October 26, 2020- Altice and Rogers Turn Up the Heat on Cogeco as They Increase Their Bid by $800 Million. Why Did Cogeco Reject Such a Lucrative Offer?
Paypal to Allow Customers to Buy, Sell and Shop Using Bitcoin. What do Crypto Investors Think of the Initiative?
ConocoPhillips to Acquire Concho Resources for $13 Billion. How Are Concho Shareholders Doing in the Deal?
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 94 of The Absolute Return Podcast. I am Julian Klymochko.
Michael Kesslering: And I’m Mike Kesslering.
Julian Klymochko: Today is Friday, October 23rd, a few really, really interesting things happening in the market this week.
- We’re going to highlight an interesting hostile takeover bid from Altice and Rogers for Canadian cable company Cogeco. They actually boosted their bid by 800 million. Yet Cogeco still rejected this, we’re going to get into the dynamics on this. Why Cogeco rejected such a lucrative offer that is ultimately costing shareholders well over $2 billion dollars of lost value? Pretty shocking.
- Some crypto news. PayPal is going to allow their customers to buy, sell, and shop using Bitcoin. What do crypto investors think about this initiative?
And lastly, touching on some more friendly M&A here. ConocoPhillips, continuing this trend in the oil patch of low premium consolidation deals, they announced the acquisition of Concho Resources for $13 billion. How are Concho shareholders doing in this deal? Plus, we’re going to talk a bit about golden parachutes and the executive comp.
ALTICE AND ROGERS TURN UP THE HEAT ON COGECO AS THEY INCREASE THEIR BID BY $800 MILLION
Julian Klymochko: But Mike let’s start things off with Altice and Rogers. Really shocking the market this week, seemingly with their improved proposal for Cogeco, we previously discussed this deal on the podcast last month. It was an unsolicited offer, quickly shot down by Cogeco controlling shareholder. No one really knew what the next step for Rogers and Altice was. So, we found that out this week, they’re coming back, topping it up by a stunning $800 million dollars. So, the deal goes from being worth 10.3 billion initially to now being worth $11.1 billion dollars. In terms of the offer per share, remember there are two Cogeco outstanding. There’s Cogeco Communications and Cogeco Incorporated. The bid stands at $150 dollars per a Cogeco Communications share and $123 dollars for Cogeco Inc share. That represents premiums of 51% and 56% respectively, significantly higher than the standard 25 to 30% control premium.
So, shareholders getting a sweet, sweet deal on this one, but unfortunately for shareholders, the controlling Audet families specifically, Louis Audet, the chairman of Cogeco is not having any of it. Despite Rogers and Altice offering a stunning $900 million dollars for their 3.3% stake in the company.
Now what’s shocking here. It gets a massive premium deal. Sweet value for shareholders. We should know because we are one, but nonetheless, the Cogeco board was quick to reject, not only the first offer, 10.3 billion, but the second offer, which reflected premiums of more than 50% for both the Cogeco shares, they rejected it basically solely because chairman Louis Audet, has no interest in this bid, which is stunning. And I wanted to get into the shockingly bad corporate governance in this company. His family only has a 3.3% economic interest in Cogeco, which is really, it’s disturbing because this grants them a 66% controlling voting interest in the corporation just due to their holding of multiple voting shares.
Now this rarely happens these days. It’s really a relic of a time gone by when corporate governance was much less of a consideration, however, poor corporate governance really coming out into the forefront here. And if we look at that $900 million dollar offer for their 3.3% stake, the economics are pretty outstanding because this $900 million dollars for a state currently worth only $150 million in the market. This equates to $500 per share, which represents a shocking 500% premium. So clearly, I don’t know what Louis Audet is thinking. However, you know, to get to that $500 per share, I believe he’s 68 years old, not going to happen in his lifetime. So clearly, he is being driven by something other than money here, perhaps he likes the perks of the job, the reputation, et cetera. Also notable is that in this deal, Rogers owns one third of Cogeco worth 1.6 billion. They want to buy the Canadian assets while Altice wants to take the US assets specifically at Atlantic Broadband. So, Rogers owns about tenfold, the amount that Louis Audet does, the only unfortunate thing for everyone all around here, not only did Audet reject this bid, but think about that, $900 million offer for $150 million stake that Delta, that $750 million Delta could be going to subordinate voting shareholders such as us. So, you know, it’s tough not to get a bad taste in your mouth from this example of poor corporate governance, obviously the market not liking it, despite the offer being increased dramatically, Cogeco shares fell almost 10% this week on news of the offer an hour trading at a shocking 35.5% discount to the offer. So, the upside is nearly 60%, 6.0% representing well over 2 billion of lost value for shareholders. When the initial bid was announced, Cogeco shares went to as high as $132 dollars, but now I’ve fallen to actually a lower price than when the first bid was announced. I believe that around 98 and change, then now there are about $97 dollars. So really, really poor raw deal for a Cogeco subordinate shareholders. What are your thoughts on it?
