Chris DeMuth's State of the Markets July 2022 (podcast #118)

Chris DeMuth joins the podcast to discuss the state of the markets in July 2022 and what’s catching his eye in event driven land, including an update on TWTR.

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All right, hello. Welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot to me if you could follow it, rate it, review it wherever you're watching or listening to it. With me today, I'm happy to have my friend, my partner, Chris DeMuth. Chris is the founder of Rangeley Capital. He comes on once a month and we just kind of talk about everything that's going on in the event-driven land and the markets and everything. So Chris, how's it going?

Chris DeMuth: Good. Great to be here.

Andrew: Great to have you. Let me start this podcast the way I do every podcast, just a quick disclaimer to remind everyone. Nothing on this podcast is an investing advice. We're probably gonna go through a lot of different names today. We may have positions and some, we may not have positions, and so on. But everybody should just remember, we're just two guys who forgot to shave this morning, talking about a bunch of different stuff. Please consult a financial adviser, do your own research, do your own work. That's the disclaimer. Second pitch for you my guests, you don't have to do it today. We do these every month, you can go listen to all the past ones for the pitch for you. But Chris, my partner, founder at Rangeley Capital covers a lot of stuff and I'm really excited to talk to you today, Chris. We're towards the end of July, things are starting to slow down in event-driven land a little bit just because people are starting to go away for the summer. So, if the bankers are there, deals can't get done. But there's still lots of interesting talk about, so just want to turn it over to you. What's been on your mind the past month?

Chris: Well, yeah, no, I think this is kind of next few weeks, Americans start to sound a little bit like Europeans with all the bankers and the lawyers and the executives all kind of on holiday, and you kind of try to... you can't really in this business be the only one working at some point, you're trying to get tax on something, and there's not a lot of checks to be had. But yeah, I think that we've talked about this as kind of the golden age of arbitrage. I think that the most golden part kind of happened fast. There were kind of days and then weeks, and then things kind of largely corrected. But still, what was great is still good. I think that yeah, definitive ARP has been a bigger interest of mine than it's been in many years, despite the fact that I think we're gonna have very active antitrust, besides the fact that the banks are on the hook for much worse deals than they thought they were getting themselves into. So that's kind of how that's resolved is a big topic and just kind of thinking about what realistically if anything people are going to do in terms of new deals. And I think that's going to be the kind of the slowest hardest slog for the next little bit here.

Andrew: I had a quick question. So look, I think probably since the Biden administration came in, you've been very specific that the trust environment is going to be really bad. I think the market started to wake up to that when the Biden administration came in, but they obviously underrated it, and it's been pretty bad. But I did have one question that I know you were looking at, but we didn't really talk about it. Sanderson Farms got done maybe four days ago, and that's a really interesting one. I'm happy to give a little bit of color there. But were you surprised that got done because for a long time, senators and farms for those who aren't listening, they make chicken, they produce chickens, they're gonna buy somebody else who produces chicken, a lot of people thought that deal was going to get blocked and ultimately, it went through? Were you surprised by that? Did you read anything into it? Is there any return for other deals?

Chris: There was something else going on there. And I think that what was hardest is where you have industry cases outside of the HSR review and outside of the deal-specific stuff. It was a really good opportunity or a grubby opportunity for regulators to kind of finagle settlements and issues that are not deal specific. So I think that was not deal specific. I think they didn't have other things, I think they might have brought a suit, I thought there was actually a suit to bring against that one. So I thought it's a close call reasonably likely that they would have done that, especially on the DOJ side, but DOJ and FTC, really, the one thing I do kind of agree with them on is shying away from complex behavioral fixes. The record in the last few years of doing something other than clearing or blocking has been just in shambles. They differ fairly heavily to the companies on who buys packages and the record.

I mean, most of these are private. So a lot of cases it's not actionable in terms of like shorting them, but they just go bankrupt or fall apart, or they lose the market share that was divested almost every time. And so the government's really pulling back from that, which is going to mean more suits. But a couple of times when you think that's a really weird nonsuit. And for me, I'm surprised by certainly if you compare it to what I would do, or my kind of ideal, there's a lot more cases that are brought that I wouldn't bring the cases that aren't brought that I would bring, but they almost always have something else going on. Quite a few of them are tobacco related, where I think oh, that is pricing power. And they simply have something to do with the MSA or other issues with the government has something else going on. I think that was the case of Sanderson.

Andrew: And Sanderson Farms, just for those who weren't following every tick or something, it's an interesting one, because the merger, the rough numbers were they were getting taken out for a little bit over $200 per share. Back in May or April, the stock was trading at I'll call it 180 because people thought there was a good chance that the deal wouldn't go through. So they were pricing if the downsides 140, the upsides to 200, then at 180, you've got like maybe a two-thirds chance that it goes through or something. But then all of a sudden chicken prices went parabolic. So by last month, the stock was trading at 220 with the deal at 200 because people were starting to say, hey, if this deal doesn't go through, the stock is actually worth more than the deal and the stock will go up. So that was the rare case where as recently as two weeks ago, ours were actually hoping the DOJ would bring suit and the deal would fall through because then the stock would go up. And ours were actually disappointed because the deal closed and it closed below where the stock was trading because we were still hoping, please DOJ bring a suit, destroy this deal.

