Comcast Makes an Offer That’s Hard to Refuse

Wednesday’s approval of the merger between AT&T (NYSE: T) and Time Warner (NYSE: TWX) seems to have made Comcast (NASDAQ: CMCSA) a whole lot more interested in fighting for Twenty-First Century Fox (NASDAQ: FOXA) (NASDAQ: FOX).

In this episode of MarketFoolery, host Chris Hill and senior advisor Bill Mann talk about Comcast’s $65 billion offer, and what it’ll mean for the three companies involved in this bidding war.

Also, the two look at the sharp sell-offs that the market treated Michaels (NASDAQ: MIK) and Tailored Brands (NYSE: TLRD) to yesterday — what went wrong, and can the companies improve from here? Finally, they dip into the Fool mailbag to explain how a company’s market cap compares to the size of its total potential market.

A full transcript follows the video.

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This video was recorded on June 14, 2018.

Chris Hill: It’s Thursday, June 14th. This is Market Foolery. I’m Chris Hill. Joining me in studio, it’s Bill Mann. The only reason he’s joining me in studio is because it’s halftime of the Russia-Saudi Arabia game.

Bill Mann: Not a very good game, but it’s the World Cup, which, for some of us, is the best month out of all four years. So, I’m all in.

Hill: It’s 2-0, Russia. And that was the thing. We wrapped up yesterday’s episode, Matt Argersinger and I, talking about the World Cup kicking off. Then, I pinged you on Slack this morning saying, “Hey, would you be interested in coming on Market Foolery?” And your answer was, essentially, “If we can do it at halftime.”

Mann: [laughs] So, let’s get moving!

Hill: Let’s get moving. Let’s start with … under the heading of “timing is everything,” Matt and I finished taping yesterday’s episode, where one of the things we talked about was, “Comcast is absolutely going to come out with a bid for Fox’s assets.” It turned out to be about, I don’t know, 45 minutes after we left the studio.

Mann: Literally, as I was listening — I listened to the episode on my ride home last night, knowing what had happened, the bid had come out by then. I was thinking, “Matt Argersinger’s a genius.” I mean, we knew that anyway. But, yeah, that was something else. But, yeah, it came out, as we knew it would.

Hill: So, now we have the particulars. Now, we have, in one corner, Disney (NYSE: DIS), with its $52 billion stock and cash deal; and now, Comcast. I don’t think the $60 billion all-cash offer was ever made official. It was reported, it was rumored, but I don’t think Comcast ever came out and said yes. But let’s just assume that that was correct. They’ve upped it by nearly 10%, and now it’s a $65 billion bag of cash.

Mann: A bag of cash, yes. I mean, Disney will obviously respond. Basically, the big prize in this is, they want to be able to compete with Netflix. That’s ultimately what’s happening here. They’re willing to pay a lot of money to make sure that they are Netflix-proof, basically.

What’s going to have to happen with Fox is, they’re going to have to figure out whether a bag of Disney’s stock, assuming that’s how they stay, becomes more attractive than $65 billion in cash for their shareholders. And they don’t necessarily have to take the cash just because it’s a higher number.

Hill: Well, right now, it’s a substantially higher number. It’s not just a couple billion more. Right now, it’s roughly, if I’m doing the math right —

Mann: Eleventy billion more.

Hill: — it’s 20% higher. Let’s assume that the reports about what’s in Rupert Murdoch’s heart are correct — and by that, I’m referring to, he thinks that Disney and Bob Iger will be a better steward of the Fox assets than Comcast — it’s still a pretty sizable gap. Do you have a number in mind that Disney needs to get to with their offer that makes it palatable for those people, who are either Fox shareholders or employees or whoever, who are saying, “Look, this isn’t just a bigger offer from Comcast. It’s a much bigger offer.”

Mann: Well, keep in mind, it also depends on the mix. If you get a cash offer, recognize that that’s going to end up being a taxable transaction for every shareholder. If it’s cash and stock, or if it’s all stock, it won’t necessarily all be taxable. You have a merger. It’s perfectly defensible for a company to take a lower offer, depending on the mix of the offer. What the law says is that it’s in the best interest of shareholders, and there are plenty of examples of the past. MCI may have been the biggest and most contentious one, they took a cash offer that was lower than another that was on the tables. This was 2004, I think.

So, it’s easy enough for them to do. I think their number has to start with a six. And I would expect, no matter what, that there will be shareholder lawsuits attached to any number that comes in lower than the Comcast offer.

And that’s OK, by the way. The shareholder lawsuits, they’re the squeegee men of the securities world.

Hill: As we say from time to time, whatever happens, the lawyers always win.

Mann: The lawyers will do OK in this. But, I tell you what, merger-and-acquisition lawyers tend to be pretty buttoned-down, in terms of the terms of the transaction. One of the things that they would sue on would be to say that Fox hasn’t done their work. You can guarantee that they’ve done their work.

Hill: Is there anything in particular we should be looking for as investors? Matty and I talked a little bit about this yesterday, that the ruling from the judge in the AT&T-Time Warner case was so … [laughs]

Mann: Unbelievable! [laughs]

Hill: So wonderfully hilarious, but also incredibly one-sided and clear. So, it sends this signal to the business world: “Mergers and acquisitions, we’re open for business. We’re going to green-light everything.” Is there anything in particular we should be looking for? Because, it seems like it’s going to be a busy rest of 2018 for M&A.