Michael Kesslering: It’s quite frustrating, and even the deal as currently constructed, as speaking as a minority shareholder here, you’re still seeing a substantial amount of value capture by the Audet family, which is frustrating as minority shareholder. They are extracting value from shareholders in this situation.
Julian Klymochko: Well not by rejecting it.
Michael Kesslering: Sorry, as the deal is currently structured, which they have denied.
Julian Klymochko: And shockingly, they still don’t take it despite taking so much for themselves for being offered so much for themselves from the pockets of other shareholders and still rejecting it. And to me, that’s just absolutely shocking. It reminds me of say back 10-12 years ago when Frank Stronach was, I believe, paid $800 million dollar premium for his voting shares in Magna, which was just shockingly bad corporate governance at the time. But this one perhaps takes the cake as the worst I’ve ever seen.
Michael Kesslering: Yeah, and looking over into the long-term as well, in terms of the strategic rationale to be selling a Cogeco. These are both competitive markets, which they are at sub scale. As you had mentioned, Altice is interested in the Atlantic Broadband, which is competing in a market against the likes of Charter and the large broadband companies.
Julian Klymochko: Plus, Altice is backed by a big, big money.
Michael Kesslering: Exactly, with Patrick Drahi. And then when you look at Canada, you have their Canadian market that is dominated by larger players being Rogers, you have Telus, you know, this is a very competitive market, which also keep in mind that especially in the US, the players in the US are committed to spending a substantial amount on 5g. So, they’re going to be outspent pretty substantially. And so really being a shareholder moving forward, it is in your best interest to be acquired and achieve scale in this industry, that is important. We’ll be talking about that a little bit in the Concho-Conoco deal, but it’s a specialty important in this industry. So just all around, very frustrating as a minority shareholder, it’s why we absolutely hate dual class shares, which we talk about in many IPO’s that try to come to market. They’ll come with a dual class structure. Some of them keep it, some of them will move forward with an IPO and cut that portion, but it’s just terrible corporate governance.
Julian Klymochko: Yeah, you know what? Our attitude is one-share-one-vote. That’s how it should be. Anything less, that’s not the best from an ESG perspective, which is becoming a greater and greater consideration within capital allocation and asset management these days. The other unfortunate thing is this likely wouldn’t be Altice and Roger’s last offer. I believe there is room for them to further increase this bid, but Louis Audet said, this is not a negotiating stance. Their shares just aren’t for sale, which is unfortunate. As I indicated, costing his family, nearly a billion dollars and costing Cogeco subordinate shareholders, well above 2 billion. Altice and Rogers indicated their offer stands until November 18th. So unfortunately, we don’t expect a lot to happen here. The market not pricing in much of anything. In fact, the stock is actually lower than here it was prior to this being announced.
Obviously, it would be a great deal if they could come to terms on an approved offer, because we do hold both Cogeco Inc., and Cogeco Communications shares in our Accelerate Enhanced Canadian Benchmark Alternative Fund. Trading as a ATSX on the Canadian market. But this is a deal that we will continue to follow, continue to monitor, because if anything, a case study in corporate governance gone wrong and something that investors should pay attention to from an ESG standpoint, and why we really need to ban dual share class structures on a go forward basis, but that is my diatribe for the day.
PAYPAL TO ALLOW CUSTOMERS TO BUY, SELL AND SHOP USING BITCON
Julian Klymochko: Let’s get onto this interesting Bitcoin and cryptocurrency news with fintech giant PayPal Holdings, announcing that it will now allow its customers to hold Bitcoin in its online wallet. In addition to being able to shop using Bitcoin and note that they have 26 million merchants on their service network, they have 346 million active customer accounts.
