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

Episode Date: September 28, 2022

Chris DeMuth joins the podcast to discuss the state of the markets in September 2022 and what’s catching his eye in event driven land, including an aggressive anti-trust regime and the potential for... a bump at Swedish Match.Chapters0:00 Intro1:50 What's on Chris's Mind3:10 What's happening in Antitrust8:25 Does UNH's win in CHNG change the environment10:45 Does European regulation impact the antitrust environment?15:55 The ATVI / MSFT deal23:30 Is it ok for regulators to be this "outgunned"?27:00 How do the November elections impact the antitrust outlook?30:00 Quick TGNA discussion31:45 Swedish Match35:55 Is SWMA really undervalued?40:20 Would there be alternative buyers for SWMA?41:20 How FX impacts SWMA

Transcript
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Starting point is 00:00:42 at composer.competor.com. All right. Hello. Welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review it wherever you're listening to it. With me today, I'm happy to have on my friend and the founder of Range of Capital, Chris the Mewth. Chris, how's it going? It's great. Nice to be here, Andrew. Great. Great to have you on for our monthly talk. Let me start this podcast the way I do every podcast. First, a disclaimer should remind everyone that nothing on this podcast is investing in advice. That's always true on this podcast, but probably particularly true today because we're going to be hitting through a bunch of securities, you know,
Starting point is 00:01:21 people should just keep in mind, not investing device, consults a financial advisor. And then the second way I start every podcast is with the pitch for you, my guess. But don't have to do that today. This is like our 10th one of these. So people can go back and listen to the first nine for a full pitch. Anyway, it is September, is today September 27th? Late September, September 26th. We're talking in the morning.
Starting point is 00:01:43 Lots going on in the markets. It's been pretty crazy out there. So I just want to pause there and ask what's on your mind today? I've been thinking a lot about antitrust over the past week. I've been thinking a lot about tobacco. over the past week, which we were just chatting about a little bit. Those are probably two of my biggest thoughts. It's been a exciting week for companies that have chosen to go up against the government in court. We have very aggressive regulators right now, and they've been suing to block
Starting point is 00:02:20 deals. And one of the jokes I heard amongst the antitrust bar is if we just all surge at the same time, they don't even have enough regulator, they don't even have enough litigators to block everything. We could just kind of bumrush them and see, you know, they're going to have to want something through if they really want to sue everything. But they'll run out of lawyers. But there were a couple developments there. And then as we were just talking about tobacco. which is one of my favorite industry topics. Great. Why don't we start an antitrust?
Starting point is 00:02:57 So you said last week there were a couple of cases that were kind of setbacks to the government's, I guess, antitrust arguments. Why don't you talk about what those are and kind of how they impact for, you know, there are quite a few antitrust cases out there for investors to look at remaining. So how those impacts the remaining antitrust cases. Absolutely. Absolutely. So a couple big speeches, both the head of the FTC and DOJ. I feel like the FTC chair has gotten a lot of press and attention, and the DOJ, AAG, the equivalent and the other agency has been kind of like catching up a little bit, kind of competitive speeches, because even though these two are very aligned, the agencies are always in a little bit of competition. I would say that they're both very aggressive and kind of reminding everybody they mean what they
Starting point is 00:03:54 say, both aggressive in terms of bringing their own kind of ideological focused antitrust and aggressive in terms of not really worrying too much about the prospects in court. The same kind of moderate voices that have historically been fairly bipartisan kind of measure their successes in wins and losses in courts. They're both pragmatic when they deal with companies, and then unsurprisingly, they also want to bring cases that they will win, and they will frequently back off if they have a problem either way, either a problem often being convinced by their staff that they're right or a problem prospectively in their estimates of the likelihood in front of a judge. These two are not that worried about either. They're more aggressive than their staff, which I think has never been the case before. Typically, the staff likes bringing cases. And even under Obama, you had a staff wanting to bring more cases than the, I usually say grownups, but then the political appointees. But this is the case where the staff sometimes saying, I don't know what you're
