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

Episode Date: October 4, 2023

It's time to welcome back Chris DeMuth for his monthly state of the markets. For this September 2023 edition, Chris provides his take on Amazon FTC case, Scultpor Capital Management bid, monthly antitrust update, and more! For more information about Rangeley Capital, please visit: http://www.rangeleycapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:49] What's been going on - September 2023: update on antitrust cases and valuing the deals [8:45] Large mergers/acquisitions and how to better understand why firms choose the paths they do [14:09] Sculptor Capital Management bid [17:25] Best case for shareholder activism and natural corporate defense of smallness [20:48] Amazon FTC case [30:22] Amazon iRobot [35:30] FTC being aggressive bringing losing cases [38:58] Final thoughts for September 2023: oil and gas, thoughts on the space overall Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you.

Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. All right, hello, and welcome to the Yet Another Value Podcast. If you like this podcast, we'd mean a lot of you follow, subscribe, rate review, wherever you're watching or listening to it, Spotify, YouTube, whatever, five stars, please. With me today, I'm happy to have on for, man, what, it's got to be like the 20th time at this point. My friend and the founder of Rangie Capital, Chris, the youth. Chris, how's going?

It's going well. I think Jeremy Raper is ahead of me on merit. I kind of am ahead of him on habit, but either way, it's good to be here again. Jeremy and I've been DMing and he was so proud of having the record, but, you know, every now and then he says, I'm going to come for Chris. I'm like, dude, you're going to start doing weekly podcasts. But before we get started, it is September 28th. We're going to do your monthly state of the markets, talk about what's been on your mind. Before we get there, just a reminder to everyone, nothing on this podcast is financial advice.

That is always true, but particularly true today because Chris and I might talk about any number of things on his mind. So, you know, people should just remember, please, it's not financial advice. Do your own work, do your own diligence. So that out of the way, Chris, again, September 28th, what, 2003, what is on your mind today? well quite a bit of litigation maybe more than a normal amount quite a bit of antitrust as recently as today there was a new judge decision that I was just going through rejecting a FTC bid to review a hospital deal in Louisiana and so yet again the judiciary pushing back against this administration in a way that no administration has gotten a kind of a thematic, consistent pushback ever

on antitrust, or been so clear that they don't care, that they're kind of pushing forward. Both of those things are new, and these judges have been very, very good kind of at looking at the law and the facts in cases and where they depart case to case. So, yeah, thinking a lot about antitrust in particular, litigation generally, peaking certainly at oil and gas as kind of commodities have started to move quite a bit recently. And going through background sections of deals, trying to be thoughtful about deals that are in the category of look suboptimal either from a just fundamental price or process perspective where you can exceed the riskless rate of return, kind of get your

your money back on an okay, safe deal, but something else might happen that's interesting. So even though I kind of like one of the supermodels that said I don't get out of bed for less than $10,000, I like to not get out of bed for a single-digit IRR on an ARB spread. If that's really what you're going to get, there's always some unitary risk in anything you do. There's always some shot that something goes horribly wrong, that you have a fraud or something that's just unavoidably awful. And if you're going to do something and get out of bed for it, you should make a lot of money

so the winners can pay for the losers and it's hard at low IRAs, but kind of in this between 5 and 10% spread level where at least you're covering the, you know, 5 to 6% riskless rate, you might have some optionality. So kind of peeking at some of those. So background sections and antitrust in merger ARB has been my kind of biggest research focus recently. Yeah, look, I guess there's a lot there and I want to turn something, but just because you ended with it.

The, you know, one of the things I think we, we frequently said internally is like, I think back to 2018 or 19 when Disney struck a deal to buy most of Fox's assets, right? And if you read the background section and you read the, you listen to the press, Disney was offering to buy Fox for $28 or $30 per share in stock, and Comcast had offered like $35 per share, but it was in cash. And I'm doing this from memory. This is six years ago, so roughly right, not exactly right. Comcast is offered about 35, and Fox had turned them down for a variety of reasons. I think there were some anti-trust concerns with the Fox.

I think Fox is Fox and Comcast owns NBC and MSNBC. I think there was some worries about the culture. A stock deal was better for the Murdox in terms of their cost basis in Fox was like $1. So if they did stock, they could delay the taxes where if they got Kat. So there were all these issues with the deal. But if you looked at it, you know, you knew Comcast had bid 15% higher than kind of what Disney'd been. And Fox's stock, let's say Disney had bit 30. Fox's stock kind of traded at 29 for months after the deal was announced.

