004: Chris DeMuth Jr. – Event Driven Trading, How M&A Has Changed, and the Twitter/Musk Deal

October 28, 2022
Stock Market Stories
Stock Market Stories
004: Chris DeMuth Jr. - Event Driven Trading, How M&A Has Changed, and the Twitter/Musk Deal

Today’s episode is an interview with Chris DeMuth Jr, a partner at New Canaan, CT hedge fund Rangeley Capital where he focuses on value-oriented strategies with a penchant for event-driven trading.

I’ve followed Chris’ research for years. He’s one of the most interesting people publishing trade ideas and analysis, and he always has skin in the game.

If I had to sum up Chris’ approach to markets it’s seeking mispriced bets, wherever they are. He was structuring heads-he-wins-one, tails-he-wins-five trades all throughout the SPAC craze, a trend which pretty much every value manager missed.

He seemingly gets as excited about unscalable, illiquid situations as he does something like the Twitter deal. He regularly flags trade ideas with a maximum capacity of less than $10,000, like finding discounts on physical gold bullion, or exploiting wine-by-mail discount codes. His idea generation process seems far more like a treasure hunt than one of surgically running value stock screens.

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Stocks Mentioned:

  • Twitter (TWTR)
  • Renren (RENN)
  • Amplify (AMPY)
  • Digital World Acquisition Corp (DWAC)
  • Tesla (TSLA)
  • Spectrum Brands (SPB)
  • Planet Labs (PL)
  • AerSale (ASLE)

Links Mentioned:

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Podcast Transcript

Please keep in mind, this is an AI-generated transcript and probably has tons of mistakes. Don’t rely on it being accurate.

Welcome to the stock market stories podcast, or interview successful traders and investors. This is the first episode I’ve done since 2020. And as I’m sure you’re aware that you’re created tons of opportunity, so I had to put the podcast on hold for the time being. I’m happy to say that I found the time to dedicate to creating and publishing new episodes of the podcast. Really excited about the future of the podcast. I have a number of super interesting guests that I’m talking to, but I’d also love your help. If you want to hear someone interviewed, please send me a tweet at stock podcast that just the word stock in the word podcast. In addition, please subscribe to the podcast on Apple podcasts, Spotify, wherever you listen to your podcasts really help us out.

Today we have Chris dimuth Jr of Rangely capital. Returning to the show. Chris is a value investor with a pension for event driven opportunities. He also runs one of the best blogs and Seeking Alpha sifting the world where he flags asymmetric and often idiosyncratic ideas. In today’s episode, Chris explains why event driven trading is generating most of his returns right now. He gives us an overview of his three largest positions all of which are event driven. The now complete Twitter deal Ren Ren ticker r e n n, n amplify ticker A n p y. Chris goes pretty deep on the now complete Twitter deal, as well as how the current activist regulatory environment is affecting m&a deals.

Alright, so you want to hop into things? Sure. Right. So I just want to start out by asking you, you know, last time we talked, it was like in the peak of Coronavirus. I think it was March 2020. And obviously, very different set of opportunities back then. Can you just walk through how you’re viewing kind of today’s market?