Chris: Any ARBs that are arbitrageurs and chicken farmers, I think there's probably a few, but they could have lodging complaints. And like here, either here's the amicus brief and like see if they could, because a recount would have been much higher. If you look at boiler prices, I mean, you could have done the deal with 250 or something like that.

Andrew: Yeah. What else is on your mind these days?

Chris: Squeeze-outs, I think that if you look at the slow pace of m&a right now, and you look at what's getting done, we have the Shell squeeze-out that you had written about persuasively. In the past, you can have other similar deals where somebody's already pot committed, were big players doing something small. I think if you have a trickle of new m&a stuff, and like, we don't need new stuff, like we could put our capital of work or not put it all work, but we could be proud of plenty busy on definitive deals at this point. But if we're looking at a kind of new deal flow, I think these kinds of tuck-in squeeze-outs are gonna be a big part of what we see in the next few months.

Andrew: And just for people who aren't familiar with the term a squeeze-out is, one company, one publicly traded company, often they own 80% of another publicly traded company. So actually squeeze out would be 90% plus, and you squeeze out the remaining 10% by just saying, hey, this is going private, here's the price. Boom, done. Thank you, ma'am. Over.

Chris: Majority owner.

Andrew: Majority owner where the majority owner owns in ShellEx's case, I think they are in 63. Shell owns 63% of ShellEx, which was their MLP, which owned... when I first started writing, I think I've said this before, I didn't quite understand how good ShellEx's assets were. Like, I saw some expert calls that were like, hey, pipelines and you think every pipeline is the same and it's like no, ShellEx owned the best pipelines in all of America but Shell offered to buy minorities out. They initially offered no premium and yesterday, I think the conflicts committee actually did a pretty nice job here. Shell made a really big bump. And there are a lot of other ones out there. There are a lot of companies out there that somebody owns 60% or so of them. I knew last month we talked about, I guess I'll get your updated thoughts. Harold Hamm with CLR. We talked CLR was trading six weeks ago for $64 per share. And Harold Hamm came out with a letter that said, hey, I don't think Wall Street will let me invest to go drill. Energy prices certainly support drilling, I'll take minorities out, I'll squeeze them out, whatever you want to call it, I'll take them out $70 per share and that's kind of still outstanding. But I guess you just flip it over to you, any updated thoughts on CLR?

Chris: Yeah, so it certainly qualifies as a big player in the sense of a multibillionaire. Doing something that for him is fairly small, it's always kind of like a bookkeeping nuisance to have this public stuff that he doesn't need the capital from the public markets. And if he can get it at a price he's happy with, I think he's pretty built up on what it's worth. And certainly, his communication with his employees and his colleagues is applied that he thinks he can do this at some price. And so I think this kind of thing is an interesting opportunity. Now the back drop being I like the asset and I'm excited about energy here. So it's kind of like I'm pretty happy to own this thing here. He plans to do the deal, even though it wasn't a well-timed offer and the skew's a little funny because it's not definitive. And I think that's the thing that gets tricky in this environment where you're counting on deals that are contracts, but he can do whatever he wants. There's not a financing problem, there's not any trust problem, and it wouldn't be a big deal for him. So I think it's the kind of thing that really could get done even in this environment across energy, credit, equities, everything else.

Andrew: I thought it was funny like I don't have a lot of experience or know a lot about Harold Hamm but a lot of people said, hey, this is a man who's like the ultimate procyclical behavior, like when energy prices are high, he's always drilling and going all out and then when energy prices are low, he's always over-leveraged and just like trying to hold it all together. I just kind of thought it was funny people said that when he made the offer on I think he made the offer on June 14 and I believe that was also like the actual top tick of where every energy price kind of top ticked out. But I do think since then, if we were talking a week ago, prices were so high from... and here ago if you had said where prices were a week ago, people would be like alright, Andrew, come on, you're a little too bullish on energy there, you're being a little bit crazy. A week ago, prices were a lot lower than they were last year but prices have actually really ramped up since then. So it's kind of almost back to where it was when he made that initial bid though it's not quite back there. He really did top ticket for in the short term.

Chris: Oil and gas guys are just denominated in oil and gas and their timing, I've been thinking about this in terms of looking at energy companies that we've looked at and looking at their hedging policies and looking at the timing and how sometimes they can be worse than almost seems arithmetically possible. It's like insiders on both share buybacks and energy companies on oil and gas hedging. It doesn't matter how expert or how many billions of dollars are in the timing of these things. Like you wish there was some kind of way to make it more index fund-like or dollar cost averaging like okay, you need to hedge out these risks, like can you at least be average? It seems like the average is something that we could all easily aspire to, inspire ourselves on micromanagement timing if we demonstrably suck at it and these guys demonstrably suck at it.

Andrew: Look, shame on me a little bit but something like Bed Bath and Beyond, I wrote about them and had a small position, unfortunately, sold a decent bit into the meme squeeze but you go look at them and last year, they're plowing like literally every dollar they can into share buybacks and this year, the stock is down 75-80%. And they can't do share buybacks anymore because they're not talking about equity value like they're trying to avoid going into bankruptcy and you're really seeing it with oil and gas guys, with retail guys like last year things were good and all of them were just buying back shares like crazy with all their cash flows and now things have slowed down and a lot of them are like looming into distress. And then oil and gas guys, I'll send you a Wall Street Journal article. I wrote about this a little bit but somebody sent me a Wall Street Journal article that was done last November that said hey if you look at the history of oil and gas guys hedging for any reason other than because the bank lines require them to like all of them are so bad at it. It's almost comical how much money they lose on these hedging and how procyclical they are.

