WEBVTT - Warner Bros. Urges Investors to Reject Paramount Bid 0:00:02.720 --> 0:00:10.559 Bloomberg Audio Studios, podcasts, radio news. You're listening to the 0:00:10.600 --> 0:00:14.560 Bloomberg Intelligence Podcast. Catch us Live weekdays at ten am 0:00:14.600 --> 0:00:17.840 Eastern on Apple, Cocklay and Android Auto with the Bloomberg 0:00:17.920 --> 0:00:21.040 Business App. Listen on demand wherever you get your podcasts, 0:00:21.360 --> 0:00:23.480 or watch US live on YouTube. 0:00:23.760 --> 0:00:25.119 Paramount updating. 0:00:25.520 --> 0:00:28.120 It's bid for Warner Brothers, but it did not increase 0:00:28.120 --> 0:00:31.200 its price. It's sticking to that thirty dollars a share 0:00:31.280 --> 0:00:33.960 offer for Warner Brothers. But what they did do is 0:00:34.400 --> 0:00:38.680 offer some more commitment on financing. Forty one billion dollar 0:00:38.800 --> 0:00:40.000 new equity backstop. 0:00:40.400 --> 0:00:40.640 KEITHA. 0:00:40.680 --> 0:00:44.519 Rongenathen is Bloomberg Intelligence analyst on US Media and she's. 0:00:44.280 --> 0:00:47.279 Here with us. Now does this move the needle at all? Here? 0:00:47.440 --> 0:00:54.360 Gita for Paramount to basically talk about the financing and 0:00:54.600 --> 0:00:57.480 how it's going to backstop it by the Ellison family, 0:00:57.520 --> 0:00:59.480 but not change the actual price. 0:01:00.880 --> 0:01:05.520 Yeah, not completely sure, Scarlett. I do think that they 0:01:05.640 --> 0:01:09.400 need to up the price. You know, Warner Brothers Discovery. 0:01:09.440 --> 0:01:11.520 Of course, the main concern that they raised was financing, 0:01:11.520 --> 0:01:15.520 but they also called the proposal inadequate, inferior to Netflix, 0:01:15.560 --> 0:01:18.880 and illusory. The inadequate really stems from the fact that 0:01:19.319 --> 0:01:22.480 they feel that Paramount Skuid Dance is undervaluing their TV 0:01:22.680 --> 0:01:27.120 network business pretty substantially. Plus they also talk about the 0:01:27.240 --> 0:01:30.280 extra almost two dollars a share that they would need 0:01:30.560 --> 0:01:33.000 from Paramount if they were to walk away from a Netflix. 0:01:33.040 --> 0:01:35.800 This is for this is to cover both the termination 0:01:35.920 --> 0:01:39.440 fee that Warner Brothers Discovery would own would owe Netflix, 0:01:39.480 --> 0:01:42.040 as well as, you know, some of the financing costs. 0:01:42.240 --> 0:01:43.120 So there's all of that. 0:01:43.160 --> 0:01:44.720 You know, you kind of put all of that match 0:01:44.720 --> 0:01:47.480 together and we come up with at least a thirty 0:01:47.520 --> 0:01:52.880 two dollars fifty cent increased bid that Paramount would need 0:01:52.880 --> 0:01:55.280 to present in order to kind of get the Warner 0:01:55.320 --> 0:01:57.760 Brothers Discovery board back to the table. So, yes, the 0:01:57.760 --> 0:01:59.760 financing helps a little bit, but not sure it really 0:02:00.080 --> 0:02:00.960 changes the conversation. 0:02:01.360 --> 0:02:03.840 We haven't heard a whole lot from Netflix recently. Are 0:02:03.840 --> 0:02:06.640 they just quietly sitting on assign lines and confident in 0:02:06.680 --> 0:02:07.080 their bid? 0:02:08.600 --> 0:02:10.920 So they did, you know, put out a letter to 0:02:11.000 --> 0:02:15.960 employees shareholders just kind of reiterating their commitment to the deal. 0:02:16.320 --> 0:02:18.280 They think that it will go through. They don't think 0:02:18.320 --> 0:02:21.640 they will have, you know, huge problems with the regulators. 0:02:22.000 --> 0:02:24.239 And it was interesting today even in the Warner Brothers 0:02:24.320 --> 0:02:27.360 Discovery letter that they put out suggesting that you know, 0:02:27.400 --> 0:02:30.440 they don't see or they rather that they view both 0:02:30.480 --> 0:02:35.280 of the deals as equal from a regulatory perspective. And 0:02:35.320 --> 0:02:37.880 one of the key numbers that they highlighted the Warner 0:02:37.880 --> 0:02:41.880 Brothers Discovery team was the nine billion dollars in synergies. 