Sure, I think that COVID plus ZURB had a really unusual aberrant period for investments that I think of the everything bubble is a period in which there was no opportunity cost either for capital or time, dudes were in their parents basements wearing pajamas, trading stock. I think that the advent of zero commission trading apps really exacerbated that. And there was a very temporary, very unusual appetite for science experiment, companies that would put out very aspirational, if not fictional, hopes for building into a business in a decade or in some implausibly long period of time. This was especially prominent in new issuances, and Spax. And in IPOs suspects get a lot of flack for it. But IPOs were really in tandem capitalizing never profitable tech. And this appealed to new retail investors. All that’s changed, you know, we come out of the worst of COVID, we come out of the worst of artificially low interest rates. And all of a sudden, the whole Hey, wait a decade for the science experiment to turn into a company might have been ludicrous at the time, but it was kind of transparently ludicrous after that. So kind of call it end of q1 2021 when things really started to change, I kind of started reading about this in February and then kind of publicized our kind of our portfolio of short ideas in March. And it really focused on interest rates, on New issuances. And conveniently on arc just because they kind of conveniently crowd a lot of these kind of science experiment ever profitable tech companies into one place. But there’s other aggregators of these Ark was kind of the most prominent, there were a few others as well, or you could just short them all individually. But that was kind of when the everything bubble really started to pop. And what are we left with coming into this year and this year, so it’s the most concentrated portfolio I’ve ever had, by far it’s the biggest, most exposed portfolio in a sense but exposed to the things we want to be exposed to. I would say that we’re very focused on event driven situations with pretty hard catalysts. We’re always going to be exposed to being right or wrong, but we really weren’t look Even for kind of exogenous macro exposure this year, litigation has been a big area for us where we can really be right or wrong but had hard catalysts that we could invest in, really, all of our biggest positions have some sort of litigation elements, some sort of corporate event that was going to be determined in part in courts. But most prominently in our biggest position, run run fairly prominently in Twitter, one of our three biggest positions, and by far the biggest merger we’ve ever done, which was bound for court and got to court and might be back in court next week, we’ll see. And also to some serious extent, amplify a&p Why third of our three biggest positions this year and ever, which is a upstream and midstream oil and gas company. That’s the kind of thing that we are comfortable with exposures. And as as the kind of never profitable tech collapsed. Energy was the one sector coming into this year that we thought would really be something where we could take a swing at

Unknown Speaker 6:21
where the thesis is that we have this infatuation with green energy and energy transition amongst a lot of large asset allocators. But this is something that’s going to have a reality two decades from now that alternative or intermittent energy, something people like to talk about, but they use oil and gas and oil and gas is going to have kind of several decades between where it is unfashionable and where it is needed. And that that’s going to be something where we’re going to allocate a lot of our capital to because we’re just investors, we’re just looking for marginal costs and marginal benefit, and we’re not religious or political about it. And so we don’t share the kind of ESG fixation that’s driving a lot of capital away from oil and gas. In places. I mean, most dramatically in California, we have politicians that one decry high prices to attack supply and three subsidized demand, which isn’t just a bad idea, it’s incoherent, but it’s exploitable and creates opportunities.

Unknown Speaker 7:36
Yeah, a ton of things. Like I want to ask you about there, we’ll get to amplify Ren Ren Twitter, you have some great things to say about that, which I’ve you’ve blogged about, you know, to no end, but you’ve really concentrated into adventure of and trading. And so my primary question there is why are the returns and event driven? seem to be so good right now?

Unknown Speaker 8:02
Sure. Well, it’s good during periods of dislocation. So if you have kind of a follow through for a few years of some kind of theme, that might make kind of momentum traders look good, we do a little better shine a little better, shine a little brighter when there is a knot that momentum follow through not obvious directions where things are perhaps jittery, volatile. And most merger ARB spreads are relatively short term. So, you know, the long end has been, you know, where our short idea was, was kind of at the 30 year, where our long positions are, tend to be, you know, what is Twitter now could be four days. So, you know, the the return we get between now and Friday, if we in fact, it $54.20 On Friday, which our thesis is that we will whether rates are up or down a few pips between now and then won’t affect us too much.

Unknown Speaker 9:14
Okay, so, sort of the dislocation liquidation people trying to reposition is what you think is creating all this.

Unknown Speaker 9:24
I would also throw out that amongst equity guys, they might understate how much havoc there is in the markets in 2022. Because you also have a lot of shifts in the bond market, which is of course, so much bigger than the equity market let’s entertainment value, perhaps less for CNBC to discuss but it’s a much bigger and more important market, to the world to the economy to corporations, has a lot more debt than there is equity traded and with all of that, you know in flux that also creates cap Little structure opportunities. I would say, the big failure this year, the big deferred opportunity or the big opportunity for next year whenever deal financing stabilizes is that the deal financing market has collapsed, and it has made it nearly impossible for most takeover, speculation, pre ARB situations. Those have been very difficult this year, the bright light within pre ARB takeover situations has been squeezed out. So it’s been quite a few successful, publicly traded subsidiaries getting taken out for good premiums. We love those situations, we’re typically involved trying to find some kind of fulcrum stake we can take and really be relevant. Where, for example, the publicly traded MLPs public subsidiaries are almost all getting bought this year. And in part, you can have kind of a cynical view of why these it’s very funny to look at the funds buttons that tend to traffic and non profitable tech that have public and private kind of VC like investments, and their public books will be down 50% or private book, they’ll mark down 5%, you know, well, that Ibogaine down 5%. That’s the public markets are a lot more honest. Public companies with public subsidiaries have a little bit of the same dynamics, they can take it out of their misery, at least the appearance of misery by taking them private. And they’ve been doing that this year, quite aggressively. So that’s kind of one area that we’ve been very interested in. But deal financing has been difficult. But just the whole movement creates a lot of price dislocation, and kind of just weird dynamics where there are opportunities for securities that aren’t really bread and butter things to own if you’re a fundamental guy or an ARB guy, and so that there have been some orphaned opportunities.

