Yet Another Value Podcast - Chris DeMuth's state of the markets May 2022

Episode Date: May 12, 2022

Chris DeMuth returns to the podcast for a new monthly segment talking about the current state of the marketsMy note on event driven situations; https://yetanothervalueblog.substack.com/p/weekend-thoughts-the-rich-set-of?s=wMy note on energy companies: https://yetanothervalueblog.substack.com/p/when-are-the-activists-and-pe-funds?s=wChapters0:00 Intro1:55 Chris's state of the markets11:05 KSS16:40 The regulatory environment and its impact on deals22:15 ATVI / MSFT28:50 TWTR and Elon Musk39:00 Commodity / energy stocks disconnect from strip pricing

Today's episode is sponsored by TIGUS. 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 DeepDive 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. Hello, welcome to yet another value podcast. I'm your host, Andrew Walker,

and with me today, I'm excited to have my friend, the founder of Brangley Capital, Chris the Mew. How's it going, Chris? Good. How are you? Doing good. Hey, let me start this podcast the way I start every podcast. First, a disclaimer should remind everyone, nothing on this podcast is investing advice. Please, we're going to talk about a bunch of situations today. So, you know, some of them we've probably done a lot of work on. Some of them were probably just fined by the seat of our pants. So everybody should just remember that. Please consult a financial advisor, do your own work, all that. Second, a pitch for you, my guest. I mean, you're my partner at Range of Capital. People can go listen to our, we did a podcast earlier this year. on rent, which I think is the best performing stuff that we've done on the podcast. Maybe I should knock on wood real quick, but that's been just an absolute killer. So people can go listen to that if they want a, in hindsight, great stock idea or if they want the original pitch. But I'm excited

to have you on. I think we're going to start doing a monthly kind of what's going on in markets, what's going on in event land. We used to run a separate podcast where we kind of do this every week. So I think we're going to start doing this monthly. I'm looking forward to it. And yeah, just turn it over to you. What's going on in markets, Chris? Well, you know, the microphone, I'm just looking over my shoulder that we used to record on. It's all set. So once we're back in the office and running to go, it'll be nice to do that. So since we spoke about Wren, there's been a lot going on. I was one of three shareholders on the steering committee for dealing with the mediation. And we've gotten through that. We couldn't talk about it for a while. I think now

we basically can. And that is unresolved but promising. So it looks good enough to be happy about but is unresolved enough to not want to jinx it by, so I'm not spiking the football, but I'm not sorry with how it's gone so far. People can go listen to the first podcast, but you know, there was in December, we were about to spike the football and then there was some unexpected things that happened there and the stock got hammered and we looked and we said we think this is an overreaction. We think it's all going to work out in the end. But this is one we certainly don't want to spike the football on. Ren has been like the S&P this past week that if you looked at the beginning and looked at the end, it was kind of plotting and miss all the

drama in the middle. Ren's kind of working out the way we might have thought before all the drama and now it's kind of back to a fairly normal situation. So that's been a big time-consuming research project and has been very kind of active. I think that's been a good one and that has like nothing to do with the market whatsoever. And so that's been kind of a pretty top of. Let me pause you there.

So you said nothing to do with the market whatsoever. And generally like these podcasts, you know, most of the time I talk to someone and we focus on one stock idea. We dive right in. And a lot of time when they try to bring up Mac or something like, I don't want to talk about that. I just want to talk about one stock idea. But you and I were here.

We're doing a monthly event-driven podcast. I think it would be tough to talk event-driven without talking about we're taping this. What is today? May 9th, we're taking this May 9th. The stock market is down 3% today. Last week he got hammered. The past six weeks it's got hammered. My favorite index, the Russell is down probably 27, 28.

percent over the past six months, which that's a pretty big drawdown. So I just want to high-level zoom out before we've been talking to situations like, how are you thinking about the market right now? What are you thinking about these days? Well, I would say that, you know, it's nice to have kind of liquidity and flexibility and cash to put to work. And we've been as recently as this morning kind of trying to think about making sure we're exposed enough. I think that I'm certainly most comfortable around situations with fairly hard catalysts so we can know within a few weeks or within a few months if we're basically right so we can kind of succeed or fail but not kind of get sucked into something, certainly not sucked in in terms of P&L and certainly not

stuck in in terms of liquidity. So it's it's kind of a time that I like really hard catalysts. I don't love the merger our market right now because of regulatory concerns specific to the U.S. So kind of U.S. regulatory situations I'm very, very light on and kind of looking for more broken situations. But it's interesting to me that in thinking a lot about corporate events, that buyers are still there. The credit market is open. Financial buyers are still there.

Strategic buyers are certainly there. And there might be some kind of opportunistic recuts or more prices to take, but it takes more than this to really blow up the deal market. And so I think that that's positive and optimistic. Deals are getting done. Deals are getting done at big premium. Deals are getting done at big premiums well above where even pretty widely projected deals were expected to.