Chris: I think one other reform that I've thought about both in oil and gas and for companies generally because shareholders are generally not as bad at this is to say, hey, every proxy, give us a choice. If you want to do this talk in the acquisition, that's fine. But it's yes, no, or we're stipulating that we have X number of dollars available for this corporate purpose, would you like us to just buy back shares instead? And that could be and then have some kind of rudimentary fairness opinion on the deal and compare it to doing nothing compared to doing the thing we're already doing which, presumably, if it's the same management team should have had some purpose. And you could let oil and gas do the same thing so hey, do you want exposure in dollars in oil and gas? Here we have these financial tools but as shareholders, you have financial tools as well. There's really no reason that they should do them especially if you don't know what they're doing in real-time. But especially also, if they're doing really badly, that if you could at least be given side by side, I think that hold them a little more accountable and give them a higher standard.

Andrew: And I've written a few times on the blog about how the share prices of oil and gas and energy companies really perplexed me. I'm just looking like, the strip is like not current energy prices, which are obviously up a lot, but energy prices for 2023, 2024, 2025. So the future strip, since the beginning of the year for oil is up, like around 20%. And for that gas is up almost 50%. And yeah, a lot of these oil companies are up a good bit. But if you looked at the kind of Cash Flows implied by the strip, throughout, nowhere close to that, and I've been very perplexed by that. And I think one of the reasons is investors are very hesitant investors are looking at these oil and gas teams who are saying, Hey, we're really bullish prices, hey, we're not putting on hedges, hey, a lot of them are returning cash to that's not fair. But I think investors are maybe rightly looking at them and saying, these guys are just gonna burn all the cash on a crazy drilling bad m&a, like, let's, let's just discount this cash every which way, because we're really worried. I think that's what's going on. But it's been really interesting, really tough to kind of figure it out.

Chris: I mean, my kind of oil and gas tourism that could get me in trouble is if you look at somebody who looks like say they're going to have been or you predict that they're going to return in capital like you can get some free oil and gas companies, none of the money they're going to make in the next few years. And it just seems like it's an amazing opportunity. And I have no thesis that either the commodity price or the equity price is more efficient. But if I had to answer that, I would say the commodity especially the more liquid and more visible commodity prices like that is, as far as we know, the price of the strip is that's the market. And then the equity prices, I don't really know what happens. It does seem like there are some, there's some crowding into the topic of what supply going to be. Okay, there's a lot of really good reasons to be very cautious on supply. And then a few weeks later, it's like, let's all talk about we could be going into recession. That seems to be kind of an all-consuming, sort of flail back and forth in the voting machine era of like, what's everybody worried about? And I think on the economic worry side, that's kind of hit oil and gas.

And then maybe there's also kind of fun flow and this is the one thing that hasn't lost a lot of money this year. And so maybe there's I mean, I always say, I like distressed investments, but I love distressed investors that have a non-distressed investment. So maybe it's kind of like a milder version of when you look at a fund that blows up and you look at their 13 F for like oh what are they going to have to puke at this point, like maybe just across not just with specific envelopes but maybe just like paying across the market? There's some like liquidity available for funds that are having horrible years from energy glass a little bit but it just I don't know either I'm gonna get either we're gonna get a profit or lesson out of why it's not as simple as these equities like really cheap I mean, with lots of cool examples compared to the commodity prices

Andrew: Yeah, Just on your cash flow thing, I think it's my buddy, Morris's proposal on Twitter who said hey, one thing, and I've certainly had this beat into my head more than once like, you can't buy back your way out of a terminal value question. If you're generating a lot of cash flow and the markets putting a 7 times multiple on you, and you think you're worth 10, you can take advantage of that but if the market thinks maybe you're not, you don't have a terminal value... I think about a lot of the legacy media companies, but the buybacks don't really matter. Like, you need to just prove you've got a sustainable long-term future. And I think a lot of people look at energy companies say, oh, well, maybe they don't have renewables coming, they're really ramping up and people are trying to eliminate carbon, maybe they don't have a terminal value. And I kind of look at them like, yeah, but there's trading so cheaply, like, the terminal value doesn't matter. They're gonna generate their whole market cap in the next year or 18 months. Either the strip is right, and we get all our cash back, or there's something like completely wrong with the strip. This isn't even a terminal value question anymore.

Chris: That was a good analogy possibly here for an industry that had just the clearest, most obvious, worth nothing, no terminal value, probably in a few years, many decades. I mean, just like in the 70s, or the 80s is like, well, everybody's gonna stop smoking, it's going to be worth nothing you have-- And like, I mean, I can't think of a category kind of over the last century, I think there might be no category last century that has rewarded outside shareholders better. [crosstalk] The cash is there and they're still kicking in terms of the value today in 2022, which is I think, I think huge, like if you just pulled investors and call it the 80s. Like, what's Philip Morris gonna be worth in 2022? I think probably the majority would have said zero prospectively. And then you kind of have a trickle of cash. Like, a kind of cliche... I mean, just kind of the speaking circuits, conference, smart guy thing you can say about ESG in the future. I mean, nobody says this is the future, if you look at oil and gas, engineering by degree, there's just like, it's just gotten smashed. Like there's very, very few really smart kids that are like, hey, what are you gonna do with your career? Like, oh, I'm going to be an oil and gas engineer. I mean, the numbers are just incredibly low. So I think there's this kind of cliche theme, that's anti hydrocarbons. And I think it's missing a like, several decade gaps between now and the most ambitious green energy goals. It reminds me a little bit of tobacco.

