Latest / Bloomberg Intelligence / United Technologies-Rockwell Collins Deal Defends Against Boeing, Rothacker Says

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United Technologies-Rockwell Collins Deal Defends Against Boeing, Rothacker Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
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  Speaker 1: or the trading floor. Find the Bloomberg P and L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well
• 0:32
  Speaker 1: the shares of Rockwell Collins. They are up about four percent.
• 0:35
  Speaker 1: This follows a report from Bloomberg on Friday that United
• 0:39
  Speaker 1: Technologies may be considering an acquisition of Rockwell Collins. And
• 0:43
  Speaker 1: here to tell us more about this potential deal is
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  Speaker 1: Bloomberg Intelligence. Is Joel Levington. He is an expert in
• 0:49
  Speaker 1: the world of corporate debt. And Douglas Rothacker, he is
• 0:51
  Speaker 1: our aerospace and autos analyst for Bloomberg Intelligence. Gentlemen, thank
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  Speaker 1: you very much for being here in the studio in
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  Speaker 1: our eleven three oh headquarters. You know, Doug, I want
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  Speaker 1: to begin with you because can you tell people why
• 1:05
  Speaker 1: forget let's put the price aside. That's gonna be Joel's problem.
• 1:08
  Speaker 1: He's gonna figure out how to pay for it. Uh,
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  Speaker 1: why would um U t X why would United Technologies
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  Speaker 1: want to buy Rockwell Collins. Sure, yeah, morning, thanks for
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  Speaker 1: having us. The strategic rational behind creating a forty billion
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  Speaker 1: dollar revenue airspace portfolio is largely to defend against the
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  Speaker 1: concerted efforts of Boeing, I would say for aftermarket services
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  Speaker 1: and revenue that they're trying to get into pretty aggressively
• 1:38
  Speaker 1: and twofold to largely gain pricing power and scale. Right,
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  Speaker 1: So as Boeing and Airbus work through years of development
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  Speaker 1: and aircraft wore largely focused on profitability, right now, you know,
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  Speaker 1: focus on improving margins and a lot of that is
• 1:52
  Speaker 1: going to trickle down to supply train pricing pressure. So
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  Speaker 1: as you see United Technologies, you know in this part
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  Speaker 1: ential deal deal, clearly it's an effort to you know,
• 2:03
  Speaker 1: fight against that troll comment on this because it's one
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  Speaker 1: thing to have a great theory about, you know, uh,
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  Speaker 1: air aircraft control systems, you've got pilot systems, avionics, all
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  Speaker 1: this thing that's Rockwell Collins. Uh. Is there a price
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  Speaker 1: at which this deal just looks bad? Because I mean
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  Speaker 1: we've been down this road before, right, I mean we
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  Speaker 1: we've seen in that you know, Rockwell Collins has been
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  Speaker 1: kind of talked about as an acquisition target previously. That's true,
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  Speaker 1: and given where the market is with high evaluations, uh,
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  Speaker 1: what I can tell you is that the math works
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  Speaker 1: with about a premium, which is pretty traditional for an
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  Speaker 1: industrial asset. So you can make the math work relative
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  Speaker 1: to uh EPs growth, which I think Doug get pittened
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  Speaker 1: out at about seven percent. And then from a balance
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  Speaker 1: sheet perspective, you could lever the company up to a
• 2:54
  Speaker 1: little over three times on a net debt basis, which
• 2:57
  Speaker 1: is actually better than when knew we'll try to buy
• 3:00
  Speaker 1: you U t X a little over a year ago
• 3:03
  Speaker 1: UM and perhaps retained the single A rating that the
• 3:06
  Speaker 1: company wants to maintain. Well, having said that, I mean,
• 3:09
  Speaker 1: would it be any problem for them to raise the money?
• 3:11
  Speaker 1: I don't think. So we got a thing today, one
• 3:15
  Speaker 1: and a half billion dollar bond offering from Tesla, So
• 3:17
  Speaker 1: I guess you know everybody can borrow money, right, and
• 3:19
  Speaker 1: that's coming with like a five percent coupon handle on it.
• 3:22
  Speaker 1: So it's so maybe you and I should and Duck
• 3:25
  Speaker 1: can open up a business together and and and finance
• 3:27
  Speaker 1: it with some debt. But I do think kind of
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  Speaker 1: the interesting or maybe the more interesting way of doing
• 3:32
  Speaker 1: things would be if this would lead to a separate
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  Speaker 1: split of United Technologies, which has also been discussed, where
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  Speaker 1: you would have an aerospace business and an industrial business.
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  Speaker 1: To me, that kind of makes the most logic and
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  Speaker 1: sense given what their peers have done, whether you look
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  Speaker 1: at a GE or dana Her and Emerson, where it
• 3:52
  Speaker 1: seems to be all the rage these days to be
• 3:55
  Speaker 1: a company that's single focused as opposed to a diversified
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  Speaker 1: industrial with some pluses and binuses. Just come in a
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  Speaker 1: little bit more about margins and pricing and if you
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  Speaker 1: can maybe use an example for Rockwall cons because this
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  Speaker 1: idea of an aftermarket uh, we all know that. You know,
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  Speaker 1: when you buy an automobile, for example, the true cost
• 4:14
  Speaker 1: is not what you pay. The true cost is what
• 4:16
  Speaker 1: you pay for the life of the automobile, right right,
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  Speaker 1: So if you look at Rockwell Collins and their recent
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  Speaker 1: acquis just in b airspace there, you know, typical operating
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  Speaker 1: margins are north of which is well above what the
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  Speaker 1: United Technologies generates on their airspace portfolio. And a lot
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  Speaker 1: of that comes from a very large business of aftermarket
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  Speaker 1: products and services. Right. So when you go and buy
• 4:38
  Speaker 1: used aircraft, you completely tear out the insides, the guts
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  Speaker 1: of it, refit it with UH new seats, new interiors,
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  Speaker 1: and boom, your customers think they're sitting in a brand
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  Speaker 1: new airplane. Right. So again, oh that's high margin and
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  Speaker 1: would uh you know, I ran the numbers UH over
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  Speaker 1: the weekend. If you combine on a proformer basis Rockwell
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  Speaker 1: Collins UH to United Technologies aerospace portfolio, they look at,
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  Speaker 1: you know, a marchin boost of hundred two hundred basis
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  Speaker 1: points and that's just on the you know, excluding any
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  Speaker 1: synergies or anything like that that that are potentially there.
