August 10, 2020- SPAC Activity Off the Charts with Record IPOs and Constant Deals. Is it a Speculative Fervor or is this the New Normal?
Clock is Ticking for Microsoft’s Acquisition of TikTok. Will they Seal the Deal?
M&A is Back With Nearly $50 Billion of Mergers Announced this Week. Is the Pandemic-Led Deal Drought Over?
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 podcast listeners to episode 81 of The Absolute Return Podcast. I am Julian Klymochko.
Michael Kesslering: And I’m Mike Kesslering.
Julian Klymochko: Today is a great Friday, August 7, 2020, a few things to chat about on the podcast this week.
- We are going to be focused on special purpose acquisition companies, SPAC, which everyone loves to hear about.
- Also some really potentially interesting M&A could be a massive deal in the tech space. Social media rumours out there that Microsoft may acquire all of TikTok are perhaps just TikTok’s U.S. assets, and as everyone knows, TikTok, the massive viral app that all teenagers seem to love.
- On the SPAC side, we just wanted to talk about some recent SPAC IPO. Things are really just going crazy in that space of seemingly two to three IPOs every day, so records SPAC issuance and a number of hot deals specifically in the electric vehicle and online gaming space.
- And we’re going to finish off the pod talking about some public M&A. How things in April and May of 2020 were effectively dead. There were no deals and things really just came back with a bang, especially over the past week, nearly $50 billion dollars in M&A announced in the U.S. which is really exciting as a merger arbitrageur. I mean, that is the type of things you like to see, but let’s get into some SPAC activity this week.
SPAC ACTIVITY OFF THE CHARTS WITH RECORD IPOS AND CONSTANT DEALS
Julian Klymochko: We had nearly 6 billion of capital raised across 13 SPAC IPOs since July 30th, so that’s basically over the past eight, seven or eight business days. We have never seen issuance like this. It has never been this wild, this crazy certainly SPACs are garnering a ton of attention, especially after deals like Nikola and DraftKings, and last year’s Virgin Galactic deal that got a lot of eyes on this asset class.
And speaking of this SPAC asset class, it started off April below 25 billion in cumulative market cap. That is now more than doubled to North of 50 billion, so it is rare that you see an asset class double within four months. Just goes to show you how hot the space is this year and on the podcast, we recently discussed Bill Ackman’s record of $4 billion dollar SPAC IPO, which was just, absolutely bonkers because the largest we have seen prior to that was around the $1 million range. So Bill Ackman doing it nearly 4x, what used to be the largest. We saw another huge one with Churchill Capital, their fourth blank check offering. That is right Churchill Capital IV, so the CEO, Michael Klein, certainly making a business of blank check companies. Churchill Capital raised $1.8 billion on Thursday and this was upsized. I believe their initial S-1 was to raise 1 billion. Then they are amended as S-1 was 1.5 billion.
And they, once again, upsized it to 1.8 billion making it the second largest SPAC of all time, nearly half of what Bill Ackman raised, and we really liked this deal, and we’re going to get into it after we discuss a couple of other business combinations in the SPAC space. Really, where we are seeing investors keenly interested in two specific sectors that is electric vehicles and online gambling specifically after Nikola, whose stock is now $35 per share off of a SPAC that used to be 10 and DraftKings, which is also, I believe in the $30 dollar range. Another former SPAC that turned into an operating company and it just goes to show you the upside potential in many of these pre deal SPACs, and it also is indicative of some of the motivations of these SPACs sponsors. They want to perhaps, you know, somewhat copy these guide and get a similar deal to a Nikola, which is like a Tesla rip off and DraftKings, which is really trying to capitalize on this being at home, gaming from home whole trend.
And so we saw a couple of new deals this week, the first one from Diamond Peak Holdings. They announced a business combination with electric truck company, Lordstown Motors, who is developing, a pretty cool electric truck. It has called the Endurance I believe, so certainly I don’t know. I have never seen any of them in real life. I am not even sure if they have built any, I am sure that Nikola hasn’t, but you know, comparing those two, it’s kind of hard to see how Lordstown Motors is only at a 1.6 billion valuation. And Nikola is about tenfold higher, despite on their last quarter, I believe they earned about 35,000 in revenue at Nikola and that had nothing to do with their electric vehicles is I believe an installation of solar panels on the chairman’s house, but I digress interesting deal with DiamondPeak Holdings, got to disclose in our arbitrage.