0:02:42.200 --> 0:02:44.880 So Paramount Skydan's basically talking about three billion dollars in 0:02:44.919 --> 0:02:47.680 centergies from its Skydance deals six billion dollars from the 0:02:48.320 --> 0:02:51.239 you know, Warner Brothers Discovery deals, saying that that will 0:02:51.280 --> 0:02:53.760 actually put a lot of you know that that's bad 0:02:53.760 --> 0:02:56.240 for Hollywood. Sure, it would result in a lot of 0:02:56.360 --> 0:02:59.240 job losses, whereas the Netflix deal might actually be better. 0:02:59.480 --> 0:03:02.400 So who knows, And I mean, this is something that's 0:03:02.400 --> 0:03:03.720 going to play out over the next year and a 0:03:03.760 --> 0:03:07.320 half to two years. Githa. We know that Jared Kushner, 0:03:07.440 --> 0:03:11.240 the President's son in law, his private aquity firm, Affinity Partners, 0:03:11.440 --> 0:03:14.040 was involved in the Paramount Skuydance deal. It was supposed 0:03:14.040 --> 0:03:16.640 to contribute two hundred million dollars to the financing, but 0:03:16.760 --> 0:03:19.640 it has since pulled out of this bid, perhaps because 0:03:19.680 --> 0:03:24.080 of potential conflicts of interest. Does this change the scope 0:03:24.080 --> 0:03:26.840 of Paramount Suiddances offer, Does it make it more attractive, 0:03:26.880 --> 0:03:28.800 less attractive, or does it not really do much? 0:03:29.919 --> 0:03:32.600 I think yes, you're right, Scarlett. The optics were definitely 0:03:32.639 --> 0:03:34.600 bad and it kind of, you know, looked a little 0:03:34.639 --> 0:03:37.120 bit questionable. So now they're kind of removing that, which 0:03:37.160 --> 0:03:40.080 is which is definitely good. I think it's more positive 0:03:40.080 --> 0:03:43.040 for the Paramount Skydance deal. That said, though, I think 0:03:43.040 --> 0:03:46.440 they really really need to deliver a knockout bid, and 0:03:46.560 --> 0:03:48.720 the knockout bid that we're kind of looking for is 0:03:48.760 --> 0:03:51.760 something like thirty five dollars. I think that really then 0:03:51.880 --> 0:03:54.280 gets Netflix thinking about, Okay, do we need to re 0:03:54.400 --> 0:03:57.040 up our offer, and everybody gets excited at the Warner 0:03:57.040 --> 0:04:00.520 Brothers Discovery board again until they do some thing really 0:04:00.560 --> 0:04:03.760 significant on the pricing front. I don't think the Warner 0:04:03.800 --> 0:04:06.520 Brothers Discovery board is going to want to come back 0:04:06.520 --> 0:04:08.640 to the table to re engage Keith. 0:04:08.640 --> 0:04:11.160 Have one of the comparable deals out there for a 0:04:11.200 --> 0:04:14.280 spin off of Warner Brothers. Cable Networks is what Comcast 0:04:14.520 --> 0:04:17.000 is spinning out. It's cable Networks and a company called 0:04:17.120 --> 0:04:19.720 Versant is that publicly traded yet have they done that? 0:04:19.720 --> 0:04:20.239 Spin out. 0:04:21.200 --> 0:04:24.560 Yeah, they did. You know, they have a when issued trading. 0:04:24.600 --> 0:04:28.480 The actual the complete distribution will will happen sometime in 0:04:28.960 --> 0:04:31.640 January when it will start trading, but we do you 0:04:31.640 --> 0:04:34.600 know they with the when issue trading, we do have 0:04:34.640 --> 0:04:36.640 some price discovery for that stock. So right now, if 0:04:36.680 --> 0:04:39.920 you kind of look at where versus just trading, we 0:04:40.040 --> 0:04:43.679 get a d or a forward EBIDOM multiple of about 0:04:43.720 --> 0:04:47.240 five point two times, which is higher than what paramount 0:04:47.760 --> 0:04:50.240 Skydance had suggested for the valuation of the Warner Brothers 0:04:50.240 --> 0:04:53.280 Discovery at four point five x. So already there we're 0:04:53.360 --> 0:04:56.599 kind of seeing some signs that the valuation of the 0:04:56.600 --> 0:04:59.000 global networks business should be slightly higher. 