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  Speaker 1: But I want to bring in starboard value for just
• 5:13
  Speaker 1: a second here, because they were a focus last year
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  Speaker 1: I believe when it had when you just mentioned that
• 5:19
  Speaker 1: be a UH aerospace right the the act with the
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  Speaker 1: Biero Space acquisition that closed in April, Joel, I mean
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  Speaker 1: they were pushing, they were saying, no, don't buy anything.
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  Speaker 1: We we we want you to split, as you were
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  Speaker 1: just saying in a new strategy, right and selling out
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  Speaker 1: at a premium might be the elegant way out for
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  Speaker 1: Rockwell Collins and their management team. So clearly you could
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  Speaker 1: see that, and I think if you look at what's
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  Speaker 1: happened with activists in the multi industrial space. Again, there
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  Speaker 1: has been a huge push you could look at that
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  Speaker 1: they wanted to get simpler. They wanted to get simpler.
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  Speaker 1: They want to get multiples that are focused on the
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  Speaker 1: different sectors and they want different balance sheets to reflect that.
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  Speaker 1: So in the piece of United Technologies, what you have
• 6:02
  Speaker 1: putting the aerospace business aside, is this industrial business with carrier,
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  Speaker 1: their security operations, UM and all the h VAC equipment
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  Speaker 1: that could be levered let's say it about three and
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  Speaker 1: a half times UH to mimic other peers, and with
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  Speaker 1: that you can take a twenty billion dollar diven end
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  Speaker 1: that goes a long way to paying for Rockwell Collins. Yeah. Well,
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  Speaker 1: I mean it sounds good on the fine on the
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  Speaker 1: balance sheet, right, I mean, it looks good financially. I'm wondering, Doug,
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  Speaker 1: is there a technical or even uh sort of product
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  Speaker 1: reason to keep it all together? Because one part of
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  Speaker 1: the business helps to inform the other part and it
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  Speaker 1: goes back and forth. UM. I think for the equity
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  Speaker 1: shareholders to really get comfortable with this, we'd have to
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  Speaker 1: get back to what Joel was mentioning about separating UM
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  Speaker 1: the businesses. The the EPs secretion of seven percent is
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  Speaker 1: is okay, it's uh, it's it's going to be a
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  Speaker 1: very expensive acquisition, you know, Rockwell Collins up from October
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  Speaker 1: when they announced quiring be Aerospace, and again Joel mentioned
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  Speaker 1: probably looking at so premium on top of that. Um so,
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  Speaker 1: I mean we'll see how the the the plans, uh
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  Speaker 1: you know, play out. But isn't this it's a sickly
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  Speaker 1: is it a cyclical business to a certain extent? I mean,
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  Speaker 1: I know, you know, aftermarket's always got to replace the seeds,
• 7:17
  Speaker 1: you know, Avionyx and somebody. Well, then the nice thing
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  Speaker 1: about aftermarket parts and services is that it's generally countercyclical
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  Speaker 1: to what you have with new production. Right, so when
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  Speaker 1: you're first here O E M supplier uh to Boeing
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  Speaker 1: and Airbus, you're you know, you're at their mercing in
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  Speaker 1: terms of raising and lowering production and the cycles of that. Uh.
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  Speaker 1: Important offset to that is the aftermarket services business, which
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  Speaker 1: again is very high margin where a lot of these
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  Speaker 1: parts suppliers you know, uh, butter their bread as they say.
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  Speaker 1: All right, well, you know, Joel, last point to you.
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  Speaker 1: You know, if if Rockwell Collins, if this deal happens.
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  Speaker 1: You think you're gonna see other deals. You're always gonna
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  Speaker 1: see other deal I mean, well, because you know this
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  Speaker 1: is like the consolidation. This is the special of the month, right,
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  Speaker 1: Everyone kind of gets in this fever of oh we
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  Speaker 1: gotta consolidate and then split right certainly in the arrows
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  Speaker 1: of the aerospace supply chain. I think you're you have
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  Speaker 1: to see consolidation happen because, as Doug was pointing out,
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  Speaker 1: as Boeing tries to become more vertically integrated, you have
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  Speaker 1: to be able to differentiate and push back on your
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  Speaker 1: on your client. Yeah. Well, thanks very much for being here,
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  Speaker 1: both of you. I really appreciated that. Joe Levington is
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  Speaker 1: our senior credit analyst for Bloomberg Intelligence. And Douglas Rothacker
• 8:28
  Speaker 1: he is an aerospace defense analyst for Bloomberg Intelligence. And
• 8:32
  Speaker 1: just by way of a kind of shout out to Boeing,
• 8:35
  Speaker 1: they did a fly by that actually flew around the
• 8:38
  Speaker 1: United States in the shape of a Boeing airliner. Paul Sweeney,
• 8:53
  Speaker 1: he knows everything about the media and the Internet. He
• 8:57
  Speaker 1: is our US Director of Research for Media and Internet
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  Speaker 1: Analysts for Bloomberg Intelligence and Paul thanks very much for
• 9:03
  Speaker 1: coming in. I want to begin by just asking you
• 9:07
  Speaker 1: about CBS and something with a T and T because
• 9:10
  Speaker 1: remember when A T and T launched that direct tv
• 9:13
  Speaker 1: now service, Well, they just reached an agreement with CBS
• 9:17
  Speaker 1: because that will give them a lot more programming. Can
• 9:21
  Speaker 1: we look forward to more of these kinds of deals
• 9:23
  Speaker 1: and what's in it for for both of them? Yeah,
• 9:25
  Speaker 1: I think we're gonna see more of these types of deals.