So you could get, and this was in a world of zero interest rates, today's world. So you could get kind of like a, you know, middling, as you said, five to 10 percent IRA from buying Fox and just expecting a Disney deal to close, but you had this huge option where, you know, that a Fox Disney deal is not going to break, right? Disney is about the best buyer in the world. Sure, there could be antitrust things, but A, it was the Trump administration. So Rupert Murdoch might have had a little bit more sway than normal. And B, like the contract was quite tight. They would have to divest anything problematic. So, you can get that 5 to 10 percent return, but you'd have this huge free option that

Comcast would come back and started bidding war. And sure enough, a few months later, Comcast came back and started like the bidding war to end all bidding wars. And not quite sure. The straight path was the bidding war to end all bidding wars. But it was a big bidding war. And, you know, you could have bought Fox at 28. And I know plenty of people who did.

Plenty people bought Fox at 28 like, hey, I just wanted to get a discount to Disney. And you ended up with the, I think the final deal was like 42 or something. So, yeah, it's one like Occidental when they bought Anadarko. That was a little bit of bidding war against, I think, Chevron was the buyer there, but we've seen these. And it's just one thing I know you and I always say, if you've got a party with, if you've got a company that has a just absolute grade A buyer, and there's rumors that another grade A buyer might be involved or their strategic value, like just kind of put it on. And if it goes through, you'll make a middling rate of

return. But if you get that bidding more, it'll pay for all the other ones a hundred times over. Exactly. I mean, I think about it in terms of private businesses or personal employees, the optimal alignment is they just treat it as if it was their money. I mean, that would be the most, that would be the biggest compliment you could make in terms of stewardship, that if you had a caretaker of a property and you were gone, and it's like, okay, they're expenses. You have to spend money. You have to, you can't, you know, you can't be unrealistic about what things cost, but they would just treat it as if there was their money, if it was due your money. In public companies, I'm often intrigued by the opposite where you have

some kind of machinations in the background section that makes it clear, oh, they're really focused on jobs. They're focused on their own tax situation. You know, they're focused on their legacy, their own company's succession plans. Rupert Murdoch wants a cool job for his kids. Which that actually might have been the most surprising point, like Rupert Murdoch caring about as kids. I say that somewhat jokingly, but if you watch Succession, that might be the most surprising point. Except that there's weird ego things involved in fatherhood that I think always comes into play. So it's not necessarily a virtue, right? It's a little bit kind of a statute to your greatness in some ways. And so for whatever reason, and I'm sure the reasons are complex, I just love where

there's optionality on, there's a net present value in cash that demonstrates the price and anything you're doing other than maximizing that has a cost. Anything that complicates the mission has a cost. So I love finding these things as long as you're not paying for them. Two that come to mind in current public markets or recently current public markets that like kind of touch on that would be number one in terms of the employee thing, right? There's this sculptor bid where sculptor is getting inspired by a hedge fund or someone and there's a group of hedge fund titans led by Bose Weinstein and I think Bill Ackman's in there who are offering more, right? And one of the reasons the board keeps turning down the more offer is, I mean,

they say it's because they're worried about the certainty to close. And I do think there's something to that. But if you kind of just read all the deal documents, it was clear that whether you think it's certainty to close reasons or other reasons, it was clear that the CEO's job was paramount to this board selling. And I think they would say, hey, that's a fiduciary thing. If the CEO's turning over, then all of our clients might leave and any deal might fall through. I think a skeptic would say, hey, this is a bad board that is controlled by the CEO and they're trying to give him a lavish payday. So I think you could read, I'm not taking a stake. People can probably guess which side I'm on, but I'm not saying either one's right or wrong. I'm just saying what

the two are. But in that case, you know, you've got more money on one side. But if you read the deal documents, it's clear that the CEO getting a job at the new thing was a determinant for taking less money. Now, was it certainty? Was it a little bit scandalous? Who knows? That's one. And Then number two was MMP just got bought out by OKE literally a week ago. The deal finalized. And the whole time the deal was going on, there was a shareholder who was saying, hey, I don't like this deal. I'm going to vote it down.