Andrew: That's such an interesting comp, I hadn't thought about that before. The other thing that I love about that comp is, tobacco, I don't know for sure but if you went back to the 70s, I think they were really conglomerating where they were taking their cash flows. And they were really like, buying movie studios and buying things that didn't matter. And then starting the 80s, I think they really slimmed down into like, look, we generate cash flow. And all we're going to do, we're going to be tobacco companies and we're just going to focus. And basically, every dollar we make, we're going to return it to shareholders through dividends and share buybacks. What strikes me about a lot of the oil companies have heard about this is a lot of them are just coming out and they're saying, hey, every dollar we make, we're gonna like reinvest enough to make sure our production like kind of stays around, flattish, maybe rose a little bit, but we're not going to try and grow like crazy. We're basically going to be this is the company we are, we're gonna stay here. And then every dollar we make, we're going to return it to shareholders, like we'll have a dividend program where our dividend is covered at very low energy prices and everything else, we just keep hammering our share count. And one of the reasons tobacco did so well is that's what they did, right? They stopped all those crazy investments and they just returned to shareholders. Most oil and gas companies I know of our trading at around five times free cash flow that's elevated because energy prices are high right now. But if you're five times free cash flow and you've got a really long tail and you're just returning to its shareholders, it's pretty tough for it not to work out well.

Chris: To push the analogy a little bit, one thing that I thought was very funny, kind of going back to like the 90s before the settlement with the government that basically made the government a limited partner of the industry was that they were simultaneously pushing a lot of litigation and subsidies. So the same industry that was told here's a lot of free stuff was also told, shut up and stop doing that. It was very superficially adversarial and then beneath the surface, it was subsidized but the superficial adversarial-ness was an incredible barrier to entry. So like nobody could compete against the big incumbents and they were doing things constantly that if it was a private pact would have been dead to rights antitrust violation. Like if your competitors are allowed to come together to basically get their advertising costs, I think all these things, an addictive product people are gonna use anyways, they got their costs cut down to the bone with rules and regulations the government insisted on. And then the government came in and said, hey, we'll settle for all of the liability, but we'll become partners.

And so I think there's a lot of analogies today in oil and gas where you have the kind of superficial adversarial-ness with a state where the state's saying basically, we're gonna drive you out of business in a number of years. Well, okay, you see, now you're not going to get new entrants. Now, you're going to have competitive barriers. And then beneath the surface, there's a lot of subsidies. There's a lot of manipulation that tends to be captured by incumbents. So I think, yeah, and I think that we'll see how apt the analogy becomes, but I think there's some prospects for that, that could be really good for the owners.

Andrew: I want to talk about Twitter in a second. But before we get there, I just anything else event or in the markets on your mind before we kind of started talking Twitter?

Chris: I think that about covers it. I'm ready for Twitter.

Andrew: Okay, so let's talk Twitter. You and I talk on Twitter, so much on a daily basis. It's hard to remember but on the podcast, we last talked about them in June, which if you remember, like Twitter was still... there's still no definitive merger contract but Elon was still technically buying Twitter at that point. Since then, I think the two major data points we've had is in early July, Elon filed a 13D, sent a letter everything that said, hey, I'm breaking the Twitter deal for XYZ reasons, and we can go into those. Twitter responded by suing Elon and saying, hey, this is not a valid breach, you still need to close us, we still think we're under the definitive agreement. So they filed that and we got Twitter's complaint, Elon's response, we had a hearing where the judge said the expedited trial will have a trial, likely in mid-October at this point. But that's kind of just the facts of what has happened since then. I want to ask you, starting I guess, from Elon's break through the hearing the trial, the notice, everything, what are you thinking on Twitter these days?

Chris: It's funny you said it, we talked about it every day. It was a tweet pretty much every day.

Andrew: Elon tweets pretty much every day too.

Chris: It's kind of been all over this topic and it's by definition, people who are interested in it. There was one Middle Eastern buyer of a very, very high-end jewelry company at one point that had much less growth than they thought they were going to. And this was a kind of a sovereign buyer. And they didn't properly calculate the fact that they were like a double-digit part of the demand for this company, and maybe it's like they were like the last people who want Twitter. But in any event, so since last we spoke on here, I think that the big thing for me, the thing that's I think most analyzable is what is the judge going to see and what's her focus going to be? I think things are going to get real serious by the time they get to October and it's going to vector from the kind of the goofy phase of kind of memes and tweet tweets to the serious one, I think that both sides are well represented and that we'll have a series of filings back and forth. They're already getting kind of sharp elbows, even about just kind of procedural stuff that normally in a smaller case would be perfunctory. But, we had what I think was a very interesting scheduling hearing, because both sides chose to sneak in a lot of substance. Be we could have just made it a who When's good for you, and it's good for me. But instead, I think that the plaintiffs want a discussion of the contract. And the defendant, in this case, Twitter, it could have run in either direction, as it turns out, Twitter sued first, but it could have been healing. So first, Twitter wants to talk about the contract. Elon wants to talk about a lot of other stuff, a lot of other kinds of insert in the contract. And so, listening to the judge, who did not interrupt Twitter once and who had this one pointed interjection as Elon Slayer was speaking, and I think he did a nice job, but she was like, So how long did IBP Tyson take? And he stammered for a moment. She has three months.