We are long the stock, we did not buy on the deal we bought pre deal when the SPAC traded at a discount to its net asset value, and this Lordstown deal really exemplifies why we like the SPAC trade so much. Because prior to the deal coming out, DPAC, the SPAC was trading at a discount to NAV. At least it was a few months ago when we bought, after they announced this Lordstown business combination. A conversion basically into an electric vehicle company.
Share price rallied. It is now at a 20% premium to net asset value and how this is going to work is they go through the approval process. They put together a proxy; have a vote, et cetera. Over the next few months, deal closes. It will trade under the ticker symbol ride, R-I-D-E. The SPAC values them at 1.6 billion. Lordstown will get nearly 700 million in proceeds from the deal in order to invest in the business, have their endurance picked up ready for production for late 2021, and I believe they are aiming to have the first EV Truck on the market. EV Pickup Truck on the market, which is interesting.
Another SPAC business combination, not the IPO, but the actual deal where they go out and combine with the private company was Rush Street and this is an online gambling and sports betting deal. It will trade under the symbol, RSI. They did their business combination with SPAC dMY Technology of which we are also long, same trade. We bought a number of months ago when I was trading at a discount to Nav. You will got announced, traded up, not nearly as much as the Lordstown deal did. However, you know, it is still a good return. Going from a discount to a premium to net asset value. This deal values Rush Street at nearly $1.8 billion dollars. That multiple is about 5.6 times Rush Streets projected 2021 revenue of 320 million.
And what’s interesting here, is you look at the investor presentation on these online gambling deals, whether it’s Rush Street or whether it’s a LCA deal with Golden Nugget. LCA is another SPAC that did an online gaming deal, and they’re both valued roughly five times sales, and they make the comparison to DraftKings whose stock has tripled since their SPAC deal and is trading at 15 times sales. So they are trying to get investors to make that connection. Hey, we are like DraftKings, but we are trading at one third of the valuation, so that is interesting to note for investors here. Mike, what are your thoughts on these two business combinations that we saw? No surprise that they are in electric vehicles and online gaming, which seems to be the default sectors for SPACs. And the other thing that I wanted to mention that you see in these deals compared to IPOs is that IPOs have become more so an exit strategy for venture capitalists and private equity firms, where they’re looking to just get rid of the company and these are mature entities. If you look at the SPACs, these are actually rapidly growing companies in which they are raising capital to build the business, so it gives investors access to earlier stage growth companies than you get in a traditional IPO. So it’s, you know, interesting differentiation factor in with the growth obsession that investors have these days, perhaps that’s why they’ve been so hot in the stock market.
Michael Kesslering: Yeah, and so in terms of this DiamondPeak Holdings deal with Lordstown, I mean, it is interesting that you brought up with Nikola. We’ve talked about Nikola being, you know, second derivative of trash but I mean, they’re not really doing anything other than putting out these renderings. They’re a rendering company of sorts.
Julian Klymochko: Yeah and taking the first name of Nikola Tesla when the company, they are copying took the last name, and I joked on Twitter that Lordstown was Nikola Tesla’s middle name.
Michael Kesslering: Yeah. Yeah, exactly and so like at least when you work at Lordstown, what they are building, they actually have a factory. So they took over an old GM factory, so they at least have that. They do have pre-orders; I believe they started taking pre-orders in June. They have $1.4 billion dollars’ worth of pre-orders. I mean, take that with a grain of salt. I don’t believe that any of those customers have put money down. So you know, that is pretty easy to back out of, but at least it does show that there is theoretically some demand there. It is interesting in that sense.
The other aspect that I wanted to bring up with this is, you know, being the third EV Company to announce a SPAC deal but as well, that DiamondPeak Holdings, so their original mandate was in the real estate sector. The SPAC sponsors smartly did shift their core area of expertise into the EV market. Their stock popped, I mean, it was trading over $50 dollar a share now down at 12-25 per share today.
