Chris DeMuth's State of the Markets July 2024

Episode Summary

Executive Summary: The episode covers Chris Demuth’s July 2024 market update, centered on special situations and financials. He argues that active bidding and tighter deadlines in RCM and WideOpenWest (WOW) reflect strong value signals, while bank M&A is likely to accelerate as rates normalize, the curve uninverts, and political/regulatory conditions potentially improve. The hosts also touch on airline antitrust, especially Spirit/JetBlue and Hawaiian/Alaska.

Main Topics: RCM bidding war and July 31 deadline (Priority: 5/5): Discussion of the unusual auction dynamics around RCM, where New Mountain and TowerBrook/CD&R are competing, with the board setting a July 31 final bid deadline to force urgency and reduce coordination or gamesmanship. WideOpenWest (WOW) takeover dynamics (Priority: 5/5): Analysis of WOW’s undervaluation in Crestview’s bid, the impact of Charter’s strong results on valuation, and the case for a higher bid or alternative paths like a capital return strategy. Banks, interest rates, and M&A outlook (Priority: 5/5): A broader view on bank stocks and deal activity as the yield curve normalizes, rate-cut expectations rise, and bank M&A becomes more feasible amid improved clarity and potential regulatory change. Activist and special-situation investing (Priority: 4/5): The speakers frame both RCM and WOW as situations where control holders’ involvement, public letters, and strategic uncertainty create opportunities for shareholders to capture a better price. Market psychology and valuation anchors (Priority: 4/5): They discuss how recent highs, stock volatility, and market context shape board behavior, shareholder perceptions, and willingness to transact, even when those anchors are economically arbitrary. Airline antitrust and precedent from Spirit/JetBlue (Priority: 3/5): A brief forward-looking discussion of Hawaiian/Alaska and how the blocked Spirit/JetBlue merger may shape future antitrust battles and restructuring outcomes.

Key Arguments: RCM’s July 31 bid deadline is likely intended to create urgency, force definitive offers, and limit late-stage coordination between competing bidders. The RCM process is unusually complex because two 30% shareholders are effectively bidding against each other, creating game-theoretic incentives and potential pressure for a sale. WOW’s initial Crestview offer appears too low because telecom and cable assets are trading at stronger multiples, and Charter’s improved stock performance raises the implied valuation benchmark. WOW management/board should either extract a much higher takeout price, run a broader sale process, or consider self-help through capital returns rather than accept an opportunistic low bid. In bank M&A, improving rate conditions and a less inverted yield curve should make deal pricing, financing, and valuation easier for both buyers and sellers. Credit unions, ESOP banks, and mutual conversions/remutualizations are expected to become meaningful themes in bank M&A activity. Political/regulatory change could matter materially for bank consolidation, because current merger approval conditions have been difficult under the present administration. Stock levels relative to recent highs affect negotiation psychology, board optics, and proxy framing, even if such anchors are economically arbitrary. The Spirit/JetBlue outcome shows that blocking a deal does not freeze strategy; the target can still change its business model, undercutting the rationale for the original lawsuit. If majority shareholders want control, they should pay fair value; if they want upside participation, rolling equity can be a rational mechanism to align preferences.

Data Points: RCM bid deadline: July 31, 2024 - The board set a deadline for final bids in the ongoing sale process. RCM public bid: $13.25 per share - New Mountain’s publicly announced bid for RCM. RCM stock price at discussion: $12.75 per share - Approximate trading price while the episode was recorded. WOW initial bid: $4.80 per share - Crestview’s initial offer for WOW, described as a roughly 30% premium to unaffected price. WOW premium to unaffected price: ~30% - Speaker’s estimate of the initial Crestview premium. Charter stock move after results: +20% on results / +40% to 45% since Crestview bid - Used as a valuation reference point for WOW’s improved environment. RCM shareholder concentration: Two shareholders at about 30% each - Describes New Mountain and TowerBrook/CD&R control dynamics. WOW ownership stake: About 30% - Crestview’s ownership position in WOW. Tegas transcript coverage: Over 75% of private market transcripts - Promotional claim in the ad read. Tegas user frequency: 1–2 expert calls per day / about 7 per week - Host’s personal usage claim in the sponsorship segment. Bank valuation reference: 80% of tangible book - Illustrative level many banks were trading at a couple of months earlier.

Pivotal Quotes: "These are investment promises. So if anything ever goes wrong in the future, come back to us." — Chris Demuth: A joking remark about the non-advice disclaimer while discussing the RCM process. "I think it’s going to sell. And so, you have this kind of non-transitivity. And I think rushing it might be one way to just give less time for coordination." — Chris Demuth: On why the RCM deadline may be designed to force a deal and reduce bidder coordination. "If they want to own this, just pay the right price, or the company can find somebody else willing to." — Andrew Walker: On WOW and the broader principle that a buyer should pay fair value if it wants control.

Implications: Listeners should expect more special-situation deal activity, especially in banks and control contests. RCM and WOW suggest boards may push harder for price discipline, while easing rates and potential regulatory shifts could unlock bank M&A and capital-return strategies.