0:05:00.000 --> 0:05:01.680 Do you see any other m and A taking place 0:05:01.720 --> 0:05:03.880 in media? I know we're all fixated on the bidding 0:05:03.920 --> 0:05:07.080 war for Warner Brothers Discovery, but at one point Comcast 0:05:07.120 --> 0:05:09.640 was a potential bidder and it dropped out fairly early. 0:05:09.680 --> 0:05:12.000 But are there any other deals kind of percolating in 0:05:12.000 --> 0:05:13.520 the background that you would keep your eye on. 0:05:14.839 --> 0:05:17.760 I think there's just a lot of consolidation that's waiting 0:05:17.760 --> 0:05:20.120 to happen. Scarlett. I think people first want to wait 0:05:20.120 --> 0:05:22.680 and watch a little bit see what happens with the 0:05:22.720 --> 0:05:26.400 Warner Brothers Discovery situation kind of test out what's happening 0:05:26.440 --> 0:05:29.480 with the regulators. But yeah, there are absolutely a lot 0:05:29.480 --> 0:05:33.479 of smaller players, and you know, Netflix becoming bigger or 0:05:33.520 --> 0:05:36.560 Paramount becoming bigger really kind of forces everybody to take 0:05:36.600 --> 0:05:39.160 a hard look at their portfolios and see what they 0:05:39.200 --> 0:05:43.000 should do next. As you rightly mentioned, NBC is the 0:05:43.000 --> 0:05:45.479 one name that definitely comes up to mind. Comcasts NBC 0:05:46.040 --> 0:05:49.279 they need something. Their Peacock platform is really subscale, so 0:05:49.640 --> 0:05:52.040 it's really going to depend on whether they want to 0:05:52.080 --> 0:05:53.880 do some kind of partnership or they actually need to 0:05:53.920 --> 0:05:57.480 go out and acquire some other smaller networks, maybe AMC networks, 0:05:57.720 --> 0:06:00.880 maybe some other kind of you know, streaming business. So 0:06:01.200 --> 0:06:03.000 a lot of deals waiting to happen, but I think 0:06:03.080 --> 0:06:05.080 this is really the big one that everybody's focused on 0:06:05.120 --> 0:06:05.599 at the moment. 0:06:07.080 --> 0:06:10.159 Stay with us. More from Bloomberg Intelligence coming up after this. 0:06:13.800 --> 0:06:17.480 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:06:17.560 --> 0:06:20.960 weekdays at ten am Eastern on Applecarcklay and Android Auto 0:06:21.080 --> 0:06:24.120 with the Bloomberg Business app. Listen on demand wherever you 0:06:24.160 --> 0:06:28.440 get your podcasts, or watch us live on YouTube. 0:06:28.160 --> 0:06:32.680 Let's switch gears to the airline business. Bankrupt Spirit Aviation Holdings, 0:06:32.680 --> 0:06:35.200 you remember them, is in revived discussions to merge with 0:06:35.279 --> 0:06:38.279 front Tier Group Holdings in a deal that could rescue 0:06:38.320 --> 0:06:42.280 the deep discount airline from insolvency. Let's break this potential 0:06:42.320 --> 0:06:45.240 deal down. But George Ferguson, senior airspace, defense and airlines 0:06:45.240 --> 0:06:49.520 analysts for Bloomberg Intelligence, George, does it make sense putting 0:06:49.880 --> 0:06:53.400 these two I'm going to call them struggling regional airlines 0:06:53.480 --> 0:06:55.559 or discount airlines? Does it make sense to put that together? 0:06:57.360 --> 0:06:57.720 You know what? 0:06:57.760 --> 0:07:01.120 I think it might actually so this is you know, 0:07:01.200 --> 0:07:04.560 back to the future. Originally sort of I think, you 0:07:04.600 --> 0:07:07.520 know what we saw sort of set off a little 0:07:07.520 --> 0:07:11.640 fight for Spirit Airlines was the initial uh you know 0:07:11.760 --> 0:07:15.680 merger purchase from Frontier. Frontier taking the Spirit, jet Blue 0:07:15.720 --> 0:07:20.280 decided they didn't want to let that those two you 0:07:20.320 --> 0:07:24.600 know coalesce, you know, merge together and become a major 0:07:24.640 --> 0:07:27.400 competitor to them, So they stepped in the middle, tried 0:07:27.440 --> 0:07:32.240 to grab Spirit and after that everyone Spirit Frontier jet 0:07:32.240 --> 0:07:34.480 Blue just went through some pretty rough times as fairs 0:07:35.760 --> 0:07:38.680 weakened in the market. I think, you know, the economy 0:07:39.200 --> 0:07:43.920 Flyer kind of faded out a little bit on higher 0:07:43.960 --> 0:07:48.280 inflation and other problems, and so, you know, I think 0:07:48.400 --> 0:07:52.160 where we're back to, though, is that Spirit and Frontier 0:07:52.200 --> 0:07:58.320 had very similar business, uh you know, types, similar cultures. 