And it was clear that the deal was bad for their personal tax considerations. And because of that, they wanted to vote it down. Whereas, you know, I think the company proxy advisors, everyone said, hey, we can't take one person's tax considerations into account. We need to look at the whole crew. But, you know, if they, if the activist there had had instead of 3%, 30% of the company, then guess what? The company would have been getting sold and dealt much more in line with how it would

affect their personal tax consequences versus kind of overall. I threw a lot out there. I'll kind of turn it over to you. Sure. So I have a small reaction to both. The first situation is fascinating to me. I am so recticent to invest money in some of the public vehicles of kind of super sophisticated Wall Street firms where I just feel like the spectrum of information.

on the outside of inside information goes to like 99.99% good information that somebody has. And if you're not the person with that legal, actionable outside information, you know, was very recently an employee or very, very close to the people who know it, you just wouldn't want, you should hold yourself from extremely high information standards so you know who you're trading against is my caveat for these. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently

through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls

transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For a long time, I was looking at, especially the publicly traded alt, so the private equity firms. But also there are some publicly traded, there are some other hedge funds that are publicly

traded. And when I would talk to people, like, you would find people who were invested in the funds and they would kind of trade on, oh, KKR this month announced a big sale in like the middle market fund that's going to give them a 27x. And it's not large enough that anyone's like really picking it up and reporting on it. But I know that when they report Q2 earnings, like they're going to have this huge mark from this. So again, one deal probably isn't going to budge the needle massively for KKR, but it could move the needle a little bit. So they'd kind of trade on that. Or if it was the hedge fund, they'd be like, oh, I get XYZ manager's letter. They're publicly traded. I know what their positions are. Their largest position is stock ABC. Stock ABC just got taken out for an 80% premium.

And it probably wouldn't be their largest position. It'd be like their sixth largest position, right? Because it wouldn't be quite as disclosed. It got taken out for an 80% premium. I'm going to buy the crap out of the hedge fund stock because I know they're about to report a blowout Q2 results. Exactly. I just I just think there's some people who are going to be very informed and I would take that into account. But separately, and in this case, I know or know of, kind of everybody know, no, no of or have worked with really everybody involved. And it's an impressive list of characters. I would say I look with extreme skepticism on any skepticism that the alternative bid could be financed and get done. These are people who I think could do it personally, let alone do it.

I mean, this is not a huge company by market cap. And these are individuals who happen to be fabulously wealthy individually, who have access to a ton of capital, who can. So I think it's a bad faith argument to say that they wouldn't be able to get it done. Let me give the Matt Levine pushback to that, right? Like, okay, sculptor, I think the market cut there is $500 million. I haven't like done these $500 million, right? Bill Ackman's probably. worth $8 billion. He's part of the group. If he really wanted, he could guarantee the financing tomorrow, right? He could just say, I will write a $500 million check if everything else of the world falls through. And I think the company might push back, hey, you have a financing contingency

in your deal. If the financing is so locked up, why not just, you know, you and I, one of the things we first met on was there was a deal where a billionaire had personally guaranteed like a $120 million deal. And the deal traded with a little bit of a spread. And we said, hey, like a billionaire is guarantee this deal and there's a bidding war here. Our downside is this deal is going to close. Our upside is we get a bidding war to go back to our bidding war conversation. Why haven't the billionaires here just guarantee the financing? Yes. And it's a very unusual situation in that everybody knows who's involved, but they cannot disclose it directly. So you have this weird kibuki where the individuals whose names are in everybody's mouths can't just speak directly

because of what they've signed so far, but I would say it's a solvable problem with a target that doesn't look to me as if they're trying to solve it and a bidder that is not allowed to simply speak directly to answer that question. So if Bill Ackman or any of these other guys were listening to our conversation, my guess is they'd be pulling their hair out saying, I have an answer. I can't tell it. I can't tell you. So I just have a high level confidence is that it's solvable if everybody wanted to be solved. First of all, secondly, cash, the whole purpose of a publicly traded company for me makes my clarity on this probably bad at negotiating if I was negotiating directly on this