So I think. at the corporate side, there's still functionality. At the retail side, there looks like there's a lot of bearishness in terms of the kind of the sediment indexes that I think are pretty useful to look at are super bearish right now, and so that might be bullish.

Let me go back to the corporate side, because I think both of you and I have been surprised, right? We've seen a number of things, and I'll just say, like, the way it's played out is Bloomberg reports, Reuters reports, somebody very credible reports, hey, this company is shopping themselves, right? And the stock trades at 10.

And the stock runs to 11 because they say deal premium deals. And then markets drift and everything falls apart. And there's never anything bad about, there's never anything bad that comes up. Companies pick where bidders aren't interested. The companies having it is at nothing comes up. But the stock dress back to 10 or something. And then six weeks fast, you know, it takes time to do a deal. And then there's announcement that says, hey, there's companies for sale.

They're sold, you know, 30% premium. I think the one we're thinking of most recently is Silicon Motion Technology, which announced an official deal last week, and that deal had been rumored. There was a pop that gave it all back, and then boom, hits. And I know there have been several other that we talked about. You know, funny Graham went earlier this year. Now, this was the sound like 20% since then, but there was rumors that they were going to have a deal. People confirmed there was process, and they gave all the back.

And then sure enough, deal at 11 comes. and now the deal is in question for other reasons. But I've been really surprised by that. It's been a really interesting thing. Do you think that's a function of people just, you know, two weeks after a deal, if the market's down 8%, Ukraine happens, all this sort of stuff, people are saying, oh, maybe the world's change and buyers just aren't as interested, or do you think there's something else going on?

Well, it's certainly legitimate that whatever the kind of inverse of the market implied probability of the deal is, the downside's going down proportionally. So there's some legitimacy in that, certainly. And there could be skittish buyers, although my history of checking back in with buyers comparing notes after things are public and done is that my sensitivity and worry about their worry was like 10x more than they ever thought about it, certainly at the minute level, right? A 30% drawdown is something C-level executives certainly pay a lot of attention. to. But if you divide that up into a 10th, every 3% move something I think a bit about,

but they really tend not to. So I think, you know, and there's this, just inertia, it takes a while to get to a deal. You know, they tend to want to, and certainly their advisors tend to want to kind of follow through with kind of more. And of course, you shouldn't be buying a company for us doing a quarter or that month or certainly that week or day. So I think that the downside is relevant. At some level, the buyer sensitivity. And then at some level, also, the credit market just shuts down. And the credit market shuts down these kind of abrupt increments. I mean, I remember talking with John Paulson's hedge fund. They're kind of research guys there that were very helpful. We were talking a lot in 2007, early 2008. And they were very kind of

early and skeptical of the credit market and we're saying watch the reverse breakup fees, watch the LBOs. And I had this kind of naive innocence about their reputational costs. Like, oh, they won't abandon deals because they're in the deal business. And they think how Padley would hurt their reputation. And watch the reverse breakup fees, watch the LBOs. They will break all of these deals. And the only one of the kind of category that looked like they would break that survived was a single deal that eventually went bankrupt after it LBO'd.

But that looks like the worst of all of them. But they really did. So you get to this credit increment where the LBOs really just all kind of fall apart. And so that's something I'm certainly thinking about. But as of now, the credit market seems to be pretty open. Yeah, it seems pretty open. me even this morning like frontier which is not in any type of uh in any type of deal situation or anything i just think it's an interesting but they came out and they're they're raising debt and

it seems like the death's going to price it's going to price at terms that i think are like kind of high but you know this is a company that was bankrupt a year ago and they're raising uh eight year debt yeah you're probably going to pay up a little bit for eight year debt when you were bankrupt last year like they're getting it priced it seems like they're going to be able to move forward. So it seemed like that must are open. Let me ask another question. So, Simo last week, right? That was a strategic buyer that bought them. I think one that you and I have thought about a lot is Coles. KS. I put an article up over the weekend. I'll link to it in the show notes. But the basics are there are a lot of financial buyers in there. And every week,

it seems we get a new article that's like, here's another buyer who's out here offering $68 per share to Coles. And as we're speaking, I think Coles is 51. And I have been wondering today, and I know you and I've talked about it, like, is there any signal in the coal stock price where because coal would get an approach by, it's not strategic buyers, right? It's not Macy's buying coals. It's Brookfield buying coals or franchise group buying calls.