• 9:27
  Speaker 1: And Direct TV Now is a streaming direct to consumer
• 9:31
  Speaker 1: app similar to a Netflix and UM and it's kind
• 9:34
  Speaker 1: of a little bit of a skinny bundle, if you will.
• 9:36
  Speaker 1: But CBS just announced that they're gonna be part of it.
• 9:38
  Speaker 1: They're gonna be on air. It's very good for direct
• 9:41
  Speaker 1: TV now because CBS is the number one ranked broadcasting
• 9:44
  Speaker 1: network in terms of total audience. So plus they have
• 9:46
  Speaker 1: NFL football, So it's certainly a programmer and a source
• 9:50
  Speaker 1: of programming that you want to have on your service. Uh.
• 9:52
  Speaker 1: If you're CBS, UM, you're like a lot of these
• 9:54
  Speaker 1: traditional media companies and you're trying to figure out, um,
• 9:57
  Speaker 1: the business is changing, my viewer is are viewing my
• 10:00
  Speaker 1: content on lots of different uh types of platforms. It's
• 10:04
  Speaker 1: not just with the rabbit ears over the air like
• 10:06
  Speaker 1: it was fifty years ago. It's not even just on
• 10:08
  Speaker 1: cable television. It's now on satellite and now more and
• 10:11
  Speaker 1: more it's now direct to consumer on some of these apps.
• 10:15
  Speaker 1: And so I think, if you're CBS, you'r ABC, your Disney,
• 10:18
  Speaker 1: you're all any of these players. You're trying to figure
• 10:20
  Speaker 1: out do I need to be on all these platforms?
• 10:22
  Speaker 1: If so, what do I need to get paid to
• 10:24
  Speaker 1: make it worth my while? What happens to CBS, Because
• 10:27
  Speaker 1: I know that you've mentioned in the past that CBS
• 10:30
  Speaker 1: almost is like a standalone when it comes to programming content. Yes,
• 10:34
  Speaker 1: CBS is a you know, it's it's the really the
• 10:36
  Speaker 1: only standalone broadcast network, UM that investors can can play.
• 10:41
  Speaker 1: The other broadcast networks are embedded in big media companies
• 10:43
  Speaker 1: like Disney and Fox UM and CBS does own the
• 10:46
  Speaker 1: Showtime premium net network as well. But if you're buying CBS,
• 10:49
  Speaker 1: you're really buying a play on US broadcast television. UM.
• 10:54
  Speaker 1: It's been a great business for them. Television advertising has
• 10:57
  Speaker 1: generally been pretty decent over the last you know, coming
• 10:59
  Speaker 1: out of the last ten years after the financial crisis.
• 11:02
  Speaker 1: And what's really changed for the better for CBS has
• 11:04
  Speaker 1: been a new revenue stream for them and for the
• 11:07
  Speaker 1: broadcast industry, and that's retransmission fees. Uh. The broadcast networks
• 11:11
  Speaker 1: are finally getting paid by the distributors the Comcast of
• 11:14
  Speaker 1: the world to carry their programming. They never got paid
• 11:17
  Speaker 1: for it before. Es Pianos got paid for their programming
• 11:20
  Speaker 1: by the distributors, but the broadcast networks never did up
• 11:23
  Speaker 1: until about seven or eight years ago. And CBS has
• 11:26
  Speaker 1: really been a big beneficiary that that's been a driver
• 11:28
  Speaker 1: of their revenue and profits. That looks to be a
• 11:31
  Speaker 1: pretty good story going forward for CBS. So so why
• 11:33
  Speaker 1: do you believe maybe the stock has not really performed
• 11:36
  Speaker 1: that well this year. I mean the stock of CBS
• 11:38
  Speaker 1: is basically unchanged. I mean that's not to say that
• 11:40
  Speaker 1: hasn't had big moves. I mean this was, you know,
• 11:42
  Speaker 1: a stock trading at fifty uh, let's say back in September. Yes,
• 11:48
  Speaker 1: the media stocks, you know, they've had a great run
• 11:50
  Speaker 1: over the last eight nine years after the financial crisis,
• 11:52
  Speaker 1: but really in the last year or so, it's been
• 11:54
  Speaker 1: kind of flattish and and year to date, you know,
• 11:56
  Speaker 1: the media stocks are pretty flat up a little bit.
