Yet Another Value Podcast - Chris DeMuth's State of the Markets May 2024

Episode Date: June 3, 2024

It's time to welcome back Chris DeMuth for his monthly state of the markets. For this May 2024 edition, Chris shares his thoughts on: Tapestry / Capri merger, Enhabit $EHAB, ECIP banks, $INBX deal. For more information about Rangeley Capital, please visit: http://www.rangeleycapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Santangel's Review [2:05] What's on Chris' mind as we head into the summer: M&A, Capri / Tapestry merger [14:33] Enhabit $EHAB [24:29] ECIP Banks [35:44] $INBX deal Today's episode is sponsored by: Santangel's Review Finding the right hedge fund cap intro event isn't just about the size; it’s about the value it brings to your time. This month's sponsor, Santangel's Review, offers something unique for fund managers and allocators. Founded in 2010, Santangel’s hosts three Cap Intro Roundtables each year - two in New York City and one at Fenway Park in Boston. These events stand out for their focus on quality over quantity, attracting some of the most prestigious endowments, foundations, and family offices worldwide. The secret sauce: Santangel’s spotlights undiscovered talent. Managers you don't necessarily see at other industry conferences. Attendees take part in eight one-on-one meetings, intermixed with ample networking opportunities. In an industry built on relationships, Santangel's fosters some of the most valuable connections. Just go to Santangels.com— S-A-N-T-A-N-G-E-L-S dot com to learn more and request an invitation. If you’re a manager or allocator who is serious about maximizing your time, you'll want to be a part of the Santangel's Roundtable. Click here: https://santangelsreview.com/

Today's episode is sponsored by Santangil's Review. Finding the right hedge fund cap intro event isn't just about the size. It's about the value it brings to your time. Santon Joel's review offers something unique for fund managers and allocators. Founded in 2010, it hosts three cap intro roundtables each year,

two in New York City and one at Fenway Park in Boston. These events stand out for their focus on quality over quantity, attracting some of the most prestigious endowments, foundations, and family offices worldwide. The secret sauce, Santon Jules, Spotlights, Undiscovered's talent. managers you don't necessarily see at other industry conferences.

Attendees take part in eight one-on-one meetings, intermixed with ample networking opportunities. In an industry-built-on relationships, Santangels foster some of the most valuable connections. If you're a manager or allocator who is serious about maximizing your time, you want to be a part of Santangil's Roundtable. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean a lot, if you could rate, subscribe, review wherever you're watching or listening to it. You know, if I get 20 reviews today, I think I'll shave the beard.

I guess that only applies to YouTube, and people probably don't even care. But that's what I'm going to set the bar for shaving the beard. Do you have to be good reviews, five-star reviews, or just any kind of... Oh, five-star reviews. If they're one-star reviews, I'm growing the beard until it's longer than Constellation Software. Chris, how many reviews did I get for you to shave the beard a few months ago? Oh, I didn't check. You gave yourself away for free, Chris.

You gave it away for free. Anyway, I'm excited to talk to my brand of the founder of Rangin Capital, Chris, the Muth. Chris, how's it going? It's going well. Great to be here, Andrew. Let me start with the disclaimer. Nothing on this podcast is investing advice. That's always true, but particularly true today. I'm looking at a list of eight different topics. We're certainly not going to be able to get to them all that Chris and I have. But as I look at them, two of them have a chance of zero. One of them is, you know, the shareholders are up in arms. Two of them are, the management's pretty questionable. So people should just remember, we're talking about a lot of different stocks. All of these carry extra degrees of risk. We're going to go through all. Neither of us are financial advisors. Please consult one on your own and do your own work. That all of the way, Chris, it is heading towards the end of May, 2004, heading into summer. What's on your mind as we head towards summer?

Well, when it comes to investing, a little bit of M&A. I mean, I'm not in love with arbitrage these days, but I guess the way I think about the public stock market and prices and any work we would do on fundamentals or game theory or anything, I largely think of M&A as kind of the report card in terms of what are these things really worth? We're not going to do better necessarily than somebody with inside information trying to buy every share in a company. So when I look at deal multiples, when I look at what industries have a lot of consolidation, I like keeping a pretty close eye on M&A even if I have a pretty small exposure, almost no exposure to merger ARB. And maybe it's just I started off doing merger ARB.