Because it would be strategic or financial buyers, is there more signal in the coal's stock? Is there more signal in the current volatility where, hey, maybe strategics can still get deals done, but financial buyers are going to start reassessing real fast based on this environment. Yeah, no, I think I think holds that under 52 bucks is more of an opportunity than a data point, but it's a bit of both, certainly directionally, and got from 60-ish to 52 with like multiple pretty well vetted, not like buyers confirming, but like a journalist that double or triple source kind of indicating that there are a number of bidders. I think you can say buyers confirming, right? Because ACTG, which is backed by Sarberg, put in an SEC filing that they bid 64 for Coles. That was the first thing that we knew up. And franchise group in their earnings calls, they didn't say, hey, here's the number we did. But they basically confirmed interest in Coles multiple times on the earnings call. So I think at least we've got two on the record bidders. And then as you said, New York Times reported one bidder, Bloomberg reported another bidder. Reuters reported it. So like we've got multiple, this.

is not New York Post just rumoring about it, though they also did rumor about it, but this is multiple confirmed sources. And I look at this and just think, the bidders know the credit market and they have a very good idea of what they can get out of calls in terms of sale leasebacks, in terms of using its cash flow to finance a very large part of what they would have to pay. Now, interestingly, as I talk to real estate people, it's always a little bit more complicated than the just financial engineering from a distance that you would like to put on this. The more you know about the specifics of their real estate, the hairier it is to do all of the things I would do with it in terms of how you could just physically redo the stores

and if you needed to shrink a footprint, who else you, like, it's, it's just, you know, there are things about the signs and the specifics to the parking and so forth that makes it less flexible than it is in my imagination. I think the shorthand way would be, all right, Coles, the parks or they own a bunch of great real estate. Well, I think I heard that argument with J.C. Penny in 2010, with Sears in 2007, with Macy's in 2016, and how's that worked for any of them? Exactly. Exactly. And so now's the time that I think it's going to work. But, you know, they think that that could be a bit of a bellwether. But I mean, this category of kind of pre-R, we're taking out candidates right now. I think it's still a pretty good one. It's certainly helpful if it's something that you wouldn't hate to own as a standalone where there's a few other ways to win, you know, both both in terms of if the deal market really does,

shut down, then you're stuck with a portfolio of things that you wouldn't, that you don't have to be a kind of price insensitive, rushed kind of arb-like seller. But also, because it might be a data point in terms of what gets done. So yeah, I think the pre-arb stuff's good. I think the actual definitive arb stuff for the most part. I mean, spreads are getting wider, but doesn't tend to, like, I'm so concerned about this regulatory environment and think there's a half dozen deal that I think the FTC and DOJ is going to want to block that I kind of feel like particularly lazy right now because I can always own everything else the day that those get blocked, right? Like everything tends to go wider and a fairly conventional concern at this point,

but I might throw myself in with, there's not many definitive deals. You have to own, I mean, we own a couple, but, and then what I think is really interesting is on the suits, on the blocks, that tends to be, you know, a really great time to at least consider setting them up, you know, the likelihood that a company sells eventually, even within the next couple of years when they've been in a broken arm situation is way higher than the average company. It's a signal, right? Most companies, most boards, like being on a board pays nice money, being the CEO of a company pays nice money, not a lot of jobs out there. But once you've decided to sell once, like now as an investor, you know, this is a board that's at least willing to

consider deals. And normally, like, you know, if you and I went through, right, did a deal to sell whatever company we own, and it went six months. And then for some reason, the deal couldn't fall through. Like, you and I have probably already mentally decided we're selling this business. So, you know, yeah, we can't sell it the day the deal breaks, but three months later, six months later, we're probably out there thinking, hey, so let me ask about the regulatory environment because I think this is when you and I have been back and forth time, right? Like, the regulatory environment, you can put it pretty bluntly, right? The Biden administration wants to, the bills more than the Trump administration did, as long as you don't own CNN. If you own CNN,

the Trump administration wants to buy deals, right? But I do look at these spreads, and I'm saying, I mean, the downside on a lot of these stocks is coming down all the time. But one that's been very popular recently is Activision Blizzard, which is in a deal to get bought out by Microsoft for $95 per share. As you and I are speaking, is trading below 77. So that's a 25% spread to a deal. the downside is going to be pretty big just based on Activision Blizzard has been a disaster. The NASDAQ is down huge since then, but, you know, a 25% spread for a deal with a grade A buyer like Microsoft's really big. Obviously, the spreads there because of regulatory, but I keep looking at this and saying, hey, it looks like this is priced.

You know, I think Microsoft would win in court, and there's a chance that they don't even have to go to court. So it walked me through, it doesn't have to be Activision's just, Why are you so bearish on just the regulatory environment in general right now? You have activists, and I'm bearish on two fronts. I'd say I'm bearish directionally in terms of how many deals does this FTC and D.OJ. Block, I'm bearish on what they do with M&A. And I'm also bearish on how analyzable it is because they're not classically kind of antitrust-focused regulars. the head of the FTC kind of just graduated from law school and is a real zealot.