• 11:59
  Speaker 1: But the real concerns are chord cutting. That is d
• 12:02
  Speaker 1: number one issue out there for the media sector. If
• 12:04
  Speaker 1: consumers really are cutting the chord in mass, everybody's economic
• 12:09
  Speaker 1: model as is at risk. The affiliate fees that the
• 12:11
  Speaker 1: content companies get paid, that's at risk. The advertising revenue
• 12:16
  Speaker 1: that's built upon a large audience that can be delivered,
• 12:19
  Speaker 1: that's at risk. And so what I think you're seeing
• 12:21
  Speaker 1: media investors do today is try to pick some winners
• 12:23
  Speaker 1: and losers within the group in general. Um, but right now,
• 12:27
  Speaker 1: I think we've had a rough third quarter results coming
• 12:29
  Speaker 1: out of the media sector. Maybe they can turn it
• 12:31
  Speaker 1: around tonight with CBS, who tends to be very bullish
• 12:33
  Speaker 1: about the prospects for the sector. Will see Disney tomorrow
• 12:37
  Speaker 1: night after the clothes, see what it has to say. Uh, investors,
• 12:40
  Speaker 1: they are particularly concerned about ESPN and the fact that
• 12:42
  Speaker 1: chord cutting is having on the great ESPN. Anything on
• 12:45
  Speaker 1: the horizon that you would point to as far as
• 12:48
  Speaker 1: someone may be making an acquisition or a run at CBS.
• 12:51
  Speaker 1: I mean, it's a twenty six billion dollar market cap
• 12:54
  Speaker 1: right now. Right Well, we just had a you know,
• 12:56
  Speaker 1: a big m and a trade in the media sector.
• 12:58
  Speaker 1: Last week when Discovery Communications and out they are buying
• 13:00
  Speaker 1: Scripts Networks Viacom, which is a sister company to CBS,
• 13:04
  Speaker 1: it was rumored to be a buyer for Scripts Networks,
• 13:06
  Speaker 1: which really caught people by surprise. Most people didn't view
• 13:09
  Speaker 1: Viacom as a buyer. But ultimately, when you talk about CBS,
• 13:12
  Speaker 1: you talk about Viacom, you're talking about Subner Redstone and
• 13:15
  Speaker 1: his common ownership of both companies. And the question remains,
• 13:18
  Speaker 1: does do these two companies should they be uh, you know,
• 13:21
  Speaker 1: maybe in a better position if they were to merge,
• 13:24
  Speaker 1: and remember they used to be together than they split
• 13:25
  Speaker 1: apart about ten years ago. The question is now in
• 13:28
  Speaker 1: a consolidating media world, in a world that's being disrupted
• 13:31
  Speaker 1: by the Internet like Netflix, Um, do these companies need
• 13:34
  Speaker 1: to be bigger, stronger, have more heft in the marketplace.
• 13:38
  Speaker 1: If so, then the easiest transaction for both of these
• 13:41
  Speaker 1: companies via common CBS to simply kind of merge back together.
• 13:45
  Speaker 1: All right, now, you mentioned Disney, so let's move on
• 13:47
  Speaker 1: to there because I want to get your thoughts on
• 13:49
  Speaker 1: ESPN that has been both an achilles heel and a
• 13:52
  Speaker 1: gold mine for Disney at different times. Right it it
• 13:55
  Speaker 1: continues to be by far the largest profit generator for
• 13:58
  Speaker 1: the Walt Disney Company, and really over the last twenty
• 14:00
  Speaker 1: years it has been the most consistent profit generator for
• 14:04
  Speaker 1: the company. Um, those days are over. UM. So what
• 14:07
  Speaker 1: you have at Disney now is cord cutting h impacting
• 14:10
  Speaker 1: the growth of their revenue, so putting pressure on their
• 14:12
  Speaker 1: revenue growth. That's a problem, but it's compounded by the
• 14:15
  Speaker 1: fact that their costs are primarily fixed. I mean, think
• 14:18
  Speaker 1: about the cost for ESPN. You think about these huge
• 14:20
  Speaker 1: sports contracts with the NFL, with Major League Baseball, with
• 14:23
  Speaker 1: all the college sports U leagues around the country. Those
• 14:26
  Speaker 1: are big, big ticket items and they are a fixed
• 14:29
  Speaker 1: cost over many years. And so if you're at at ESPN,
• 14:32
  Speaker 1: you're seeing your revenue pressured and your costs you know,
• 14:35
  Speaker 1: continuing to go up. So that's a real profit issue
• 14:37
  Speaker 1: for this company. It's been you know, really developing over
• 14:40
  Speaker 1: the last two years, and quite frankly, investors are are
• 14:43
  Speaker 1: very concerned about that. It's definitely impacted Disney, who you know,
• 14:47
  Speaker 1: despite you know, the concerns at ESPN, the other two
• 14:50
  Speaker 1: main businesses of the Walt Disney company. It's theme parks
• 14:53
  Speaker 1: um and um uh it's movie business are both doing great.
• 14:58
  Speaker 1: But again investors are really focusing on on ESPN. All right,
• 15:01
  Speaker 1: you want to do Fox, uh, twenty one century Fox
• 15:04
  Speaker 1: because they're waiting on a deal in the UK for
• 15:06
  Speaker 1: a Sky Yeah. The next big trade for the twenty
• 15:10
  Speaker 1: one century Fox and Rupert Murdoch. You know, one of
• 15:12
  Speaker 1: the great media moguls is to get even bigger, and
• 15:15
  Speaker 1: that is to own complete control of be Sky b
• 15:18
  Speaker 1: which is this big satellite provider in the UK and
• 15:20
  Speaker 1: in Italy and Germany. UM and that is being that
• 15:24
  Speaker 1: is under review. It was he was kind of thwarted
• 15:27
  Speaker 1: in this transaction about seven years ago. He's now come
• 15:30
  Speaker 1: back and the expectation is that transaction will be approved.