0:07:58.760 --> 0:08:01.000 I think if you put the two airplace airlines together, 0:08:01.120 --> 0:08:03.320 now you have an airline that have something like three 0:08:03.400 --> 0:08:06.480 hundred and fifty seats, I think there's enough other markets 0:08:06.480 --> 0:08:10.240 they could go after. I mean, in comparison, you know Southwest, 0:08:10.240 --> 0:08:14.360 which is is a domestic and sort of near to 0:08:14.440 --> 0:08:18.520 the US kind of market airline, they have seven hundred airplanes. 0:08:18.520 --> 0:08:20.480 They find a place to put all those airplanes. So 0:08:20.840 --> 0:08:24.040 I think it could sort of charge growth up pretty 0:08:24.080 --> 0:08:27.040 quickly for Frontier, sort of help them lay in an 0:08:27.040 --> 0:08:29.720 extra hundred airplanes might not be a bad idea, and 0:08:29.760 --> 0:08:31.680 they might get a really nice price on it. 0:08:31.800 --> 0:08:34.280 But do two week airlines make a strong airline. 0:08:35.679 --> 0:08:40.240 I mean, look, right now, I think the economy portion 0:08:40.320 --> 0:08:43.520 of the business is reeling. It has too much capacity. 0:08:44.240 --> 0:08:46.880 Spirit is shedding. Some of those airplanes are going to 0:08:46.880 --> 0:08:49.120 go elsewhere. So we're you know, we're talking about an 0:08:49.120 --> 0:08:51.960 airline that only has one hundred and I think if 0:08:52.000 --> 0:08:54.120 you want to be competitive in the market. You have 0:08:54.160 --> 0:08:56.800 to be able to fly sort of coast to coast 0:08:56.880 --> 0:09:00.160 off of your customers, you know, a full comple men 0:09:00.200 --> 0:09:03.960 of destinations. I think you need more half for those 0:09:04.040 --> 0:09:09.240 loyalty programs that helped drive some better results as you 0:09:09.280 --> 0:09:11.839 sell them, you know, credit cards and they buy their 0:09:11.880 --> 0:09:15.520 groceries and things like that that on it. So I 0:09:15.520 --> 0:09:17.920 don't think it hurts for Frontier to try to get 0:09:18.000 --> 0:09:21.000 larger and to do it, to supercharge it through taking 0:09:21.000 --> 0:09:23.480 one hundred airplanes out of Spirit. I don't think it's 0:09:23.520 --> 0:09:25.679 a I don't think it's a bad idea. 0:09:26.520 --> 0:09:28.960 Will the regulators allow this church, I. 0:09:28.960 --> 0:09:30.400 Don't think it's going to be a problem, right. I 0:09:30.440 --> 0:09:33.880 don't think it was originally a problem when when Jet 0:09:33.880 --> 0:09:36.840 Blue was looking at Spirit and when Frontier was looking 0:09:36.880 --> 0:09:40.000 at Spirit. But now Spirit's even smaller. We kind of 0:09:40.000 --> 0:09:43.840 put them together today, looking at available seat miles in 0:09:44.000 --> 0:09:47.280 one queue, a combined airline looked to us to be 0:09:47.400 --> 0:09:49.320 the sixth largest in the country. 0:09:49.800 --> 0:09:50.600 It was just. 0:09:50.600 --> 0:09:53.000 Ahead of Jet Blue. If it adds I don't know. 0:09:53.000 --> 0:09:55.880 If it adds you know, some premium seating and knock 0:09:55.960 --> 0:09:59.080 some seating out of some of those airplanes, it might 0:09:59.120 --> 0:10:01.520 not even beat Jet Blue. I don't think this is 0:10:01.520 --> 0:10:02.960 a big issue for the US market. 0:10:03.080 --> 0:10:06.080 What would this mean for jobs? Jobs at Spirit, jobs 0:10:06.080 --> 0:10:06.640 at Frontier. 