So it's kind of like debating antitrust with them is more like talking about somebody else's religion than it's like comparing views on antitrust, which you can kind of, which is falsifiable and analyzable. So they tend to not like these companies. They tend to not like the deals. And there's a lot that's going on that's kind of punitive. You know, we're not going to do early terminations on deals, even if there's no issue. you wait in line and you, you know, well, that has nothing to do with the merits.

And while I said earlier that these companies shouldn't be doing a deal for a day or week or a month, once you start delaying a deal by six months or nine months or a year, that could be a high percentage of why this company was doing this deal at this time for this specific market. Like if you just say you're going to be put on the bench for a year, there's a lot of things you won't do. and it will make markets less efficient and less liquid. They're like office depot staples, which might merge now, but, you know, five years ago, they were going to merge and FTC, but I think the FTC was the one who blocked it there, if I remember correctly.

And they blocked it and it was like, hey, I mean, I wouldn't have made that ruling. But, you know, at some point, maybe they, maybe the office depot stable stuff they could have kept appealing at some point one. But at some point, like the retail statement. people's business is going to go out of business. So, you know, if you agree to the merger in 2015 and it can't get done to 2018, well, that's years of cash flows where your synergies are gone and all this. And that was like a big piece of the reason you wanted to do the deal, right? So I'm definitely with you on that. So I think that I think it's reasonably likely

that this deal gets done. Actually, I would say that the point at which I feel like these situations are more analyzable and we kind of get what we deserve, right? So that might be a loss. That might be, we get to see what the downside is, but where we're going to win or lose based on the merits, I feel much more comfortable in front of a judge than in front of these regulators, right? There's a lot of things going on where they're happy to bring suits, where they are making some point unrelated to the deal, where they, that's just, politics. And I think the judges, I mean, judges can be political, but I think it's more robustly related to the law. I think I've seen some pretty silly FTC and DOJ decisions. I've seen

fewer silly decisions coming from judges. I mean, I disagree with them from time to time. But I think that I'll like that one. I think it's going to be lower later if they do get a suit. And that's one that, and even if this one doesn't get blocked, I think we even have other opportunities as, you know, as I said, like a half dozen others get, you know, I think that there's going to be actually one of the funny things that a lot of the people in the antitrust bar have been talking about, and this actually probably would be an antitrust violation, is that they all just like certified at the same time because if the FTC and DOJ really just wants to bring all these suits, they don't have enough litigators to like block everything. So you could just kind of like

throw all your forces forward at the same time. Here's 20 certified compliance. Pick your two that you want to sue because the other 18 you're going through. That's pretty funny. Let me ask you, Activision Microsoft, right? Like the theory here is Microsoft, I'm going to quote unquote, owns PCs, but they do own Xbox. So if you buy X, if, you know, there's the theory where they buy Activision Blizzard and they make call of duty exclusive to Xbox.

Activision owns King, so they make Candy Crush. exclusive to PCs, I guess. I don't know. But, you know, it reminds me of Time Warner. This is probably more on the border than Time Warner AT&T, where Time Warner AT&T, a media company merging with a phone company. I don't know a lot of people who really thought that was a concern, but I do know a few. Like, Activision merging with Microsoft, I know a few more, but like, do you think they would have a chance in court? Because I just look at the gaming. It depends if you define it as gaming market or entertainment market. But either way I defined it, it doesn't seem like Microsoft buying Activision is going to foreclose on competitor, eliminate consumer choices or

anything. It's a theory that's going to get a lot more traction with the regulators than it would with the judge. And there's been some signs with other things that are looking at the same time that this kind of theories, one that the regulators really are thinking about. But it depends on the judge, right? You always have some shot that you're just in front of somebody who has a lot of deference to the agencies. This is what they're supposed to be expert in. If you have somebody who has no background himself in antitrust, you know, the agencies, you know, I've never been in the situation, but when you see a court case and it's, you know, the United States of America versus, you know, we kind of have a certain amount of likelihood that they win. But

But no, I think that it would be, I think Microsoft would have a very good chance of seeing this through. Do you put any, I would struggle with this, right? Because obviously you never enter a merger agreement thinking, hey, we're going to get sued to block by the DOJ and we're going to have a year-long antitrust battle that's going to consume everyone's time and, you know, keep the lawyers sending their kids to college and then the yachts and everything. But do you think there's any significant, like Microsoft knew the regulatory environment wasn't great when they entered into this deal in. I think it was October of 2021. They knew the regulatory environment. They obviously hired the best law firms, the best legal advice of them.