• 15:34
  Speaker 1: That would be a net positive for twenty one century
• 15:36
  Speaker 1: Fox because a lot of those markets in Europe there's
• 15:39
  Speaker 1: still more growth to go there in terms of pay
• 15:40
  Speaker 1: TV subscribers. It is not saturated like the US market,
• 15:44
  Speaker 1: and so a lot of investors believe that is a
• 15:46
  Speaker 1: better organic growth market than the US. Right now. Hey, Paul,
• 15:49
  Speaker 1: you know, as as something that's been doing this more
• 15:51
  Speaker 1: really more years than I know, you care to care
• 15:53
  Speaker 1: to admit, is can you give some advice to people
• 15:55
  Speaker 1: that are trying to sort of value these businesses When
• 15:57
  Speaker 1: you've got companies like Amazon getting into con tent and
• 16:00
  Speaker 1: you know, music from from Apple and so on, it's
• 16:03
  Speaker 1: hard to kind of get your fingers around this, it
• 16:05
  Speaker 1: really is. I mean, we have, you know, the traditional
• 16:07
  Speaker 1: metrics for media companies, whether that's price, price to earnings,
• 16:10
  Speaker 1: or enterprise value. But those are well established and we
• 16:13
  Speaker 1: know how to value you know, the Disneys of the world,
• 16:15
  Speaker 1: in the Foxes the world, in the Comcast of the world,
• 16:17
  Speaker 1: and we have historical benchmarks for when these stocks are
• 16:20
  Speaker 1: expensive or when they're cheap given their growth outlook. But
• 16:23
  Speaker 1: when you bring in some of these new disruptive stories
• 16:26
  Speaker 1: like Netflix, like Amazon that are coming into the movie business,
• 16:29
  Speaker 1: and you take a look at even at the internet companies,
• 16:31
  Speaker 1: the Internet companies are more media companies than they are
• 16:34
  Speaker 1: technology companies. They are driven by advertising revenue, and they
• 16:37
  Speaker 1: trade at different valuation multiples multiples revenue, and it's really
• 16:40
  Speaker 1: hard to compare. Thank you very much, Paul Sweeney. Here's
• 16:43
  Speaker 1: our expert US Director Research, senior Media Internet analyst for
• 16:46
  Speaker 1: Bloomberg Intelligence, Berkshire Hathaway. The shares are up nearly nine
• 17:02
  Speaker 1: percent so far this year, but what will move them higher?
• 17:06
  Speaker 1: Here to tell us more is Tara La Chapelle. Our
• 17:08
  Speaker 1: Deal's column is for Bloomberg Gadfly and you can follow
• 17:12
  Speaker 1: her on Twitter at Tara l. A c. H. Great
• 17:16
  Speaker 1: to have you with us, Thanks for coming into the studio. UM.
• 17:18
  Speaker 1: The report from Berkshire Hathaway last Friday not greeted by
• 17:22
  Speaker 1: the market with much enthusiasm. But this is a company
• 17:25
  Speaker 1: that has what a hundred billion dollars in cash right
• 17:28
  Speaker 1: which is almost exactly why it's not being greeted with enthusiasm, ironically,
• 17:32
  Speaker 1: because the results were a little lackluster. We saw another
• 17:36
  Speaker 1: underwriting loss in the insurance division, dragged down overall results.
• 17:40
  Speaker 1: So you know, the whole point of Berkshire's conglomerate is
• 17:42
  Speaker 1: that all these other businesses offset the ones that are having,
• 17:45
  Speaker 1: you know, going through difficult times, and this time it
• 17:48
  Speaker 1: did drag down earnings a little bit um nothing to
• 17:51
  Speaker 1: be concerned about, of course, but I think what it
• 17:53
  Speaker 1: comes down to is they have almost a hundred billion
• 17:55
  Speaker 1: in cash now and they're not really spending it, and
• 17:58
  Speaker 1: so what are the high return opportunities out there, what's
• 18:00
  Speaker 1: the reason to own the stock and what's Buffett thinking next?
• 18:03
  Speaker 1: So what do you believe is necessary for Berkshire Hathway,
• 18:07
  Speaker 1: Because you know they Burlington Northern Santa fe uh acquisition.
• 18:13
  Speaker 1: They just got eight hundred million in cash in the
• 18:17
  Speaker 1: from the railroad. Um. Also I understand you know that
• 18:21
  Speaker 1: they want to be even bigger in the energy business.
• 18:24
  Speaker 1: They're trying to acquire the Texas utility Encore, right, So
• 18:27
  Speaker 1: that deal makes a lot of sense for Burlington Northern
• 18:31
  Speaker 1: and that business has been great for them to total
• 18:33
  Speaker 1: home run of an acquisition for Berkshire. But with all
• 18:37
  Speaker 1: this cash, a deal like Encore, which I believe is
• 18:39
  Speaker 1: around nine billion dollars, really isn't enough to move the
• 18:42
  Speaker 1: needle that much anymore. It's it's great for that division,
• 18:45
  Speaker 1: but overall, when you have a hundred billion dollars of
• 18:47
  Speaker 1: cash and it's just sitting there with these low returns,
• 18:50
  Speaker 1: it makes sense for Berkshire to start thinking about bigger acquisitions.
• 18:53
  Speaker 1: I mean, we could see the fifty billion to even
• 18:56
  Speaker 1: a hundred billion dollar range. Realistically, it's not crazy to
• 18:59
  Speaker 1: think that they could do something like that. The problem
• 19:01
  Speaker 1: is finding a target that's worth that price and would
• 19:04
  Speaker 1: fit in with the conglomerate. Well, you mentioned in your
• 19:08
  Speaker 1: story that you know, the equity investments that warm Buffett
• 19:10
  Speaker 1: has made, whether it's craft Hinds, whether it's airlines, Apple
• 19:13
  Speaker 1: and so on, that's all been they've done pretty well.