So it's kind of the kind of thing I think about. There's one that's really literally interesting to me today. I owe no position in it today, which is Capri. I'm going to get weird search engine ads because I'm on so many like purse blogs and purse related things. I just need some side note to AI. I have no interest in ladies handbags. other than this deal. When I first cancer range, I remember one of the first things I was looking at was a

a breast implant company. And first I felt weird because I was Googling at work. And then I remember our EA Jane at the time, she walked in. I had all these images of breast implant. Oh, no, I'm going to get it. And then I do remember for a while my search history was very strange because I spent all this time looking up, you know, different breast implants and different companies and sizes. So the handbags are going to be weird.

but I have not that word. So I've been thinking a lot about handbags. And I think since last we spoke was the kind of market definition hearing. I think it went, I think it went extremely well for the government. I have to really cleanse my mind from any sort of aesthetic or philosophical bent. which I just, when I listen to them, I realize they sound disdainful and annoyed about the companies existing to me. I just kind of get a little irritated at their sense of irritation. You know, these companies always want to know why we're trying to ruin their

deal. They want to, they just want to know. They want these really, you know, they don't want to accept our market definitions blindly. And their irritation, I have to just kind of be zenny and kind of try to be objective about it. And being zeny and objective about it, and being zeny and objective about it, I'd say it went very well for the government, went very badly for the companies. I think the judge in her demeanor, who had, based on her tempo, like she decided the whole thing ahead of time, and she just didn't decide in favor of the government's keeping secret the exact market definition until literally the moment the experts come in late in the trial, she just sounded as if it was kind of had this blasé attitude that just sounded ultra deferential to the

government. So I just, if this is the person I have to appeal to, that is a very different question than appealing to in a clean room what I think is objectively correct. You know, I don't want to spend all our time on Capri. Sure. Tapetry, but I guess the two things I would yes and you, there is one, you know, there is a lot. I think one thing we underestimated in spirit uh spirit jebelo the merger which uh you know sent me on on a trail of a thousand tears uh the there's a lot of difference to the government in these cases right the people the judges who are doing these generally have done one two maybe zero antitrust cases in their entire careers so they have a lot of deference to the government they are government employees they they believe in the government

and they have deference there so i think a consistent thing you and i i've probably talked to eight lawyers all of them are all over the map on if they think this deal will get approved or not, but all of them have said something similarly to me of, look, I would not have brought this case. I think this is a silly case, but even if they think the government has a bad case, all of them wouldn't have brought this case, but they say, there is a lot of difference to the government here. This judge was a bad draw for them. And while I wouldn't have brought the case, you know, the government, all they have to do is

win on market, and they're probably going to win this case. and deference to the government, the judge here having no antitrust experience, being a Biden appointee. They say, you look at those, and it's going to be very, very tough sledding for the companies. And I guess how I was relating to Spirit was, I liked the judge. I thought Spirit had the best of it, but that was a much more complex case there. And I think in the end, the judge gave just an enormous amount of deference to the government. And here, it's a little bit easier, right? You got two handbags merging.

You can imagine handbags. the government, a lot of different. So I don't know if what I didn't go. And a younger judge appointed by this administration who could get upgraded by this administration if Biden's reelected, right? So you have a real focus from the FTC, and you look at a kind of ascendant young FTC chairman who is the kind of ally and weapon of the most ascendant, energetic, progressive wing of the Democratic Party. So all of her kind of political sense would be side with this administration. And how much

trouble do you get saying, yeah, sure, to the administration that you came from? Maybe it's my naivety, but, you know, until a couple years ago, I would have thought most judges, not all, you know, there's always like the district court judge in like East Texas who always rules per on the conservative side or you know there's an Oregon judge who always ruled on the liberal side so liberals and conservatives were trying to venue shop there you know I thought like 90% of judges were kind of neutral and maybe they had liens but they didn't really play politics but if the past couple years has taught us anything like a lot of the judges do have real political liens and they are bringing them into the court case and these are rational human beings even if the administration

as you said hasn't said hey rule our way on this case and we're going to promote you to you know, to the next level of federal judge, the judges can do the math on their own and say, hey, if I'm ruling for the administration that appointed me, I'm probably more likely to get that bump up in stature. And yeah, the one other thing I wanted to mention on Caputti, before we were, you know, the one thing that jumped out to me in the tapestry response to the government, which again, I would favor the tapestry case, but I have to call it like I see it and I have to give a lot of difference to the judge. The one thing that jumped out to me in the tapestry case was how much they talked about how disastrous Michael Coors is. And that was interesting