Starting point is 00:05:04 talking about, and they just want to bring something, especially when it relates to industries that are important to them, big time. And if I could just jump in there, I mean, just to explain why, I think The staff, look, they're working. They've got a view. They join this thing to, you know, you join the DOJ anti-trust department because you want to enforce antitrust law. So, you know, you kind of get that if you've ever been like the manager of something, you've got your employees and they're always bringing you great ideas and you've kind of got to focus on the few. And for the actual political appointees, they have to look at all these and say, hey, if we do this, we have limited resources. I'm kind of staking my career on it, right? Because if we go
Starting point is 00:05:42 and bring a case and it gets rejected, boom, that's a lot of political capital. People are going to look at me as a little tainted. So you've got, that's the traditional way. And here you've got the reverse, right? The staff are saying, oh, I don't think these are great cases because, yes, they want to do antitrust, but they don't want to bring bad antitrust or do work for cases that, I mean, bringing a case takes a lot of work, do it for something that's going to get rejected. And here you have the political points. He's saying, I have a political view. I don't care if I lose. Expressing that political view is kind of what I'm here for, might be helpful for me for some other ways. Am I kind of interpreting all that correctly? I would say that's correct. And the other element
Starting point is 00:06:19 I would bring in is that historical antitrust analysis, which has historically been fairly bipartisan based largely on economics and historical legal precedent, is kind of a skill set that these staffers have. If they're going to go on to a lucrative career, higher compensation career in the private sector, they want their skill set to be kind of valid and used. And this administration, they kind of call a whole of government, which is, if we have any target we are going after, we are using all of the tools. And these tools do not have to necessarily relate to their nominal purposes, deal-specific antitrust reviews.
Starting point is 00:07:01 Now, they're pretty much telegraphing. If they want to go after a company, they're going to. to use whatever process that they have. If that's what's going to happen, it kind of gets far afield from what the staffers know how to do. They're not necessarily in it for anyone administration. They might have their proclivities on average. They might, you know, they skew a little more Democrat than the population overall. But they also have a lot more longevity than any political leader. And so this politicization of it is a little creating some conflict. I'd say especially at the FTC, there's been a lot of turnover and there's been a lot of kind of leaks from the civil staff
Starting point is 00:07:45 on some of the things they're doing. And then losing in court, that's going to, that's going to make it's going to embolden companies and it's going to make the staff involved in happy. So I think you said at the start, and you mentioned FTC going after companies that are targets and they're using every tool. I think the clear companies you're thinking of here are all the big tech companies, right? Amazon and Facebook, Amazon, Facebook meta, whatever people call it these days, are especially in the cross-hares. But you said at the beginning, last week was a bad week for the regulators. And I just want to go into that. I think the two things are United Health, one in action, one in court, DOJ suits a block.
Starting point is 00:08:29 their acquisition of change health care. DoJ got lost in court. And then the other was a sugar deal that I believe that was the DOJ loss in court as well. So I just want to pause there. What happened there and how does that affect things going forward? Two completely decisive, kind of devastating legal decisions where the judges were just completely one-sided against the government in the, I guess I paid more attention to the change deal. I have a tiny position. should have been bigger. It wasn't a big spread, though. The market had kind of backed into this being the likely outcome.
Starting point is 00:09:05 The two kind of topics that were really under scrutiny were verticality and market definition. So on the first verticality in the United Health, the government, one, had a vertical theory that they failed to convince the judge on. And the companies had what they thought was a reasonable, they litigated the facts. They said, here's the things that we would do. And then the government kind of tried to make the point they were making and kind of talking past the overture. And the judge found the overture completely of solving the problem. So approved it with the imposed effects. and that kind of seemed pretty pragmatic.
