are trading like they're just nonsense. But a year ago, I was certainly less brave than I should have been. But, but boy, you know, it had been so consistent for so long and there were so many examples in a world of no opportunity cost of your time or money,

zero interest rate and COVID. But that was the weird thing. I think what we're dealing with now is the is the kind of reversion to making sense. Yeah, you know, maybe we'll do better, like, and both of us, the dot-com bubble was a little before both of our times, really, but maybe we'll do better like 20 years from now when we're doing this and we're both quite old men, but we're doing it. We'll be able to remember this a little better and, like, hammer it home harder because these bubbles do come every 20 years. But I'm with you, like, last year, people forget how scary it was when the mean bubble was really blowing up and like every short was going up 10x and people were getting their faces ripped off. But I look at something, this is not correct. to like lemonade you know like it's cool it's got penny's pet insurance i love it as a product but it was so obvious it was an insurance company with really bad underwriting and when the stock went to

a hundred it was really hard and people sounded like geniuses and now you know it's come screaming down and i'm not saying short or long but it's just another example of something where i'm like oh this is something you could have raised the alarm a little higher harder you could have been more skeptical you could have been more cautious and we never had a position lemonade but i just that is another example. I was just traumatized. And I mean, it's just, it's obvious arithmetic that everybody knows, but living through the reality that if your portfolio is basically doing okay, I mean, even a day like today, portfolio is basically doing fine. There are blowups within individual positions. One thing about a blowup in the long side is before long, they're very small

positions. And a few days later, a few weeks later, you're not, your nose isn't necessarily rubbed in a bad outcome in a long position, but a year or two ago, a short position that even just a relatively small position that starts to moon very quickly becomes a very large short position. And you have to deal with it. You have to think, you can rarely think about anything else. So it kind of force, having a portfolio ever force the topic is horrible. And, And if you've been through that a bit, at some point, you just kind of throw in the towel. And with short positions, it doesn't take much, as you said, like, you've got a one, you normally think, oh, it's a 1% position.

It's not that, you've got a 1% position that goes up 10%. Suddenly, your entire portfolio is basically that thing. And it is just, yeah. Cool. Well, Chris, it's been an hour. This has been a ton of fun for listening to. We're going to do another one. I'm going to include a link to one of Chris's golden age of ARB things in the note so people

can go find that and you'll be able to find all this stuff once you can obviously see that. We're going to do another one next month. I'd say probably I hope markets will be a little better then, but who knows what the world will throughout us. We know. Thanks so much for coming on and we'll chat soon. Thanks, Andrew.