May 19, 2020 — Bitcoin Goes Through a “Halving.” What is it and Why is it Bullish for Bitcoin’s Price?

Uber Makes Play for Grubhub. Why is This a Bad Deal?

Gran Colombia Gold Reveals Unsolicited Bid for Guyana Goldfields. What Will Happen With Silvercorp Waiting in the Wings?

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Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by accelerate financial technologies. Accelerate because performance matters. Find out more at www.Accelerateshares.Com.

Julian Klymochko: Welcome ladies and gents to episode 68 of The Absolute Return Podcast. I am your host doing Julian Klymochko.

Michael Kesslering: And I’m Mike Kesslering.

Julian Klymochko: Today is Friday, May 15, 2020. Interesting times in the markets these days in the age of COVID-19, but still a lot of interesting things going on, not just in stock markets, we’re going to chat about some M&A, a hostile bidding situation but also about cryptocurrency.

    • We are going to talk about Bitcoin. It went through a halving this week, specifically on Monday. What is it? And why is it bullish for Bitcoin’s price?
    • Uber makes a play for a GrubHub. They are trying to put together a friendly deal. They are not there yet, but nothing official. We are going to chat about if this is made official, why is it a bad deal?
    • Then we are going to chat about Gran Columbia. They revealed an unsolicited bid for Guyana Goldfields, topping Silvercorp, friendly acquisition price. What will happen with Silvercorp waiting in the wings and will this turn into a full-blown bidding war?


Julian Klymochko: First, I wanted to chat about an event that comes about every four years. It is a pretty rare event, which is Bitcoin going through it’s a third halving this week, which is really, really interesting event. First, I wanted to discuss and talk to listeners about what exactly is a halving. Well, it refers to the 50% reduction to the rewards earned by Bitcoin miners that successfully process transactions on the network. When Bitcoins are created or mined by so-called miners, they are not actually physical miners, but basically you know, warehouses of these very, very powerful computers. They contribute computing power to securing the Bitcoin network, which basically makes it impossible to hack. And that’s what makes the network so powerful is this so called proof of work mechanism where miners, they run these calculations. They process these transactions on the network and solving these complex mathematical puzzles through their vast computational power. And then after they do this, these miners are rewarded for their work processing, the transactions on the block chain with Bitcoins and the way the network was initially designed to combat inflation, it was written into their initial code, that the total number of Bitcoins that will ever exist will be 21 million. Right now, there are about 18.4 million Bitcoins and the expansion of the supply decreases over time.

So the way it works, if we get into the details, the first block recorded on the Bitcoin block chain was in January, 2009 where the miner, which I guess was Satoshi, he received 50, or they received 50 Bitcoins. Then this halving occurs every 210,000 blocks. It is expected to happen roughly every four years and these block rewards will half at that point. The first halving officially took place on November 28, 2012 and the miners’ reward was reduced from 50 Bitcoins to 25 Bitcoins. Then for the next four years, miners were rewarded 25 Bitcoins for each successful blocked mine. Then the second halving was on July 9, 2016. Then a miner’s reward was reduced from 25 Bitcoins to 12.5 Bitcoins. What happened this week was we had the Third halving on May 11 where Bitcoin miners will now receive 6.25 Bitcoins as a reward and really the net effect of the halving is such that growth and supply decreases and is thus disinflationary, which many Bitcoin bowls believe makes it superior to the inflationary nature of Fiat currency. The other thing that I wanted to mention is if we go back in the Bitcoin’s history, which is not all that long, I mean, in just over 10 years now, the previous two halving’s specifically one in 2012, and one in 2016, they led to like ridiculous bull runs in the price of Bitcoin. If we go back to, and it wasn’t initial like the most Epic bull runs in Bitcoin have been in I feel like in 2013 and 2017, where you had the price going up by an order of magnitude just sees wicked bull markets which basically a year prior you had one of these halving episodes. That is something to keep in mind if we go back to kind of 2012, 2016, when those halving did occur, initially there was a brief fell off, and we did get a bit of that this week over the last week.