Starting point is 00:09:57 And I would say the judge sounded precisely like the DOJ themselves that have historically sounded on deals like this. You know, kind of we have talked about and expected there was going to be this kind of cascade of lawsuits. And this was kind of early on that. And there could be others. But the judge kind of put things back in place. When you look at U.S. and European
Starting point is 00:10:23 And in a trust enforcement, there's this big difference that the Europeans can really just do what they want to do in both the EU and in the UK at the CMA. The government, the U.S. has to bring their case. They're given some amount of deference, but they have to tell it to a judge. In this case, the judge was completely unconvinced. So I think we're going to talk about some specific examples in a second, but I just want to pull on one thread you mentioned there. Like one of my worry, so United Change was, I think exclusively U.S. right i don't think there's any international business there but a lot of the companies we're going to talk about like something like an activation blizzard it really jumps to mind here but you know
Starting point is 00:11:04 they do have that is international right you don't just need u.s approval you need and when i talk to other arms and stuff like the focus is all on the u.s and you know generally if you get u.s you tend to get u if you get u you tend to get us but i do worry like everyone is focused on the u.s and saying oh well, this is great. If the U.S. brings a suit, they're going to lose in court and XYZ deal will go through. And I do worry like, okay, maybe, but if the U.S. brings a case and like the DOJ, the EU regulators or the U.K. regulators just want to follow on what the U.S. is doing. And everybody kind of doesn't like big tech in particular. Like, won't the EU just bring something and kind of shut it down over there where they've got a lot less kind of appeals
Starting point is 00:11:50 process or legal ability to overturn it? What do you think about that? I think it's a very valid concern, correct. In the case of United Health change, it was just H.S.R., the U.S. process. And so everybody knew you're going to have to take it to a judge. And when I say everybody knew that affected not just the government's leverage, but affected how the companies negotiated this, right? So if you were United Health, I think at this point you'd be very happy with how your antitrust lawyers gamed this out. They used the flexibility to have and they won.
Starting point is 00:12:23 in the case, which just jumps off the page in the case of multiple jurisdictions is Activision. I mean, Activision is the biggest, the most important case that has a U.S. review. It has to go through HSR. They will have to take it to a judge. It is a vertical case. It rhymes with United Health. And also, just to bring in for a sentence or two, the sugar deal, that was a economically unsupported narrow market definition that fit what the government wanted to say. If you can control the denominator, you can say whatever you want to say about anything. If you can say, here is the geography.
Starting point is 00:13:16 I mean, you're always a monopolist of your own. product. And so you have to expand it to what is economically relevant in terms of real price discovery. And an economist can do that. There's an answer to the question, what's the geographical market? And something like sugar, it was not as specific to the Southeast U.S. as the government wanted to claim. The econometrics weren't there. It was just what they wanted to say. I think that in the case of Activision, you have to really ask what the right market definition is, and you have to ask, are there real foreclosure issues? Two problems with that.
Starting point is 00:13:57 One, judges are much less likely. It's much more subtle to bring a vertical case. Secondly, it's much more fixable, right? At the last minute, Microsoft could make overtures and say, you know, fair and reasonable. access. There's ways contractually to fix a lot of the things you could come up with. So in any event, it's a case that would be tricky in front of a U.S. judge, but the issue is what you raised. It's especially relevant to the U.K. CMA. Historically, they have been closely aligned with the U.S. DOJ, and they could carry water for the Americans. When the
Starting point is 00:14:36 CMA block something, you are blocked. It is dead, dead or dentist. And in this case, you have one side that might want to block it and the other side that has the tools. And so, you know, could there be a regulator on regulator quid pro pro? I think it's highly possible. And that would tell me neither be exposed now, nor would it be a prospective opportunity the day that it tanks, the day that the CMA moves forward. Now, the CMA is actually have been bringing some slightly different concerns recently. They're very recent verbiage on what they are focused on has not matched up with the DOJ. So in terms of, I don't want to call it conspiracy theories because it's true, but in terms of
Starting point is 00:15:22 cynicism about people using the tools they have for the purposes they say that they're using them for, that is the risk that could be real deal. risk for Activision. Yeah, and just so we jumped right into Activision, just so people understand why we're talking about Activision. Activision is under contract to get bought out by Microsoft. The headline price there is $95 per share. As we speak, Activision's trading in about 75.
Starting point is 00:15:52 So you're talking about a $27%, you know, what should be market neutral, return 27%. I think I've got it set to close in March. You know, if we get a DOJ lawsuit, maybe it's next September or something. But, you know, if it closes inside of a year with a 27% Chris IRA, like, that's something people are going to find very attractive. So, yeah, and over the weekend, I believe there was a Microsoft CEO had a quote in Bloomberg that said, we're very, very confident about obtaining all approvals. And you'd have to think, like, you go into this, like, they entered this deal earlier this year. They knew who the regulators were. Like, one thing I always think about is companies know who the regulators are.