0:10:07.520 --> 0:10:09.920 I mean, I think it could probably preserve some jobs, 0:10:09.960 --> 0:10:12.480 because I don't think they're going to want to shrink 0:10:12.520 --> 0:10:16.400 the airline operations. But I do think if Spirit doesn't 0:10:16.480 --> 0:10:21.079 find someone to go with soon, that they may cease 0:10:21.120 --> 0:10:23.080 to exist, and that obviously hurts jobs. 0:10:23.880 --> 0:10:27.000 Stay with us. More from Bloomberg Intelligence coming up after this. 0:10:30.880 --> 0:10:34.560 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:10:34.640 --> 0:10:37.760 weekdays at ten am Eastern on Apple, Cocklay and Android 0:10:37.760 --> 0:10:41.079 Auto with the Bloomberg Business App. Listen on demand wherever 0:10:41.120 --> 0:10:44.199 you get your podcasts, or watch us live on YouTube. 0:10:44.960 --> 0:10:47.319 Marry Scarthoompaul Sweeney live here in our Bloomberg and Director 0:10:47.320 --> 0:10:49.440 Brooker Studio in New York City streaming live on. 0:10:49.360 --> 0:10:50.360 YouTube as well. 0:10:50.360 --> 0:10:53.760 Well. Home Builder Leonar reported some earnings today, A little 0:10:53.760 --> 0:10:58.200 bit disappointing here on stock down five percent today, down 0:10:58.280 --> 0:11:00.760 eighteen percent year to date. It's a big company, it's 0:11:00.800 --> 0:11:02.840 kind of market capped for like twenty eight billion dollars. 0:11:03.360 --> 0:11:04.880 But I'm looking at some of the homebuilders, a lot 0:11:04.880 --> 0:11:06.640 of them are down double digits on a a year 0:11:06.640 --> 0:11:07.320 to date basis. 0:11:07.360 --> 0:11:07.520 Yere. 0:11:07.800 --> 0:11:10.800 Let's break it down with Drew redding Hope, building analyst 0:11:10.920 --> 0:11:14.400 for Bloomberg Intelligence. Drew talk to us about Leonar. What 0:11:14.440 --> 0:11:17.000 did they say to the street here with their latest earnings? 0:11:18.200 --> 0:11:20.120 Yeah, this was a This was a tough print for 0:11:20.240 --> 0:11:22.440 Leonard at this cord. They came into the quarter with 0:11:22.840 --> 0:11:26.000 a pretty low bar. Investor expectations had been coming down, 0:11:26.440 --> 0:11:30.520 but they still disappointed on both orders and margins. And 0:11:30.880 --> 0:11:33.280 even more concerning was the guidance they issued for the 0:11:33.280 --> 0:11:37.800 first quarter, which was short on orders, closings, and margins. 0:11:37.800 --> 0:11:40.640 So we think that consensus needs to come down pretty 0:11:40.640 --> 0:11:43.960 sharply here. You know, what this tells us is that 0:11:44.559 --> 0:11:46.480 even though rates have fallen to kind of that low 0:11:46.559 --> 0:11:49.360 six percent range, I think we're about six point three now, 0:11:49.480 --> 0:11:55.960 it doesn't appear that they're significantly catalyzing demand, which was 0:11:56.080 --> 0:11:57.920 what a lot of people had been expecting. So I 0:11:57.960 --> 0:12:00.280 think that points out that, you know, there's other things 0:12:00.320 --> 0:12:02.440 going on. It's you know, we've we've said in the 0:12:02.480 --> 0:12:05.480 past it's not just rates, but its prices and overall affordability. 0:12:06.360 --> 0:12:09.400 But something we've heard pretty consistently from the builders is 0:12:09.920 --> 0:12:13.120 that consumer confidence is really holding the market back. There's 0:12:13.160 --> 0:12:16.280 concerns over the direction of the economy and concerns about 0:12:16.280 --> 0:12:18.280 the labor market. If look, if you don't have a job, 0:12:18.440 --> 0:12:21.440 you're you're certainly not buying a house. So we expect 0:12:21.480 --> 0:12:24.360 in this environment the use of sales incentives to remain 0:12:24.400 --> 0:12:26.760 elevate it and that's going to continue to pressure margins. 0:12:27.080 --> 0:12:29.199 Yeah, I mean, they get volume, but they don't get 0:12:29.200 --> 0:12:33.440 the profitability. So home builders are facing a lot of challenges. 0:12:33.480 --> 0:12:36.720 They also face competition from the resale market. Talk a 0:12:36.720 --> 0:12:39.040 little bit about the numbers involved here in terms of 0:12:39.080 --> 0:12:41.360 new construction versus existing homes. 