And there’s a lot of hype around the halving that happened on Monday and I believe Bitcoin actually tanked about 10% and has recovered quite a bit over this week. Nonetheless you know, really interesting aspect of how this works. You can contrast it to the Fiat currency system where the growth and central banks effectively target inflation, at least in developed markets, roughly 2%. And you get this compounding effect such that on amount of money, outstanding money supply basis, it’s effectively compounded. It turns exponential, right, but Bitcoin; it is kind of the opposite where you have a growth in supply actually declined such that once they reached the 21 million no more growth in supply. Then it will perhaps turn a deflationary, but really interesting thing happening in a, you know, the digital ccurrancy system, really a stark contrast to what’s happening these days with central banking, where there’s a tremendous amount of stimulus and big increase in money supply. It is interesting to keep in mind and the main reason why there is many investors out there that increasingly see Bitcoin as an investible asset class in a store of value. Having something that is definitely worthwhile to pay attention to and an interesting point in the history of this cryptocurrency, what are your thoughts on it?

Michael Kesslering: Well, so I guess, first of all, so you’d mentioned the price effect. Bitcoin is on the whole up 6.3% since the halving so that’s interesting to note as well, you know, why does this matter? So if you’re a holder of Bitcoin, you’re worried about the price effect effectively, it’s introducing more scarcity to the asset class as less Bitcoins will be mined on a daily basis. That is good for you as a holder. The other party that this early impacts are the miners, so they have two ways of making money as a miner. Now you had mentioned the block rewards that you get for verifying transactions and finding the new combination for the next block. Now, the other portion of how miners make money is through transaction fees. As you had mentioned in the halving, that’s a 50% decrease for the block reward.

Their revenues on that side of the business are cut in half but what you have also seen is that block transaction fees. Whenever you do a transaction on the block chain, you have to pay these transaction fees. If you are moving your crypto from one wallet to another, you have to pay these transaction fees. Those have actually increased from 4.6% to 7%. Some of the lost revenue form minors has been regained on the transaction fee side. Now, one interesting thing that I would like to note on that specific to the halving is that back in 2017, 2018 Julian and I we were looking at a variety of different mining operations and predominantly these mining operations you know, there was multiple companies becoming public. We were looking just at the public documents and what you saw was their use of machine was typically the S9 Antminer. And when they were building out their curbs for their production, in terms of mining, many of these companies were assuming a useful life of five, mostly five years into the future that, these machines would be useful for. Well, this halving is now expected that the S9 minor will now become obsolete.

Julian Klymochko: Goes into the junk pile.

Michael Kesslering: Yeah, exactly. It is too inefficient. There is more, more productive machines that are out there that can mine Bitcoin at a more efficient rate. Just in a couple of years, you are seeing these being scrapped, which is, you know, just speaks to how difficult the Bitcoin mining space is. Now there is another interesting thing that came out in the crypto space this week that some of our listeners would have came across, was on Wednesday, Reddit as many of our listeners are well aware of it is a top 10 in terms of visits, daily visits, a website in the U.S. Now what they did was they took a couple of their sub-reddits, the cryptocurrency sub-reddits, and the Fortnite sub-reddits and they started a pilot program where they actually gave each of those sub-reddits, their own individual cryptocurrency, which is what they have termed as a community currency.

And this can be viewed as for anybody that follows the crypto space. There is two types of tokens in the crypto world. There is utility tokens, something that you just use on a platform and security tokens. Which are mainly used for speculation and come under the purview of the SEC. As there has been quite a bit of drama in terms of frauds where security tokens were speculated, investors lost a bunch of money and, you know, they wanted the SEC to protect them for those losses. Now in this situation, really what it’s being used for is a rewards programs. On the sub-reddit, you use it this for status. You are given some of the coin for just basically engaging in the sub-reddit and what you can do with that is you can buy gifts with it, as well as get entrances to special groups within the sub-reddit.

So really right now it’s based on the Ethereum block chain. You can transfer it over to other wallets, but right now, it is not being traded on any of the exchanges, so there is no value to it. There is no monetary value to it right now, but it does look like they are in the future looking to really increase the engagement on their platform and hope that if there is any value to the special memberships and other platform options. That they have within the sub-reddits, then there will be a monetary value and they will be traded on the exchanges. Now there is a lot of people within the crypto world that are excited about this. And really, this is an actual legitimate use case that would be a way of showing-especially with regards to other companies’ rewards programs- that the block chain is the best use of database for their rewards program and having a rewards program that could perhaps be traded across platforms.

Brian Armstrong, the CEO of Coinbase one of the largest crypto exchanges. He fired out a tweet storm a couple of days ago. He is really, really excited about this. Given his excitement, it may indicate that Coinbase will be interested in having these traded on their platform, but ultimately at the end of the day, the value of these coins will really be tied to any demand of the services and options on this, the Reddit platform. If you can represent any sort of scarcity that these cryptocurrencies could increase in value, but Reddit is being very clear that these are utility tokens and they don’t want people speculating on them at this point in time.

