WEBVTT - United Technologies-Rockwell Collins Deal Defends Against Boeing, Rothacker Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P and L 0:00:20.840 --> 0:00:32.200 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well 0:00:32.240 --> 0:00:35.440 the shares of Rockwell Collins. They are up about four percent. 0:00:35.640 --> 0:00:39.200 This follows a report from Bloomberg on Friday that United 0:00:39.240 --> 0:00:43.000 Technologies may be considering an acquisition of Rockwell Collins. And 0:00:43.000 --> 0:00:45.880 here to tell us more about this potential deal is 0:00:45.880 --> 0:00:49.000 Bloomberg Intelligence. Is Joel Levington. He is an expert in 0:00:49.040 --> 0:00:51.879 the world of corporate debt. And Douglas Rothacker, he is 0:00:51.880 --> 0:00:57.080 our aerospace and autos analyst for Bloomberg Intelligence. Gentlemen, thank 0:00:57.080 --> 0:00:58.680 you very much for being here in the studio in 0:00:58.720 --> 0:01:01.240 our eleven three oh headquarters. You know, Doug, I want 0:01:01.280 --> 0:01:05.080 to begin with you because can you tell people why 0:01:05.720 --> 0:01:08.679 forget let's put the price aside. That's gonna be Joel's problem. 0:01:08.720 --> 0:01:10.959 He's gonna figure out how to pay for it. Uh, 0:01:11.360 --> 0:01:15.319 why would um U t X why would United Technologies 0:01:15.520 --> 0:01:19.680 want to buy Rockwell Collins. Sure, yeah, morning, thanks for 0:01:19.720 --> 0:01:24.520 having us. The strategic rational behind creating a forty billion 0:01:24.560 --> 0:01:29.479 dollar revenue airspace portfolio is largely to defend against the 0:01:29.520 --> 0:01:33.119 concerted efforts of Boeing, I would say for aftermarket services 0:01:33.600 --> 0:01:37.440 and revenue that they're trying to get into pretty aggressively 0:01:38.000 --> 0:01:42.000 and twofold to largely gain pricing power and scale. Right, 0:01:42.040 --> 0:01:46.240 So as Boeing and Airbus work through years of development 0:01:46.240 --> 0:01:49.840 and aircraft wore largely focused on profitability, right now, you know, 0:01:49.920 --> 0:01:52.720 focus on improving margins and a lot of that is 0:01:52.720 --> 0:01:56.400 going to trickle down to supply train pricing pressure. So 0:01:56.520 --> 0:01:59.880 as you see United Technologies, you know in this part 0:02:00.080 --> 0:02:03.400 ential deal deal, clearly it's an effort to you know, 0:02:03.480 --> 0:02:06.560 fight against that troll comment on this because it's one 0:02:06.560 --> 0:02:08.960 thing to have a great theory about, you know, uh, 0:02:09.200 --> 0:02:14.320 air aircraft control systems, you've got pilot systems, avionics, all 0:02:14.440 --> 0:02:18.800 this thing that's Rockwell Collins. Uh. Is there a price 0:02:18.840 --> 0:02:22.240 at which this deal just looks bad? Because I mean 0:02:22.280 --> 0:02:24.519 we've been down this road before, right, I mean we 0:02:24.680 --> 0:02:27.440 we've seen in that you know, Rockwell Collins has been 0:02:27.520 --> 0:02:31.760 kind of talked about as an acquisition target previously. That's true, 0:02:31.800 --> 0:02:35.080 and given where the market is with high evaluations, uh, 0:02:35.760 --> 0:02:37.440 what I can tell you is that the math works 0:02:37.480 --> 0:02:41.760 with about a premium, which is pretty traditional for an 0:02:41.800 --> 0:02:45.600 industrial asset. So you can make the math work relative 0:02:45.680 --> 0:02:49.040 to uh EPs growth, which I think Doug get pittened 0:02:49.040 --> 0:02:51.760 out at about seven percent. And then from a balance 0:02:51.760 --> 0:02:54.480 sheet perspective, you could lever the company up to a 0:02:54.480 --> 0:02:57.680 little over three times on a net debt basis, which 0:02:57.720 --> 0:03:00.880 is actually better than when knew we'll try to buy 0:03:00.919 --> 0:03:02.840 you U t X a little over a year ago 0:03:03.560 --> 0:03:06.600 UM and perhaps retained the single A rating that the 0:03:06.639 --> 0:03:09.560 company wants to maintain. Well, having said that, I mean, 0:03:09.600 --> 0:03:11.720 would it be any problem for them to raise the money? 