Now, you could have said the same about AT&T time Warner or any hundred other deals that have been suits to block. But do you put any weight into Microsoft looking at this deal and saying, hey, we're going to sign this contract. We'll be out. I think the break fees $2 billion, which, you know, that's pennies for Microsoft. But they put $2 billion in break fees on the line, plus a lot of legal headache in time trying to get it. Do you put any credits in that? I don't know. I was actually trying to think if I was going to push back on,

has anybody announced a deal expecting to have to go to court to defend it? And I would say, you know, Sprint Timo maybe and JetBlue Spirit probably they think there's a pretty good shot. I mean, so every once in a while that you have one. And, of course, the antitrust lawyers love it. Like, they're happy to deal with it. But, no, I think that Microsoft probably, they probably have a high confidence that they can be persuasive before it gets to court. They probably like their theory.

However, and this is a little dangerous to the target, they probably think it would be a useful theory to test, right? Like, it would be good for them to be able to get this deal done. and it would be good for them to know if they could. And they, of course, have other things going on in terms of banditrust with the government. But they probably ultimately aren't playing games with this. So they think that they can, and in a normal time, I think it would be a cinch. And this time, maybe I'm more worried than there. Do you, I mean, obviously this got on a lot of people's radar because at Berkshire last week,

Buffett comes out and says, hey, we bought. almost 10% of the company. And I think the quote was, we bought it for the spread. And if the deal falls through, we'll see what happens or something. I think those the quote. Do you put any credence into that? I thought it was a very funny, like, kind of foxy Buffett. And it was like, there's got to be more analysis that he did in this.

Because it was kind of like, it was just almost like a cliche. And he's careful to say, it's not merger arbitrage. It's not an arbitrage. It's what he used to call workouts. And he was very good at this back when there was like no competition. in massive, massive spreads. And he made a ton of money for the, especially back in the Buffett kind of partnership era. He did the, what, even as recently as I think it was 16 or 17, he did the Monsanto Bear deal, if I remember correctly. And that was a pretty much. And that

worked out well, but in hindsight, and we had a good size position in Monsanto, but everyone's only like it done something and think, oh, we really were taking the risk we thought we were. Monsanto was a lot riskier than I thought it was the time, as it turns out, it was a terrible acquisition for the buyer. And just we got paid cash. So day for us. So what Chris referred to is like a month after the deal closed, Monsander lost a huge lawsuit in California on, I think it was Roundup causing cancer. I don't mean to make light of it. That was just the basics. And they owed billions and billions and billions of dollars. and obviously bear as the buyer's on the hook. And I don't think many Monsanto's shareholders

were really building that downside into their model. But, you know, that's another interesting one because Bear, you know, the giant company doing a multi-billion dollar acquisition, they got to look into Montanto's books. They got to look at all that I'm sure they looked into the legal risk for this random thing. And much like shareholders did, probably dismissed it, and now they're on the hook for billions and billions of dollars. And I disagreed with how the decision worked out, but should have, probably been more humble and worried about it than I was. You know, it's interesting. You have a little bit of opposite dynamics in ATVI and Activision as we do in Twitter, right? Because we have

this alternative world if the deal doesn't get done. I think it's actually decently likely both deals get done. But if Activision Blizzard breaks, you have a data point that at least Berkshire would like to own it and own it right around the break price anyways, right? Like they were buying it ahead of time and then Buffett himself at it. And then you have Twitter where you have the opposite techniques where not only do you have the potential for the break, but then the buyer becoming a seller, right? So, you know, it could break even uglier as a result. That's a great transition because Twitter's the other one I wanted to talk about. That's a popular one. I'm sure we're going to get a couple of buzzword SEO optimizations from talking Twitter.

But look, Twitter, as we talk, as you mentioned, Elon Musk has the deals and buy them for 5420 per share. As you and I are talking, Twitter's at about $48 per share. That is a big spread, 13, 14% spread for a deal that, you know, it's a all-cash buyer. The richest man in the world is an all-cash buyer here. I would think there shouldn't be antitrust. We can talk antitrust. I would think there shouldn't be antitrust for Elon Musk who can choose the majority shareholder of SpaceX and a car company.

I don't see how we can't buy Twitter, but maybe. But, you know, what is the market seeing that's got the spread so wide here? There's no antitrust by my standards, kind of free market and economics-based antitrust standards. And there's no antitrust by Lena Kahn's, you know, progressive activists and Biden's, He tells that kind of whole government, which is if there's something you're against, you use any power the government has, regardless of their statutory authority or focus, to simply thwart things you don't like and benefit things you do like. I mean, this is something the DOJ is signed on explicitly, and I think the current FTC majority is

the heart and soul of it. But even by that standard, there's just no antitrust issue with this. There's no FCC jurisdiction. I don't believe there's Scipious jurisdiction, although there's ambiguity that's raised by the other equity holders that are coming in, but there's nobody else that's can have control. So there's no Siphy. There should not be Siphyest jurisdiction. That's a little squishier. So kind of ticking off the list of what happens with this on a regulatory front, it should be very smooth. Ticking, you know, if this is a normal situation, and then you go through like thinking about, about the ability of the, you know, if you stipulate, if you stipulate the deal was announced by somebody who's kind of a willing, sentient buyer, and has fewer, like, embedded agency issues? It's one person. It should be extremely simple from a financing perspective, too. So you go through. HsS.R. gets done. Cepheus, I don't think is needed. There's really no,