Julian Klymochko: Yeah, that makes sense. That makes sense. Because they don’t want them to be viewed as a security likely.

Michael Kesslering: Absolutely but really what this points to is just a little bit of renewed interest in the cryptocurrency space specific to Bitcoin, as well as some of the other cryptocurrencies that are based on the Ethereum block chain.

Julian Klymochko: Yeah, the other thing that I wanted to mention with respect to this halving is that I do believe it is bullish on the price. You look historically 2012, 2016 after the last 2 halving’s, Bitcoin has gone on an absolutely epic tear after that. One economic theory I like to observe as the cost of production, which basically governs clearly after this halving the cost of production is going up because the block rewards get cut in half. Right? And so if you think about commodity production, typically the clearing price in a market is a premium to the cost of production. Otherwise, no one would produce the commodity if they could not make a positive margin on it. Right? And so that’s a good economic theory to keep in mind in terms of the future price of Bitcoin. If the cost to produce is going up, then you are likely to see the price follow.

And if it didn’t then, you know, the whole system wouldn’t work because there would be a big restriction in supply. And if there’s a restriction in supply, then you know, economics one-on-one indicates that a price will go up. That basically summarizes what’s going on in the cryptocurrency space this week.


Julian Klymochko: Definitely exciting news. Wanted to chat about some M&A with ride sharing company, Uber reportedly trying to merge its subsidiary, Uber Eats with rival Grubhub and a potential all stock $6.9 billion deal, wanted to disclose that we are short and Grubhub shares. Not in our merger arbitrage fund, but in our multifactor strategy. Had to note that but nonetheless, according to sources, Grubhub is requesting the 2.5 Uber shares per Grubhub share in consideration while Uber is reportedly only willing to offer 1.9 share exchange ratio.

This is not a done deal. It has been reported by the Wall Street Journal. There is still a wide bid-ask. Talks could certainly fall apart here. It has been heating up and Uber seems to be walking down the price. We will see where this ends up. We just wanted to chat about, you know, what the deal could like if it impact does get made official. One thing I wanted to mention is this company that combined entity would have pretty significant market share North of 50%. This deal would consolidate effectively at three-player market down to two. The major players are Uber Eats, Grubhub and DoorDash. DoorDash is the most popular meal delivery service in the U.S. with about 42% of the sales. Then you have Grubhub and Uber Eats with roughly 30 and 20% respectively.

These top three players have roughly 90% market share. Then you have kind of a bunch of minor players, but a lot of antitrust is based off, you know, local market shares. If we look at some local markets just to look at how this pro-forma market share would look at that combined entity. It would have 78% of the market share in New York, which is clearly from a department of justice perspective that would raise significant antitrust concerns from a competition standpoint, go to Boston, Chicago, and Miami that combined Uber Eats and Grubhub would have North of 60%. That is 60% market share. Certainly, from a merger perspective would be a major concern. The other thing with respect to this business model is third party food delivery has been unprofitable for years, despite incredibly high fees, as high as 30%.

That is taken out of the pocket of restaurants on each delivery order, plus fees on fees, additional fees processing, delivering marketing, etc. Very, very slim margins. Was just looking at Grubhub, 10 Q and 10 K not very good. Unprofitable last quarter, they had a number of years in which they are losing money on a net income basis. Still these businesses have been doing decently well over the pandemic, obviously more and more people ordering in food. However, Grubhub and Uber Eats are still struggling to make a go of it, to make it profitable. It is an interesting fluid situation as a negotiated deal, is not done. However, you know, we will, remain observing to see what happens here and just wanted to chat about our initial thoughts. What are your initial thoughts? Do you think that this is a high quality transaction?

Michael Kesslering: I mean, in terms of, you know, anybody looking to speculate on the potential for a transaction is what jumps out right away is the gap between their valuation expectations. Right away, there is obviously a bridging of that gap that needs to happen, and then the other thing that you mentioned was from an antitrust perspective. Is even if they announce a definitive deal, is that this is most certainly going to be analysed by the antitrust watchdogs. You know, like, especially when you had mentioned areas such as New York. I mean, that is just a very politically charged area. Where the attorney general there, I mean, it would be highly likely that they would end up bringing that individual state would end up looking to block that deal. Ultimately, like Uber and Grubhub, their defence in an antitrust situation would likely just be that Grubhub would not be able to survive on their own, which has been used successfully in the past, but it is not a particularly strong argument.