Unknown Speaker 12:19
Can you give me an example of what wouldn’t be a bread and butter security to own for a guy like you?

Unknown Speaker 12:24
Sure, one that I’m very interested in, I’ll probably have more to say about this in the months ahead. But spectrum brands is one that I have not written about yet. But it’s a significant investment of mine. SP B, and the reason is, is that it is not a corporate transaction like Twitter that has kind of an obvious upside, downside probability. Kind of typical our situation, it’s kind of gotten somewhat abandoned by fundamental guys, but it has a an asset sale in excess of the size of the company, or the current market cap right now. And it is, in court, this extremely aggressive Department of Justice’s suit, to block it, I think it’s quite likely the deals gonna get done, that they’re going to be able to, by this coming spring, get this done. And I think it’s, you know, takes maybe a hair more work, and it’s a little bit of a different situation, and whatever we end up with the money goes to the company, not to us directly. So we have to hope that they will not deserve a big discount on what they get by malinvestment. But, but it’s a very interesting risk reward we think it’s worth plausibly around what it costs right now without the deal and far more with it.

Unknown Speaker 14:01
Like a special situation. Yeah. So you’re seeing a lot more of that

Unknown Speaker 14:06
to a lot more of that. A lot more of that. Going right

Unknown Speaker 14:09
along with the adventure of and thing you called 2022, the golden age of merger ARB and the spreads are super wide and whatnot. And you kind of touched on why that is. So if you could quickly just give us your thought process. Sure. Yeah.

Unknown Speaker 14:26
So so so we were squeezed between two problems for arms. The was kind of touched on both, but just to list them one. They frozen Deal finance market, and to the woke, progressive. FTC and DOJ of Joe Biden got elected president, kind of as a kind of Democrat from Central Casting normal guy kind of has been flopping around DC for decades. Not that Scary to capital markets, kind of normal politician. But his party and his administration, all of the pressure comes from his left. And he is not young nor energetic, nor particularly engaged in regulatory policy. So it’s essentially been outsourced to people to his left, especially Liz Warren, but others who have been crucial to personnel decisions. And you now have heads of the FTC and DOJ, who are kind of jihad ease who hate companies hate m&a, are really fanatical, especially on health care and on large tech companies. And they’re trying to outdo each other. To the left, they’re kind of tripping over each other, to go well outside of these agencies mandates their jurisdiction in terms of law, in terms of what they’re supposed to be doing just to kind of weaponize their review process against political adversaries and against companies they don’t like the m&a process is kind of their hook. But the things they’re going after have nothing to do with antitrust have nothing to do with the merger, as you know, they’re going after going after Amazon for a vacuum cleaner deal. And it’s just, you can say out loud, their rationale for antitrust cases they bring but barely, I mean, you can say it out loud, it’s hard to do it without smoking. And the judges are just stuffing on one after another. They’re losing these cases. So there might be woek, antitrust, hipster antitrust regulators, but they’re not hipster judges, these judges, a Republican and Democrat alike are mostly, I mean, these are not just people with serious jobs, but they’re the kind of people who, you know, wanted to become judges and wear black robes and sit in these oak, wind. courtrooms and they’re mostly, with some exceptions, I can think of pretty dang serious people who follow the law. And when it’s not on these regulators side, they lose as they have time after time in the last few months. And so it’s really going to change the dynamics between the regulators and the company, since the company is going to become a lot less scared of them. And But meanwhile, I don’t want anything to do with these arm spreads unless they’re incredibly wide. And unless they’re already in front of a judge, because a lot of them are going to head there.

