Chris DeMuth's state of the markets July 2022

Episode Summary

Executive Summary: The episode centers on event-driven investing in a slow summer tape, with a strong focus on antitrust, squeeze-outs, and energy. Chris argues the antitrust regime remains unusually aggressive, definitive arbitrage still has opportunities, and energy equities may be pricing in excessive skepticism despite robust commodity strips. The longest segment analyzes Twitter v. Elon Musk, with both speakers concluding Twitter has the stronger legal case and likely specific performance.

Main Topics: Summer slowdown in event-driven markets (Priority: 4/5): Both speakers note deal activity is thinning as bankers, lawyers, and executives go on holiday, reducing the pace of new M&A and arbitrage opportunities. Antitrust environment and definitive arbitrage (Priority: 5/5): Chris argues antitrust enforcement remains harsh, making hostile or complex deals difficult, but definitive arbitrage still attractive where closing risk is manageable. Squeeze-outs and minority takeouts (Priority: 4/5): They discuss majority owners using squeeze-out structures or minority buyouts, including Shell/Shell Midstream and potential similar situations in other controlled companies. Energy equities, hedging, and capital allocation (Priority: 5/5): A major theme is that oil and gas companies are often poorly hedged, overbuy shares or overinvest cyclically, and may be undervalued relative to commodity strips if they simply return cash. Twitter vs. Elon Musk merger litigation (Priority: 5/5): The speakers analyze the merger dispute, emphasizing contract language, litigation posture, judicial temperament, and the lack of a smoking-gun document for Elon. Market skepticism versus terminal-value debate (Priority: 4/5): They compare energy and tobacco, arguing some industries can produce strong shareholder returns even when terminal value is questioned, if cash flows are returned efficiently.

Key Arguments: Antitrust is still a major obstacle: Chris believes regulators are more likely to litigate than accept messy behavioral fixes, which increases deal uncertainty. Definitive arbitrage remains viable: even in a tougher regulatory environment, completed or near-certain deals can still offer attractive risk-reward. Squeeze-outs may become a more important source of event flow than new M&A in a slow issuance environment. Energy management teams often time hedges and buybacks badly, making shareholders vulnerable to pro-cyclical capital allocation mistakes. Energy equities may be priced too cheaply because investors fear management will waste future cash flows on poor drilling or acquisitions. The Twitter merger contract appears to favor Twitter because the agreement’s drafting and negotiation history support Twitter’s interpretation. Elon Musk weakened his own position by speaking publicly and early, reducing optionality and creating messy evidence for court. The judge, Kathaleen McCormick, appears highly capable, contractual, and inclined to focus narrowly on the agreement and equitable remedies rather than PR narratives. Specific performance appears likely if Twitter wins because monetary damages were described as insufficient and the court has a prior history of enforcing similar relief. There is no obvious smoking gun proving Twitter knowingly misled Elon about bots; the case appears to turn on contract interpretation, burdens, and conduct rather than hidden evidence.

Data Points: Delupa database size: 2,500+ models - Sponsor read describing the company’s financial modeling database Twitter deal price: about $54/share - Referenced as Elon’s agreed acquisition price Twitter stock downside estimate discussed: about $25/share - Used as a rough standalone downside estimate in the discussion Twitter trial timing: mid-October / October 17-21 base case - Expected expedited trial date after the scheduling hearing Twitter complaint filing timing: early July - Twitter sued Elon after his attempted termination Elon 13D filing timing: early July - Elon filed a 13D and letter attempting to exit the deal Sanderson Farms deal consideration: a little over $200/share - Takeout price cited during antitrust discussion Sanderson stock trading level pre-close: around $180/share - Market pricing when many believed the deal might fail Sanderson stock trading level later: around $220/share - Stock traded above deal price as chicken prices rose and arbitrage became inverted Shell ownership of Shell Midstream: 63% - Used to illustrate a controlled-company squeeze-out situation CLR squeeze-out proposal: $70/share - Harold Hamm’s implied takeout price for minority holders CLR trading level discussed: $64/share - Price when Hamm floated the takeout idea Energy strip change: oil up ~20%, natural gas up ~50% - Future strip move since the start of the year was cited as strong

Pivotal Quotes: "we're probably going to go through a lot of different names today. We may have positions in some, we may not have positions in some" — Andrew Walker: Standard investing disclaimer at the start of the episode "I think that's going to be the kind of the slowest, hardest slog for the next little bit here" — Chris Demuth: On the difficult environment for new M&A and deal-making amid antitrust pressure and summer slowdown "You can't use these things as termination events if you don't have clean hands." — Chris Demuth: On why Elon Musk’s conduct and public statements weaken his attempt to escape the Twitter merger

Implications: Listeners should expect a slower deal calendar, continued antitrust friction, and more controlled-company squeeze-outs. In Twitter, the transcript suggests Twitter has the stronger case and that specific performance is a real risk for Elon if he loses.