Starting point is 00:16:33 They don't have their head in their sand and they pop them and say, oh, my God, the DOJ doesn't want big tech companies merging together. Like, they understand that and they answer the merger and agree to a $2.5 billion break fee, which, you know, is pocket change for them. But they agree to that, knowing what the environment looks like. So clearly they think there's some chance they get it through. But I'm rambling a little bit, but it is a certainly very interesting situation. Yeah, I would just, I would add to that. One thing nice about widespread is it's less sensitive to timing risk. we're having a conversation, and you and I don't have this conversation, but a lot of merger
Starting point is 00:17:07 our funds do, hey, let's do a 5% IRA between now and the second quarter of next year. That is a, you have to be extremely precise about timing because a 5% yield that takes twice as long as you think becomes a really bad investment. The nice thing about this case with a 52% IRA if it closes by the second quarter is even with a delay, you're probably fine setting it up here. And you might have a terrific opportunity kind of the day that is the day that the U.S. brings suit as long as they're not coordinating with the CMA. The CMA is really the deal killer here. If you can get comfortable enough with that, I think that this would be one where the companies have a good probability of winning
Starting point is 00:18:00 in court. And unlike so many other deals right now, you might have a little bit less of a catastrophe with this target. They've been doing fairly well. It was interesting that Berkshire Hathaway was buying shares, you know, right before the deal was announced. And convincingly, it was not a deal check. He was pretty adamant about he wasn't kind of whipping this around on the deal rumors. So at least some intelligent players think that it was okay price before the deal premium, after which they've been performing well. I've been asking around if you can expense call of duty as a research expense for tax
Starting point is 00:18:44 reasons, but it's a cool target. And it is an aquifer. You know, in Silicon Valley, they talk about aqua hires when you buy the company to get the CEO. This is one they're buying the company to get rid of the CEO. CEO had problems. And they said, well, let's hire Saito Mnadell to run the place. He can come up with something and they'll be part of Microsoft and that'll smooth over some of the problems they had before the deal was announced. So that's Activision. I just want to, I mean, look, there's a lot of things out there with antitrust risk. As you said, because people are affecting
Starting point is 00:19:19 in a much more aggressive antitrust. Are there any other antitrust risk companies that you're you're really interested in are thinking about right now. I'm interested in how far they will go just on the buyer's identity versus the deal-specific issues. I mean, they have gone to, I can't call it meta, all these new meta and alphabet, like, I think it's like an old man problem that once you know something's name, you're just going to stick with it forever. So Facebook was told, hey, we'd really like you to get pre-notification to us, not just HSR, but like we want you to kind of bring us into your room when you're doing any kind of deals whatsoever. So the outlook of this current FTC and DOJ is so new and so different.
Starting point is 00:20:10 but the fact that they recently blocked a kind of small VR fitness app that Meta Facebook was buying really shows that they might just block everything. I mean, they might just kind of say. And that was like a $100 million acquisition or something, right? So you say small, Facebook's a multi, multi, multi, hundred billion dollar company. like you're you're talking about literal pocket change like that's approaching aqua hire in a market that is still pretty much yet to be defined and for them to block that it's like and you're basically saying Facebook cannot do deals by the it's it is that and it really the two deals the
Starting point is 00:20:56 government lost this past week both come into play both in terms of the super narrow mic if you were taking it to a judge the market definition I mean especially you're talking to an older judge you're going to have to explain to him that this industry exists and that this company exists and that they are monopolizing it. And I think so there's going to be a real question on market definition, right? Because you're going to have to have this incredibly narrow market definition. And then you have the vertical issue. Again, tricky to litigate. So maybe they're just going to go after everything. And then if you say, what is everything include? Well, Amazon buying Irobot, Amazon buying one medical. Maybe they're just going to attack Amazon with a
Starting point is 00:21:40 HSR process and kind of brainstorming what they could do next, that's up there. Neither of those would be as good a case as Activision, which I think you could bring with a straight face, kind of iRobot and one medical that those are going to be real tricky. I robot's such a strange one because for those not familiar, I robot makes the Roombos, right? Everybody knows the Roomba that goes around the house. It's like, what is Amazon monopolizing by buying them? Like, it's such a strange one because you can't say they're monopolizing vacuums. Like, anybody can get a vacuum cleaner.
Starting point is 00:22:18 And I think in part there was, I can't remember specifically, but I think in part, like all the antitrust is there was a tweet thread that went viral. And I think that almost the government's responding to a tweet thread, like, what is Amazon going to monopolize? I believe the theory here is Amazon's going to use the I robot to take the measurements of your house and use that. but I don't know where the monopoly problem with them buying a vacuum cleaner is. Now, I also don't know why they'd really want to buy a vacuum cleaner, but, you know, they want to take a billion and buy a vacuum cleaner. That's kind of their prerogative. So, yeah.