0:12:42.800 --> 0:12:45.720 Yeah, that's a that's a great point. You know, the 0:12:45.840 --> 0:12:48.960 lack of force sale inventory in the resale market was 0:12:49.000 --> 0:12:52.160 a huge benefit to the builders over the last couple 0:12:52.160 --> 0:12:55.120 of years. There weren't a lot of options with funneled 0:12:55.160 --> 0:12:57.600 buyers into the new home market, where you know, builders 0:12:57.640 --> 0:13:00.320 have been able to make monthly payments more attractive for 0:13:00.400 --> 0:13:03.360 their use of buydowns. That dynamic has shifted over the 0:13:03.440 --> 0:13:06.319 last year where we're starting to see pretty significant increases 0:13:06.880 --> 0:13:10.040 in for sale listings in the resale market, particularly in 0:13:10.440 --> 0:13:16.120 the most important markets for the builders. You know, think Florida, Texas, California. 0:13:16.200 --> 0:13:18.640 So all of a sudden, there's this new competition for them, 0:13:18.720 --> 0:13:20.560 and in order to get a sale, they're having to 0:13:20.559 --> 0:13:24.680 fight harder for each one, which means higher incentives, more 0:13:24.760 --> 0:13:27.400 pressure on pricing. Drue. 0:13:27.400 --> 0:13:30.400 I'm looking at the existing home sales in the United States. 0:13:30.400 --> 0:13:32.480 It has been been running at about a four million 0:13:33.160 --> 0:13:36.520 home rate for the last few years, but historically that's 0:13:36.520 --> 0:13:39.160 been a lot higher, hasn't it. So there just there's 0:13:39.160 --> 0:13:41.080 just not a lot of supply of existing homes out 0:13:41.120 --> 0:13:41.920 there in the marketplace. 0:13:42.080 --> 0:13:45.880 And is that an interest rate story? 0:13:46.800 --> 0:13:50.320 Yeah, it's partly an interest rate story. You know. The 0:13:50.360 --> 0:13:52.640 one thing that we've consistently pointed out is that if 0:13:52.679 --> 0:13:55.160 you look at the composition of outstanding mortgages, you have 0:13:55.200 --> 0:13:58.839 a majority of current mortgage holders who have something well 0:13:58.880 --> 0:14:02.560 below the prevailing mortgage rate, which is around six percent. Now, 0:14:03.120 --> 0:14:04.920 a lot of people during the pandemic, we're able to 0:14:04.920 --> 0:14:07.120 lock in rates in the fours and even you know, 0:14:07.200 --> 0:14:10.840 the high threes, some perhaps in the twos. So, you know, 0:14:10.920 --> 0:14:13.680 the existing home market has really been frozen if you 0:14:13.720 --> 0:14:16.800 look at total volumes, you know, you mentioned we've been 0:14:16.880 --> 0:14:19.800 hovering around this four million annualized rate for about three 0:14:19.880 --> 0:14:23.480 years now, that's that's about twenty percent below what a 0:14:23.560 --> 0:14:27.680 normalized market would look like. So you know, I think 0:14:27.920 --> 0:14:30.240 rates coming in will certainly help. As we look out 0:14:30.240 --> 0:14:31.800 to next year, we do think that you're going to 0:14:31.840 --> 0:14:34.560 see perhaps mid to highest single digit growth in the 0:14:34.600 --> 0:14:37.080 existing home market. But keep in mind we're coming off 0:14:37.400 --> 0:14:40.520 you know, historically low levels, so some improvement, but I 0:14:40.560 --> 0:14:43.320 think context is certainly key there well. 0:14:43.280 --> 0:14:46.640 And are certainly not the only builder facing these these challenges. 0:14:47.280 --> 0:14:51.280 How is the company specifically saying or explaining to investors 0:14:51.280 --> 0:14:54.920 how it's adapting to this new normal of persistent affordability 0:14:54.960 --> 0:14:59.840 concerns due to softening consumer confidence and a weakening job 0:14:59.840 --> 0:15:03.320 mar get all these macro headwinds that it has no 0:15:03.360 --> 0:15:03.920 control over. 0:15:05.320 --> 0:15:09.360 Yeah, Lenar has been a pretty interesting example. Remember they're 0:15:09.400 --> 0:15:12.440 the second largest builder by volume in the country, and 0:15:12.480 --> 0:15:16.680 they run a production first business, which means their goal 0:15:16.840 --> 0:15:18.760 is to push volumes, and over the last couple of 0:15:18.880 --> 0:15:23.240 years they've been willing to sacrifice margin to get volume. 