Julian Klymochko: We are seeing a lot of SPAC do that these days is they IPO and say they are focused on a specific sector, and then when it comes to announce a deal, they are really on trend and going after what is hot recently. We saw that with a Tortoise acquisition as well. They did, I believe they did another sort of electric vehicle deal and they are actually focused on energy and then that Apollo SPAC, they did the Fisker deal and they weren’t focused on that at all.
Michael Kesslering: Yeah. Yeah, so it is opportunistic in terms of this SPAC sponsors. I mean, at the end of the day, they are looking for a pop and I guess they were able to achieve one. Interesting as well with the DiamondPeak deal, GM investing into the deal. I thought that was interesting to note. I mean it, is not a huge amount of capital that they are putting in for GM. But as well, moving on towards Churchill, I know you have some thoughts on Churchill as an investment as well.
Julian Klymochko: Specifically Churchill Capital IV. Too many Churchill Capital.
Michael Kesslering: But a little bit of background before we get into that on their CEO, Michael Klein. His claim to fame is he is an absolutely legendary investment banker, so really when you’re looking at SPACs. You are looking for deal flow and Klein would have as good a deal flow as anyone. Where he became a little bit well known in finance was as Sanford Weil a protégé at Citigroup before he then left in 2008. Fairly, opportunistically to start his own a boutique investment bank with a $28 million dollar exit package in the middle of a financial crisis, which obviously made headlines for the wrong reasons for the bank.
Julian Klymochko: Another honestly fun fact, another Sanford Weil protégé, none other than Jamie Dimon.
Michael Kesslering: Exactly.
Julian Klymochko: CEO of JPMorgan.
Michael Kesslering: There is quite the network from Citigroup and Travelers where Weil used to be, but in terms of what Klein has done since then. Just really running a small boutique in terms of Manpower, but really advising on some pretty major deals. Notably did actually advise on both sides of the Glencore Xstrata mining deal, which is fairly, that doesn’t happen very often. So that was an interesting thing a few years ago but really punching above his weight class in terms of being a small boutique and getting some very large and high profile mandates and early, like when getting into the thesis on, on Churchill is really what you’re paying for in a SPAC. And ideally you’re able to get it at a discount which Churchill offers. Is you’re really just paying for deal flow and it’s kind of a crop shooting guessing which deal announcements are going to pop which is where it comes down to having a basket of SPAC names and getting them at a discount. So you are not paying for that optionality, you are able to get paid a little bit for that optionality, but I know you have some thoughts as well on, on the deal, Julian?
Julian Klymochko: That is a good point, Mike, we are not really paying for anything when we buy it at a discount or even at NAV. Cause if you buy it at NAV, you are just going to get worst-case scenario, treasury T-Bill returns, right? If you buy it at a discount to NAV, worst-case scenario, you are going to get T-Bill returns plus the amortization of that discount, so it is basically a T-Bill, plus a spread return. And the worst case scenario but with respect to SPAC like Churchill Capital IV, of which we are long buying the units, and the units represent a shares plus I believe one fifth of a warrant. And so there’s further upside here, but these SPACs, the Churchill SPACs, you can put together fairly, simple thesis here. Michael Klein currently has two other publicly traded SPACs Churchill Capital III, Churchill Capital II. You look at where those are trading; it is fairly easy comparable Churchill Capital III. Units are trading at a 13% premium to NAV off the multiplan deal that they announced about a month ago.
Churchill Capital II units are trading at a 15%, 1-5% premium, not even off a definitive deal. There were rumours a couple of weeks ago about a potential top gout deal that sort of technology, golf Simulation Company nothing announced yet and Churchill Capital IV is trading in the market at a discount to its net asset value. It just IPO basically a week or two ago, and so you can go into the market buy that, say 998, earn the treasury returns and good upside. I mean, Churchill Capital SPAC have been extremely successful in, announcing deals. And the number one thing that a SPAC sponsor needs to be concerned about when structuring a deal and announcing a deal and trying to get it over the finish line, their number one worry or their number one goal is to get the stock up above NAV.