to me for two reasons. Number one, the downside of this case, right? The downside's an open debate. And when you've got the company that's buying Michael Coors saying, hey, you know, sales decline, the strategy is awful. Our strategy is coming here and turn it around. Like, I'm really worried about the downside of this breaks, right? I think the downside of this breaks. Maybe Capri rips the Band-Aid off and says, hey, it's getting even worse. Like, we need to invest tens of millions of dollars of extra marketing spends, whatever it is. So that's one thing that concerns me on the downside. On the upside, I was reading that and saying, hey, similar to JetBlue Spirit,

if you're writing in court, Michael Corr's is a disaster. Our role, our job here is to come in and turn it around and that's what we're basing this merger on. It gets harder to claim MAE or try to walk away. So I wasn't sure if you thought that was a positive or a negative. Negative, especially a world in which the deal breaks and you're not allowed to sell. So, you know, I would say if you look at iRobot, if you look at Spirit, and if you look at what would have happened to Horizon in a world where now you're on your own and you can't sell anymore, that's now criminalized. You know, it's a bleak, it's a bleak turnaround in a market segment that doesn't usually do turnarounds.

Usually you just lose because people want the new thing, not the old thing that's kind of trying to be warmed up again. So, yeah, and I think it's bleak. I would take the under on 25 as a standalone right now, but we probably will see. The last little thing I wanted to just mention was we do have a less redacted version that just popped up. The hot docks not only didn't look so hot to me, but they looked exactly like the kind of cliche. It's funny, my cliche about marketing hot docs as opposed to lawyers or people who make pricing decisions, CEO, CFO, kind of senior people on pricing because there's lots of banter that's totally benign and my kind of analogy has always been you know if a football player says I'm going to kill the guy

next Sunday that's not a death threat that's just people talking locker room talks not illegal and one of the lines was literally coaches marketing officers are saying we're going to kill cores and and again the government thinks that that's super interesting ha ha we got them I think that's how a human being talks about a competitor. I know you people work in the government. You don't have competition, but this is just horrible. You know, there's some divisions of the government that has competition where they might say we're going to kill them and they might mean that literally, Chris.

Yeah, yes, right, right. You're going to drone strike some American. But when somebody selling ladies handbag says we're going to kill somebody, that's just a person talking, good Lord. And so I take that to me. very little. They take it to mean quite a lot. It was literally the line. They kind of had marketers bantering. I mean, marketers, they say a lot of things. They tend to be extroverted people. They tend to be interested in their product and they're jabbering all day along. And so you can

find something that they consider to be a hot dock. And if this kind of thing is illegal, then they will be able to block every deal. But in the $100,000 price range, they call that an over 50% market share. That's just clearly completely excluding huge numbers of more kind of de novo-e, startup-y, you know, they're talking, I mean, they have some kind of corporate standard for coming up with that, or you just can't get there to that market share. But in any event, docs are out and more of the verbiages out that kind of starts to vector-es. on the market that they want to claim is being hurt by this deal. Today's episode is sponsored by Santangelo's Review.

Finding the right hedge fund cap intro event isn't just about the size. It's about the value it brings to your time. Santinjol's Review offers something unique for fund managers and allocators. Founded in 2010, it hosts three cap intro roundtables each year, two in New York City, and one at Fenway Park in Boston. These events stand out for their focus on quality over quantity, attracting some of the most prestigious endowments, foundations, and family offices worldwide. The secret sauce, Santangels spotlights undiscovered's talent.

Managers you don't necessarily see at other industry conferences. Attendees take part in eight one-on-one meetings, intermixed with ample networking opportunities. In an industry-built-on relationships, Santangels foster some of the most valuable connections. If you're a manager or allocator who is serious about maximizing your time, you want to be a part of Santangil's roundtable. Last thing on Capri, as you and are talking, the stock is trading. just above 34. You know, if you use the downside as $25 per share, then the market is pricing in about 31% odds that the deal goes through. Fifty-seven, if the deal goes through, 25 if it doesn't. If you use 20, the market's pricing in about 40% odds. I think you would probably agree

with me that that's based on my work. I mean, I would approve the deal in a second, but based of my work, that's probably about right for what we've seen so far. You can feel, and again, that's just kind of reading the cards, the deference to the government and everything. Let's turn to... Yeah, I don't have a strong reaction to the market price here for that. Let's turn to... What do I want to talk to? Let's turn to Ehab, because this one, you've done a lot of work, and I've just kind of been following it out the corner of my eye. The basics here of this had a failed strategic review, and then an activist immediately stepped in, but you have done all the work here. I only, like, kind of followed some of the VR. So I'll talk us it over