And PayPal is just a massive company, nearly a quarter billion dollars in market cap. In addition to this move into the Bitcoin space, they’re also exploring M&A, some acquisitions of cryptocurrency companies. Media rumoured is BitGo, which is a company that helps store Bitcoin securely. So, if they’re going to offer this Bitcoin service within their app, there are going to need some sort of custodian option. And it looks like they’d rather buy than build, but Mike, what are your thoughts on this deal here with PayPal getting big into the crypto space? Finally.
Michael Kesslering: Yeah, I guess first of all on the custodian side, what’s interesting about the rumours around BitGo is that PayPal within their announcement, the service provider that is providing their custodian services for their crypto side is actually Paxos Trust Company, a crypto custodian. So, it’s interesting that they would be wanting to acquire someone different than who is actually providing their services. I thought that was a little bit interesting, but just to dig a little bit deeper into what is happening. So first you as a PayPal customer, you will be able to buy, hold and sell cryptos in your wallet as of Q4 this year, but longer term looking into Q1 of 2021. It seems like part of PayPal plan is to grow users with their P2P cash transfer app Venmo, where you will then be able to transfer in the Venmo accounts using crypto.
But for a little bit of context, one of Venmo main competitors is Square Cash App.
Julian Klymochko: It’s been super-hot.
Michael Kesslering: Yes, and in January 2018, Square actually started allowing users to buy and sell Bitcoin. That was kind of around the time of the crypto boom, where crypto was just trading off the charts. But during the timeframe from January 2018 to today. You’ve had the Square Cash App, their monthly users have increased 5X, to 39 million. Whereas Venmo’s grown 2.5 times during that time to $29 million. Now this is just one variable for the difference in growth, but it is likely that they felt that this was partly responsible for the different growth rates. So, it’s a play for them to try to catch up with the Cash App. But one thing that is really negative in the crypto community surrounding this. With the PayPal system users actually aren’t able to transfer their crypto out of their accounts or even between accounts to start off. They’re effectively not allowing self-custody of the cryptos, which is inherently important for the crypto community. So, a lot of crypto enthusiasts have went out on Twitter and are complaining about it. I believe the founder of ripple had some comments around it. There’s been quite a few players that have voiced their displeasure for this. Really viewed it as a nothing burger because of that. I would disagree with them just because it still is at its base another large firm that is interested in expanding within crypto and as well today, you did have Mike Novogratz. Now he’s the CEO of the Canadian listed Galaxy Digital Holdings. He was interviewed on Bloomberg and he’s been a Bitcoin bull for a few years, but the point he was making today was around the industry consolidation that you mentioned Julian and his belief would be that it wouldn’t really be among crypto players consolidating between themselves. Really looking at more strategic M&A where you have outsiders coming in, buying the expertise in crypto, as opposed to building it out themselves. Where you have the BitGo rumours and notably in the Bitcoin transaction, Novogratz his firm is actually an investor in BitGo. So, they would stand to gain from that as well as Goldman Sachs and the Founders Fund backed by Peter Thiel. So, I think it’s quite interesting times in crypto, we’ve seen a lot of interesting developments and a lot of really legitimate players getting into the space now.
Julian Klymochko: Yeah, we had MicroStrategy and then we had Square and now PayPal. The momentum continues to build, and I keep saying this, but it’s only a matter of time until we see large pensions and endowments, these brand names getting into it. And once you have, say, a Yale, do it, everyone else will follow. It’s only a matter of time. And when they start getting into Bitcoin than whereas the price is going to be significantly higher. Nonetheless, investors loving this news bidding up the price of Bitcoin. It jumped this week, over 13%, hitting new 52-week highs around 13,000, US per Bitcoin. So, another positive development in the space, but much of what we have been harping on over the past number of months.