Because if you look at the shareholdings and the firms that buy these IPOs, it’s basically a hedge fund hotel, in it for the arbitrage plus this upside. Sponsor’s goal is to excite enough investors to bid up the stock, such that those hedge fund liquidity providers can exit. And you can get, say, ETF holders, like we’ve seen on LCA, you saw the bet CTF buying into it. Robinhood speculators, or other institutions, retail traders to bid it up above NAV.
Michael Kesslering: Long-term long holders that really liked the story, right?
Julian Klymochko: Yeah, exactly. If they see the growth there, they want to get it up above NAV, such that when the boat comes, no one redeemed their shares or at least very little redemption. Cause otherwise if it is trading below NAV, that is indicative that everyone is going to redeem and the SPAC going to fail. And they’re at risk capital, which is in the millions or in some cases, tens of millions of dollars specifically on Churchill Capital IV, they lose all that money, right?
And it was a huge waste of time putting the deal together and it’s just a massive failure, so sponsors are super cognizant that they need to announce a very attractive deal. Market it such you get the stock up above NAV and that is really the trade right there. And it represents a circle of life as the shares go from hedge funds who buy the IPO or units at a discount to more so retail speculators, other long-term investors, and then perhaps ETF investors has it sort of fits their sector bucket and it’s generally how it works and what makes a successful SPAC deal.
Michael Kesslering: Yeah, and one other thing that I wanted to add there is why sponsors will give a teaser of who they are looking at. As you had mentioned with the Topgolf with one of the other Churchill Capital SPACs, is they will do a little teaser like that. See how the stock price reacts and it really just is a litmus test on whether the market is excited about the deal, and then they may or may not move forward with a definitive deal. Just to look at it from the other side, is it perhaps one reason why it would be trading at a discount, that investors perhaps just aren’t as confident in this size of deal since they’ve raised over $1.5 billion dollars, I believe it was $1.8 billion. At that size range of company that perhaps investors just don’t think there’s as many good targets. Do you think that would factor in at all?
Julian Klymochko: No, I think it is purely a case of too much supply. I mean, there is tons of SPACs coming out. They haven’t been trading great over the past few weeks, you’ve seen quite a bit trade down and then this was initially a $1 billion dollar deal, and as they judged demand and perhaps that wasn’t a hundred percent genuine demand, you know, when you’re bidding to get into an IPO, typically you get cut back on your allocation. So perhaps people oversize their allocations and looking to trim. But when you basically double the supply, I think that had a muting effect on the price action, and that’s largely it, but that also provides opportunities for other investors. Such as us to come in, buy the units at a discount, which is, you know, not all that often, especially with like a premier SPAC management team, such as Churchill Capital IV. I think the opportunity or the odds that they are not going to announce a deal, let alone a good deal is quite slim. Because let’s admit this is their fourth SPAC and you don’t get to your fourth SPAC without doing a number of successful ones previously.
So that’s kind of how we see the SPAC market at that’s ultimately the fairly simple thesis on getting long of Churchill Capital IV and on the Lordstown deal and the Rush Street deal. We are long, these SPACs, you have dMY Technology on Rush Street and DPHC on the Lordstown deal. That is DiamondPeak Holdings. Just got to disclose that there, but enough chats about a SPACs this week. I am sure we will be talking about it next week. This is a market that we’re seeing a ton of S-1 filings, meaning there’s just going to be a ton of upcoming SPACs IPOs in the near term, but let’s get onto some M&A.
CLOCK IS TICKING FOR MICROSOFT ACQUISTION OF TIKTOK
Julian Klymochko: A really interesting potential deal. Nothing is definitive yet. Largely we have just read about this in the media. TikTok, the viral video app taking the world by storm is under pressure from none other than President Donald Trump to sell itself before Trump bands at, in the lucrative, U.S market.
The main issue here is that TikTok is owned by, ByteDance, which is a Chinese company. Obviously, China, the U.S. have not been getting along lately. Specifically the U.S. is very concerned about data. You know, we all know how Beijing loves to use their domestic champions to harvest data from its users, and TikTok offers a steady stream of users who upload videos and generate all these content. It is wildly popular with teenagers, and they have nearly 800 million users of which about a hundred million are in U.S. it is worth a ton of money. Rumours on this deal, it could be worth as much as $50 billion if ByteDance did sell TikTok to Microsoft, which is the current rumour. There are also rumours that Facebook and perhaps Apple were looking at the asset as well. Those don’t seem to be, that thesis doesn’t really seem to have much legs to it.