Unknown Speaker 17:38
So they’re going to bring tons of suits. I don’t think they really care if they lose they, they’re appealing to people who are radicalized and who are have kind of an almost religious fervor against these companies. They just want to hurt or use the process as the punishment against Amazon against Microsoft against Google against healthcare companies, and then proud of it. So it’s not as if they don’t understand what they’re doing. They know exactly what they’re doing what they want to do. And they want to outdo each other. The fact that they’re these two competing NHS agencies, currently competing for the affections of Liz Warren, is not a good thing for deal time, lines and deal certainty. But that causes you to wait and the fact that the banks are having a huge amount of trouble with syndicating debt also causes you to wait, one of the reasons why I have this huge position in Twitter is looking at the opportunity cost. Twitter had and has no antitrust issue. Twitter has had and has no financing issue richest guy in the world without owning a competitor to Twitter. If he wants to get this deal done, he can get it done. If he doesn’t want to get this deal done. He has a very tight contract. And the way I think about it is I would not invest in Twitter. The company I don’t have an investment in Twitter, I have a massive investment in the definitive merger agreement that Elon Musk, clean, sober and free on his own recognizance decided to voluntarily sign of a huge position in the Delaware Court of Chancellery in the chancellor McCormick in particular and a huge investments in the rule of law. And if I can’t bet on those things, I can’t do anything else anyways. So I might as well make a buck or $54.20 between now and then. Because if he can just kind of smirk and write some bad tweets and blow out of his commitment. What am I going to do the next day, pick up the next merger agreements and read the clauses and see if I can understand the contract cuz if he doesn’t have to close this deal, none of that matters anymore.

Unknown Speaker 19:55
Right? All right. So I mean outside of Twitter, you kind of are being the dumb money that hasn’t adjusted to this new kind of regulatory activist environment. Would that be accurate?

Unknown Speaker 20:06
Yeah, we’re just we’re just certainly certainly being patient. Spectrum brands, which are quite likes already in front of a judge.

Unknown Speaker 20:18
And we have a court, you know, we have a, we have a, you know, we have, we’ll have our day in court, the government wants to settle with us, there were terms that were offered before they sued to clean sweep. So I mean, the government here really is just being a being a kind of dramatic, vindictive bully, going after something that has a full offer to fix the whole thing that they’re nominally for, which is exceedingly revealing. But Twitter is, of course, already in front of a judge. So it’s just worth waiting. And a lot of the a lot of the marginal cases or cases that this agency these agencies will bring. And so just being patient, and there’s a lot of other cool stuff to do while we wait.

Unknown Speaker 21:06
Right on. Right on. I noticed recently the prediction markets for the Senate in the house. I don’t know what the date sometime in November, they flipped. Do you worry, or are you? You know, have your ears perked up to the potential that that environment you just laid out my radically change? Should the Republicans take both the Senate and the House?

Unknown Speaker 21:30
Well, the White House still picks a three out of five FTC commissioners right now they have a kind of radical leftist chairman, to acolytes and only one Republican. So it’s, it’s the farthest to the left. And I’m somebody who had great admiration for a lot of the Democrats involved in the Obama administration and era on antitrust, where it was far more bipartisan and rational and economics based and adherence to their statutory jurisdiction than today. The DOJ will still very much be Joe Biden’s DOJ, or to the extent that it is Liz Warren’s DOJ. So none of that will change. You know, they will they will have a harder time getting new laws to make the actual law more progressive and targeting non price based theories and targeting tech platforms. But they don’t care about their jurisdiction limits anyway. So I think it’s not going to make that much of a difference. And a lot of the Republicans getting elected from the more kind of populist wing actually have common cause with the progressives. So this isn’t kind of the Chamber of Commerce Republicans winning this is this kind of kind of weird, lower left, lower right quadrant that can work pretty well with the lower left quadrant on kind of populists anti corporate sentiments, and so I don’t think the concerns I see on the NHS side getting better if the Republicans pick up that house and somewhat less likely the Senate. But the scope for big new legislation to kind of step change things in a worst direction goes away.