0:03:11.919 --> 0:03:14.960 I don't think. So we got a thing today, one 0:03:15.000 --> 0:03:17.560 and a half billion dollar bond offering from Tesla, So 0:03:17.639 --> 0:03:19.640 I guess you know everybody can borrow money, right, and 0:03:19.680 --> 0:03:22.200 that's coming with like a five percent coupon handle on it. 0:03:22.280 --> 0:03:25.239 So it's so maybe you and I should and Duck 0:03:25.240 --> 0:03:27.920 can open up a business together and and and finance 0:03:27.960 --> 0:03:29.960 it with some debt. But I do think kind of 0:03:29.960 --> 0:03:32.480 the interesting or maybe the more interesting way of doing 0:03:32.520 --> 0:03:36.080 things would be if this would lead to a separate 0:03:36.240 --> 0:03:40.360 split of United Technologies, which has also been discussed, where 0:03:40.360 --> 0:03:42.960 you would have an aerospace business and an industrial business. 0:03:43.600 --> 0:03:45.920 To me, that kind of makes the most logic and 0:03:46.040 --> 0:03:49.280 sense given what their peers have done, whether you look 0:03:49.320 --> 0:03:52.720 at a GE or dana Her and Emerson, where it 0:03:52.720 --> 0:03:54.640 seems to be all the rage these days to be 0:03:55.120 --> 0:03:57.800 a company that's single focused as opposed to a diversified 0:03:57.840 --> 0:04:01.120 industrial with some pluses and binuses. Just come in a 0:04:01.120 --> 0:04:04.960 little bit more about margins and pricing and if you 0:04:05.040 --> 0:04:07.800 can maybe use an example for Rockwall cons because this 0:04:07.840 --> 0:04:10.840 idea of an aftermarket uh, we all know that. You know, 0:04:10.880 --> 0:04:13.920 when you buy an automobile, for example, the true cost 0:04:14.040 --> 0:04:16.320 is not what you pay. The true cost is what 0:04:16.400 --> 0:04:19.280 you pay for the life of the automobile, right right, 0:04:19.520 --> 0:04:21.560 So if you look at Rockwell Collins and their recent 0:04:21.600 --> 0:04:24.479 acquis just in b airspace there, you know, typical operating 0:04:24.480 --> 0:04:27.560 margins are north of which is well above what the 0:04:27.640 --> 0:04:31.560 United Technologies generates on their airspace portfolio. And a lot 0:04:31.600 --> 0:04:35.640 of that comes from a very large business of aftermarket 0:04:36.240 --> 0:04:38.360 products and services. Right. So when you go and buy 0:04:38.480 --> 0:04:41.599 used aircraft, you completely tear out the insides, the guts 0:04:41.600 --> 0:04:45.960 of it, refit it with UH new seats, new interiors, 0:04:46.000 --> 0:04:48.400 and boom, your customers think they're sitting in a brand 0:04:48.400 --> 0:04:51.200 new airplane. Right. So again, oh that's high margin and 0:04:51.279 --> 0:04:54.360 would uh you know, I ran the numbers UH over 0:04:54.400 --> 0:04:58.679 the weekend. If you combine on a proformer basis Rockwell 0:04:58.720 --> 0:05:02.520 Collins UH to United Technologies aerospace portfolio, they look at, 0:05:02.680 --> 0:05:05.400 you know, a marchin boost of hundred two hundred basis 0:05:05.440 --> 0:05:08.520 points and that's just on the you know, excluding any 0:05:08.520 --> 0:05:10.920 synergies or anything like that that that are potentially there. 0:05:11.120 --> 0:05:13.480 But I want to bring in starboard value for just 0:05:13.560 --> 0:05:16.240 a second here, because they were a focus last year 0:05:16.279 --> 0:05:19.560 I believe when it had when you just mentioned that 0:05:19.760 --> 0:05:23.400 be a UH aerospace right the the act with the 0:05:23.440 --> 0:05:27.480 Biero Space acquisition that closed in April, Joel, I mean 0:05:27.880 --> 0:05:30.320 they were pushing, they were saying, no, don't buy anything. 