to you. Why is Ehab so interesting to you these days? So I know you and I have both read the Joel Greenblatt, you can be a stock market genius. I actually just bought a big stack of them that I gave to my kids and a nephew who's interested in the stock market saying, read these, find a modern example. And it's so funny. Whenever somebody in high school or college says, hey, I want to get into investing what I always say, read, you can be a stock market genius. Like if you're interested in activist investing, forget a lot, some of the stuff stated, but just the mindset of picking the right games and finding these nooks and credits in the market, it's the best book I've read on investing, and maybe it's a little cliche, but I will tell you, I tell it to everyone. I'd say

maybe 5 to 10% of the people I give the book to actually read it, which probably speaks, you know, those are the 5% to 10% who are actually interested, but go read that book if you haven't read it. I guess every listener here has, but yeah. And if you're really interested in a topic and you want to discuss it deeply with people who actually care, give them a reading assignment first because the 5 or 10% of people are the 5% or 10% of people you want to follow up with as opposed to just using your own balance sheet of time for their edification when they don't actually you can't help somebody on something that they don't care about as much as you do. And so in any event, this is a, so I told them, you know, read the book, come back to me with a thesis

on something that's actionable today and I'll buy you some shares in it and then we'll kind of start going on the topic. But this is an interesting one. It was a spinoff. And ticker EHAB and Habit, it is home hospital hospice care. And they have had a rough go of it since the spinoff stocks them poorly. And shareholders have kind of been pushing kind of a fairly constant effort to push them on getting costs under control, kind of improving operations. it seems to be undermanaged. They did a strategic review that resulted in no deal. But they did it kind of under duress,

or it was sort of a passive-aggressive-aggressive strategic review. Fine, we'll do a strategic review and did it, but they were kind of happy when it didn't work in talking to people involved, there were bidders that had first meetings they thought great, went great, and then they wanted follow-up meetings, and the company just wouldn't follow, like, the people nominally trying to sell a business wouldn't follow up with bidders that were interested after the first round. They wouldn't contact private equity.

They wanted to do a strategic deal at a time where, and actually the same phenomenon has come up today and a different thing we're following, but where one of the obvious bidders had a conflicting deal going up at the same time that maybe a slightly different timing would have opened them up. So they wanted a strategic deal, two strategic bidders were kind of out of the market, could have come back later, one, and express some interest. But it was a really flawed process. It was a disorganized process. People couldn't get the information they wanted. And it resulted in no deal. And now a shareholder is coming forward with a alternative board to refresh the board and refresh the management.

Let me just ask you a question. Sure. I'm with you, but every failed strategic review I've heard of, you know, if you talk to any shareholder involved or failed bidder, or sometimes the failed bidders, but especially any shareholder involved, they'll be like, look, I'm hearing that the process was bungled.

Like, management is terrible. And, you know, for a lot of these, I would certainly agree with that. Again, I haven't done enough work on rehab to. comment on that but they'll say management is terrible they're conflicted they didn't want to lose their jobs you know this is a bad management team so if they they're entrenched here if they lose their jobs here they know they're never going to get a C sweet job elsewhere or something so they're trying to entrench themselves they did these meetings to try to play play key shareholders but you know I talked to five bidders and the bidders said oh management wouldn't give me

the information they wanted they stiff on me and I was kind of wondered like how much is that true versus how much is that you know if you and i showed up to pick a five billion dollar company that's running a strategic review right now you know i showed up and said hey we'd love to do we'd love to bid you know the company might have some questions like hey Andrew Chris like do you have financing and they might kind of stiff arm us and then if somebody talked we'd be like oh yeah we love this company we wanted to buy him for seven billion but they stiff armed us they wouldn't they didn't meet with us they gave us a 20 second cursory phone call I was kind of wonder like how much is this scheme of telephone? Like, was it, was it really bad? Because the bankers are involved, you know,

like, was it awful? How much do you kind of discount that? Does that make sense? I mean, it was Goldman Sachs, and they named drop their bankers at Goldman Sachs really aggressively trying to say they did a good process. My thought of that is, geez, Goldman Sachs, probably the best people in the world to do what their clients want, whatever their clients wanted. So their clients are happy with no deal. So yes. And I hear you, but like, if I'm Goldman Sacks and I'm going to my client list of buyers and saying, hey, we're selling this thing. Like, they're taking a little bit of a reputation hit if they know that management like doesn't, just flat out doesn't want to sell or this is a sham process or something, right?