Andrew: Should I just pause you for one second there? So just to give everyone a bit of an overview, Twitter was arguing for an expedited trial, right? They sued in early July and Twitter said, hey, we would like the trial to take place in September, for XYZ reasons. And Elon said, look, this is a this is one of the largest mergers in history. There's a lot of data. September is way too quick for all of this. We think the trial should take place, I believe in February is what they said. And Elon's lawyer was saying he was trying to give his reasons for why the trial should take place in February. He said, hey, the IB Tyson precedent... he was talking about the reasons and the judge interrupted and said, how long did it take for IB Tyson to get to the trial doorstep? So just to get that background so people understand.

Chris: Thank you. Yeah, so I thought she was pointed. So what I took from that, and then we heard her decision, which was to call it 80 to 90% of what Twitter wanted, which I guess we're allowed to read into things and think about things. But reading into it a little bit, what I took away from that is one, the quicker we go, the less time there is for other things to go wrong. We'll probably see one more quarter, we will probably have new economic information, we'll have new data about how the company is doing. But there's a shorter timeline for other things too long. A better IRR, but also, it seemed like a pregnant decision.

It seemed like it was citing going strongly in the direction of let's talk about the contract, we can do that quickly, versus what's kind of tossing whatever anybody else wants to chat about. That's gonna be really complicated and time-consuming because we have all sorts of things, a fishing expedition is going to be really time-consuming. My sense is that her patience for that would be small and that seemed corroborated by her behavior at trial. And then there's a third thing I think I would throw in there, which is, and this is just how she handled the scheduling. She took a 10-minute break with COVID and she came back...

Andrew: Just for those who don't know, when Chris says with COVID, she actually tested positive for COVID, it was going to be in person case, and she switched it to Zoom because she tested positive for COVID.

Chris: So this is somebody who's just not necessarily her fullest capacity, took a break to collect her thoughts and came back and had a full elegance, a detailed explanation of why she was going to do what she was going to do and then just kind of an authoritative answer. That to me struck me as somebody who's kind of last in line, for some reason be tentative about making this decision or somehow split the difference for political reasons. She's gonna do what she thinks is right, it is going to be based on this contract. And she knows what she's doing. And she's smart. And she had probably 95% made up her mind before the orals which oral there's something for us to listen to. So we can kind of overdo how much it matters. She was probably listening for anything that was going to have a countervailing influence on what she did. She didn't hear it. And some of the things she spoke to came out of what happened that day. But this is just a smart, serious person who can follow not just all the contractual issues, but all the parole evidence, all the things that go beyond the four corners of the contract. I think she has a strong bullshit detector and knows so much about what's normal in these situations. I think she's gonna have a really good grasp of just the dynamics here. Yeah, and

Andrew: I 100% agree with you. One of my friends, we were talking about it and they were like look, she took a 10-minute break and as you said when she came back with the decision that was well written out, well spoken, well thought through, they were like, look... I haven't been judged so I can't say for sure that she obviously had this written before and she could listen to the arguments she could change it if something new came up, she can respond to it. But she obviously had this written before she had seen all the arguments it's up and unless something crazy came to light she was obviously going to rule for Twitter. She had thought about that before. I read the other two new pieces... we've gotten a lot of new information since we last spoke on the podcast about Twitter.I think the three big pieces would be number one Twitter reported earnings Snapchat reported are in social media stocks are down a lot. I don't think we need to talk about that. There's committed financing here, unless you believe Twitter is insolvent, which I don't believe neither you nor I do, then this deal will happen if Twitter wins the case. We can maybe next month or the month after we'll talk more about Twitter solvency. So I want to put that aside.

But the other two new pieces I did want to talk to you about was, number one, there's been a big question about whether will Twitter win a specific performance if they win. And I think the judge at least hinted and I'll let you speak, to disagree with me or agree with me. And the judge's ruling, one thing she said, I think this is the record, she said, based on everything I've seen here monetary damages would not be sufficient for Twitter if they want you which the judge we owe. And we didn't even know who the judge would be when we talked last time. But this judge last year had a big ruling and a case that to me looks a lot like the Elan Twitter case, where she wrote for specific performance for a seller. And she just said, hey, monetary damage was insolvent. To me, one of the biggest pieces of news we've got in the past month is this judge does not seem scared to reward the specific performance of Twitter wins. And I will pause there and let you comment.