0:05:30.440 --> 0:05:32.400 We we we want you to split, as you were 0:05:32.440 --> 0:05:35.560 just saying in a new strategy, right and selling out 0:05:35.920 --> 0:05:37.880 at a premium might be the elegant way out for 0:05:38.160 --> 0:05:41.680 Rockwell Collins and their management team. So clearly you could 0:05:41.680 --> 0:05:43.880 see that, and I think if you look at what's 0:05:43.920 --> 0:05:48.160 happened with activists in the multi industrial space. Again, there 0:05:48.160 --> 0:05:50.120 has been a huge push you could look at that 0:05:50.160 --> 0:05:52.520 they wanted to get simpler. They wanted to get simpler. 0:05:52.520 --> 0:05:55.520 They want to get multiples that are focused on the 0:05:55.560 --> 0:05:59.279 different sectors and they want different balance sheets to reflect that. 0:05:59.400 --> 0:06:02.440 So in the piece of United Technologies, what you have 0:06:02.839 --> 0:06:06.880 putting the aerospace business aside, is this industrial business with carrier, 0:06:07.000 --> 0:06:11.160 their security operations, UM and all the h VAC equipment 0:06:11.240 --> 0:06:13.240 that could be levered let's say it about three and 0:06:13.279 --> 0:06:17.040 a half times UH to mimic other peers, and with 0:06:17.080 --> 0:06:18.960 that you can take a twenty billion dollar diven end 0:06:19.240 --> 0:06:21.920 that goes a long way to paying for Rockwell Collins. Yeah. Well, 0:06:21.920 --> 0:06:23.279 I mean it sounds good on the fine on the 0:06:23.279 --> 0:06:26.799 balance sheet, right, I mean, it looks good financially. I'm wondering, Doug, 0:06:26.880 --> 0:06:30.799 is there a technical or even uh sort of product 0:06:31.000 --> 0:06:34.200 reason to keep it all together? Because one part of 0:06:34.200 --> 0:06:36.960 the business helps to inform the other part and it 0:06:37.240 --> 0:06:40.400 goes back and forth. UM. I think for the equity 0:06:40.600 --> 0:06:44.040 shareholders to really get comfortable with this, we'd have to 0:06:44.080 --> 0:06:47.400 get back to what Joel was mentioning about separating UM 0:06:47.560 --> 0:06:50.960 the businesses. The the EPs secretion of seven percent is 0:06:51.160 --> 0:06:53.920 is okay, it's uh, it's it's going to be a 0:06:54.000 --> 0:06:59.080 very expensive acquisition, you know, Rockwell Collins up from October 0:06:59.120 --> 0:07:02.520 when they announced quiring be Aerospace, and again Joel mentioned 0:07:02.520 --> 0:07:06.880 probably looking at so premium on top of that. Um so, 0:07:07.520 --> 0:07:10.080 I mean we'll see how the the the plans, uh 0:07:10.120 --> 0:07:11.840 you know, play out. But isn't this it's a sickly 0:07:12.000 --> 0:07:14.280 is it a cyclical business to a certain extent? I mean, 0:07:14.320 --> 0:07:17.600 I know, you know, aftermarket's always got to replace the seeds, 0:07:17.840 --> 0:07:20.560 you know, Avionyx and somebody. Well, then the nice thing 0:07:20.600 --> 0:07:24.520 about aftermarket parts and services is that it's generally countercyclical 0:07:24.680 --> 0:07:27.440 to what you have with new production. Right, so when 0:07:27.480 --> 0:07:30.880 you're first here O E M supplier uh to Boeing 0:07:30.880 --> 0:07:33.640 and Airbus, you're you know, you're at their mercing in 0:07:33.800 --> 0:07:37.880 terms of raising and lowering production and the cycles of that. Uh. 0:07:38.040 --> 0:07:41.000 Important offset to that is the aftermarket services business, which 0:07:41.000 --> 0:07:42.880 again is very high margin where a lot of these 0:07:42.960 --> 0:07:46.640 parts suppliers you know, uh, butter their bread as they say. 0:07:46.720 --> 0:07:49.000 All right, well, you know, Joel, last point to you. 0:07:49.000 --> 0:07:52.480 You know, if if Rockwell Collins, if this deal happens. 