The other thing that is up in the air. Is how is this deal going to be structured as Microsoft looking to buy just TikTok U.S.? Is it going to be TikTok U.S., Canada, Australia, New Zealand, and perhaps some other countries, or are they going to buy all of TikTok in its entirety? All we know is that President Trump has indicated publicly that he wants to see a deal done by September 15th or he’s just going to straight up block TikTok in the U.S. which would obviously be devastating for ByteDance. I believe the most highly valued private company in the world and it is based out of Beijing. Wanted to talk a bit about valuation on this TikTok deal. The one thing that we do know or we have heard rumours that TikTok is aiming for about 500 million in sales, in the U.S. for this year, and evaluation of 50 billion would put a multiple of a hundred X of their sales, which is fairly steep. I mean, we look at other social media comps, Facebook trading below 10, Twitter 8 and a half times, so I mean, I’m kind of sceptical of the price, but I wouldn’t be surprised to see a definitive deal announced. Certainly, Microsoft has the capital; they have done large deals in the past. For example, they did buy LinkedIn for about 26 billion in 2016. They love the social media space. They are into it. They have a ton of cash and there is really not too much competition for this deal, is there?
Michael Kesslering: No, there really isn’t. It seems that there is really just one. One logical buyer or at least one buyer that has come out and said that they are in negotiation.
Julian Klymochko: Well, the other thing is Facebook likely would get blocked from an antitrust perspective.
Michael Kesslering: Yeah, so almost undoubtedly given everything that is going on in the antitrust space with kind of the big four right now. But as well, when you do mention on a revenue multiple, it is interesting because TikTok still is somewhat in its infancy of their monetization plan and so really right now, it seems like they’re mostly just worried about acquiring users and focusing less so on monetization. And so in theory, though, the rationale and say with things such as Instagram, you know, Instagram was acquired with like effectively no revenue.
Julian Klymochko: Which at the time was a massive, massive price tag, like $1 billion for a company that was fairly new, I think, like two years into it and about like a dozen employees and everyone at the time was like, what’s Facebook doing? Bang a billion dollars for this app that shows pictures, it is nonsense and look at it now. It is rumoured to be worth North of a hundred billion dollars.
Michael Kesslering: Exactly, and that’s the exact thing is that with social networks such as this, the monetization plan really comes in second after you acquire the users and keep those users engaged. It is interesting that you do bring up Instagram and the whole Facebook acquisition, because also with all of this going on. Instagram, owned by Facebook, came out with Instagram Reels, which is basically meant to be just a complete knockoff of TikTok.
Julian Klymochko: Yeah, they did to Snapchat and came out with their Instagram stories when Snapchat would not sell to them.
Michael Kesslering: Exactly and that was the Instagram stories that move was successful but this Instagram Reels move. I just want to dig into that a little bit because, you know, it is a very different situation. And to me, when you look at, I did read a little bit about how potentially this Instagram Reels can really just crush TikTok, and I don’t really think there’s a lot of validity to that. Number one, you just have to think about where the priorities lie within the Facebook organization. And when you look at this Instagram Reels, at this point it doesn’t even have its own app, so there is some concern that Reels will now clutter the Instagram app as it isn’t displayed at all prominently within the app, so you have to go through multiple clicks to get through there on your phone.
But as well, you know, you look at over the last month or so, there’s been a lot of info come out. A couple of profiles in particular around the relationship between the Instagram founders who left in 2018 and Mark Zuckerberg, which ultimately left as I mentioned to them leaving and the main complaint there for them at Facebook after the acquisition was just the lack of autonomy and lack of resources where the core Facebook platform was very much that priority and Instagram was more of an afterthought, despite the massive growth of Instagram within Facebook. But also I would like to remind our listeners, which is something that we talked about well over a year ago, was when Facebook announced they were entering the online dating business. And at that time the main consensus when you looked at the share price of Match.com as well as some of the commentary around Bumble, which is a private company was that really that this was a deathblow for these incumbent players.
