Chris DeMuth's State of the Markets February 2023

Episode Summary

Executive Summary: Andrew Walker and Chris Demuth dissected a busy February 2023 special-situations landscape, focusing on Tegna/Standard General, Microsoft/Activision, AMC APE, and Manchester United. The conversation emphasized unprecedented regulatory behavior, especially at the FCC and CMA, the limits of legal remedies, and how politics may now outweigh traditional deal analysis. Demuth assigned low but nonzero odds to a Tegna rescue and remained cautious on Activision and Manchester United despite potential upside.

Main Topics: Tegna / Standard General vs. FCC (Priority: 5/5): The FCC’s bureau-level move to block Standard General’s acquisition of Tegna was portrayed as highly unusual and possibly politically motivated, with the speakers arguing it may effectively kill the deal while creating a precedent against private equity-backed media M&A. Microsoft / Activision Blizzard regulatory risk (Priority: 5/5): The discussion framed Activision as procedurally troubled in both the U.S. and U.K., with the CMA viewed as a major hurdle and cross-border regulatory coordination criticized as undermining due process. AMC APE recapitalization litigation (Priority: 4/5): They examined the unusual sequencing of holding a vote before a preliminary injunction hearing, debating whether the company was improving its bargaining position or simply improvising under financial stress. Manchester United sale process (Priority: 4/5): The auction for Manchester United was analyzed as a trophy-asset sale driven by emotion, prestige, and scarcity rather than conventional valuation metrics, with skepticism about press leaks and bidder behavior. Regulatory power, politics, and due process (Priority: 5/5): Across the situations, Demuth argued that current regulators, especially under politically progressive influence, are using broad discretion in ways that go beyond statutory intent and create a chilling effect on mergers. Event-driven investing caution (Priority: 4/5): The speakers repeatedly warned that spread math alone can be misleading in broken-deal situations, citing precedent risk, fundamentals deterioration, and the tendency for post-break trading to overshoot on the downside.

Key Arguments: The Tegna deal appears nearly dead because the FCC’s action was unprecedented, politically charged, and not obviously solvable through legal or political channels. Even if Standard General wants to continue fighting, that does not imply a realistic path to closing; maintaining contractual duties until the walk date is different from having a viable closing path. The FCC’s public-interest reasoning seemed broad enough to discourage many media or private-equity-backed M&A deals, especially if leverage or layoffs are involved. The Activision deal’s biggest issue is not antitrust in the abstract but procedural/regulatory power in the U.S. and U.K., especially the CMA’s blocking authority. Microsoft has already offered meaningful concessions to Sony and others, but competitors may still prefer to kill the transaction rather than settle. The market may overestimate the option value in broken-deal situations; Activision could trade down sharply if the merger collapses, as seen in prior event-driven precedents. AMC’s structure and financing needs make the APE vote strategy plausible, though unusual; the vote may be more about leverage and timing than immediate legal clarity. Manchester United should be evaluated as a rare trophy asset where prestige, scarcity, and emotional value can overwhelm normal valuation discipline. Press reports around auctions are often strategic leaks from both buyers and sellers, so traders should be skeptical of surface-level narratives. Regulatory outcomes now reflect broader political alignment, with figures like Elizabeth Warren seen as shaping agency behavior more than the sitting president himself.

Data Points: Tegna deal price vs. implied market view: Roughly $24 if it goes through, $16 if it breaks - Andrew summarized the market’s rough framing of Tegna before the FCC action. Tegna share price: About $17.50 - Used to infer the market’s rough probability of a successful rescue. Implied Tegna success probability: About 10% - Demuth’s estimate of the chance Standard General ultimately wins an appeal or otherwise closes the deal. Tegna walk date: About May 22, 2023 - Referenced as the contractual deadline while the buyer still has duties. Activision deal size: $60 billion - Described as a massive takeover and the most commonly asked-about situation. Activision net cash: About $8 billion to $10 billion - Part of the bull case arguing standalone downside may be cushioned. Microsoft break fee: Another couple billion dollars - Included in the free-cash / downside-support argument for Activision. Activision valuation multiple mentioned by bulls: 18x to 20x EPS - Used to argue the deal value plus net cash roughly equals or exceeds current trading levels. Standard General / Tegna review timing: About a year since announcement - The deal had been pending for roughly a year when the FCC action occurred. AMC APE vote date: March 14, 2023 - Expected vote date discussed for the recapitalization / share authorization process. AMC preliminary injunction hearing: April 27, 2023 - Scheduled hearing after the vote, unusual because the vote occurs before the legal challenge is resolved. Manchester United bid range: $4.5 billion to $5 billion - Reported Qatar-related bid range discussed during the auction process. Manchester United share price range: From 13 to 25, then around 20 - The stock rose on sale expectations and later eased as skepticism increased. Manchester United stadium upgrade estimate: About $1.5 billion - Mentioned as a possible capital need the Glazers may want to avoid funding themselves. Tegna comparative stock moves: Gray Television down 45%; Sinclair down 40% - Used to illustrate how broadcasting peers fell over the prior year.

Pivotal Quotes: "This kills deals." — Chris Demuth: His blunt summary of the FCC’s action against the Tegna transaction. "I think this was the plan." — Chris Demuth: On the FCC Media Bureau process, suggesting the unusual ruling was intentional rather than accidental. "I like to think about that as more of 10% than zero." — Chris Demuth: His estimate of the probability that Tegna/Standard General could still be rescued despite the regulatory setback.

Implications: Listeners should take away that regulatory process, politics, and precedent can dominate classic valuation work in event-driven investing. Deals may appear mathematically attractive yet still collapse if agencies or counterparties choose confrontation over compromise.