Chris: Yeah, so two quick thoughts. One is, she's the ideal judge for Twitter. Again, reading into things, the fact that she assigned herself I think kind of doubles down on that fact, right, that she's not trying to in any way pass the BOC or avoid this issue. She actually has two five-day trials involving Elon Musk in October, which I think might serve our purposes well, in that it's on his comp unrelated to us. I don't care about that, as much as she's here to think about him a lot. There's kind of two kinds of chancellors in Delaware. They're all good at this stuff. But there's a kind of the more cautious, the less self-confidence in their own legal abilities, the more they want to just tie themselves to some very specific statute where it says, look, I'm just doing this one thing. So when it gets appealed, don't come to me and complain. Then you have the kind of Leo Strine who works at Wachtell now, kind of genius bold, look, I know all the law, I can say you want me to say statutes, I'll say some statutes, here's what I'm gonna do, and then get his clerk or something to kind of double check him to kind of paper it over. But it's a court of equity so either is appropriate.

But I don't know if I was on Elon Musk's side of which do I want? Do I want to talk about this contract and have a very legalistic narrow conversation? Not so much. Do I want to instead focus on the parole general outside evidence of like, who's a bad actor whose hands are dirty? Not that either. And so I don't know which direction you want, but she's kind of she can do either, I think she's going to be kind of an equity-based. And even on the topic of specific performance, her last decision on this last calendar year, the part that very much looked like an equity vote, I mean, going outside the four corners of the very specific statute to do what makes sense overall for contract law, but also for the Delaware court kind of thinking kind of broadly about this, kind of almost like spike the football and our own ruling saying score one for contract certainty. So this is clearly something she's kind of talked about that she cares about, and kind of the reason Delaware matters to the rest of the country and everybody else.

So, yeah, so I think that she's kind of a big deal on this. And personality-wise, she's like the most un-Elon Musk person on the planet, like just as a serious person. You'd have to be really careful if you're the defendant here to not make a misstep stylistically. There was one case that might have been a stylistic misstep was when the defendants were saying, oh, well, it's gonna take a really long time for you to understand this kind of thing. There's some complicated things going on. And little lady, you might need to take some time and she came back and this was one that was clearly targeted what happened that day saying, you might have underestimated how much the court can assimilate information about things like this real fast. And that was the time that I'm glad she's not talking to me right now.

Andrew: Yeah. All of that actually bleeds nicely into the other point. The other really major piece of news we've gotten aside from Elon actually attempting to break this contract since we talked last was Twitter filed their complaint to compel Elon to close Their prayer for relief or whatever it is. And Elon filed his response. And I think we can talk about all the different things. But last month when we talked, we hadn't seen either of these. So we didn't know... we knew probably why, like Elon had already filed his 13D that said, hey, here's all the things I need, I think you're in breach of contract. But we didn't know what he was trying... And now we've seen both and to date, as far as I know, there's no smoking gun, right?

Like Elon's complaint doesn't have an email that was sent to him by Twitter that said, hey, we've been saying under 5% of MDA use our bots publicly, but privately, like we actually think it's probably 50% of the user on the platform are bots and we're just kind of saying a fake number online and playing games with investors. Like Elon doesn't have that smoking gun. So like to me the other new information is I've read Twitter's complaint, I've read Elon's complaint. I know you've read Twitter's complaint. There is no smoking con, the case is about exactly as we thought it was when we were talking last month, probably a little better for Twitter based on some of the like, things that we didn't know last month that we do know now thanks to Twitter's complaint, but there's no smoking gun. I think that's a great thing for our thesis, which is that Twitter's in the right here, Elon should be forced to close. All pause there, anything you saw, do you disagree with that, anything you saw that you wanted to highlight from the complaint and the filings and everything?

Chris: I guess three things kind of jumped out at me. One was the counterfactual of the contracts that you and I read long before it was being litigated, read before Elon complained about it. We read the merger agreement, the counterfactual all the stuff that wasn't in it, I thought was hugely in Twitter's favor, that really put an exclamation point behind each of their points to say, oh, you know how it kind of didn't say this thing? Yeah, we talked about saying that thing we decided not to. It's very meaningful, the specific way this was written.

Andrew: Can I pause and just give an example? So like Elon, in the original merger contract, he signed with Twitter said hey, Twitter, if you would like to fight fire someone, you need to come to me to get approval first. And Twitter actually struck that from the merger contract. They said we can fire people as we want. And Elon signed that and Elon is complaining against Twitter, one of the three things that he's trying to get out on is Twitter fire people, and we thought Twitter could fire people no matter what. But Twitter can go a step further now and say, oh, actually, in the merger contract we signed, you wanted the right to hire or fire people and we did that. We could only read the final draft. And Twitter can say, no, we took that out and you agree to it. So not only do we have the right, just based on the contract, but based on the negotiations, you agreed to give us that break.

Chris: That really puts in my mind this as the Super Bowl of contract law and the rule of law generally, which says, why do we even have these conversations, if the result of the conversations doesn't dictate what happens? I mean, you're gonna feel kind of foolish if you're a lawyer the next day if Elon Musk wins, trying to hash out the minutia of these contracts, because it either matters or it doesn't. But I think that it was very meaningful here how this contract came together, that was the first thought. The second was that the most important part to me that I think the Twitter complaint really got out and it under the contract, and that it fits in with how strong a contract that says is that you can't use these things as termination events if you don't have clean hands. You have to come as a good actor who has lived up to your own contract duties to then use things to get out of.

