Chris DeMuth's State of the Markets October 2023

Episode Summary

Executive Summary: The episode focuses on three event-driven value/arb themes: failed biotech liquidations, closed-end fund discounts/activism, and merger arbitrage in antitrust-heavy deals like Spirit/JetBlue and Kroger/Albertsons. Chris Muth argues that cash-rich failed biotechs and wide CEF discounts create clear, countable value, while current antitrust complaints may lag changed facts and broader market realities like Costco and Instacart competition.

Main Topics: Failed biotech activism and liquidation value (Priority: 5/5): The hosts discuss post-failure biotech companies trading below cash, where activists like Tang Capital push for returning capital rather than letting management pursue new speculative drugs. Closed-end fund discounts and Boaz Weinstein activism (Priority: 5/5): They examine wide CEF discounts, the role of distributions in monetizing NAV, and why activism can unlock obvious per-share value in funds trading below portfolio value. Spirit/JetBlue merger arbitrage and antitrust trial dynamics (Priority: 5/5): They debate whether the government's case remains valid after the Northeast Alliance was dissolved and divestitures were offered, arguing the complaint may be stale relative to current facts. Kroger/Albertsons antitrust and market definition (Priority: 4/5): The conversation covers whether grocery competition should now include Costco, Walmart, and Instacart, which could weaken traditional antitrust concerns and affect merger approval odds. Amazon/FTC and consumer convenience as competition (Priority: 4/5): They use Amazon and e-commerce as examples of how lower prices, delivery, and time savings can meaningfully expand competitive markets beyond legacy definitions. Liberty/John Malone skepticism and SiriusXM collapse speculation (Priority: 3/5): Chris expresses growing skepticism about Liberty entities, arguing past capital allocation wins are not being repeated and guessing a simple one-for-one SiriusXM collapse structure on Liberty Day.

Key Arguments: Failed biotechs often trade below cash because tax-loss selling and management teams' desire to keep control delay rational liquidation or return of capital. Activists are effective in failed biotechs because the value is concrete and countable; the goal is to get shareholders from 'zero to two' rather than chase a dead drug thesis. Closed-end fund activism is one of the cleanest forms of activism because the portfolio value is public, the discount is measurable, and distributions can help monetize NAV over time. Wide CEF discounts have become more attractive as spreads widened to levels not seen since major market stress periods, improving entry points for activists and arbitrageurs. In Spirit/JetBlue, the government's original case was credible, but the factual landscape changed materially after divestitures and the dissolution of the Northeast Alliance. Antitrust authorities may be relying on outdated market definitions and ignoring new forms of competition such as Costco memberships and Instacart delivery. Amazon's convenience and pricing benefits show how consumer welfare can be real even when a platform is accused of market power; lower prices and time savings can be pro-consumer. Liberty-related investment structures appear less compelling today because several operating teams have performed poorly despite high executive compensation, reducing confidence in repeatable Malone-style value creation.

Data Points: Date of episode: October 20, 2023 - The discussion is framed as a monthly market update during late October. Failed biotech market cap example: $50 million cash vs. $20–25 million market cap - Illustrative example of biotechs trading below cash after failed drugs. MEI Pharma cash balance: about $100 million in cash - Used as a real-world example of a failed biotech with activist pressure. MEI Pharma ownership disclosure: about 1,000 shares - Andrew discloses a small personal position in MEI Pharma. MEI Pharma CEO ownership: 20,000 shares (~$100,000) - Management ownership is cited as low relative to compensation and options. MEI Pharma CEO options: 220,000 stock options - Described as effectively worthless after the company’s failures. Closed-end fund discount context: largest since 2005 excluding COVID and GFC lows - The hosts reference a chart showing unusually wide CEF discounts. Kroger/Albertsons spread: $5 spread on a $27.25 cash deal - Used to illustrate the size of the merger arbitrage opportunity. U.S. population using Instacart: 10% - Cited as evidence that grocery competition now includes delivery platforms. Instacart cost on $200 grocery order: $30–$40 all-in - Includes delivery fee and tip; used to compare convenience versus time cost. Instacart fee estimate: 5%–7.5% plus 7.5% tip - Breakdown of the delivery economics discussed. Spirit trial start: October 30, 2023 - The expected start date of the antitrust trial. Liberty Sirius proposal ratio: 1.05 proposed; expected near 1-for-1 - Chris suggests the final SiriusXM collapse ratio may settle near parity.

Pivotal Quotes: "People don't change, and people don't change when change is necessary." — Chris Muth: On why failed biotech management teams often fail to pivot into value-maximizing liquidation or return-of-capital strategies. "I think it's one of the cleanest and best forms of activism you can actually do." — Chris Muth: Describing closed-end fund activism as especially straightforward because NAV and discount are transparent. "What is this company supposed to do?" — Chris Muth: On Spirit/JetBlue, criticizing the government for allegedly ignoring material divestitures and changes to the original fact pattern.

Implications: Listeners should watch for activist-driven value creation in distressed biotechs and closed-end funds, and for merger arb opportunities where legal facts may have shifted. Antitrust outcomes may depend on whether courts accept broader modern competition definitions.