• 19:16
  Speaker 1: Oh those have been great. I mean Apple, It's so funny,
• 19:18
  Speaker 1: right because Buffett for so long was opposed to investing
• 19:21
  Speaker 1: in things that really didn't um weren't his expertise industrial
• 19:25
  Speaker 1: companies or insurance businesses, right, So to to have Apple
• 19:29
  Speaker 1: be sort of this incredible investment for them, and in
• 19:32
  Speaker 1: kudos to their UM investing lieutenants there. But it's just
• 19:35
  Speaker 1: been really fun to watch. But even though those are
• 19:38
  Speaker 1: doing really well again, it's like they need to think
• 19:40
  Speaker 1: about a big acquisition to take in house, not just
• 19:43
  Speaker 1: these equity investments that are doing well. But in doing
• 19:46
  Speaker 1: your research, you find that investors in Berkshire Hathaway have
• 19:49
  Speaker 1: a different criteria when it comes to what they do
• 19:52
  Speaker 1: with their money. They want to be there because warm
• 19:54
  Speaker 1: buffets there, right, And I think that's where the issue
• 19:58
  Speaker 1: is now because if the and you own the stock
• 20:00
  Speaker 1: is because Buffett can take that money that all these
• 20:03
  Speaker 1: businesses are throwing off and invest it far better than
• 20:06
  Speaker 1: your return would be if he had paid, you know,
• 20:08
  Speaker 1: a dividend or was buying backstock at these levels. Then
• 20:11
  Speaker 1: I mean, we're looking at this and we're waiting for
• 20:14
  Speaker 1: him to do that, and there really hasn't been a
• 20:16
  Speaker 1: whole lot of deal activity in the past year. So
• 20:18
  Speaker 1: I mean, he did do the Precision Cast Parts deal.
• 20:20
  Speaker 1: Now that's clothes. That's been doing very well for the
• 20:22
  Speaker 1: manufacturing division. But it's like, Okay, well, what's next now?
• 20:25
  Speaker 1: Because the reason the shareholder's own the stock is because
• 20:28
  Speaker 1: they want to see him invest the money. And if
• 20:30
  Speaker 1: he's not going to find a great target that's really
• 20:32
  Speaker 1: going to move the needle, then it begs the question,
• 20:35
  Speaker 1: you know, do does Berkshire start to pay a dividend? Right?
• 20:38
  Speaker 1: But but I guess my point is do investor's care.
• 20:41
  Speaker 1: I mean, I understand from a theoretical point of view,
• 20:44
  Speaker 1: but when you go to the annual meeting in Omaha,
• 20:48
  Speaker 1: you don't find people saying, oh, I wish they do this,
• 20:51
  Speaker 1: I wish they did that. No one's pounting the table saying,
• 20:54
  Speaker 1: you know they I mean, everyone trust buffet. I think
• 20:55
  Speaker 1: the problem is Buffett is going to be eighty seven
• 20:57
  Speaker 1: this month, and people are starting to think about what
• 21:00
  Speaker 1: does Berkshire look like after Buffett? And I think he
• 21:02
  Speaker 1: needs to sort of open the door for his successor
• 21:04
  Speaker 1: to have that wiggle room, you know, have a good deal, opportunities,
• 21:07
  Speaker 1: have the ability to pay a diven if if that's
• 21:09
  Speaker 1: going to be the reality and this sort of slow
• 21:11
  Speaker 1: growth world, um, I think Buffett sort of needs to
• 21:14
  Speaker 1: start giving commentary on that. And I think that's what
• 21:16
  Speaker 1: people are looking for. It's not that they're thinking he's
• 21:19
  Speaker 1: you know, not living up to what he's promised them
• 21:21
  Speaker 1: or anything, but it's just that they're waiting to see, well,
• 21:24
  Speaker 1: what's Berkshire look like now for the next ten, fifteen,
• 21:26
  Speaker 1: twenty years. Maybe he's just waiting for the right pitch, right,
• 21:29
  Speaker 1: I mean, because I note that just I guess it
• 21:32
  Speaker 1: was over the last month when a Bank of America
• 21:35
  Speaker 1: Merrill Lynch announced, you know that they were paying Buffett
• 21:39
  Speaker 1: because of his participation. And you know, he strikes these
• 21:43
  Speaker 1: sort of idiosyncratic deals with preferred stock that you know,
• 21:46
  Speaker 1: they really pay off, right, I mean, the Craft Hyans deal,
• 21:49
  Speaker 1: the same thing. I mean, that's been great for Berkshire.
• 21:52
  Speaker 1: I think we're waiting to see kraft Hians do something
• 21:54
  Speaker 1: else and that Buffett will sort of bankroll the deal
• 21:57
  Speaker 1: and get another sort of high return preferred doc situation. Again. Um,
• 22:01
  Speaker 1: but I think it's you need is a really big
• 22:03
  Speaker 1: sell off, or you know, you need somebody get into
• 22:06
  Speaker 1: a lot of trouble. But also I think it's it's
• 22:09
  Speaker 1: a little more nuance on that now too, because you
• 22:11
  Speaker 1: have all these big companies that are thinking about acquisitions themselves.
• 22:15
  Speaker 1: So it's a much more competitive m and A environment
• 22:17
  Speaker 1: right now. Buffett is used to someone calling him up
• 22:20
  Speaker 1: and saying, you know, we want to sell to you,
• 22:21
  Speaker 1: here's our price. I don't think that that's as realistic nowadays.