CONOCOPHILLIPS TO ACQUIRE CONCHO RESOURCES FOR $13 BILLION
Julian Klymochko: Wanted to lastly touch on a friendly M&A deal in the oil patch. And we’ve had such a brutal bear market in the oil patch for so long that it appears that many management teams are just pretty much throwing in the towel and saying no mas. specifically, in this one, we’re seeing ConocoPhillips striking a friendly deal to acquire Concho Resources for $13 billion inclusive of debt. I believe the equity value is 8.7 billion, something around that. So, this was and all shared deal. Low premium transaction, 15.4% premium, which is quite a bit lower than the standard 25 to 30% control premium that we see on the average M&A deal. But really, it’s been the story of oil patch consolidation, these really low premiums, because that’s what you see in a bear market. You see high premiums in a bull market, and when they’re just throwing in the towel desperate for merger partners and Mike, as you’re going to get into managements with very large golden parachutes, that really makes them more likely to accept a deal that’s perhaps not so great for the target shareholders. From a Concho perspective, it does appear to be a counter cyclical bet. They’re continuing to expand their presence in US shell oil and gas specifically, this deal expands their asset base and the Permian basin, which is where we’ve seen probably the most growth in US oil and gas production over the past decade. Now this is the third deal in recent months, the string of oil patch consolidation. First, we saw this Chevron, Noble Energy deal in July, 13 billion transaction. Then Devon Energy taking over WPX for 12 billion last month, but you know, how are shareholders doing in this deal? As I indicated, low premium, not just that, but both Conoco shares and Concho shares dropped about 5% this week. So not great for shareholders, but isn’t it pretty good for management?
Michael Kesslering: Yeah, really good for management. As this triggers a change in patrol pay-out of $44 million dollars total with $9.7 million dollars going to their CEO, Tim Leach.
Julian Klymochko: That’s a nice pay day.
Michael Kesslering: Yeah, and so as a multiple of his current salary. This is actually pretty significantly higher than peers. So just using the CEO’s example, it’s about nine times their current salary whereas prior they had actually just made a change to this severance pay-out in early to 2019. And so, prior to that, the pay-out would have been about two times their current salary. I think their peers clocked in somewhere between four to five times on average. So, this is a pretty large pay-out and in my eyes. It’s a pretty large incentive to sell. If you’re the management team and when you talk about the premium, although it is lower than what you would expect in a normal market.
Julian Klymochko: And even worse, given that it’s all shares and the shares tanked.
Michael Kesslering: Yeah, exactly. But given the fact that this deal was kind of leaked out a couple of days before, and at that time, sell side analysts were expecting a no premium deal. So, I guess technically 15% is like slightly better than nothing. But from a valuation perspective just looking at it through forward EBITDA, they were acquired at a 40 EBITDA of 5.6 times.
Julian Klymochko: It’s just very low. The markets at what? 13-14 times.
Michael Kesslering: Yeah, exactly. But is in line with the Parsley Energy deal. I believe that was done at 5.7 times. For Concho shareholders, I mean, I guess this gets them shares of Conoco, which is a little bit more liquid stock. Gets them to a bit larger scale. Liquidity will come into play if they want to wait until close and just sell out immediately. Although by the looks of the investor sentiment at the time of this announcement, just gauged by the share price performance. Looks like investors are already heading towards the exits and getting out.
Julian Klymochko: Yeah, that makes sense. And from a merger arbitrage perspective, not a lot to do on this merger spread. Fairly slim, which is typically what you see with low premium deals. It coming out at 1.3% annualized and a, 95% implied odds of success. Really no point in doing a risk arb deal at 1.3% with downside risk in cases breaks. And in my opinion, little upside optionality, because we are in an energy bear market and bidding wars don’t happen in bear markets.
Mike: One of the other players that has been talking about doing Permian M&A is Exxon. I mean, do you think there’s any appetite for them to overbid?
Julian: Oh my God. I think their shareholders would have a conniption if that happened. As we were seeing in energy, you announce a deal, your shares are going to trade down even more and look at Exxon share price. Clearly, I think heads are going to roll if they do any other big M&A deals. So certainly, no interest from energy investors backing these companies. Like I said, Conoco shares are down about 5% this week. Not a great deal for Concho Resources, perhaps a pretty sweet deal for management. Arbitrage spread, real, real slim in my opinion, much better deal in SPAC arbitrage, where we’re seeing, you know, low risk returns in the 7% annualized and high range. Where you don’t have this deal-break risk, so that’s where we’re allocating most of our capital in The Accelerate Arbitrage Fund. We definitely prefer SPAC arbitrage to straight merger arbitrage in most cases these days, but who knows what’s going to happen? That’s always subject to change. But that about wraps it up for us. Interesting episode, a lot of cool stuff happening this week on episode 94 of The Absolute Return Podcast. If you enjoyed it, check-up more @absolutereturnpodcast.com, definitely follow Mike on Twitter. What’s your handle?
Michael Kesslering: It is M_Kesslering.
Julian Klymochko: And you can check me out at @JulianKlymochko on the Twitter machine. And until next week we wish you all the best in your investing and we’ll chat with you soon.
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 www.AccelerateShares.com. 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.