because it would be very hard for me to say no to almost any kind of premium. Once you've risk adjusted, time, value, money, because I just think there's not a lot of opportunity cost for securities, if somebody wants to pay you more than the public markets do, I have a real struggle saying no to more and being forced to pick amongst the remaining, you know, 70,000 other securities that we could put our money in. And with that premium, you know, we have to maximize after tax value. And so there's tax consequences and so forth. And sometimes we have a better plan. I think once in my career, I've had a short-term value, maximizing clear liquidation activist opportunity that I was utterly convinced by management

that I was wrong and they were right and we should do something else for the long term. But the long term is mostly made up of short terms. And I think that there is kind of a rhetorical flourish that conflicted insiders make about how, well, you're a short term hedge fund guy. And I think it's more of something to say than something that's true. The short term is made up. The short term makes up the long term net. and you can do things that are long-term value, maximizing and short-term, for the most part.

So I'm skepticism. I have skepticism of the skepticism of the higher bid here, and I hope that works out, but think that you should tread lightly on these. My personal favorite, just in terms of this short term, and this hedge fund guy, my personal favorite is there are, and people can go find them. There are 100 different biotex and pharma companies that trade for market caps of 30 to 50 million with, you know, 150 million. million on their balance sheet. And the way they got there is they came public, you know, with a $250 million market cap. And then they got to a billion as people got excited about their drugs and they raised more money. And then the drug failed. And now they trade for, you know, 30 to 50 million. And a hedge fund will come and be like, hey, you know, I'll offer to buy you out tomorrow

for $120 million. And then I'll deal with the liquidation cost and everything. And if I can make money, you know, I'll make a little bit of money. But your shareholders would get this huge premium. And invariably, the management seems to come out and be like, don't let this. hedge fund, you know, short term, just liquidate this company. Really stick with us. Look, we've failed seven phase three trials so far, but we just brought a drug for $100,000 and we're going to take it through. It's going to be a blockbuster. Let's go. By the way, the board of directors all gets paid $3 million per year or CEO gets paid $2 million per year. None of them own any stock. Ignore all that. We're going to create a ton of values. Like, dude, you guys have burned so much

money. You've destroyed so much value. And like, clearly you're just doing it for a job and you have to, But what does a hedge fund have to do with? They're trying to save your shareholders. It's just my favorite. You can find it a hundred times. And it's a really, you know, if I had more money, I feel like this is one of the plays I would be focused on doing a lot, just like, but it is, it is crazy to me how many of these have been able to beat back shareholders who buy up 10% of the company offered to buy

them out. And they managed to beat them back just because, you know, the incumbency advantage of controlling a $50 million, $50 million market company with 100. million dollars in cash is so great. It's just insane to me. It's the best example I can think of for shareholder activism and for the natural corporate defense of smallness just because all of the acts you have to take to take it over don't really scale down inexpensively. But just making the case even stronger are the recent activists that say you're trading, you're a net net, you're going to incinerate all the cash, but you're trading at, you know, 50% of your liquidation value.

I'll pay you in cash immediately, 75% of liquidation value. And the only conceivable argument you could make against this is if you have some moonshot success in something that's obviously 90 plus percent failed at this point, that's why you're trading where you are. And I will see VR it out if the things you think conceivably happen, happen. So even the shareholders even get that upside. So that's just utterly an arguable. Most of them are structured as we buy this for some discounts of the cash.

And basically the reason you as a shareholder would get that is you get the cash in your bank. And it's easier to liquidate as a private company than a public company. So, you know, the buyer, yes, they get some upside. But I think most of the upside goes to the shareholder. And as you said, they'll give a CVR for this remaining moonshop asset that likely was acquired for like $5,000. They'll give a CVR and they'll say, hey, if anyone wants to buy it, anyone wants to develop it, we'll go do it. And invariably, all of these failed. Nobody wants to touch it because the drug they acquired on the cheap because it's not a great drug.

And the management team's over here saying, wouldn't it be better if we blew $100 million investing into this drug that nobody else on Earth wants to touch? It's like, it's just crazy to me. Anyway, you know, I did want to talk about, so we talked about all that for 30 minutes. I did want to talk about Amazon FTC, right? Just yesterday, two days ago, the FTC files an antitrust case against Amazon. This is on the Hill, there are two Google antitrust trials going on right now. Those are from the DOJ, maybe a little more serious. I don't want to say none of any of them are serious.