Unknown Speaker 23:33
Okay. Yeah, I mean, I guess on tech, even all the Trump Republican guys that they agree with all the, like the AOC type of Democrats that you know, you might see some significant there. Right. But let’s let’s go over Twitter, I don’t think you want to spike the ball just yet. Like for anyone who doesn’t know, just like an hour before we’re recording this. Musk told. I think he told bankers, was that right, that he’s intends to close that Twitter deal on Friday, just like three days from now. The it’s, it’s a spectacle, it’s been a spectacle. But your thesis has remained like really simple that Elon doesn’t have much of a case and translate McCormick is a serious person. So you by Twitter, so can you just go over really quick, kind of like your thought process and how you’ve with all the headlines, like I was asking before we started recording, like, Oh, how about this? How about this, you know, like, well, you know, the details of the case are very simple, like how you’ve reacted to all the different head fakes.

Unknown Speaker 24:42
The details of the case are very simple. And were it not for Elon Musk Zenus this would have been a tedious but lucrative opportunity with Elon Musk. It’s made it a exciting and lucrative opportunity, with kind of more opportunities along the way.

Unknown Speaker 25:07
The deal, contract was something I thought about a lot at the time.

Unknown Speaker 25:15
One of the ways I think about contracts, is trying to understand the negotiating dynamics that both sides have. And when one or the other side is really pushing, what almost always happens is, the other side’s lawyers essentially dictate terms. So if you have kind of a multi better situation, then you tend to have the target able to really pick a lot of the qualitative terms, and then you can just compete on price. If you have a desperate company that’s otherwise going to file for bankruptcy, and you have one bitter, then the buyer gets to dictate the qualitative terms, you say, well, we can always buy it in bankruptcy, you’re getting your equity holders are getting wiped out anyways, I’m gonna write the contract, and you’re gonna say thank you. And in this case, it was a contract, dictated by the target by Twitter, by their lawyers, with a enthusiastic, bitter, Elon Musk. And Much has been said about how he did not do due diligence. It was very fast, it was very informal. And he got what he wanted at the time. And the targets. Lawyers made for a contract, it’s almost as tight as they could make it. It’s the kind of thing that in dozens of clauses, they really pick the language that they would often fight for, and maybe get a third of a loaf. By the time something was signed, but he just signed it. So we had this, we had just the contract we wanted, required antitrust approval, which was perfunctory in the US in the UK, required a UK National Security Rule required terrible shareholder vote. But given that it was priced where it was that shareholder vote was always going to be nearly unanimous. And that was reasonable people disagree on what Twitter’s worth, I think the estimates range from call it 15 to $30 a share and we’re at the very low end of that range. And, you know, there could have been an activist that could have come in, we’re not for this deal. We don’t think there were other strategic bidders. You know, there were really private equity bidders anytime soon, there are things you could have done, but I think $15 a share is kind of probably where it would have settled out, give or take. And nothing about other social media platforms, nor Twitter’s performance quarterly since the deal was announced gives you more comfort than we had at the time. But we were not enthusiast of the company of the management of the board. I own more shares than the board doesn’t aggregate, once Jack Dorsey left the board. So these guys, it was a weird board. They were neither really investors in Twitter, nor really users of Twitter. I think I’ve I’m not positive this is the case. But I think I probably have more tweets and more shares than the board does put together after Jax was off. That’s probably true. Almost certainly true. If you say compare me to any one of them. I mean, they just don’t use it that much. They don’t own that much. So I think they were happy to be put out of their misery. And Elon wanted us. It was classic buyer’s remorse, very clear in the discovery process. He was concerned about really three things, maybe four things are three positive things and one negative thing, three positive things, or three affirmative things. And then one kind of dog that didn’t bark, the war in Ukraine. He very specifically cited that and cited as a reason that he wanted to slow foot the deal. With the potential for World War Three and Vladimir Putin and Ukraine he was very concerned about a number two, just generally the weakness in the market. But number three, in particular, the weakness in Tesla, if you look at how Tesla declined the number of if you didn’t nominate the Twitter deal in Tesla shares. It went up substantially from the time that the deal was announced to the time that he kind of first attempted and then purportedly tried to terminate. And then the dog didn’t bark was nobody else bed. No, there was no other calm You might be put into a bit of a frenzy trying to bid thinking you had to get ahead of somebody, but there was no strategic or private equity interest. So he was kind of on his own. So he probably felt a little dumb, you knew that he overpaid.

Transcribed by https://otter.ai

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