Like, that's kind of where I'm saying that. Yeah, but in this case, you're dealing with interest from very large reputable private equity shops that were explicitly carved out of the process. You're dealing with United Health and Humana who had other deals and other. things going on that even day-to-day, I mean, just shifting slightly, could have brought them back in the process. And in the back of my mind is, look, I think the United Health and Humana is going to own this thing five years from now, very high level of confidence.

There's two ways to get to the end from here. There's really no reason for this to be a publicly traded company at the scale in this one business as a standalone, which is why the whole industry is now basically private. this is a kind of standalone public hospice like this at this scale, really the only one, and there should be zero probably. But I would look at this and say, you could sell it to private equity like today, and they could have a really clear exit a few years from now, because I think it's very improvable in a way that private equity would really like it.

Or shareholders could get control management and board refresh, more shareholder-friendly in June, And then we go into, which, oh, by the way, coincidentally, we come up on the two-year anniversary of the spin, which is then the IRS safe harbor. So one of the issues here is they ran a whole process within before the end of that normal safe harbor, which makes it, it's not illegal. It's simply you have a presumption that's really adverse to doing M&A within the two years of the spin. If I remember the rules correctly, you can sell within a year of a spin, but the IRS is going to be all over that. Like, hey, was it the intention of the spin to sell? Like, that would get you in a lot of trouble if they could prove the intention. You can sell within two years, but it has to be to, you can't have had any discussions of sale with the people who you were looking to sell to within the two years.

So, you know, to me, that does say, hey, maybe EHab shop themselves to Humana. to the natural buyers before the spin, and then they did this strategic review. No, because they were only going for strategic. So, yeah, yeah. And then also we have the possibility of a new administration early next year. So if this is going to be a public company solution, I think either a more shareholder-friendly board or a private equity shop

would do a lot of the same things in terms of cost containment and so forth. But either one would take well into next year. If we had a new administration, it might be a friendlier. This is just a very regulatory, unfriendly administration specifically to health care, specifically in United Health. And, I mean, they are putting out almost daily kind of threats to these companies on antitrust. So, you know, BAMS. If I was United Health, and you came to me right now with any type of strategic merger,

I'd be like, what the fun are you thinking? No, come talk to me in six months because even if we want to do it, we do it in six months from now, at least we'll be able to, we'll have a lot of clarity on how much regulatory downside we need to build in, you know, change of administration. There's just no chance I'd be looking to enter into any strategic deal right now. At some point, you're just like, I'm not, I don't even want to think about it. I mean, Amazon, after a robot, United Health, after anything they try to do, you know, just, just wait. And look, if 60 months and Biden wins, you can still do deals, but then you're like,

okay, we know we're going to have an, a hostile administration, we need to build that into the merger contract. We need to build that into the break price. But why would you do the deal now when you have regulatory uncertainty where it's either, hey, we continue with hustle or we get what might be the most friendly administrations to deals going forward that we could possibly have? Let's move on. Sure. Let's see. I'm looking. You know, the one other thing I really want to talk about here is ECIP banks because there's some movement here.

We saw a sale, which I thought was interesting on all hosts of reasons. haven't divin dove quite as deeply into the sale as I want to, but I have given into a lot of ECIP banks. So I just want to talk, and I know you and I both talk to a lot of bank investors, so I just want to toss it over. So what do you think of the sale I mentioned? What do you think of ECIP banks in general right now? Sure. I think the opportunity is fantastic. I think the sale split the value almost, I mean, it's kind of quint. I don't know if they were thinking about the same way I am, but if I looked at what I thought the target could have been worth,

it was literally a premium that got half of the very full value, if you included largely writing off the E-C-I-P. And the sale, what was the ticker? Okay, so it's a C-B-C-O-B-C-O-B-A, ticker C-B-O-B-A.

Yep. And the way to think about it is they sold for an 80-1 premium, which was $14 per share. And that was, you know, a very full price if you ignore DCIP and a very soft price if you took it fully into account, right? So it was, so I believe what's interesting to me is when the market's really going to give this notices, at some point late this year, early next year, they're going to close the deal. And I already

have this question into the buyer, I have not gotten this answer yet, is how are they going to mark on their books and the buyer's books, these prefs? Because if they mark them anywhere close to zero, this deal will just be a bonanza. It kind of, it will present to the market at bonanza doing a deal like this. And then they're just going to be layup after layup, right? If they're very cautious about that market, it's just an accounting mark, but they're going to have a choice of how revelatory to be about how good these values are. And just remember this is a liability. So the more you mark it down, the better the deal will look. The other interesting thing to me about this deal is from my knowledge, and this is the part where I said I need to spend a little more time

studying this. So the buyer, CBC, they are not an ECIP bank. And I don't think they're intended. I don't think they're intended like ECIP, all the ACAP money went to bank. that we're lending into, you know, smaller, less focused communities, particularly diverse communities, that type of thing. I don't think CBC has, I mean, every bank's got a little bit of focus, but they don't have, like, the target demographics. Obviously, they're buying CBOBA, so they're getting some of that. But I didn't think a non-ECIP bank would be able to buy an ECIP bank and hold on to that