Julian Klymochko: Certainly not as strong argument for being long Grubhub shares. If they are basically saying that, look, we’re going to go out of business or it’s not a great strategic rationale for Uber Eats, buying a company that’s going to go out of business.

Michael Kesslering: Exactly and at the end of the day, antitrust authorities are not necessarily as concerned about how vibrant a business can be. They are more concerned with the consumers. As you had mentioned, going from a three-player market down to a two-player market, it is a pretty tough argument that’s better for consumers. You had mentioned just how unprofitable the business is, is in Q1 of this year they are not doing well. I mean, Uber Eats that division lost $313 million in Q1 of this year, despite a doubling of revenue. And that that $313 million loss is just a 1% increase, but that’s on a doubling of revenue. They are actually scaling up, but their losses are remaining the same, which really just speaks to how poor the underlying unit economics are.

I remember when Uber did go public as well. The Uber Eats division, I believe in their S1 was showing that that division was actually not growing revenue that they are actually declining in revenue year over year. Now with everybody quarantining right now, it has been better in terms of revenue growth, but you know, you just have not seen any benefits to scale. I would be very curious to know which side the details of the deal. As this was very obviously leak to the press, just given that exact share exchange ratios were given to the press, you know, I’d be very curious what the negotiating tactic was in releasing this and which party did so.

Julian Klymochko: Yeah, perhaps it was on the Uber side because what was interesting is traditionally in all shared M&A, you see the acquire stock go down, but in this one Uber share has actually rallied. Perhaps they wanted to get some insight into what their shareholders would think prior to signing on the dotted line for a definitive agreement. That is my thoughts on that, but with respect to the overarching strategic rationale of the deal, I think it is a low quality transaction. Not only are there massive antitrust potential issues that could end up blocking the deal, but you basically putting together two crappy business model. It is not going to make things a lot better, as you indicated, Uber Eats losing a ton of money, hundreds of millions of dollars Grubhub modestly profitable sometimes and the other thing is these companies face tremendous regulatory pressure delivery fees are coming under massive scrutiny.

Just the restaurant industry is, in a pretty fragile state and you’re hearing more and more noise from restaurants just regarding the gouging that these meal delivery companies are doing. Then in New York, just this week, city council voted to place a 15% ceiling on meal delivery charges which has a big impact on someone like Grubhub. And I’m sure we’ll see additional States, counties, cities implementing the cap on fees that third party food delivery companies can extract from restaurants, but nonetheless, still this deal is quite speculative, nothing official. At this point, the shares are kind of moving a rumour charge. It could in fact get announced, but it certainly cautions listeners on the antitrust concerns. And then Mike, you mentioned the so called antitrust offense that Grubhub, isn’t going to make it well, that’s not necessarily a great long thesis on the stock or a great long thesis for the strategic rationale on the deal. They do believe that there could be some pretty significant synergies. However, at the end of the day, the business includes delivering food via car. I mean, you know, there is only so many orders that a delivery driver can make. What, two to three per hour, how’s combining both companies going to prove that?

Michael Kesslering: The last mile has always been the most difficult in logistics and for food delivery. The entirety of the business model is the last mile. It is a very difficult space.

Julian Klymochko: Yeah, so we are negative on this deal just to wrap that one up, we will see if it gets announced and perhaps we’ll do some follow-up coverage on it, but leave it at that for now.


Julian Klymochko: I wanted to chat about what gets me really excited, the first step potential hostile bidding war of this whole new COVID-19 era. Obviously there’s been a, quite the lull in M&A mergers and acquisitions transactions over the past two and a half months ever since this whole Coronavirus led bear market and recession commenced. However one side effect of all the fiscal and monetary stimulus has been a big, big bull market in gold. And that’s carried a lot of these gold miners with it. I was looking at the new 52-week 52 high list yesterday on the TSX; basically all 20 of the stocks on the new 52 week highlights were gold miners.

And so this is a space that investors have to be paying attention to. You know, the sector has been on fire with the underlying commodity and we are seeing a lot of M&A in the space and I was looking at it just now, seven deals announced in Canada over the past, well, since March 23rd and all seven have been in the gold space. It is really important to consider that now more than half of our community and M&A is in the gold mining space and what happened this week was gold miner, Gran Columbia. They revealed an unsolicited proposal to acquire Guyana Goldfields for a hundred million bucks in an all share offer. Now this potentially kicks off a bidding war for a Guyana Goldfields against friendly acquire Silvercorp. What happened on April 27, Silvercorp and Guyana, announced a friendly acquisition for about 70 million bucks, as Silvercorp to buy Guyana Goldfields.