0:15:23.360 --> 0:15:25.040 So you know, they'll tell you they're bringing a more 0:15:25.080 --> 0:15:28.440 affordable product to the market, But what we've seen is 0:15:28.480 --> 0:15:31.400 a dramatic drop in their gross margins. In just three years, 0:15:31.480 --> 0:15:33.720 they've gone from you know, a gross margin in the 0:15:33.800 --> 0:15:36.440 high twenty percent to something in the high teens percent 0:15:37.600 --> 0:15:40.200 in twenty twenty five, so a very sharp ball. And 0:15:40.240 --> 0:15:43.520 what they told us last quarter is that, you know, 0:15:43.640 --> 0:15:47.000 they can only push so hard on this market. The 0:15:47.320 --> 0:15:49.320 demand just simply isn't there. So in order to get 0:15:49.320 --> 0:15:52.200 more sales, the incentives have to keep ratcheting up. So 0:15:52.600 --> 0:15:55.400 what they told us is that they're they're making some 0:15:55.440 --> 0:15:58.160 sort of a pivot into where they're looking to sustain 0:15:58.200 --> 0:16:00.480 their gross margin. So what we want to hear from 0:16:00.520 --> 0:16:02.480 them on the call is, you know, where do we 0:16:02.560 --> 0:16:06.600 think that gross margin floor ultimately lands and is the 0:16:06.640 --> 0:16:10.120 pullback in production that we've started to see it has 0:16:10.120 --> 0:16:10.920 it normalized? 0:16:11.720 --> 0:16:14.880 Stay with us more from Bloomberg Intelligence coming up after this. 0:16:18.760 --> 0:16:22.440 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:16:22.520 --> 0:16:25.920 weekdays at ten am Eastern on Applecarclay, and Android Auto 0:16:26.000 --> 0:16:29.080 with the Bloomberg Business App. Listen on demand wherever you 0:16:29.120 --> 0:16:32.120 get your podcasts, or watch us live on YouTube. 0:16:32.760 --> 0:16:35.840 The biggest IPO of the year priced last night, Medline. 0:16:36.080 --> 0:16:38.440 It's not really sexy. It's like a medical device company. 0:16:38.880 --> 0:16:42.120 But it's like a six plus billion dollar IPO. It's 0:16:42.160 --> 0:16:45.160 just extraordin. It got some blue chip private equity of 0:16:45.160 --> 0:16:48.040 folks behind it. I have no idea what this company does, 0:16:48.080 --> 0:16:50.880 but I know who does, and that's Jonathan Palmer. He's 0:16:50.880 --> 0:16:54.200 an analyst at Bloomberg Intelligence. He covers all the healthcare 0:16:54.560 --> 0:16:56.880 device companies and things like that. And the good thing 0:16:56.880 --> 0:16:59.480 about Bloomberg Intelligence, We're not an underwriter, we're not a 0:16:59.480 --> 0:17:02.600 broker dealer. We could write on private companies. We can 0:17:02.640 --> 0:17:05.440 write research on private companies, we can write research on 0:17:05.720 --> 0:17:06.560 IPO companies. 0:17:06.600 --> 0:17:08.000 And that's exactly what Jonathan did. 0:17:08.200 --> 0:17:10.359 So he's out there with a definitive view on this 0:17:10.400 --> 0:17:14.240 company for investors. Jonathan, what does Mendline do here and 0:17:14.240 --> 0:17:15.199 why are they coming public? 0:17:15.840 --> 0:17:16.760 Thanks Paul for having me. 0:17:16.840 --> 0:17:16.919 So. 0:17:17.040 --> 0:17:20.320 Medline is what's traditionally thought of as a distributor, but 0:17:20.400 --> 0:17:23.399 I'd argue it's more than that. So really, this company's 0:17:23.440 --> 0:17:25.800 been around for decades. It's started by the Mills family 0:17:25.880 --> 0:17:29.080 in the sixties. In twenty twenty one, they sold to 0:17:29.119 --> 0:17:31.600 private equity and now they're coming back to the public markets. 0:17:32.920 --> 0:17:35.720 You know, what they traditionally did was provide distribution and 0:17:35.840 --> 0:17:37.199 logistics to hospitals. 0:17:37.640 --> 0:17:38.800 But over the years they. 0:17:38.680 --> 0:17:43.000 Actually started making their own products, so things like masks, strape, sutures, 0:17:43.119 --> 0:17:45.520 all the stuff that kind of you need into surgery 0:17:45.680 --> 0:17:47.800 or to take care of patients. It's not too sexy, 0:17:48.160 --> 0:17:51.119 but it has a much better margin than logistics. So 0:17:51.520 --> 0:17:54.240 half the company today is their own medline brand products. 