there's really no foreign issues. And then not only is it a good premium with, especially compared to where trade otherwise, but if there is any opponent, they kind of can get bought off by being able to go on the private side, right? So if you think it's worth less than this price, you take the money. And if you think it's more than this price and you're a major player, you invest alongside Elon. So the target votes a cinch, right? So it should get done. And my kind of dumb, dumb analysis is that it will. I mean, I think that, you know, you probably looked at the Hindenberg research. I like their stuff. I read their stuff. This was a pretty short form bit of analysis. I think I would associate myself with everything they wrote as a caveat. I just think

that you kind of get paid enough based on one of the stock prices. So I wasn't that impressed by the short term. They put out a short on, I did not see that yet. Oh, okay. I should have sent that as I. That was, yeah. So they just, I mean, it was almost, it was just like a blurb on that, and the idea was mostly the market's missing, the reprice scenario here. Elon holds all the cards. And if you look at, I mean, one thing that they're certainly right about was it was an unusual sale process, right? Like, it's a weird board that owns almost no equity and doesn't really. I don't even think they use Twitter for the most part. No, I mean, I know we're both fans of Matt Levine and this has been some of his best work.

But yeah, they have neither economic nor sentimental attention. attachments to the company that they're the board of. And so they're like, oh, sure, you can have it. And so it was kind of a weirdly attenuated process. I mean, usually from our perspective, you know, there's a certain kibuki back and forth on almost like a Middle Eastern bazaar where you have a price and then you kind of, you go back and forth. And there's like, oh, no, sure, that's fine.

But so basically saying he's in a strong position. He can come back. The downside's bigger, duh. The performance announced subs of a deal has been bad, duh, and their subscriber numbers were somewhat inflated, not to level of materiality. I don't think enough that he could walk. You know, I guess the two things that jump out, all the reporting suggests Elon basically waived all financial due diligence as part of the thing. So if he goes to you and tries to recut, like the contract does, I don't know how you try to recut. I mean, anybody can try anything, right? But you need something to, you need something to point to

to break a legal contract. And I don't know how you go to them and say, hey, your subscriber numbers are worse and be like, well, you waive due diligence and we've got a contract that says material adverse clause, like this is not carved into, this is carved out of the material adverse clause. And then the other thing I've been wondering, I don't know, but I've been tossed around like, you mentioned with private equity firms, right? Like in 2007, a lot of people said, oh, these guys are into business and doing deals, they have to consider their reputation. and private equity firms said, hey, when push comes to self, like, we want to make money and protect capital more than. But I do wonder for Elon, like, if he, if he backed out of Twitter

at this point now, right, after all this, like, it does seem like it would be, I mean, maybe just the richest man of the world in money talks, but it seems like it would be really tough for him to pull some, to do what he normally does going forward if he stiffed Twitter here, right? Like, he said this was to be taken seriously. He subbed off a lot. to co-investors. He's raised money. It just, it seems like it would be a real reputation because if he walks. I don't know if that matters or not. I honestly don't, but yeah. He didn't recut Solar City, so he's not going to recut Twitter. But I don't think he's thinking, I think we've probably thought about the price now more than he has. You know, I think he's kind of moving on

this company and these kind of slashing increments. I think he has plans for it. that it doesn't have the replicability issue that the LBOs have. It's not like he's going to be in this business, but it is pretty interesting to be a guy who can both bring this huge amount of your own equity, have leverage on it with your friend's equity, raise debt in the market that's willing to lend him money against Tesla, and bring on other post-deal equity holders in a way that kind of gets around the SEC stuff that he doesn't seem to like, but lets people come in.

You know, if you can set a price and back to the, well, he certainly can get the shareholder vote because everybody thinks it's worth more or less than that price, and he can appease either sides, at least the kind of major holders. You know, that's a pretty big thing to be able to do to throw away for a couple of bucks unless he needs to. I mean, I think the big risk in all of this is Tesla. And I have no, you know, new Tesla thought other than if it, falls apart as much as many, many other financially similar companies have in the last few months

in the next few months, this deal could really get in trouble. You know, Tesla, half the price, a quarter of their price, changes things a lot for Elon and his deal. I do think they got help there because, correct me if I'm wrong, but all the syndication that he did for the equity where he went to Brookfield and the Saudis and everything, I think that reduced the requirement on the margin loan side, right? No, that helps a lot. That helps a lot. And just his ability to do that as fast as he did. But in terms of his sensitivity and what he, yeah, in terms of thinking about his behavior, I think he closes this deal at this price with Tesla, with Tesla at this price. You know, if Tesla really imploded, you know, would that change things for him?