Julian Klymochko: I remember match was down at the 20%.
Michael Kesslering: Exactly and when you look now, since that announcement. Facebook has really made no traction and Bumble and Match.com, their app have continued their rapid growth, so it really comes down to news such as Instagram Reels, it is a big splashy news, it will be in the news cycle for a little bit, but we will, we even remember it in a year from now? Or will it be the new Instagram stories? Perhaps it will, but the other aspect of TikTok that I think is really underrated with all this commentary is what TikTok’s main source of vitality is their engagement algo. so how they recommend new videos for users and keep them engaged on the app, which in terms of people that are, you know, following the space very closely, it’s really unique in that sense.
So you are paying for their algorithm basically where, you know, there’s been a ton of virality with Instagram and Facebook, there’s absolutely no doubt about that, but TikTok does have a pretty interesting niche, so there certainly is value there. But one last thing that I did want to mention as well was that I think this could be a little bit of a reminder for a new generation of content creators of really the platform risks that you have, because there’s some of these very young TikTok stars that, you know, are making millions of dollars, but they are wholly reliant at this point on TikTok.
Julian Klymochko: And I think Facebook or Instagram, they are trying to recruit some of them with large pay cheque.
Michael Kesslering: Yeah, exactly, which is smart of Facebook, but in terms of other generations of content creators. I mean you have seen it on YouTube and Instagram where can be demonetized fairly easily, so it does become important to highlight that like. Cause really, if you are a content creator, like one of these large ones, they are a legitimate business. You need to take a little bit of highlight some of that risk that you have on the platform, but a very interesting situation to watch evolve and we’ll see if something goes definitive, as I guess there is a short fuse on this side, mid-September I believe is the deadline.
Julian Klymochko: Yeah, we will know, within the next handful of weeks. I think this is a deal that’ll get done. It is just a matter of structuring the deal but the more important question is Mike, are you going to give our listeners your TikTok handle?
Michael Kesslering: [Laughing] I do not have a TikTok handle, no dancing on TikTok for me unfortunately.
Julian Klymochko: The other interesting aspect on this potential deal. One sticking point is oddly Trump has demanding a finder’s fee on this one, to go into the U.S. Treasury, which is certainly unprecedented and perhaps illegal, but we’ll see whether he’s just bluffing on that one, got to disclose we are along Microsoft in one of our multi-factor funds.
M&A IS BACK WITH NEARLY $50 BILLION OF MERGERS ANNOUNCED THIS WEEK
Julian Klymochko: Last thing I wanted to touch on is if we rewind the clock, go back to April, May of 2020, just slowly recovering from the Q1 bear market, which was just a vicious M&A was dead. We had one public U.S. deal announced in April. One public M&A deal announced in May and the business for merger arbitragers. If there were not SPAC deals to do, there was really nothing going on at the time. It looked like the Coronavirus had killed corporate mergers, but alas things have flipped flopped. Changed dramatically, say over the past, it’s kind of been building over the past few weeks, all of July, we saw about 13 deals, which matched the magnitude of deals that we saw in July of 2019. So flat year over year, which is good to see. A good amount of deal flow and in the past week, we have seen nearly $50 billion of M&A deals publicly announced in the U.S., which is just gangbusters.
Some examples here, we saw Telemedicine leader, Teladoc Health announced the acquisition of Livongo Health for nearly $19 billion dollars, consideration is a mix of cash and shares. Now, both those stocks have been absolutely on fire. I think Livongo is up about four X year to date because in a pandemic everyone is staying at home. You know what sector is hotter than Telemedicine, so Teladoc looking to consolidate there. More on the healthcare side, German health group, Siemens Healthineers expanded into cancer care with the 16.4 billion acquisition of Varian Medical Systems.