Starting point is 00:22:50 And some of the privacy concerns that you could imagine somebody might have with both of these deals, with Amazon getting your medical information, with Amazon, getting the dimensions of your home, as soon as people start complaining about it, what do they say? Well, I'm not going to buy that anymore. I'm going to buy one of the many other things I can do. In both cases, the customer complaints imply the normal free market response from a customer, which is if you don't like it, and for some reason you don't like the identity of the buyer, you go somewhere else, and they can, and they will.
Starting point is 00:23:21 Now, I want to go back to one thing you said, and then I want to ask a couple other deals. One of the things you joked earlier was, hey, the discussion among like basically buyer antitrust is, hey, let's just all file these at once and certify and make them kind of pick. They can't try to block 100 of them. and so make them pick the five they want to go after the 95 sell through. And that also would be an antitrust conspiracy between the law firms to. Yeah, that would be, but, you know, just that. And I think Lena Kahn had a quote where she said, look, we're committed to bringing
Starting point is 00:23:51 difficult cases, but we're outgunned by these companies. We have 350 fewer people at the FCC than we did in the 70s. And look, I know you're no fan of Lena Kahn. You know, I think both of us think regulations are, regulations, especially on antitrust, are a little bit overstated. But it does strike me as concerning. Like, you get these companies, it's the old argument, like, the world wasn't designed for companies as big and as powerful and as cash rich as Amazon, Facebook, and these guys.
Starting point is 00:24:18 And if they can just outspend their way, like it just does seem like there is a problem where the regulatory agencies are just this outmatched by some companies. Do you read anything into that? I'm open to the idea that our regulatory apparatus is antiquated. and I think where I would overlap the most with the kind of progressive wing of the antitrust bar called the kind of hipster antitrust people is the idea that the current rules don't fit well and do not contemplate this kind of company and I think where we diverge is they say well we'll just use the rules we have and just apply them outside their intent and mine would be okay let's
Starting point is 00:25:04 pass new laws and have Congress address this and see how. And I think on that grounds, there's a ton of bipartisan interest. But these are big, powerful companies whose reach exceeds what the antitrust law contemplates, which doesn't fit well, and concerns people across parties and ideologies. In some ways, concerns me less. You know, I love the idea and I'm still surprised how frequently I, with all of the concerns about how ingenious their data mining is, I'm astonished how frequently I see ads that are demographically incoherent with me, you know, that are, you know, seeing something for
Starting point is 00:26:00 you know, pharma things for diseases that I can't get or that are just, you know, for women or for something like that. I'm surprised that they don't do this better if the deepest, darkest conspiracy theories about what they do are true. You know, some of the accusations
Starting point is 00:26:21 against Twitter, something we've been thinking about a lot, I found we're so lame in terms of if they have all this information, they're going to be able to discover your phone number. And, like, that's not that, like, it's not nearly sophisticated when we kind of delve in because of litigation to some of the things that they're doing. And on ads, I kind of find evidence, at least anecdotally, that it's not super savvy. Yeah, so it's new and different than the antitrust authorities are used to dealing with.
Starting point is 00:26:55 And Lena Kahn's solution is just to kind of force it and hope the judges, are convinced. Obviously, there's an election coming this November, and right now I think the market's got it priced. I'm just looking at predict it, which I'm sad that's going away next year. But it's a nice thing for quickly seeing what market's pricing. And it's got Dems 60% to hold the Senate, Republicans 75% to take the House. And look, the FTC and DOJ's budget comes from Congress approves and then president.
Starting point is 00:27:27 So they do get their budget from here. it affects, it affects confirmations, all that sort of stuff. So when I say Dems 60%, Republican 75%, do you think Republicans basically flipping the House? Does that do anything to the regulators? Does it change more if like you get a Republican sweep? Does that change how the regulatory outlook looks? Well, you know, appointments are are Senate heavy. Budget both matters, but it's really interesting because a lot of the direction of the Republican Party in the past half decade or so has become much more suspicious of big tech. So a lot of the most conservative members and most involved in antitrust are actually kind of Lena Khan curious.