And now a couple of weeks later, a Gran Columbia came in with an all-share proposal worth about 90 cents per share on the announcement came in at 114% premium to Guyana uneffective price and nearly a 30% premium to Silvercorp’s friendly bid. Certainly, they are putting up a serious offer here that is super competitive and a massive premium price to Silvercorp friendly bid. In addition to that, they did establish a toehold in Guyana Goldfield stock. Gran Colombia by toehold we mean they bought a bunch of the shares in the open market. Gran Columbia bought $8.7 million shares of Guyana in support of the transaction representing roughly 5% of the shares outstanding and this cost them about $5 million bucks. If they were not serious about this deal, they probably would not sink $5 million into it. One of the main strategic rationales behind the deal, significant synergies you know, super, super high way higher than what Silvercorp could recognize.

Because Silvercorp mines are in China, meanwhile, Gran Colombia, Guyana Goldfields, and a third party in this transaction. Another junior miner that Gran Columbia has a friendly deal to acquire a Gold X as they’re all in the same kind of jurisdiction in South America, despite the higher price on this one, thus far, Guyana board of directors has rejected the unsolicited proposal. They did indicate in their press release that the price did look nice. However, they did blame some of the attached conditions to prevent them from scrapping their friendly deal with Silvercorp, which would come with a break fee of about what is it, $3.7 million. One of the reasons they indicated is that they wanted the cash from Gran Colombia to pay that break fee. And they also wanted this acquisition by Gran Columbia, not to be contingent upon the Gold X deal, which is the other friendly deal that Gran Columbia is proposing.

In addition, I wanted to mention that we are long this M&A trade. We really like it, so we are at this point long Guyana Goldfields, a potential bidding war. I personally think that we will see Gran Columbia come back. As we like to say in an auction process, you never start with your highest offer. They are kicked off the bidding war at 90 cents per share with a couple of conditions. I would not be surprised for them to remove some of those conditions just because the price is so far superior. And I mean, they took that 5% total, that 5 million bucks. If they are not serious, then it is probably something that they would not do. Super excited about this because this is the first potential bidding war and hostile M&A proposal since the coronavirus market crash. For Merger Arbitragers, exciting, exciting times. What are your thoughts on this potential bidding war here and this crazy bull market? We are seeing a lot of consolidation in the space.

Michael Kesslering: Yeah, I completely agree with the excitement over the deal or the offer. Just because, I mean, and if you’re just reading the headline, it said that Guyana had rejected the offer and that’s, you know, if that’s all you read into it you wouldn’t be as bullish, but really like this was a far superior price offered in terms of their proposal. What they were just kind of rebutting where the conditions placed on it. Like the concurrent closing of the Gold X mining acquisition, I mean that just introduces more dealer risks. Their line of thinking is that when you take into the account, the break fee that concurrent Gold X mining acquisition and especially the short-term liquidity stress that would put on Guyana for that $3.7 million is they just did not think that they were being compensated enough for that.

The couple of options is that Gran Columbia can either increase their consideration to a point where Guyana feels that they are being fairly compensated for that risk, or just very simply remove some of those conditions, especially the concurrent acquisition. I understand what they are doing because they are all in the same geographical area. They only want to do this and they can maximize their synergies, but by removing, that condition can perhaps result in all three of them having a higher probability of making out good in this situation. It is very interesting situation. With the break fee, they already have offered to provide a loan to Guyana. Lessening the requirements in terms of use of proceeds could help with that. Overall, you know, this is great news for anybody in the Merger Arbitrage space that is, you know, itching for a big war.

Julian Klymochko: Yeah and bidding war are the types of deals that can really make an ARB’s year. Situation certainly worthwhile paying attention to, and better believe we’ll be following it very, very closely and we’ll keep you updated on the situation there, but that’s about it for us on The Absolute Return Podcast this week. If you enjoyed it, please check out more podcasts and I definitely encourage you to follow us on Twitter. Mike where can they find you, what is your handle?

Michael Kesslering: Mine is M­_Kesslering

Julian Klymochko: And you can follow me @Julian Klymochko that, is K-L-Y-M-O-C-H-K-O. We wish you the best of luck in all your trading, investing and speculating over the next week, and we will chat with you soon. Cheers.

Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.

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