A point that they didn't hit as hard as I might have, in part because I can see the reason why they did this because it could change yet again, depending on how facts unfold. He cited things that have never been cited before, like information requests, that would be literally unprecedented to get out of the contract for. One of the reasons is that it's curable. It's not even to the end of the contract yet. He waited the 30 days though the one part of the contract his advisors apparently got him to read was that you have to get this 30 days to bring the suit. He brought the suit on the 30th day from his original complaints. But I think that one of the reasons why Wachtell was so kind of so much on offense, they weren't apologetic and saying, hey, we'd love to do this deal. We think we're doing the best we can kind of please don't they were like they were I mean, this was an offensive complaint is that he has a very hard time using any of these provisions if his hands aren't cleaning, and I think that 25 years from now in law schools, masking a contract will be used as a verb for like, screwing up your ability to get out of it, because you've done. I mean, just by definition, if this isn't violating nondisclosure violating nondisparagement, what would it be? I mean, it's using their platform to do it. And so I think he has the dirtiest of dirty hands. And I think he's the baddest of bad actors.

Andrew: I think, Elon, if you believe that Twitter, he's paying about 54 per share and reasonable people can disagree, but let's just say a lot of people think the downsides of Twitter if it was a standalone stock would be 25. That's obviously a huge spread. The most reasonable thing for Elon to do is try to cause maximum pain on Twitter to get them to agree to a price cut. And I think to some extent, he's done that. But the one thing where I think he really failed is, you always want to preserve your flexibility, your strategic optionality, and the best thing for him to do would have been to wait till the very last second to break, allow every different plot point to play off. So anything can happen, and maybe something breaks right to one that has already passed. But the DOJ just decides Elon is too rich, and he owns Tesla, he can't own Twitter. That has passed but Tesla's site gets hacked for 100 days and all the user information gets lost and Elon can actually file a Mac on that. Like by doing this way earlier--

Chris: The SEC who's going after him on unrelated things won't approve the proxy. So you get to the termination date, he gets out because the SEC... I mean, we still don't have final approval or definitive proxy.

Andrew: By going early, Elon gave up all of that optionality, which I think was a tactical mistake. And then I agree with you. Elon's hands are very dirty by not being able to not say stuff on Twitter. There's that old thing, you can always tell someone's go to hell tomorrow, put your phone away, don't put it online, all that type of stuff. And Elon put this all, everything he was basically live tweeting in real-time, and yeah, that got him attention and got him followers and it might make Twitter uncomfortable. But from a court perspective, it was just awful. And I did like how, in the hearing, Elon seems that oh, well, Elon was tweeting bad stuff about Twitter constantly and Twitter didn't sue Elon for tweeting bad stuff. So they didn't like respond in time and both the judge and Twitter were like, we wanted him to close the merger. Of course, we weren't going to sue them because he put a bad tweet out, but we sued him two days after he tried to break, like how much faster do you want us to go? Anyway, I'm rambling a little bit, but anything else from the suit that you're hearing, anything to talk about on Twitter?

Chris: I'll just tick off briefly my third, which is his whole career and his whole public persona, in a way he's been brilliant at this, he's really really good at winging it. In terms of maybe some people's including my skepticism of his that has been wrong or early, but long enough now you can call it wrong is in the world of faking it until he make it, maybe he's the world's greatest fake it until you make it errs and differently to describe that is not burdening yourself, not putting the burden on yourself in a way that in all sorts of possible public scandal or technological delay or so forth, he'll describe something that's aspiration, and he probably truly wants to.

A version that I've heard of his promises, or his plans or his from, and this was actually very clear to the books written about him was that engineers would say, they were basically asked, if you worked on this 24 hours a day and you had no problems and something that you have 17 problems today, how many months would it take to get this new feature in the car? And they would answer that question, and then that would go out as a projection. Like, yeah, if nothing goes wrong, maybe... yeah. So there's some kind of underlying reality to it but it's highly aspirational. This kind of thing has served him so well, in terms of getting Twitter followers, in terms of getting capital from the public markets. I mean, so many things. He's tried this kind of stunt of basically you say this and I say this, but somehow rhetorically making sure that I own the whole field other than the very specific thing you said, right? So like, if it's anything other than your thing, I'm kind of more or less right. It's a rhetorical flourish that he's done countless times and to really good effect. And so it's kind of like in this case, if you're Twitter, it's like, oh, so you claim it's less than 5% monetizable daily active users. The cheap trick, his version of this is kind of dropping the MDAU and saying, okay, let's argue with the dominator.

Andrew: Right when he tried to break, he did this thing where he was like, Twitter claims 5% of MDA user bots, like, that's not my experience with Twitter at all my replies are filled with 25 40% bots. And it's the type of thing it sounds so smart when he says like, oh, yeah, there's lots of, but then when you kind of break it down, and you look at how Twitter defines MBA use and stuff, it's like, That's the dumbest thing. Like we're arguing two different things. But he's so good at switching conversation like that.