Starting point is 00:28:14 Or at least, you know, she can say some things because of the identity that people she's going after and get applauded on both sides. So, you know, you. You know, I think what really matters is the kind of Chamber of Commerce, old style Republican Party and more business friendly Democrats, kind of blue dog Democrats, you know, kind of what is their relationship with the opponents on both sides of their party at the more kind of the wings of the progressives and the populists. But she might be okay with the progressives or the populace because neither of them like big tech. Yeah, no, I mean, the one thing I know we both listened to the Twitter mud shearing a couple weeks ago. And the one thing that really jumped out to me was, A, I didn't hear anything that made me too scared for Twitter. You know, it's scary as an overall thought, but there was nothing that jumped out to me as a moot. But the thing that really jumped out was I think it was Lindsey Graham who said, hey, Elizabeth Warren and I are working together on,
Starting point is 00:29:24 a new agency to regulate the big tech. And I was like, Lindsay Graham, Elizabeth Warren, working on a big tech regular? That was just trick me. All right. So that was the macro sense on the regulation, but there was one micro since I wanted to jump into. And that's Tegna. And Tegna owns a bunch of local TV stations. The stock prices, it's about 21 right as we speak.
Starting point is 00:29:46 They're under a deal to get bought out for $24 per share. And that is kind of held up in at the FTC level. I believe. And I was just wondering, you know, we've seen deals for regional TV stations fall through before, but with some confirmations on the FTC, with the potential change in, with the potential change in the Senate and the House, does that affect one way or the other how the Tegna deal was going to go? Or you can say you haven't been following it that closely since I know we haven't talked a ton about it. I have been following it. I do think it matters. The Democrats got in, you know, they have a majority. There's not going to be a Senate problem where there is,
Starting point is 00:30:30 the Senate really matters when there's open seats, right? Everybody gets kind of like playing musical chairs. If you lose the Senate, you're stuck with the, you got to go to war with army you got, an army you got is the army you have before you lose the Senate. And historically, both parties have kind of worked with the other side, certainly about picking their own guys. So you really have to convince your party leader in the Senate of which individual you want. But in this case, the Democrats really do have good working control of the FCC. In addition to normal antitrust issues, which should be surmountable here, you just have the sensitivity, especially in the Liz Warren kind of progressive sod, but a fairly general sensitivity on local control of papers. and kind of trying to hang on to local journalism and a fight against aggregators that in many cases
Starting point is 00:31:28 have just tried to squeeze out whatever remaining cash flow they can from newspapers in their dying years. The other two things I think you mentioned at the top just to make a hard shift away from antitrust and regulatory is the first was tobacco. And I think the specific one you were kind of thinking of was sweetest match. So I'll just flip it over to you there. So I am very interested in tobacco. I've never used it at all. Shout out to credit bubble stocks that is the kind of, I think has been one of the best kind of newsletter blogs out there on the idea that societies under nicotine, that we've had this history with tobacco that's gone back for such a long time. And over the last. century or so, nicotine use is going way down, sugar use has gone way up, it has not been a good trade-off, and that the big health devil is cigarettes themselves, is the combustion and tar, that if you took out nicotine, that it's kind of intuitive, that huffing smoke into your lungs
Starting point is 00:32:38 is not good for your lungs, and tar is bad. But that nicotine has kind of been condemned because of this association. Well, Philip Morris, P.M. is their history. I mean, they say our history and our present is in cigarettes, but our future isn't. And they came in and put this bid in there for Swedish match that I think has some of the most innovative and promising kind of post-cigarette delivery devices that I think is the greatest healthcare innovation since penicillin. I think that I think that it saves lives and that is something that should be encouraged or very least a matter of open inquiry. And I'm not a user. I'm a shareholder. So I guess I'm talking to my book. But I think that it's a really open question of what nicotine does, especially when you get
Starting point is 00:33:32 rid of cigarettes. Yeah. So why don't you just, so Philip Morris loves it. I'm still trying to get over this news or whatever being the greatest innovation in health care since it's been I'm baiting. I'm sure. I'm baiting with that a little bit. But, too, look, Philip Morris, I think a couple months ago, they enter a deal to buy Swedish match. I think it's 106 sec, SEC, S-E-K, per share. And, you know, right away, you get a bunch of shareholders coming out and say, look, Swedish match has this killer product. It's taking to the share. It's growing rapidly. This undervalues the company. It undervalues the future. I believe Elliot recently crossed the 5% stake.