ECIP funding, clearly these guys do based on the price that they're paying, right? So that's just an interesting signal to me where if that's the case, then all these ECIP banks that have this great funding, you know, before I thought they all had to like kind of devour each other. But if community banks and credit unions can buy ECIP banks and hold on to that funding, all of a sudden it's like a free-for-all. I don't know if that makes sense or if you have any thoughts there. They are allowed to, the less attention. the better for that regulatory issues. They did regulatory approval this year.

There's absolutely no, there's nothing on the books that should slow this down at all. And there's another strange problem that you start to create when you're dealing with

whether you're helping or hurting the interests of certain minority groups when you're doing legislation that's clearly about the legislation or rulemaking or regulatory that's specifically about them. But there's also two ways you could look at it, right? You could say, oh, we're helping these organizations by blocking their selling. But then you could also say, hold on, wait a second. So you could be in an ethnic minority that's not allowed to get a premium that's not allowed

to get a golden parachute that's not allowed to get all these good things that all these other companies and management and boards wants and they're actually trying to get they're the second class and so it's a little bit like menthol regulation

and cigarettes right you could say this oh this very kind of paternalistic view of something that's specific to a specific ethnic demography needs special scrutiny

but I could look at the same facts and say that might not be helping them that might be hurting the same people you're trying to think about so there's nothing that should prevent

a deal like this And if it goes through smoothly, I think it will open the floodgates. You know, just on the hurting of communities by blocking deals, the other thing is, I've been thinking about this. I've been thinking about ranting on this. So I recently got a Bank of America account. And if you download the Bank of America app, and most of my accounts are at Chase, if you download the Bank of America app and then you use the Chase app, the Bank of America app is like it's from 2008. I mean, they literally, they bought Merrill Lynch in 2008, 2009, and the sites are like run on, I would say, a 2008-2009 infrastructure. They connect in a weird way.

If you want to open like a Merrill Lynch account and Linketeer bank, they connect in a weird way. It's old. And as soon as I opened that and Chase has a very modern website, very modern app. As soon as I did the two of them, I was like, oh, you know, I bet you it's worked for 10 years. But I bet you would continue working short Bank of America. JPMorgan. That's not investment advice. I'm just saying, but the tech is so bad. And you know, banking is increasingly a game of scale. And if a literal trillion dollar company like Bank of America, their app looks like it was designed in 2008. And now banking apps are

unique because there's lots of things with consumer protection. And, you know, that's an app that it cannot get hacked because you'd have real problems there. So I understand there's unique stuff. But when you look at these small banks, like there's a reason the small banks are ceases to exist. I always think of this Wall Street Journal article with a local banker who he was like, it's really hard out here. And they're like, hey, where are you? He says it's really hard out here. We're losing all these customers, the Bank of America and J.P. Morgan because they've got great apps and you can deposit checks on them and stuff. And they're like, oh, you know, where are you making? He was like, most of my banking accounts are at J.P. Morgan because I love being able to deposit checks.

And it's like, this guy's the CEO of this community bank. And he's like, I can't even deposit stuff at my own bank because I want to do mobile check deposits that I can't offer does so long sort long winded way of seeing if you're blocking these e cip banks and these small community banks from selling because you want them to have this special place in the community well you might be like sending to that community to 1900 style banking right they can't invest into the tech they can't have modern infrastructure eventually you might have like technological risk where hey these banks are far behind on cybersecurity and they're getting hack like there's all these issues that it sounds nice hey we want these local banks but in practice like It might be better to let the markets decide where the money flows.