Mann: I’ll tell you what, though. I don’t know if you remember when the telecom networks all started merging with one another. It was, there were six, OK; and then there are five, and that’s OK; and then there’s four; and suddenly, with T-Mobile, the Justice Department got very nervous, as you were starting to get lower and lower numbers of competitors. I think the thing that Matt was exactly right about yesterday is that time was of the essence. You know that there are other potential places for concentration in the market.

Hill: Let’s move on to retail, which is kind of having a bad day, or at least part of —

Mann: It’s having a 20% off sale!

Hill: Yes. Shares of Michaels, down about 18%. Tailored Brands, which is the parent company of Men’s Wearhouse and Joseph A. Bank, down 22%. Anything to glean from this? In the case of Tailored Brands, I was all prepared to go with the tried-and-true jokes about Joseph A. Bank — you know, buy one suit, get seven for free, that kind of thing.

Mann: Get six years’ of stock for free.

Hill: But, I’m wondering, at least in the case of Tailored Brands, if it’s a valuation thing, because that thing has had an amazing 12 months.

Mann: They were a company that, after the merger — and, I think it actually was a pretty good merger. Men’s Wearhouse was a much better-run company than Joseph A. Bank, so they literally were able to take — the jokes actually make themselves — a pretty incompetent competitor out of sequence.

So, they have done quite well in terms of basically amalgamating the company and all of the synergies, but it’s still a retailer that’s selling men’s suits, and that’s going to remain a tough business. So, yeah, I think that’s probably a little bit more of a valuation play.

Keep in mind, the stock is down a great deal simply because same-store sales were down. They beat all of their earnings expectations, beat on revenues. But, they warned that same-store sales were down, and it’s going to remain flat for a while.

Hill: Does Michaels have any kind of e-commerce presence? It seems like, given what they are selling, if they don’t have an e-commerce strategy, they should probably get one, quick.

Mann: Yeah, they probably should. They don’t have a huge e-commerce presence, simply because, in a lot of ways, Amazon has eaten up that. What Michaels is a little bit more is, “I need a piece of balsa wood,” “I need some paint.” It’s very much a quick impulse purchase.

They also beat on revenues, they beat on earnings, but they warned that sales were going to be flat. They’re still planning on opening 17 stores this year. Their same-store sales were lower than expectations. They were basically flat, it was 0.4% instead of 0.7%.

But, this is a company that has absolutely been larded with debt after it was taken private and came back public in 2014. It has an enterprise value above $6 billion, market cap of $3.4 billion. The venture capitalists did what they do. They took a company private, they stripped out, basically, the equity for themselves, and sent it back out with a lot of debt. So, this is not a good situation for Michaels, even though, as a business, it’s relatively healthy.

Hill: From Nathaniel Johnson, Nathaniel writes, “How big should or could a company be relative to its market? For example, if the economy is going to spend $20 billion on a service like data mining, how should I value a company that services that market? If the market cap of a data services company is $10 billion in a $20 billion market, is that too rich?” That’s a great question.

Mann: I love this question!

Hill: That’s a great spin on the valuation question. I had never really thought about in those terms before.

Mann: It’s the exact right way to think, but there’s one other variable. Let’s go back. We were just talking about Michaels. Now, I think we can agree that Michaels has a huge percentage of the cash and carry arts and crafts market, right? A huge percentage of a market that, unless there’s a big push toward scrapbooking, is not going to get that much bigger. It’s probably a pretty defined market. So, the fact that they own such a big slice of it should tell you what the northern bound of their market cap should be. It’s not going to be too much higher than it is today, unless things change. But, let’s take something — what did he say, data mining?

Hill: Yeah, data mining, data analysis.

Mann: Chris, you’re kind of an expert on data analysis. Would you suggest that a $20 billion market for data analysis in 2018 is going to grow in the future? Or, is it going to shrink?

Hill: I’m going to say grow.

Mann: Yeah, I think it’s going to grow exponentially, so there’s much less of a worry that you have a business that has such a large market share. There’s also less of a worry, should they give up some of that market share, if the market is growing that fast. If it goes from 50% to 38%, but the market has doubled, that’s still a pretty good thing for them. So, the third element of that is, is this a growing market or not. It’s a great question! I think that’s fabulous.

Hill: It is a great question. You just reminded me of Danny DeVito in the movie Other People’s Money, when he’s at the shareholder meeting and he talks about buggy whips. “Once upon a time in America, there were all these companies making buggy whips. Then they started to die off. I bet the last buggy whip maker made the best damn buggy whip in the world.” And he goes into the whole thing of, the surest way to go bankrupt is get an increasing share of a market that’s shrinking.

Mann: That’s right. S&H Green Stamps has 100% of that market. I mean, that’s great. [laughs]

Hill: We should probably wrap up, because halftime is wrapping up. We have to get you back for the second half. I would be remiss if I did not wish you a happy National Bourbon Day.

Mann: That’s today?

Hill: That’s what’s the Twitter tells me.

Mann: The elixir of the gods! We should celebrate the Saudi Arabian soccer game with a bourbon.

Hill: There you go. ​Bill Mann, thanks for being here!

Mann: Thank you, Chris!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of Market Foolery. The show is mixed by Austin Morgan. I’m Chris Hill. Thanks for listening! We’ll see you on Monday.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bill Mann has no position in any of the stocks mentioned. Chris Hill owns shares of AMZN and Walt Disney. The Motley Fool owns shares of and recommends AMZN, NFLX, and Walt Disney. The Motley Fool recommends TMUS. The Motley Fool has a disclosure policy.

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