• 22:25
  Speaker 1: I think there's so much em and a happening, and
• 22:27
  Speaker 1: people are paying incredible prices for some of these deals,
• 22:30
  Speaker 1: and I don't know that Buffett is willing to you know,
• 22:33
  Speaker 1: overpay of course, so it becomes a little more tricky.
• 22:36
  Speaker 1: And then also he's looking for companies with really solid
• 22:38
  Speaker 1: management teams that want to be around for a really
• 22:40
  Speaker 1: long time, and with all this activist investors out there
• 22:44
  Speaker 1: and a lot of shake ups up top, and you know,
• 22:47
  Speaker 1: I think it's just it's becoming a lot harder to
• 22:49
  Speaker 1: find companies that fit his criteria. Thank you very much
• 22:52
  Speaker 1: for coming in and spending time with us. Tara la
• 22:54
  Speaker 1: Chapelle is our deals columnist for Bloomberg Gadfly, speaking about
• 22:58
  Speaker 1: a Berkshire Hathaway and that a hundred billion dollars of cash. Alright,
• 23:12
  Speaker 1: no vacation when it comes to negotiations of what is
• 23:15
  Speaker 1: the future of Sprint. And here to tell us more
• 23:18
  Speaker 1: is Alex Sherman, our deal's reporter for Bloomberg News. Alex,
• 23:22
  Speaker 1: always a pleasure. Maybe you could just give us the
• 23:24
  Speaker 1: lay of the land, because there are a lot of
• 23:26
  Speaker 1: moving parts here. You've got Sprint, T Mobile, Comcast, Charter
• 23:31
  Speaker 1: and go ahead. I'm sure there must be something else
• 23:33
  Speaker 1: I'm forgetting. I'm sure there is him. You basically got
• 23:37
  Speaker 1: the gist of it there, but already that's quite a
• 23:39
  Speaker 1: bit so. Last week we did a bunch of reporting
• 23:43
  Speaker 1: suggesting that Soft Bank and it's billionaire owners, Mathayoshi's son
• 23:49
  Speaker 1: was considering buying Charter, which would be a huge deal,
• 23:54
  Speaker 1: one of the largest deals ever probably let's say about
• 23:57
  Speaker 1: a hundred and fifty billion dollars. After the attack on
• 23:59
  Speaker 1: a reasonable premium. Uh they Haffik has not made a
• 24:04
  Speaker 1: formal bid for Charter, but what we reported was that
• 24:07
  Speaker 1: it was at least considering it, and this would unite Sprint,
• 24:11
  Speaker 1: the fourth largest US wireless player, with Charter, the second
• 24:14
  Speaker 1: largest US cable provider, and give the United States its
• 24:18
  Speaker 1: first true wireless flash cable combined company if it were
• 24:23
  Speaker 1: to happen. What my colleagues Scott Maritz and I reported
• 24:26
  Speaker 1: last night was that in addition to this, Sprint has
• 24:30
  Speaker 1: also resumed talks about a potential merger with T Mobile,
• 24:35
  Speaker 1: something that has been sort of batted around by both
• 24:39
  Speaker 1: sides for years. You should think of this as Sprint
• 24:43
  Speaker 1: covering its basis before it spends a hundred and fifty
• 24:46
  Speaker 1: billion dollars on Charter. It probably wants to see if
• 24:49
  Speaker 1: a deal with T Mobile can be done, because there
• 24:52
  Speaker 1: are so many synergies in this deal that they would
• 24:56
  Speaker 1: be doing themselves a disservice if they didn't look very
• 25:00
  Speaker 1: hard at it. So I think that's where we are
• 25:02
  Speaker 1: right now, where Sprint is looking at both options. Well,
• 25:05
  Speaker 1: what about just let's talk about Sprint for just a second,
• 25:08
  Speaker 1: because I understand in the last quarter they lost thirty
• 25:10
  Speaker 1: nine customers. Is there something inherently broken at Sprint? There
• 25:16
  Speaker 1: is something inherently broken at Sprint as Sprint stands today.
• 25:19
  Speaker 1: I mean, this has been a long time money losing operation.
• 25:22
  Speaker 1: The the bet on Sprint is that they are well
• 25:26
  Speaker 1: positioned for tomorrow's wireless world. So today we all have
• 25:32
  Speaker 1: what's known as an LTE standard or other people call
• 25:35
  Speaker 1: it four G. In a five G world, this would
• 25:39
  Speaker 1: be you know, five G standing for generation. Uh. Many
• 25:42
  Speaker 1: people feel like Sprint has the correct wireless spectrum or
• 25:47
  Speaker 1: wireless air waves that if combined with so called small
• 25:51
  Speaker 1: cell technology, which is owned in large part by cable
• 25:55
  Speaker 1: companies but also Sprint on some uh, that Sprint can
• 25:58
  Speaker 1: actually be a much strong, younger competitor. However, the finances
• 26:03
  Speaker 1: are what they are today, and that's why Masayoshi's son,
• 26:07
  Speaker 1: the founder of soft Bank, who owns plus of Sprint,
• 26:10
  Speaker 1: has been so aggressive in trying to do a deal
• 26:13
  Speaker 1: because Sprint as it stands today is not well positioned
• 26:17
  Speaker 1: at all. So it needs to be a much more
• 26:19
  Speaker 1: robust company. You combine that with T Mobile, you combine
• 26:22
  Speaker 1: it with Charter, you combine it with some other company,
• 26:24
  Speaker 1: then Sprint can sort of get from where it is
• 26:27
  Speaker 1: today to the ties when five G technology will kick in,
• 26:31
  Speaker 1: and theoretically Sprint would be a much stronger company then
• 26:36
  Speaker 1: because of the airwaves it owns I like this idea
• 26:39
  Speaker 1: that you know, it's all in the future, right, it's
• 26:41
  Speaker 1: all in the creation of this rhetorical Uh sort of
• 26:45
  Speaker 1: makes sense a program, but you know, it just makes
• 26:49
  Speaker 1: me think of John Ledger and T Mobile because when
• 26:51
  Speaker 1: he came in, people were leaving T Mobile for dead,
• 26:54
  Speaker 1: but they actually took some initiatives that have not only
• 26:58
  Speaker 1: changed the industry but have forced the competition to follow them.
