Chris DeMuth's State of the Markets September 2022

Episode Summary

Executive Summary: Andrew Walker and Chris Demuth discussed a market marked by aggressive antitrust enforcement, recent court defeats for regulators, and how those rulings may affect pending deals like Activision, iRobot, One Medical, and Tegna. They also examined tobacco as a long-term thematic investment, focusing on Philip Morris’s bid for Swedish Match and the possibility of a higher bid driven by activism, FX, and strategic optionality.

Main Topics: Antitrust regulators and recent court setbacks (Priority: 5/5): The hosts analyzed how aggressive FTC/DOJ leadership is shaping antitrust enforcement, but noted that recent losses in court undermine regulators’ credibility and may embolden dealmakers. UnitedHealth–Change Healthcare and market-definition/vertical-merger precedent (Priority: 5/5): They discussed the DOJ’s loss in the UnitedHealth Change Healthcare case, emphasizing how the judge rejected the government’s vertical theory and accepted the companies’ proposed fix. Activision Blizzard–Microsoft as the key live merger-arb case (Priority: 5/5): They focused on Activision as a high-probability merger-arbitrage opportunity, while warning that UK CMA action could be the real deal-killer even if US regulators lose in court. Broader FTC scrutiny of Big Tech and deal review strategy (Priority: 4/5): They considered whether regulators might go after companies based on buyer identity alone, with Meta/Facebook and Amazon singled out as likely targets for broad enforcement. Tegna and political/regulatory sensitivity in media deals (Priority: 3/5): They briefly assessed the Tegna deal and argued that FCC/FTC sensitivities around local journalism and media consolidation could shape the outcome more than standard antitrust issues. Philip Morris–Swedish Match and the tobacco thesis (Priority: 5/5): They explored Swedish Match as a strategic asset in nicotine alternatives, arguing the business may deserve a much higher valuation if Philip Morris is forced to raise its bid or if a separate value-unlocking path emerges.

Key Arguments: Recent antitrust losses for the DOJ/FTC matter because they weaken the regulators’ ability to intimidate future dealmakers and may create opportunities in merger arbitrage. UnitedHealth’s victory shows that judges can reject aggressive vertical-merger theories when the company presents a workable fix and the government fails to prove harm. Activision is structurally similar to UnitedHealth: a vertical deal, subject to US review and potentially vulnerable to the UK CMA, which may be the true blocking risk. The CMA is especially important because, unlike the US process, a UK block can effectively kill a global transaction with less room for reversal. FTC/DOJ may increasingly target deals based on who the buyer is, not just the transaction economics, especially for Meta/Facebook and Amazon. A lot of the market’s fear around Big Tech may be overstated, but the agencies’ enforcement model is mismatched to the scale and complexity of modern platforms. Swedish Match has strategic value beyond the bid price because Philip Morris views it as part of its future away from cigarettes, not just a simple financial acquisition. A successful higher bid for Swedish Match is plausible because the company’s shareholders and activists may force a renegotiation, and a failed deal could still leave the stock above pre-deal levels. FX and financing conditions cut both ways for Swedish Match: a weaker krona versus a stronger dollar can support a higher bid, while higher rates make financing more expensive. Tegna is more likely to face political/media-policy resistance than pure antitrust objections, especially given concerns over local journalism and media concentration.

Data Points: Activision bid price: $95 per share - Microsoft’s agreed acquisition price for Activision Blizzard Activision trading price: ~$75 per share - Referenced current trading price during the podcast Implied upside on Activision: ~27% - Difference between the trading price and the deal price Activision closing timing: by March / possibly second quarter - Merger-arb discussion on when the deal might close Expected IRR mentioned for Activision: ~52% IRR - Illustrative merger-arbitrage return if the deal closes by the second quarter Microsoft break fee: $2.5 billion - Referenced as the fee Microsoft agreed to in the Activision transaction Tegna deal price: $24 per share - Price under the pending buyout of Tegna Tegna trading price: ~$21 per share - Referenced current market price for Tegna Tegna upside: ~14% - Approximate spread from market price to deal price Swedish Match bid price: 106 SEK per share - Philip Morris’s offer for Swedish Match Swedish Match alternative valuation: $175+ / 175 SEK - Discussed as a potential private-market or strategic value estimate from activists/shareholders Swedish Match shareholder threshold: 5% - Elliott reportedly crossed a 5% stake FTC staffing comparison: 350 fewer people than in the 1970s - Used to illustrate agency resource constraints

Pivotal Quotes: "if we just all surge at the same time, they don't even have enough regulators, they don't even have enough litigators to block everything" — Chris Demuth: Describing the strategy and limits of aggressive antitrust enforcement "The CMA is really the deal killer here." — Chris Demuth: On the main risk to the Activision-Microsoft transaction "I think that it's the greatest healthcare innovation since penicillin." — Chris Demuth: Referring to Swedish Match’s nicotine-delivery products and their health impact potential

Implications: The episode suggests merger-arb opportunities may improve where regulators are overreaching, but UK/EU actions remain critical. It also highlights that nicotine alternatives and other strategic assets can justify higher valuations than the market initially assigns.