You know, that's where I'm less sure. One more question. Twitter reports results on April 28th, if I remember correctly. And they, he does all the equity syndication. I think May 4th is the deal that's officially signed. So if he tried to walk away from Twitter, couldn't Twitter point and be like, hey, not only is this not an MAE, but you syndicated equity capital on May 4th with our results in hands. Like, isn't that a real bad look? Yeah. No, I think, no, I think it would be, as a Twitter shareholder, you're not, happy about thinking of your prospects in, you know, in front of a chancellor kind of quibbling about corporate law and what isn't, what isn't a MAC. But I think the company would have a really good, would have a really good case there. So, no, they'd be, they'd be on the side of the angels, but that would only be partial solace for an equity holder. What else should we be talking about? Energy. Energy, yeah, go ahead.

I think we've been thinking of we have one of our kind of top three positions this year in it, although it was really kind of backed into the energy exposure because, in large part because of our interest as a kind of special situation there, but we've been kind of peaking for those who don't, Chris is referring to Amplify Energy, which we've done two podcasts on with Tim Weber. he was great. It's worked out really well so far. So that's what Chris has kind of worked. Yeah. And we're kind of as big in it as we can be. So we're kind of thinking about other things in the equity market. But boy, there seems to be a big disconnect right now between commodity prices and the equity prices that should be pretty directly related. It's not quite as simple as this, but one of them seems to be wrong. Yeah, yeah. Look, I wrote about this on the weekend over the blog, but just like I keep looking at these companies and, you know, let's say energy prices are up 10%, so their PV 10 should, that is up 10%. Their stock prices will be up like

2% or something. And it actually kind of seems like energy goes up 10%. The stocks move 2%. Energy goes down 10%. The stocks go down 10%. Like, and I'm short-handed. I know there's a lot more complications and everything. But it just feels like the market is saying, like, it's looking at, I understand oil is $100 right now and the futures curve, you know, 12 or 24 months from now is 80 or 75. I get that. But the market is looking at that futures curve. And it's saying, I know oil is 80 then, but I'm going to price this company like oil is going to be 60 in 12 months. And it just seems wrong, you know, like lumber, one of the things with lumber that I didn't realize so we started getting really into it is it's very difficult to hedge lumber. You know,

If prices 10 months from now or 1,000, it's tough to go out and actually short like $1,000 with the lumber for your deliver oil and gas, it is not like that. The next 24 to 36 months are super hedgeable. So it's not a case, like the companies can realize that if they really want to. So I don't know what the market is telling us here. And if you look at a lot of the geopolitical stuff, I mean, I think that there's more opportunities on the equity side to be rather precise in terms of, you know, onshore. And in terms of the commodity prices have been spiking in part on huge swaths of supply in certain geographies being unavailable, maybe for a pretty durable length of time.

I mean, the industry people I speak with, even on Russia in particular, are just fascinating in terms of just the mechanics of turning pipes on and off. Like I was wildly off guessing how easy it is to turn on supply that you've turned off for a while. I mean, there are pipes that take like years to get kind of, they're designed to run. They're not designed to be flipped on. Yeah. And so all of the things that have been driving, disrupting supply and driving up commodities prices makes me even more interested in owning domestic supply and owning having access to the individual. companies, some of which that we've been investing in, that are not affected by that. So I would have never guessed at this combination, maybe in some part just kind of chaos and equity market

and kind of everything bubble, things coming down, everything has gotten really, really correlated in equities. And maybe there's this kind of correlation of one on panic days, but it seems like a really good opportunity. Yeah. Yeah. Yeah. Yeah, what do you think? One thing I've thought about it, I've called it going wildcatter, right? The market is forecasting that all these energy companies are going to take their huge cash flows. And the market's kind of not doubting the cash flow, but the market's doubting that they'll ever get the cash flow, right? The companies will go wildcatter and drill lots of wells that turn out to be on economic, do lots of awful M&A, something like that.

And that's one theory for the market's concern. So far, we haven't seen companies go wildcatter. like most of them are saying, hey, we learned our lesson in 2015, we're not going to go drill like crazy, we're going to take this cash, pay down debt, return its shareholders. Do you think that the market is missing kind of that go wildcutter odds, or do you think there's something else going on? My experience with kind of especially small cap companies in industries where, mostly extraction industries, but where the people involved are very specific to that industry, like, you know, certainly oil and gas exploration and production, wildcatters, and then, like, gold miners, like, their whole lives are denominated in that thing. Like, they'll never, they'll never be great, um, uh, asset allocators. There won't be that. They won't, like, pull back for five years or something. Like, they're going to spend whatever, uh, and biotech that certainly like to be the same thing too. But like, like, it's hard to, it's hard to have a lot of confidence in management from a