But as soon as the Amazon FTC case was filed, I got multiple inbound. Hey, what's Chris's take on the Amazon FTC case? I don't think it's particularly actionable from a stock perspective. You know, I think most people think the FTC, not to spoil this, the FTC is going to lose this. If the FTC won it, I think Amazon stock would go down quite a bit. But I just want to turn it over to you. What's your thoughts on the Amazon FTC case? I would be much more excited by this if it was down 30% or something dramatic.

It was, you know, market discounting mechanism largely priced in. Any times where you have, you know, at least a dozen states involved, it was widely leaked. And even before that, this was the basis on this case was the basis in which the current FTC chairman was higher. I mean, she was higher. Her college thesis is, hey, Amazon is an anti-competitive thing. It's no surprise when she's in charge of the FTC. She's going to bring anti-competitive stuff against Amazon. So I think the probability went up from 99 to 100 percent that it would be filed

when it was filed. And so the market got that right. Yay for the market. Too bad for me. And so it'll be just such a noisy trade because it's going to take years and years and years to go through. This is not going to be a fast one. And it's going to be one that the company fights quite comprehensively.

I mean, my dream scenario for all of the big tech companies, I think is not going to happen. But my dream scenario from an investor perspective would be spook the market, let Christa Meath Jr. get in for a huge discount and then settle for a shareholder value maximizing kind of reed utility-like amazing value business and then spin off kind of moonshot, weird stuff that they want to do separately. that's not going to happen. One of the early antitrust settlement offers in the ATT breakup was keep my bell, keep the baby bells, spin off what later became Altel and others, spin off the physical phone business. And that was just a spectacular settlement overture to AT&T at a time where they would have locked in their monopoly and gotten rid of stuff

that they probably had no business owning anyways. And that settlement didn't end up happening and they ended up getting broken up. So that would be my dream scenario. I think that this administration is sincere, this company is fighting back. It is a little bit a sign in the times and how these things work

that these big tech companies like about, public policy because it's barriers to entry and then they fight like hell to protect themselves. It's kind of too bad we don't have big companies that kind of fight back against government intervention more generally in the economy. But this is something they're both going to fight and it's going to really come down to the political calendar of how long this administration and this FTC majority is in place because it's been so one-sided that the change back to a different majority would change everything. Yeah. No, I do wonder if this case, like, if you had to change administration next year, this case might not ever even see kind of the light of the courtroom

because different administration might drop it. I don't know. What are your thoughts on the merits in the actual case? I mean, I think there are, I don't, I don't disagree that there are some issues people have never thought of before with, you know, antitrust regulation was mainly made in what, the 30s, the 40s. Like no one thought of businesses where, the marginal cost of serving is zero and like most of your revenues coming from different things. But at the same time, like, maybe it's libertarian in me. I read this case. I'm like, look, I read this case or maybe it's because most of the people I follow a libertarian, like a lot of the harms that they say, like if you broke it up would actually be more harmful to consumers,

businesses, everything. You know, I think about their thing with, hey, you know, for sellers not to have to work with Amazon. It's like, cool. Amazon logistics is incredible and like all this sort of stuff. You're going to make them go to third parties. It's going to be, it's going to take. longer to consumers, it's going to be more expensive. I don't know. What do you think? It's a pretty easy one for me to think about in terms of, well, let me say this. If I was to divide the current antitrust cases into just preposterous boondoggles, and I think we've seen some of those on one hand, and on the other hand, cases that I would probably bring or unfixed have a lot of respect for. This is kind of in the middle, and it's in the middle because I'd say,

the counterfactual of not having Amazon or breaking up Amazon or the FTC's case is just clearly worse for the consumer. So of all the problems I have in my life as a consumer, you know, somebody that delivers for a low one-digit price toothpaste that I want tomorrow to my front door. And where I live, it's frequently actually the same day. They'll just sometimes just bring it by that day. I mean, is almost inconceivable to me, circa 25, 30 years ago. I mean, it's just amazing.