Starting point is 00:34:15 So, you know, I just want to focus on the deal here and say, like, what do you think happens here? How do you think this plays out? You have the three perspectives. You have the buyer, the seller, and the seller shareholders. The seller's management seemed to acquiesce to this pretty quickly and complacently. The buyer seems very committed, especially they don't. say this is a one-off financial deal. They say this is our future. We were tobacco and we're going to go into this. I think so it's a huge strategic commitment for them. It's completely
Starting point is 00:34:54 affordable. The numbers just say it approximately. There's fairly surmountable downside. I said that Activision was one that you could, you know, size with a somewhat know-knowable and limited downside. I think a Swedish match, you know, call it, you'll lose money if Philip Morris walks, but I think that shareholders are emboldened. This is not a situation where you're bluffing. They're emboldened. One shareholder, not one of their biggest, but certainly one of their vocal and well-followed. John Hempton said that he thought it was worth, you know, 175 to a private equity firm. So presumably worth even more than 175 Swedish Corona to a strategic buyer. But I think the likelihood that you could get a substantial bump out of Feld Morris to get this
Starting point is 00:35:47 done is really quite good. So I think there's a couple other things to argue and we can talk about in a second. But the one thing that always strikes me in these situations is, hey, you've got a management team. The stock, the day before, I'll use round numbers, the day before the Philip Morris offer, was around 75 or 80, if I remember correctly. And then so you've got a management team. They look at their stock. Shareholders are freely trading this well below 106. They take a big premium deal from a strategic, well-capitalized buyer, you know, pretty much certainty of closing here.
Starting point is 00:36:21 And then all of a sudden shareholders wake up and say, hey, no, this is worth, I mean, 175 is more than double what the stock price was trading the day before the Philip Morris sale. So I think the two pushbacks would be like, okay, well, why weren't shareholders like appraising this rosy future before the deal, number one? And then number two, management should have the best line of sight into the value, what the companies were, the growth prospects and everything. And management took this deal. So you combine those two together and you're like, hey, aren't you guys just kind of arguing and saying, oh, this is worth much more now? But, you know, you're putting on rose colored glasses when the day before maybe you had more neutral glasses. and, like, Philip Morse is just actually paying you the strategic premium. Does that make sense? It does make sense. And I would just break it down into three reasons why something might
Starting point is 00:37:06 break. The most dramatically cautionary is if it breaks because the buyer walks, does he see something new in the target that's problematic? So, you know, if you break a deal because of a material adverse effect, you don't have the deal, but you still got the material adverse effect. So if there's something wrong with it, then that preexisting deal price might be invalid because you don't get it anymore. It's much worse than that. So you imagine a biotech deal with one product and the commercial pharma company walks away because the product doesn't work. You don't get the pre-deal price. You get maybe nothing. The middle category is just there's a bit of NASP. You don't close the difference. It doesn't trade. In this case,
Starting point is 00:37:49 though, I think there's actually a benign break scenario where this set of shareholders don't want this deal. Philip Morris doesn't bump enough. I think they will, but maybe I'm wrong. And the management then becomes under scrutiny from Elliott and other holders to say, you have to do something progressive now. We were this thing, but you have to reveal this value that we see. We see this future that's not matches. It is not cigarettes, but you have these different products. And so they look to unlock value in some other way. And I think that the likelihood there that it breaks to say 90 and not 80, even if it breaks down, I think, is a substantial probability that it's kind of a particularly benign break, that it's drawn
Starting point is 00:38:37 attention in the process with holders that see more value than the management does. Sorry, I was on mute there. No, that makes it, you know, I guess the only, again, you said the shareholders now they come in, they see more value, they've got more pressure. like management kind of opened themselves up for that license, right? Like one of the things is at 80 before the PMI deal versus today, like you had a sleepier shareholder base. They weren't focused. They saw the long-term value, but maybe they didn't need. Whereas now this deal breaks.
