What You Need To Know This Week — July 25th, 2020
What You Need To Know This Week
A weekly recap to keep you informed on the most important events this week impacting markets, business, tech and the global economy.
BILL ACKMAN LAUNCHES LARGEST SPAC IPO ON RECORD AT $4 BILLION
Hedge Fund manager Bill Ackman raised $4 billion in the initial public offering of the special purpose acquisition company he leads, Pershing Square Tontine Holdings. In addition to the $4 billion raised, Ackman’s investment fund has committed to adding $1 billion to $3 billion more to the SPAC. The record-setting IPO, which raised the bar as the largest SPAC of all time, will allow the investor to target substantial, profitable private companies he refers to as “mature unicorns”, or established and profitable multi-billion dollar start-ups. Investors welcomed the issue, bidding it up 6.5% on its first day of trading. Pershing Square will have two years to strike a deal.
TESLA REPORTS PROFITABLE QUARTER AS SHARES HIT NEW ALL-TIME HIGH
Electric vehicle manufacturer Tesla reported a profitable second quarter, which marked its fourth consecutive profitable quarter in a row, making it eligible for S&P 500 index inclusion. Given the company’s historical lack of profitability combined with stringent index addition requirements, Tesla is not currently in the benchmark stock index despite its nearly $300 billion market capitalization. It is currently the 12th largest U.S. company, therefore, index inclusion in the near-term would make sense. However, Standard & Poor’s uses additional discretionary data when considering a stock’s addition to the index (despite claiming to be “passive”), so index inclusion is not guaranteed. There would be nearly $50 billion of buying demand from index funds and trackers if S&P gives the nod.
CONSOLIDATION IN THE OIL PATCH: CHEVRON BUYS NOBLE FOR $13 BILLION
Much needed consolidation in the oil patch has commenced as Chevron announced the acquisition of Noble Energy for $13 billion, including debt. While the bear market in energy enters its seventh year, the all-share deal represents a capitulation for Noble as it is selling for a measly premium of just 7.5% and at the same share price its stock traded for in 1996. Unsurprisingly, Noble shareholders seem to be demanding more, given its share price is currently trading at a 2.4% premium to the merger consideration.
Notable Insights, Articles, Podcasts, and Tweets
Listen to Peter Schiff, CEO and chief global strategist of Euro Pacific Capital Inc., discuss the Federal Reserve and his bullish case for gold on the Joe Rogan Experience podcast.
Economist David Rosenberg: “the level of today’s default rate has historically been associated with an interest rate, on average, of 11 per cent in the high yield sector. Today, that yield sits at 6.1 per cent.” The high yield bond market is not appropriately compensating investors for default risk. Hence why we continue to prefer to generate a yield from arbitrage.
In the U.S., active ETF launches have outpaced passive ETFs for the first time, with 68 active exchange-traded funds launching in 2020, compared with 63 passive ones. This trend will likely continue, given passive products are saturated and dominated by the likes of Blackrock, Vanguard and State Street. In addition, more mutual fund companies are giving into the trend and launching active ETFs given investor preferences.
Electric vehicle companies have easy access to capital without even having to manufacture products. Upstart EV firms such as Fisker, Rivian and Karma are accessing capital at increasing valuations as investors remain keen on the sector.
Warren Buffett put over $800 million to work buying Bank of America shares. The open market purchase of nearly 34 million shares increased Berkshire Hathaway’s stake in the bank to approximately 11.3%.
Direct-to-consumer startup Hims, a U.S. online provider of men’s healthcare and consumer products, is exploring going public through a SPAC. The rumoured deal would value the company at more than $1 billion.
Travel company Airbnb was supposed to IPO in 2020, however the coronavirus pandemic put a wrench in those plans. However, the company is now considering going public through a SPAC.
One major underappreciated risk of investing in leveraged buyouts is increased bankruptcy risk. More than 50% of companies that defaulted in the second quarter are owned by private equity firms. Leverage is a significant driver of private equity returns, however, leverage cuts both ways.
A handful of companies have gotten cold feet with respect to consummating their acquisitions that were announced prior to the commencement of the coronavirus pandemic. Some have tried to back out of definitive deals by claiming a Material Adverse Effect (MAE). With respect to the potential success of litigation claiming a MAE, legal precedents remain elusive as thus far companies have decided to settle at a lower deal price instead of going to trial. Last week, Forescout and Advent settled their MAE litigation by agreeing to a -12% price cut. This week, seller Bed Bath & Beyond and buyer 1–800-Flowers settled their lawsuit after agreeing to a slim -3% price cut. These precedents indicate that relying on an MAE to back out of a deal is shaky at best, and most acquirors are better off settling at a reduced price.
Inflation in Canada hit 0.7% in June, representing the highest increase in consumer prices in nine years. The inflation rate was more than double the 0.3% forecast by economists. Energy, food and consumer goods were the main drivers of inflation for the month. Meanwhile, gold and silver continue their bull run.
Elon Musk’s SpaceX is in talks to raise $1 billion at a $44 billion valuation. Its most recent financing valued the space startup at $36 billion.
Investors snapped up $1.75 billion of a new security from RBC, called a LRCN or Limited Recourse Capital Note. The LRCN is similar to a preferred share for investors, however, offers the issuer the tax deductibility of bond interest payments. Analysts expect Canadian banks to issue as much as $16.7-billion of LRCNs. We continue to advise investors to stay away from preferred shares and their equivalents, such as LRCNs, given the poor risk-reward characteristics.
Executives and directors at public companies, who were previously aggressively buying in March of this year, have now turned into sellers. Insider sellers have outpaced insider buyers by a ratio of 5-to-1.
Hedge funds continue to harvest new alternative datasets. Robintrack, which tracks retail traders stock positions on free-trading app Robinhood, is one that has been in focus as of late as an increasing amount of retail investors drive securities prices.
Jim Chanos, the “LeBron James of short selling”: “This market is setting up to be one of the great short opportunities of all time. Trouble’s coming, I don’t know when, but it’s coming.”
Mall-owner Simon Property Group teamed up with Authentic Brands Group to offer $305 million for bankrupt retailer Brooks Brothers. The most confounding thing about the deal is Simon is currently trying to wriggle its way out of acquiring rival mall owner Taubman Centers. It makes you wonder — shouldn’t Simon close its outstanding, definitive deals before starting new ones?