It would be very similar. It's one of these products or services that is available to average people that would only be what a very wealthy person could have, you know, having a, you know, a large personal staff at home. It'd be normal for a rich guy who has somebody who could just turn to and say, go to the store, wait in line, do this and that. And somebody to do that for you, just average Americans get this amazing, almost magical thing now. So the idea that the counterfactual is better is preposterous and the idea that

this is a problem is preposterous. And people should say thank you to Amazon or go someplace else. It's amazingly great. But they could probably find some econometrics in terms of the relationship between them and third parties in the site. But I just, we're not supposed to care about competitors. We're supposed to care about customers. And we're supposed to care about customer pricing data. And by that, there's not much of a case. I just think, a judge trying to make a careful decision is going to have a much easier time rating this in favor of the company than the government. The government can make the process, the punishment, and will for years balk them down, try to settle for something. If this type of FTC, if a Liz Warren,

FTC stays in power. And boy, it's it's a hard case to make that the alternative is better and the alternative that the government could construct would help consumers and the prices they pay. If Lena Khan, if I'm trying to say something nice just to sound a little balanced here about the chairman and her animus towards Amazon, it would be raising the topic that our antitrust laws are antiquated enough that they might just not fit these companies and what happens when we have tech companies that have almost unlimited economies of scale. and become ubiquitous and have a role in our society that's so hard to avoid for the consumer on areas other than price. It's a little bit hard. It's kind of like when you have a constitutional

issue and you're trying to be a constitutionalist on something that just doesn't contemplate some modern technology, that's the case now for these antitrust rules. You know, what do I pay Google? What do I pay Amazon? I think it's the case that I pay Google nothing and I pay Amazon a trivial amount of money for something that's this huge part of my life in both cases. Well, I think as the law is written now, I think that comes close to ending the topic as a customer and potential consumer harm. But that irritates the chairman and she wants to have something different. I think that's a topic for, I think she should run for Congress. I think that's a topic for lawmakers, not for the administrative agencies to take on. And I think that's what the judges will determine.

the one that really bothers me just so people can hear my grievances like the the app store is the one that really bothers me like that's where i think that consumer harm is really behind the times on because like i do not directly like obviously apple gets a cut but it there's no it's very difficult to prove the counter fashion with the app store but it is just so terrible like i go on amazon i'm looking on the amazon app on my phone i see a book you know i'm on twitter on my phone i see a book that i i click it the link on my phone. I can't buy it on my iPhone because Apple would charge Amazon 20% of a take rate and Amazon just says we can't pay that. You have to go to your computer to buy it, right? Like those types of things. The app store, they take cuts of everything and like, yes, I do get if you're buying an app, they should get a cut. But it seems kind of crazy to me. Like if I download Netflix from Apple, Apple will be like, hey, Netflix, we need to take a 10% cut of every subscription you get if it's the iPhone. So Netflix sends everyone around like the app store is the type of thing where I look at and I say, hey, you know, these types of walled garden networks,

they weren't really, antitrust wasn't really meant for it, but Apple controls iOS and they won't let any other apps are on there. And that seems kind of crazy to me. That's just one example. Let me turn to a specific example. Amazon I Robot. We've talked about it before. I actually think I need to refresh on this because, you know, I Robot ran into financial distress. They cut the price down. I don't believe like Amazon I Robots has been out there. I don't believe the FTC, they obviously filed the case against Amazon. I don't think they filed a case to block i robot i think a lot of people think they will but i i do wonder like just in my mind if you think this fdc goes like kind of crazy is going out just against big as bad i don't see what the

the harm is i think uh i think the e u is still has a phase two out there but i don't know how that's going but that's what i haven't thought about how do you think about that in the wake of uh kind of the amazon getting sued overall uh there's no legitimate antitrust uh issue against the deal There was no mention of it in the case against Amazon. It does still need EU and HSR. The recut deals, recut, my history of, and I didn't own this at the time, but of recuts has kind of been a fairly benign one as an arb because it kind of almost always lets you live to fight another day.

You know, you're never out of business on these things. They tend to be much worse than the best case and much better than the worst case. I still grind my teeth over Tiffany just because they've done so unbelievably well with that that was probably the most ridiculous one of all of just completely opportunistic predatory just he did it because he could but for the most part these things are

quite innocuous and they kind of also true up the date by which you can walk from a deal and there wasn't new kind of antitrust standards applied to that. So I think it's a pretty good contract. I think it's a shoe-in that it should get approved. I don't particularly want to own I-Robot as a broken deal, which has kind of been a struggle for me and all this.