Starting point is 00:39:07 You've got Elliott in there. You've got a more aggressive set of shareholder bases that are, as you said, going to hold people's fees of fire. The one other thing that jumps out to me here, actually two things. The smaller thing is, hey, this is worth 175 to a financial buyer. And that might be true. But, you know, this is a $15 billion tobacco company with the high growth tobacco. Like the pool of financial buyers who can buy a $15 billion tobacco company is it's not that big. And all of them do have, I think, rightfully, ESG concerns, not in the, not in the ESG.
Starting point is 00:39:41 Like, I do think they have, hey, we go buy a tobacco company and all of a sudden, all the pension funds who are our core customer won't invest into our funds anymore. Or they call someone, they say, what the hell? like we can't own a tobacco company. So like you almost have, yeah, we could make a lot of money on this deal, but we're sacrificing our franchise for all the potential financial buyers there. It thins them out quickly. It really does. And this ESG thing, if you look at the assets under management of the firms that have
Starting point is 00:40:10 been sold out to this, it's just the hugest firms, right? So like you're really limiting the potential bidders. Like even I couldn't, I couldn't even see like a burglest. or something buying this company. I don't know if that's right or something. I believe Buffett's invested in tobacco in the past, but I just don't know if in today's day and age, I could see him buying a tobacco company and saying, hey, let's deal with all of that headache for a $20 billion deal, which is still very small by the grand scheme of things, but let's deal with all this regulatory scrutiny and anything. Even if it's 2% of your upside,
Starting point is 00:40:44 it's going to be 20% what you have to think about and talk about and respond to it for the rest of your life. The other thing I wanted to admit is we were emailing about this this morning, but, you know, anybody who's filing financial markets knows that the U.S. dollar has been on just an absolute rampage this year. And, you know, it does strike me, this deal is priced in Swedish Krona, Kona, Kona. And I believe two-thirds of Swedish matches revenue and more than two-thirds of their value comes in U.S. dollars. So, you know, I just wanted that FX mismatch right there could argue for a bump because they've been taking in cash flow, you know, if two thirds of their value in USD, that's going up versus the share bid just on that FX
Starting point is 00:41:27 mismatch. So just wanted to ask you, how does that FX mismatch play into the thought process here? I frequently get this backwards because I first think about the arithmetic and then I have to, it tends to be, there's, it tends to be across purposes in terms of the business impact of selling back to the US, right? So sometimes it's easier. In this case, sometimes it's it's easier to nominally buy something, but then the thing you're buying might, it might be worse off or vice versa, right? So it's not always, the secondary impact sometimes negates or softens the primary. Primary one in this case is it'll be easier for PM to pay more. They could bump substantially. Thanks, Andrew. Yeah, I agree, though. You know, then you start getting, it's just so,
Starting point is 00:42:12 because then you start getting in, well, interest rates are way higher today than they were a couple months ago. So yeah, you get the FX, but do you get the, hey, if we were financing this on, I'm pulling a number, 2% debt. And now that's 4%. Like, does that mean we've got less room to go because, you know, the synergies are four years out to realize and all the values in the terminal calendar, blah, blah, blah, blah, blah. Anyway, it's so interesting. But yeah, I'm with you. It's just, it's strange when you get this mismatch of long, not mismatch, but this match of like long-term value shareholders plus a more aggressive activist all coming out and saying, wow, this strategic deal way, way undervalues this target company.
Starting point is 00:42:51 Like, that's a really interesting combination. Obviously, it's strategic deals. Strategic deals you can pay up because they're synergies. It's the future, all that type of stuff. So very interesting. We talked tobacco. We talked antitrust. Anything else you want to talk about here?
Starting point is 00:43:05 Or should we wrap it up and save it until a spooky Halloween episode? I think that's a wrap until Halloween. And then we'll have Halloween topics and other things to happen. You know, it's like the one thing we didn't talk about, which we've talked about almost every podcast we've done this year so far as Twitter. But I do think you and I've talked so much about Twitter elsewhere. We'll have so much more next time. And I don't think there's been, there have been a lot, but I don't think there's been like groundbreaking news since the last one. The next podcast we do, the Twitter trial will have happened.
Starting point is 00:43:33 So we actually have quite a bit to talk about there. So we'll, I'm just teasing the next podcast. Yeah. So people can look forward to the next podcast. Chris, thanks so much for coming on. Thank you for having me. But looking forward to our podcast next month. I look forward to it.
Starting point is 00:43:48 Nice talking with you, Andrew. Bye-bye. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests 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.

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