Anyway, I rambled a ton there. That's why it was a ramble in tech. But any thoughts there? The whole program that intended to support this very specific list of banks, I think, was very, it's already dated. It was very indicative of the time and place that it was established. I don't think it has a big future. It's huge for these institutions, and it's huge for me.

me, but it's tiny for the U.S. federal government and department of Treasury, Treasury Department. So I think that the paradoxes and weirdness of it can kind of just go away without them having to double down and defend it. But you're always going to have this problem. If you don't have price controls and you have more and more regulation and rules around what is allowed for financial tools for lower socioeconomic areas or people that sniffy rules saying this shouldn't be allowed, that shouldn't be allowed. It comes very close to saying poorer people shouldn't get to bank, shouldn't get modern things. Because if there's not a market clearing price for them, businesses will just pull away. They just won't do it. And so there can be, I mean,

government policy can always have unintended consequences and perverse effects, but this is a laboratory for perverse effects where you just are explicitly hurting the same people you mean to help. And it's not just a numbers game in terms of the population, but poor people have less money. It's just a very, it's actually a fairly small market. So if you're dealing with huge national corporations, and you start telling them what they can and can't do, at some point, it's just easier just to pull out from an area than it is to follow lots and lots of rules. So I just think that there's lots of scope to get it, not just kind of wrongish, but completely backwards in terms of policies in this area. Fortunately, I don't think they're

really going to push this one, but it's just kind of a time and place where these very specific banks were able to take advantage of it. I think there's going to be a lot more deals like this, Ponce is one. I think we've probably talked about in the past PDLB. I've actually taken way down my upside on Ponce to, it's just a coincidence that the numbers all, and maybe, you know, they issue shares at the same time and price, but I think their deal will work out about the same. I think they're going to get sold. I think they're going to work out about the same as Saba did. It actually ends up being the same $14, just if you use the same metrics and the same discount on the prefs that Subboa got,

his Ponce would get $14 a share as well. Today's episode is sponsored by Santangil's Review. Finding the right hedge fund cap intro event isn't just about the size. It's about the value it brings to your time. Santon Joel's Review offers something unique for fund managers and allocators. Founded in 2010, it hosts three cap intro roundtables each year, two in New York City and one at Fenway Park in Boston. These events stand out for their focus on quality over quantity,

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I think they would actually go for a little bit more just because they got a little bit more book value there. But, you know, the stock's at nine. And if you're saying 14, who am I to look that gift horse in the mouth? Last thing and then we'll wrap it up. You know, you mentioned you can be a stock market genius. I just, it's the last day. So by the time people listen to this, it will be a different company. but this i nbx deal yes i we don't even have to like talk of it but as you know this is it closes

today so there will be an eye by the time people listen to this this is today's may 29th if you listen to it i don't know may 31st june 3rd wherever comes out there will be an i mbx but it will be the spinoff but this i nbx deal you know it's completely fascinating to me i wrote it up on the premium side but somebody put it succinctly to me and you recently they're like look this is a merger with a CVR and a spin-off, a non-traded CVR and a spin-off, I'm not sure that that's ever happened in the market before. And now, look, it could be a huge opportunity. It could be a disaster. Who knows? But when you have something that's never happened in the market before and it fits into the CVR and spin-off category, which are both mentioned in, you can be a stock market

genius as like areas of opportunity, like, that's just, it's worth like at least perking your eyes up. Like, it's really, really interesting. I don't know if you want two minutes on that. I love things like this. I love kind of one-offs. I love just doing the best you can, trying to come up with some valuation. If you think about the constituency for doing work on something like this,

one of the big problems is you can't put together a diversified portfolio to something that's truly unique. And so I think it's exceedingly likely a deal is going to close. I mean, there's not, it is essentially, it's unconditional. It's supposed to close in less than 12 hours. I hope the deal closes. We've had one or two deals out of 25 years of looking at M&A that looked to me unconditional, that had a penny or two spread that broke over the buyer balking.

So it's just 99.99% chance. It could, like, you know, if there was a clinical death last night that with the, it's IMBX, what is it, 101 is what they're selling to think? If there was a clinical death. possibly the buyer would like pause and claim M-AE but at this point it's gone unconditional the share it's very rare once the shareholder buyer vote pass but yeah look it's gone unconditional it should close I just so so we probably get but if you were a kind of long only mutual fun guy and you just were trying to not get fired and you didn't have an

incentive fee so you kind of wanted to be you know good enough is good enough and you didn't want to get yelled at this would not be the kind of question you'd be asking yourself because it's just you're going to get the 30 don't you're going to get the cash, but it's entirely possible that the CVR doesn't work and the spinoff trades poorly, right? So I'm just saying that it's easier when you can do at least a dozen of something to actually get some semblance of the expected value you compute, right? Like you could do beautiful work valuing the CVR and the spinoff and lose money in this from 3431, even that of the 30. So just throw away a throat clearing that I think you get the 30. So you get the cash.