It's like, look at this and it's not one I particularly would be happy to be stuck with. So no current position, but it's the kind of thing that at a big spread, you know, $51.75 cash deal, $12, about $12, $0.50, $12, $0.46. Spread, I look at it and think, you know, later, lower on a suit. I just, is opposed to trying to mind read this FTC and their level of aggression, which seems to be high. I would love to own this going into a judge's decision. I'm just looking, so CMA approved. EU is phase two till, I think, December.

And do you think the EU is going to approve this? I don't know. I mean, I think it's something that, no, I think they'd prefer to block it than get it done unfixed. Is it the kind of thing that they would like to take something out of? It's not clear what you'd ask for because it's not a real problem. But I don't know. I think they probably can find some other way to appease the EU, probably. Does Amazon have, if EU blocks this, is there a appeal process in EU? I'm not as familiar with the EU appeals process and stuff versus how it's, yeah, no, I mean, it's much, it's worse than, you know, is CMA like or in the CMA direction, kind of worse than the U.S. You have a lot more that the age, the, the, the presumptions are favored agency much more than they do in the U.S. Okay. Yeah, that's just, again, I haven't looked it in a while, but as we were talking, it strikes me as like, like, there was the article, I know it got emailed to me a hundred times, an article in either the Wall Street Journal or FT, I can't remember which, two, three days ago that was like golden age of Arb. And it specifically focused on Pentwater just took like to their credit. They took huge positions in multiple deals that the FTC sued on what a lot of people thought were shaky ground. But, you know, a lot of people thought it was shaky ground. And Pentwater is one of the few people like that kind of put their money where their mouth was. and took huge positions these things and said the FTC is going to get beat in court on these things

and who made a lot of money correctly. You know, like Horizon Amgen would be one example. I think they've got a big position in CGen, which hasn't closed. But with Horizon Amgen closing, it seems like CGen is going to close a few others. But I just look at that. I say, look, if Amazon I robot, yeah, the FTC is probably going to sue here. If it's a bad case, like I'd love to read the case and get like real, real confirmation. but, you know, at, as you said, at $37, there is some fundamental downside here.

Like, if you think there's a shot through EU, like, it just, it seems interesting. And the more cases that the agencies bring and lose, just the bolder these companies are going to be. Amazon doesn't really have any reputational or relational problem with the FTC and fighting like hell now, because they're, you know, in court with them anyways. Just maybe one more thing. So companies are going to be more bold. I feel sorry for the next FTC Commissioner that's going to step in because, I mean, I think you've seen reports at a lot of these agencies where career staffers are like, hey, these agencies are way more aggressive than we ever thought. And they're making us bring cases that we think are losers.

I think you're hearing huge turnover. Again, I'm not trying to decry. I can understand some of what these agencies are trying to do, but I feel bad for whoever steps in. It's like, hey, okay, great. We've got like 15 precedent cases now that are highly unfavorable to us. We're kind of a laughing stock after losing all of these cases. you know, my predecessor was getting called in front of Congress and being like, hey, you keep racking up losses. Why do you keep racking up losses and wasting taxpayer money like on exotic

quests to get these losses overturned and stuff when there's no chance? They're going to step into a pretty broken agency. Yeah, I mean, if you start to debate them enough, I mean, this is kind of a joke. This is a joke. But all these companies, you know, between JetBlue and Albertsons and Amazon, they should just all pick a date and just certify substantial compliance at the same time and say, what are you going to do? You can sue 100 deals at the same time? You don't even have enough lawyers to- It's funny you mentioned that. I did have a thought I wanted to ask you. Okay, we might have a government shutdown this weekend, right? And if you have a government shutdown, like there are cases that the courts will eventually stop and like all cases get delayed.

But if you're, let's choose Albertson's Croker, right? If the government shutdown happens on September 30th, and it looks like it's going to drag on, right? Could you certify compliance October 1st? And then if the government shutdown lasted for, three months, right? November 1st would roll around. You get 30 days after certifying compliance for the DOJ to say stop or go, correct me if I'm wrong. But could you certify October 1st? And if the government shut down lasted two months, like there's no one at the DOJ. So you just say November 1st come down, you're like, all right, guys, close the deal. This is over. I would say yes. And then they'd come back with the fine print on any approval saying that it's never final and that they would just

come back. And it's not an approval, right? Like they just certified compliance and the DOJ never approved and then you close. So you would close around HSR and then they would bring a non-HSR in a trust case against against it, but, which I think would be tougher because I'm not seeing to be possible. Like, obviously there were real, there were and are real antitrust issues with Albertson's Kroger's, like a lot of local markets thing. They've got to divest. I think the divest is good.