• 27:01
  Speaker 1: Why doesn't Sprint take a leaf out of their book? Well,
• 27:04
  Speaker 1: that's a great question, and I suppose they merged with
• 27:06
  Speaker 1: T Mobile would do that because in the end, here
• 27:08
  Speaker 1: Mateyoshi Son, who has a three hundred year plan has
• 27:11
  Speaker 1: uh and that's not an exaggeration. He literally has a
• 27:14
  Speaker 1: three hundred year plan for his company. UM has two
• 27:16
  Speaker 1: options here, UH, If you buy charter Mateyoshi Son would
• 27:21
  Speaker 1: stay in control of this new company UH, and therefore
• 27:24
  Speaker 1: would be able to dictate its terms. If they merge
• 27:27
  Speaker 1: with T Mobile, so I think would actually have to
• 27:30
  Speaker 1: sell Sprint and it would be run by T Mobile
• 27:33
  Speaker 1: and John Ledger. So I think that the the the
• 27:36
  Speaker 1: idea there would be Sprint would say, look, we we
• 27:39
  Speaker 1: understand here that this combined company is stronger, and frankly,
• 27:43
  Speaker 1: T Mobile, you've done a better job than us over
• 27:45
  Speaker 1: the past few years of running this company. It's certainly
• 27:48
  Speaker 1: possible that Sprint could have done exactly what T Mobile
• 27:51
  Speaker 1: did under price, be very aggressive, have a much better
• 27:54
  Speaker 1: marketing plan, sort of failed on all of these. Uh
• 27:57
  Speaker 1: if if if you follow John Ledger on Twitter, he's
• 28:00
  Speaker 1: constantly mocking Sprint and it's sort of second rate promotions
• 28:04
  Speaker 1: and also it's second rate network. Uh So, the idea
• 28:08
  Speaker 1: here then would be this combined company would in fact
• 28:10
  Speaker 1: be run by Ledger and Sun would give up on Sprint.
• 28:14
  Speaker 1: He would still own some of the company, but he
• 28:16
  Speaker 1: would no longer be the controlling shareholders. So very much
• 28:19
  Speaker 1: two different outlooks there. Some people tell me the idea
• 28:22
  Speaker 1: would be after Sprint bought Charter, if that's the plan
• 28:25
  Speaker 1: that happens, it would then go after T Mobile, and
• 28:27
  Speaker 1: in that case stop think actually would be able to
• 28:30
  Speaker 1: maintain control of the company because it would be so
• 28:33
  Speaker 1: much bigger than T Mobile. Of course it is still
• 28:36
  Speaker 1: to be determined. If T Mobile's German owners, Deutsche Telecom,
• 28:40
  Speaker 1: would even be interested in selling the company, we know
• 28:43
  Speaker 1: for the time being they are not, which is why
• 28:46
  Speaker 1: the Sprint Temo deal may actually happen with the Germans
• 28:50
  Speaker 1: buying and consolidating the new Sprint Temo company. Of course,
• 28:54
  Speaker 1: that wouldn't mean anti trust regulations or review. Yeah, why
• 28:59
  Speaker 1: doesn't Mastios he sagn just hired John Leger. Well, that's
• 29:04
  Speaker 1: a good question. Um. I think part of the reason
• 29:07
  Speaker 1: is that he feels like Stephen John Leger at this
• 29:11
  Speaker 1: Maybe it's too little, too late. Look, he did hire
• 29:15
  Speaker 1: a person named Maurice Claure excuse me, Marcello Claure. Um,
• 29:19
  Speaker 1: I would say a few years ago at this point,
• 29:22
  Speaker 1: to try to turn around the net worth of previous
• 29:25
  Speaker 1: CEO's name was Dan Hessey. Uh So, the idea at
• 29:28
  Speaker 1: the time was to bring in someone that Massio she
• 29:31
  Speaker 1: soun was familiar with to to turn around the company.
• 29:34
  Speaker 1: And look, if you if you go on a pure
• 29:36
  Speaker 1: stock performance, even though Sprint continues to struggle, actually you
• 29:40
  Speaker 1: could make a very strong case that Sprint has turned
• 29:43
  Speaker 1: it around. I mean their shares were training around two
• 29:45
  Speaker 1: dollars a share at one point now eight dollars and
• 29:47
  Speaker 1: seventy three cents now a lot of a lot of
• 29:50
  Speaker 1: that m and a premium, but still tapped off the
• 29:52
  Speaker 1: Clare and the Sprint team for getting the share price up.
• 29:54
  Speaker 1: We gotta leave it there. Alex Sherman, our tech media
• 29:56
  Speaker 1: and telecom m and a reporter from Bloomberg News. Thanks
• 30:02
  Speaker 1: for listening to the Bloomberg P and L podcast. You
• 30:05
  Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 30:09
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 30:12
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 30:17
  Speaker 1: It's one before the podcast. You can always catch us
• 30:19
  Speaker 1: worldwide on Bloomberg Radio