generalist perspective that isn't always interested in that industry. So it's always, it's always one where I, you know, I guess that's a reason why you'd generally like it's cleaner to own the commodity than equity. But that seems to be so overdone right now. And I don't know why it would be worse now than than usually. But part of my hope is that hope or part of my kind of bullishness is just market correlates with one in panics, and we're in kind of a mini soft panic right now. Maybe by the time we check back in the market, maybe time to do I'm just, full on back. And then secondly, the new kind of special sauce to now, or now is in the past, you know,

year or so, has just been how an investable this is for ESG mandates. and including huge, huge asset allocators, including huge pension funds and just mammoth companies with billions and billions of dollars that are really fixated on this measurement. I think the concept has a lot of flaws and I think how they implement it has a lot of flaws. But if we can be a counterparty to that,

that is just probably my favorite place to be in the market right now. Let me ask you one last question on energy before we can kind of wrap this up. A lot has been made of, maybe I should do a post or tweet on this, but a lot has been made of Warren Buffett, you know, he's been buying Oxy up into the rank, right? Like he's buying Occidental every day. And I think he bought a lot of Chevron in Q1 as well, right? So oil, gas prices were rising, Ukraine was having all this, and he was leaning into it.

He was buying these commodity prices. And I've been wondering, and it's not just him, right? There are other very sophisticated smart investors. I don't know if we can throw our own hats in there, who've been buying into the prices rising on the theory, partly the theory that prices are probably higher for longer, but also partly the theory that the stocks aren't moving anywhere close to as much as the underlying commodity is, so you kind of get a met discount. And I'm wondering, is there, like, signed there? Or I do remember Buffett bought a ton of Chevron in late 2007, early 2008,

and ended up selling it a couple months later on a big loss. So I wonder, like, is there something different this time? or are we kind of repeating the mistakes of the past where oil prices, energy prices rise, and everybody wants to run out and buy them. It's like, no, that's the time you shouldn't be buying them. Does that make sense? Yeah. And he, of course, has so many fewer tools in his toolkit than we do in some regards, right?

There's a lot of cool stuff. He looks at the X on or the shell. He's got four names he can buy, right? That's it. Whereas you and I can go buy the smallest EMP company with an oil spill off the California. if we want to. Yeah, I like ours better, at least in percentages. I might like his better in terms of dollars. But so, yeah, I think the big caveat is he has very few tools in his toolkit. If he has kind of a little bit of a thought on this, they're big enough that he can actually

put a decent percentage of Berkshire money into it. His timing's been wrong in this in the past. I think, no, I think it's a data point. I think it's congruent. And so yeah, I think that that's, it's a little like Activision, you know, peaking at what he's doing, you know, it gives, I mean, I would hate to have that the entire thesis, but it's kind of, it lines up. Yeah, just the thought that'd been in the back of my head and I hadn't really expressed it or even considered, reconsidered it since a few weeks ago. So I thought I'd throw it off there. We've been going for about now or anything else you want to chat about before we wrap this up or. No, I think it's an interesting time in markets. I think talking my book thematically, I think it's a fantastic kind of golden era for event-driven special situations, like both in terms of there's a lot of cool stuff at the corporate level. Deals are still happening. There's a lot of

transactions and I think the kind of boge of the kind of directional market is going to be easier and easier to hit. So I think this is a cool time for this stuff that we think about and hopefully continues to work this year. Yeah, you know, the common joke has been for the past the past five years or so, just owning Fang has been like hitting the button. It's been so frustrating. And hey, maybe we're entering the time where it's not, you know, owning Fang is the hard button and Robert body called it the revenge of the old economy. You know, with energy stuff and some of the other stuff we're talking about, it does seem like the real values, like they do seem to be real mispricing in some of

these things. So, yeah. Yeah, I mean, the thing about you have that pivot and then you layer the ESG thing on top of it. And like one of the best places to invest over the past 100 years has been in tobacco, which thematically, if you were just going to. to kind of try to predict the future. If you were soothsayer, like it would be the easiest soothsaying thing to say, oh, that's not the future. But they've been really good money-making

companies, really good equity investments. And I feel like ESG is going to push energy and more and more things into the category of it's going to be Philip Morris-like investing, where it's going to be great for investors because of this weird anomaly of a supply and demand created on who's willing to invest in it. And so I think that if somebody is rational, self-seeking, and probabilistic, I think that that mindset has been kind of depressing versus, versus, what is Kathy would call it, versus thematic investing. And I think it could be really optimistic going forward. Perfect. Well, look, this has been a lot of fun. I think we'll have to talk before then. But I think we'll do another one of these.

in a month and listen to that and look towards that. And maybe in person. And maybe we'll do it in person. Possibly. Talk to Zimm. Thanks.