It might just be a starting point. But, you know, I do think if they, with the divest in hand, if they certified compliance and closed and then the government came after them was like, like, it's harder to break something that's already put together than something that's a part. And I think it would be kind of hard once it's... And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are.

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ones i've been thinking about the most um yeah so litigation antitrust uh deals with possible kickers if other bidders want to come in um those are those are those are anything else we should go through those are well i guess there's two things look we've been doing this i think we started doing monthly updates in like May 2020, and every month we've mentioned Activision, Activision Microsoft. Last month we mentioned, and we said we thought it was going to be closed. It has not closed yet, but it looks like there's a path to CMA. I think Microsoft has said we plan on closing this on October 18th.

It's September 28th right now. Do you think on the next monthly update, we will be talking about Activision Microsoft? I think I've said this before and I'll say it again. Yes. You think we will or you think this is going to close? I think the deal is going to close. I think I'm with you. I'm finally ready to say this will close.

This will be done. We will not be talking about this next month except to say we don't have to talk about anymore. One more. You mentioned it. I've been really interested in as well, oil and gas. And we don't have to go like, look, I've had Josh Young on the podcast. We've had experts.

There are probably people better upon. But I just want to get your thoughts like oil and gas in general. What are you thinking about like kind of the space overall? Hopefully we see more deals. I was very interested in the Exxon deal for Denbury, one that we own that I like. The spread's gotten a little tight at this point just for this deal. But hopefully we see more oil and gas deals. We have the whole sector of equities, you know, just you kind of run around and you see so many things that look like bargains.

the current kind of complex of commodity prices are anywhere near where they are now. And the geopolitics seems to have more roots you could imagine to prices going a lot higher than lower. I mean, just it's an amazing one listening to politicians that want less supply and they want more demand and they want lower prices. And, you know, this has kind of been going on for a while now. And the industry seems to be kind of durably doing less CAP-X than they've done every other time in this similar point in the cycle. And I think at some point you just have a combination of a politically driven pushback against exploration and production and refining. and at the same time, you have them joined by the private sector with their being undercapitalized. So they're just going to be returning money to shareholders.

Hopefully, it comes in the form of more M&A than we've seen so far. I've looked at a lot of situations that seem to be ripe for it. I would say this is second only to financials in terms of something that looks like it has obvious deals that just don't happen as much as I would hope or expect. Yeah, no, look, I think the nice thing about it is all of these companies, like in the past, few, in the past five years, all of them went through between one to three distress cycles. And I think management teams across the board have largely, not completely, but largely gotten the message. Like, hey, we like, your shareholders don't want you drilling. Your shareholders don't want you going and finding new fields. Like, if you want to do that, go be a private

company, like find somebody to underwrite that. Shareholders will vote you out if you try to do that. Some of them are going to the, okay, fine, we'll buy versus drill. And I don't think shareholders love being on the buyer end for the most part, but it's better than, you know, wild expiration. But I think most of them got the memo, hey, you're going to generate a lot of cash flow. The cash flow comes back to shareholders. If you don't do that, we'll find somebody who will.

And, you know, I think about coal, which unfortunately I never played because, you know, coal Twitter's going crazy and coal prices are through the roof. And, you know, all energy is connected. And I think coal is just like the most levered play on energy since it's like the most marginal of it. But all the coal companies have largely gone in the memo, hey, you know, it's coal.

We don't want you to go build a new coal mine. Just return the capital shareholders. So I love the, I just love the combination of really cheap, really cheap stocks. I agree with everyone who says, you know, oil is going to be here a lot longer than people think. And most of the cash flow is coming back to shareholders in one way, shape, or form. Well, so. Well, Chris, appreciate you hopping on. That's been the September, 2023, State of the Markets.

We'll hopefully, I don't know. We'll hopefully get one in October. I've got some personal news that might stop the October team. But I think we'll get in. But this has been great and looking forward to catching up soon. I look forward to it. Nice talking to either. 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.