0:17:54.280 --> 0:17:57.680 Half of it is distribution services. The secret sauce here 0:17:57.920 --> 0:17:59.920 is that they basically give They don't give it all, 0:18:00.240 --> 0:18:02.840 but they can essentially give away the distribution and logistics 0:18:02.920 --> 0:18:05.840 piece while capturing all the margin on the product side. 0:18:06.160 --> 0:18:07.600 How much market share do they have? 0:18:07.680 --> 0:18:10.199 I mean, I've gone to hospitals before and seen the 0:18:10.240 --> 0:18:12.960 midline name attached to I don't know, like a bed 0:18:12.960 --> 0:18:16.200 for instance, or you know the canister on the wall 0:18:16.280 --> 0:18:17.800 where you get your ro gloves. 0:18:17.920 --> 0:18:19.280 Yeah, that's a good question. I mean I think it 0:18:19.560 --> 0:18:22.040 would depend on the product category. I mean, from the 0:18:22.040 --> 0:18:25.120 distribution side, they're just a little bit bigger than their 0:18:25.119 --> 0:18:28.159 peers like Cardinal Health and what was Owen's and Minor. 0:18:28.440 --> 0:18:31.200 It's kind of a a oligopoly where those big three 0:18:31.200 --> 0:18:34.800 players are distributing to all the healthcare facilities. You know, 0:18:35.040 --> 0:18:38.160 in terms of products, you know, it's about half of revenue, 0:18:38.240 --> 0:18:41.240 so roughly twelve fifteen billion right here. 0:18:42.440 --> 0:18:44.760 What about tariffs? How affected by tariffs are there? 0:18:44.800 --> 0:18:48.040 Because I can't imagine that these items gloves, masks, swaps, 0:18:48.119 --> 0:18:49.240 ranges are made in the US. 0:18:49.600 --> 0:18:52.000 Well, they do have a fair amount of manufacturing in 0:18:52.520 --> 0:18:55.640 the United States. They have talked about tariffs a couple 0:18:55.760 --> 0:18:58.760 hundred million impact this year and next year. I mean 0:18:58.800 --> 0:19:00.840 to be honest with you, For a be this size 0:19:00.840 --> 0:19:04.639 and this scale, that that's a pretty surmountable hurdle. You know, 0:19:04.640 --> 0:19:06.880 it'll get priced in in the next round of contract 0:19:06.880 --> 0:19:09.840 negotiations and it'll be you know, business as usual going off, 0:19:09.840 --> 0:19:10.399 going forward. 0:19:10.520 --> 0:19:12.800 As a former banker, I just look at the deal 0:19:13.040 --> 0:19:19.400 dynamics here, upsized offering offering finished north to ten times oversubscribed. 0:19:19.800 --> 0:19:22.720 Top ten investors in this allocation took more than fifty 0:19:22.760 --> 0:19:25.200 percent of the shares. Top twenty five investors took about 0:19:25.200 --> 0:19:28.440 eighty percent of the deal. Here are the private equity guys, 0:19:28.440 --> 0:19:30.359 are they selling here or is this just company shares? 0:19:31.119 --> 0:19:34.080 It's a combination of both. And then the Mills family 0:19:34.160 --> 0:19:36.480 still owns about twenty percent of the company and they're 0:19:36.520 --> 0:19:38.400 not selling any shares good. 0:19:38.480 --> 0:19:40.159 So what what what are you suppose each here? 0:19:40.200 --> 0:19:40.560 Do you think? 0:19:41.160 --> 0:19:41.560 I'm sorry? 0:19:41.600 --> 0:19:42.639 What what are the U s of proce each here? 0:19:42.680 --> 0:19:43.640 What are they going to use the money. 0:19:43.480 --> 0:19:46.360 For primary to pay down debt? They had about sixteen 0:19:46.359 --> 0:19:48.719 billion dollars of debt. You know that they levered up 0:19:48.720 --> 0:19:50.720 on the private equity transaction, and they're paying down a 0:19:50.720 --> 0:19:53.120 pretty healthy slug of that right here. 0:19:54.080 --> 0:19:55.400 Stock hasn't even opened yet. 0:19:55.560 --> 0:19:58.320 I mean, Jesus, well, when I was doing this, then 0:19:58.400 --> 0:19:59.160 is the ticker to watch? 0:19:59.320 --> 0:20:01.480 I was doing this if I didn't have it open 0:20:01.560 --> 0:20:04.560 by ten third, not till the noon hour. Now, I 0:20:04.600 --> 0:20:06.159