Chris DeMuth's State of the Markets August 2022

Episode Summary

Executive Summary: The episode is a market-state review focused on three live special situations: Twitter, Unity/ironSource/AppLovin, and Turquoise Hill/Rio Tinto. The hosts argue Twitter’s legal odds favor closing at or near the original deal price, view Unity as a messy but strategically valuable takeover triangle with real antitrust and structuring risk, and see Turquoise Hill as a control/minority-holder showdown where Rio’s leverage and capital needs make the outcome uncertain but likely negotiated.

Main Topics: Twitter merger litigation and odds of closing (Priority: 5/5): The hosts argue the market is underpricing Twitter’s legal position. They believe Elon Musk’s public statements, the lack of a smoking gun, and confirmed disclosures all strengthen Twitter’s case, while the current stock price implies too much probability of Musk winning. Elon Musk’s public messaging and litigation strategy (Priority: 5/5): Discussion centered on how Musk’s tweets and public comments seem aimed less at a judge than at Tesla followers and market sentiment. They suggest his behavior helps his broader brand and Tesla stock, even if it hurts his legal position. Unity, ironSource, and AppLovin takeover triangle (Priority: 4/5): The hosts dissect an unusual stock-for-stock bidding situation where AppLovin overbid for Unity with an awkward structure including non-voting Class C shares. They debate whether the bid is strategic, coercive, or a way to interrupt the existing Unity/ironSource merger. Strategic optionality and antitrust risk in software/gaming M&A (Priority: 4/5): The Unity situation is framed as a strategic asset that could draw a larger bidder, but the list of realistic buyers is limited by size and antitrust concerns, especially for large tech firms. Turquoise Hill and Rio Tinto minority-control dynamics (Priority: 5/5): Turquoise Hill is presented as a control transaction where Rio Tinto’s majority ownership, capital needs at the mine, and a weaker commodity backdrop create leverage over minority holders, but valuations remain sharply disputed. Market reflexivity, spread investing, and deal modeling (Priority: 3/5): The conversation repeatedly emphasizes how stock prices, probabilities, and settlement expectations feed back into each other in merger arbitrage. The speakers stress modeling deal outcomes via win probability, downside, and settlement rather than simplistic price moves.

Key Arguments: Twitter is likely to win or at least has a far stronger legal case than the market implies; the hosts think the deal is still far more likely than the stock price suggests. Musk’s tweets undermine his legal arguments because he has publicly repeated bot/fraud claims while also disclosing or alluding to facts that cut against a fraud/MAE narrative. The absence of a dramatic new revelation or “smoking gun” since the dispute began materially improves Twitter’s position. Musk appears to be speaking to Tesla shareholders and supporters rather than the Delaware judge, using public statements to shape sentiment and protect Tesla value. The Unity/AppLovin bid is unusual because it was only a modest premium and used a Class C non-voting structure that seems inferior and potentially designed to manage voting/control dynamics. Unity is the strategic prize; AppLovin may be trying to prevent Unity from completing its merger with ironSource, but the eventual outcome could still be an overbid from a larger strategic acquirer. For Turquoise Hill, Rio Tinto’s majority ownership and the company’s need for large equity financing give Rio leverage, but minority holders may still believe the asset is substantially undervalued. In all three situations, the key is not current price alone but the probability-weighted outcome and the negotiating leverage created by market conditions.

Data Points: Twitter deal price: $54.20 per share - Original Elon Musk acquisition price used as the reference in the discussion Twitter stock price at time of podcast: About $45 - Current trading level during the conversation Implied Twitter deal probability from market price: About 67% - Derived from downside around $25 versus deal price of $54.20 Twitter downside estimate referenced by market: About $25 per share - Used as the assumed downside if the deal collapses Host’s subjective Twitter win probability: Over 90% - Andrew and Chris state they believe Twitter is very likely to prevail IronSource/Unity spread: About $1.37 - Mentioned as the spread between the merger price and market price at the time Unity stock price movement: Roughly $50 to $55 - Approximate market move after AppLovin’s unsolicited bid Unity value in AppLovin bid: Roughly $55 to $60 depending on AppLovin stock - Estimated value of the stock-for-stock proposal AppLovin bid structure: 1.152 shares of AppLovin Class A plus 0.314 shares of AppLovin Class C per Unity share - Described as an unusual mix of voting and non-voting stock Unity share price last November: Around $180 - Used to emphasize the company’s prior valuation and upside Turquoise Hill required equity financing: At least $650 million by year-end - Used to explain Rio Tinto’s leverage and the company’s capital needs Turquoise Hill / Rio ownership: Rio owns 60%+ - Majority control position that shapes the transaction dynamics Copper/mining market context: Commodity prices weakened; copper specifically weaker - Backdrop affecting Turquoise Hill negotiations Time reference: August 15 - Podcast date used to anchor the market discussion

Pivotal Quotes: "Twitter is hugely hard to get away from. I think it is not the biggest spread in the spread universe. It is the third place spread." — Chris the Muth: Opening framing of the Twitter situation as a top special situation "Anyone who uses Twitter is well aware that the comments are full of spam, scam, and a lot of fake accounts." — Elon Musk (quoted in transcript): Used by the hosts to argue Musk’s public statements undercut his reliance and fraud claims "The rule does tend to be: minority stakes are made to be taken out by their majority controller." — Chris the Muth: Summary of the Turquoise Hill/Rio Tinto control dynamic

Implications: Listeners should watch merger arb through legal odds, control leverage, and strategic optionality—not just headline spreads. The episode suggests Twitter still favors closing, Unity could trigger broader bidding, and Turquoise Hill may resolve through capital pressure and majority control.