and then you get these other two components. Yeah, having them, both of them are really cool. And then when somebody like you or I are trying to think of our own judgment, we have a view, but we also want to really understand what the market's telling us. And so on something like when you're talking about Capri, you can say, oh, if we stipulate this downside, then we can say the probability of reverse it. It's really hard to say, what is the market saying? Because you need to both think about the CVR discount probabilities and reasonable

valuations for the spinoff. So kind of backing into what what your view is pushed up against is kind of a brainer. The only other interesting thing, I agree with everything. The only other interesting you said, you mentioned the mutual one. I did a post on this a while ago, but with CVRs, and this certainly falls into it, but the CVR I was mentioned was the stock was at like 300 and there was a CVR that the management team said was worth 10, but it wouldn't pay out for present value was sent, but it wouldn't pay out for five years and, you know, it was kind of 50-50. And one of the things I said was, look, this is really hard to get to fair value.

Let's say everything manager said was true, the fair value is 10. That's really hard because if you want a position in the CVR, you know, the stock's at 300, you need to put on, to get a 1% position in this thing, you need to put on kind of a, what, about a 100% position in this. stock to and have it closed for you to get a 1% position in the CVR and you know similar things are having with IMBX right now the stock's 34ish and you're getting $30 in cash so the $4 is made up of the CVR plus spin you know if you put on a 20% position in IMBX which again consult financial advisor consider all the risk everything but if you put on a 20% position tomorrow

you all have gotten just about a 1.5% position in the combined CVR and spin so even if you are like I am max, max bullish on this thing. It's really hard to get the position. And then on the CVR side, as you mentioned, if you're a mutual fund, if you're at a pod, Cvarr is not going to pay out for four years. You might be on not just your next job. You might be on your next next job. So.

Is he a learned or would have fired you like 10 times by the time you get the CVR or not if you had even a slight drawdown? Yeah, no, I think it's a big argument. It's an example of why a fund manager. somebody in your role should have as clear but also as broad mandate as possible to do what really makes sense for your LPs to get the best expected value and to not have a lot of arbitrary constraints because let's just say the $30 is certain you need to slosh this nominally huge amount of money in and out to get what you think is a sensible risk

as opposed to a nominal risk, so you get the right risk in the portfolio. I think at a lot of funds, that would trip all sorts of, that would trip all sorts of rule violations. And so it's important to not have rules that are dumb rules because I'm not worried about people not following the rules. I'm worried about people following the rules

and then not doing what makes sense. And then the LPs say, why didn't you make me a bunch of money on this? Well, I was following the rules. And so having a broad kind of loose mandate that's really based on, ideally as far as possible, reasonably likely downside in an adverse outcome, which in many cases, zero.

But in this case, I really think it's fair to say is 30. No, I agree with all that. I just, I'll remind everyone, you know, not invest in advice, please consults a financial advisor. Again, IMBX, not only we're talking about something crazy risky, by the time you hear this, it's going to be gone. The spinoff's done. The CVR's on traded.

The merger finishes because we're talking, May 29th, unless something disastrous happens, this wrap up. But, you know, this is... I think we know one person who sizes these things more dynamically than we do, or that I ever would, without naming him who is like, whatever I hear, his percentages. I'm like, oh, my goodness, I'm not nearly that brave, even when I'm pretty sure I'm right and pretty sure I'm being... I know, but it is interesting because, like, this is, if you read, I mentioned this

in the, it was on the premium side, so unless you're a premium sub, you're not going to see it, but I mentioned this article. read the merger background, you know, Biohaven, I mentioned that in the podcast with the Asif Suria, Biohaven had a very similar deal where they did a spinoff. The spinoff came out at like five or six and it traded up to 30 within 18 months. You know, if you read the background of this IMBX, the management team is constantly saying, we want the Biohaven structure. Give us the Biohaven structure. Like we and there's a lot of similarities between IMBX and Biohaven. So, you know, while the CVR and the merger spread here will be done, but when you hear this.

the spinoff opportunity might just be getting started. So, you know, the writer was on the premium side, but there's a free wreck on the public side. Anyway, Chris, rambling. It's been almost our, I think both of us have top, especially I want to talk to you about one more thing offline once I stopped this. But this was great. Excited for the summer.

Excited to get out to New Canaan in the near future. And we will chat soon. Very good. Thanks, Andrew. A quick disclaimer. Nothing on this podcast should be considered investment advice. Yes, or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Thanks.