In an all cash deals struck at a 24% premium, so that is just another massive deal, nearly 20 billion and these types of deals we weren’t seeing at all in 2020, and now they’ve all come out in the same week. A third deal north of 10 billion, Cable Cowboy John Malone is merging two of the cable companies that he controls Liberty Broadband is acquiring GCI Liberty in an 11.5 billion all stock deal. In addition to those, we had two more sub $1 billion deals, a deal involving a merger of Third Point re-insurance, which is Dan Loeb’s hedge fund. He started a reinsurance operation, basically to provide his hedge fund with permanent capital. However, the reinsurance side has been tough, tough, tough business. If you look at the long-term share price performance of that. They are merging with Sirius then a real estate merger involving Jernigan Capital and Nextpoint Advisors. So Mike, what are your thoughts on some of these deals? I mean, it is really nice to see things get back to normal and see some blockbuster deals, especially in the merger arbitrage space.
Michael Kesslering: Yeah, in general, it is really nice to see this pipeline being refilled with new deals. The only deal that I had really wanted to highlight would be the GCI Liberty and then Liberty Broadband. Now that deal is really just a classic John Malone deal where it’s two tracking stocks being consolidated where these tracking stocks are really just entities where the vast majority of the value is actually ownership of charter communications.
Julian Klymochko: John Malone loves his tracking stocks. How many does he have these days?
Michael Kesslering: I think there is like 8 or 10. Yeah, and in terms of that, there is some other equity positions as well as a small operating entity within GCI, but Liberty broadband is basically a pure play tracking stock on charter, and so really when you looked at GCI Liberty. It was kind of a second derivative tracking stock of charter, right. Because it held a large portion of Liberty Broadband already, so it is really just simplifying the capital structure.
Julian Klymochko: Each one has a HoldCo discount, so GCI basically had a HoldCo discount squared.
Michael Kesslering: Yeah, It had a discount about 10% to NAV. Whereas Liberty Broadband had a higher double digit; I believe it was around a 17 or 18% discount. So it will bring in that discount to NAV slightly, but really it will still trade at a double digit discount, but really this just takes it closer to the long-term investor thesis of charter, eventually rolling these up into the parent into charter these ownership stakes. And so I thought this one was interesting, as this is a very popular special situations hedge fund trade. Where, you know, it is appealing where there was a lot of interest in Charter for their broadband capabilities bringing them into more in line with their competitors in terms of valuation, which in terms of operationally, it was a turnaround. They were integrating a massive deal with Time Warner Communications, so that has been the thesis there where it was a turnaround undervalued with this NAV discount as well, but eventually that is the thesis that folks are looking at within that. But still interested to see as anything that John Malone does in this space is always interesting to follow. As you had mentioned, Julian, he loves his tracking stocks.
Julian Klymochko: Yeah and we love to see a lot of M&A and a lot of SPACs because if you look at where things stand currently, obviously just got to a very difficult market environment. But the S&P has once again, gone to near record valuation levels, growth stocks are at valuations exceeding that of the last growth stock bubble in 99, 2000, which ended in tears for growth investors, and then you look on the bond side. Yields are rock bottom. I mean, nearly zero. You have tips trading at negative 1% yield. Some people speculating that they are only going to go lower and lower. I always like to think of the quote from Charlie Munger. Fish where the fish are and where we see fish in this potentially perilous environment. Record high equity valuations, growth stock valuations, just absolutely off the charts. Bond yields, really nothing to do on the fixed income side, where we see the fish. SPAC arbitrage, merger arbitrage, there is a ton to do there.
And it’s a very exciting space and it can generate pretty exceptional returns, especially in a low risk nature and that’s why, really that’s what we’re all about in terms of investment strategies. Obviously, in addition to multi-factor long short strategies, which does not really matter so much where market valuations are, you are more playing a spread between different types of securities, but that is about it for episode 81 of The Absolute Return Podcast. Folks, if you enjoyed it, check out more at absolutereturnpodcast.com definitely follow Mike on Twitter. What is your handle?
Michael Kesslering: @M_Kesslering.
Julian Klymochko: And mine is @JulianKlymochko, K-L-Y-M-C-H-K-O. And until next week, hopefully we see more SPAC IPOs and deals more M&A activity. It is really just a great trend that, we like to see and we will definitely keep our eyes on this TikTok, Microsoft deal. Could see something announced soon, so we wish our listeners all the best in your investing, trading, speculating. Maybe even some arbitraging, we will chat with you soon. Cheers.
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