Chris: The rhetoric works really well. Then say, oh, so you claim this one specific thing. And then I will kind of wave my hands over here about what I'm saying. But I'm not ever going to hold myself accountable to my specific claim. But when you go to Delaware, and his whole shtick is being unburdened, literally, the burden is his. Literally, he has to have something. He can't just kind of wave and say, other than this thing that you said and the thing that you've said, you've just claimed all sorts of ways, as an estimate as in no way have you claimed it to be specifically correct. And so he holds you to this impossibly high standard, he holds himself to no standard whatsoever other than saying stuff. And I don't know that he can get away from that tactic. I think his legal advisors would probably like him to, but if he goes to Delaware, with that in front of Chancellor McCormick, the likelihood that works, and that she kind of gets distracted and confused and kind of sides with him over the hand-waving versus the specific claim of the company, given that it's his burden to get out of this, probably not.

Andrew: Yeah. Look, we're talking late July, the trial will be sometime in October. I see they're doing a little bit filings back and forth but I think that Elon Musk team said, hey, October 17th or 21st. I'm going to use that as base case. So we're less than three months from the trial, if I'm kind of doing the math in my head right. But, to me, anything can happen, we'll get new information, there are still a few things I sit on and discuss. But look, based on the facts of the case, I've seen the kind of body language on the judges up, this is the best legal case I've ever seen. I mean, I'm sure there's been better legal cases but in public markets and m&a, it's the best legal case I've ever seen. I don't know, Elon has pulled rabbits out of his head before, people thought he was gonna lose several trials that he won. This is just this is right up the middle for merger contract law, the judge has experienced with tougher cases in this. I just don't know how he's gonna lose or how he's going to win. I'll give you the last word on it. Anything else on Twitter, anything else in the market you want to talk about?

Chris: Two little things on Twitter that I wanted to get in. There were very few factual discrepancies between the two sides, that makes me think less likely to have a smoking gun or some huge change. I think there's going to be low volatility in your view of what you're looking at over the next three months. The only factual thing that was glaring to me was whether or not Musk was notified on the hearing that they had a incompatible description of. I don't think it's going to be salient to the ultimate outcome here but I think that's notable and how little factual discrepancy there is between what the two sides are talking about.

Then the thing that keeps bringing me back to this topic, because every once in a while, I think, Andrew, we've thought through this, let's just turn to other topics. What keeps beating me over the head is maybe the markets' right? So maybe this is the correct market price, and it's, you know, net present value, all that kind of you have risk adjusted. This is the expected value. But then, within minutes, I stumble on the state, utterly incorrect, factual claim in a major publication or an analyst on television. It's like, if it's based on that and it's just plain reading of the contract says that's wrong. Like five minutes after I say let's turn to other topics, maybe we're wrong, maybe we should be more humble about this. It seems like well, he can definitely walk for a billion dollars. He just has to pay that tomorrow. So he keeps saying that. So if that's what's leading this market price, it's hard to it's hard to stay away from it.

Andrew: The worst was... I didn't want to dunk on it too hard, because especially on the blog, when I post something like its syntax, the blog gets enough traffic that it will probably find something a way back to the person. But there was a lawyer and a portfolio manager who published an opinion and the Wall Street Journal, and the opinion was Twitter can't sue and Twitter can't win this suit, because Elon is harming Twitter shareholders, not Twitter, the company itself, so Twitter can't sue and Elon will win this case, which is maybe the dumbest thing I've ever heard. Like, you can't sue someone for breaching a contract to buy you out, because the shareholders were harmed, not the company itself, like ignoring that the company has certainly been harmed by Elon's actions. Like that's an argument for every person in the history of the world can get out of any deal with a corporation because it's harming the shareholders, not the corporation itself, particularly merger contracts, obviously, but basically any deal if you took it to its logical conclusion.

Chris: Above the law blog had my favorite reaction to that in their headline. I'll just read the headline in the article that does it justice. Elon Musk will beat Twitter, Wall Street Journal says it's obvious, assuming you change every single fact and law.

Andrew: Yeah, that's exactly it. I mean, I could not believe and it was, again, it's not like this was published on a Seeking Alpha blog that wasn't even read by editors or something. This was published in The Wall Street Journal and to a lawyer and a portfolio manager put their names on this thing. And I was thinking the whole time I was reading I was like, if that guy was my lawyer, I certainly might be interested in finding another lawyer because I'm probably the breaking some laws are getting taken advantage of pretty hard right now. And obviously, as a portfolio manager, I'd be like, this guy might not understand exactly how things work. I certainly wouldn't be happy if every time something bad happened to one of my portfolio company, my portfolio manager said, well, something bad happened but unfortunately, I'm only a shareholder, and they only damaged me so my company can't get anything from it. Anyway, last thoughts, anything else from you?

Chris: Just one positive on sources on this, just because it's your alma mater all mentioned, and Lipton[?] is a professor who has been weighing in on this, and she's been as proportionately bad as the Wall Street Journal. She's just one of the kind of brightest lights on this topic and has been if people are looking for people other than us to listen to on this, she's been fantastic and testament to it.

Andrew: She has been great. I wish you would stop sharing her work of scores on Twitter because she's making my Wordle scores look bad. Anyway, I think we'll wrap it up here. Chris, famous last words, we'll do an August podcast. I think we have less to say on Twitter because we're probably in the doldrums for Twitter filings. But Elon always manages to cook something up, so maybe we'll have more. Chris, thanks so much. Looking forward to podcasting with you tomorrow. Looking forward to seeing you in person in New Canaan tomorrow. Podcasting next month, seeing you in person tomorrow, and we'll talk then.

Chris: [inaudible] Thanks.

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