0:07:52.800 --> 0:07:55.760 You think you're gonna see other deals. You're always gonna 0:07:55.760 --> 0:07:57.320 see other deal I mean, well, because you know this 0:07:57.400 --> 0:07:59.960 is like the consolidation. This is the special of the month, right, 0:08:00.160 --> 0:08:02.400 Everyone kind of gets in this fever of oh we 0:08:02.520 --> 0:08:06.760 gotta consolidate and then split right certainly in the arrows 0:08:06.760 --> 0:08:09.720 of the aerospace supply chain. I think you're you have 0:08:09.840 --> 0:08:12.520 to see consolidation happen because, as Doug was pointing out, 0:08:12.880 --> 0:08:16.680 as Boeing tries to become more vertically integrated, you have 0:08:16.800 --> 0:08:19.280 to be able to differentiate and push back on your 0:08:19.440 --> 0:08:22.040 on your client. Yeah. Well, thanks very much for being here, 0:08:22.040 --> 0:08:24.280 both of you. I really appreciated that. Joe Levington is 0:08:24.280 --> 0:08:28.080 our senior credit analyst for Bloomberg Intelligence. And Douglas Rothacker 0:08:28.160 --> 0:08:32.680 he is an aerospace defense analyst for Bloomberg Intelligence. And 0:08:32.760 --> 0:08:34.920 just by way of a kind of shout out to Boeing, 0:08:35.280 --> 0:08:38.480 they did a fly by that actually flew around the 0:08:38.559 --> 0:08:53.840 United States in the shape of a Boeing airliner. Paul Sweeney, 0:08:53.960 --> 0:08:56.880 he knows everything about the media and the Internet. He 0:08:57.000 --> 0:09:00.360 is our US Director of Research for Media and Internet 0:09:00.360 --> 0:09:03.720 Analysts for Bloomberg Intelligence and Paul thanks very much for 0:09:03.760 --> 0:09:07.160 coming in. I want to begin by just asking you 0:09:07.200 --> 0:09:10.199 about CBS and something with a T and T because 0:09:10.880 --> 0:09:13.200 remember when A T and T launched that direct tv 0:09:13.320 --> 0:09:17.599 now service, Well, they just reached an agreement with CBS 0:09:17.640 --> 0:09:21.040 because that will give them a lot more programming. Can 0:09:21.080 --> 0:09:23.000 we look forward to more of these kinds of deals 0:09:23.000 --> 0:09:25.199 and what's in it for for both of them? Yeah, 0:09:25.240 --> 0:09:27.160 I think we're gonna see more of these types of deals. 0:09:27.400 --> 0:09:30.079 And Direct TV Now is a streaming direct to consumer 0:09:31.320 --> 0:09:34.640 app similar to a Netflix and UM and it's kind 0:09:34.640 --> 0:09:36.440 of a little bit of a skinny bundle, if you will. 0:09:36.480 --> 0:09:38.960 But CBS just announced that they're gonna be part of it. 0:09:38.960 --> 0:09:41.120 They're gonna be on air. It's very good for direct 0:09:41.120 --> 0:09:44.280 TV now because CBS is the number one ranked broadcasting 0:09:44.280 --> 0:09:46.640 network in terms of total audience. So plus they have 0:09:46.800 --> 0:09:50.120 NFL football, So it's certainly a programmer and a source 0:09:50.160 --> 0:09:52.240 of programming that you want to have on your service. Uh. 0:09:52.280 --> 0:09:54.520 If you're CBS, UM, you're like a lot of these 0:09:54.559 --> 0:09:57.520 traditional media companies and you're trying to figure out, um, 0:09:57.559 --> 0:10:00.880 the business is changing, my viewer is are viewing my 0:10:00.960 --> 0:10:04.280 content on lots of different uh types of platforms. It's 0:10:04.280 --> 0:10:06.160 not just with the rabbit ears over the air like 0:10:06.200 --> 0:10:08.080 it was fifty years ago. It's not even just on 0:10:08.160 --> 0:10:11.520 cable television. It's now on satellite and now more and 0:10:11.559 --> 0:10:15.640 more it's now direct to consumer on some of these apps. 0:10:15.640 --> 0:10:18.080 And so I think, if you're CBS, you'r ABC, your Disney, 0:10:18.120 --> 0:10:20.240 you're all any of these players. You're trying to figure 0:10:20.280 --> 0:10:22.439 out do I need to be on all these platforms? 0:10:22.480 --> 0:10:24.160 If so, what do I need to get paid to 0:10:24.160 --> 0:10:27.199 make it worth my while? What happens to CBS, Because 0:10:27.880 --> 0:10:30.040 I know that you've mentioned in the past that CBS 0:10:30.080 --> 0:10:34.160 almost is like a standalone when it comes to programming content. Yes, 0:10:34.200 --> 0:10:36.559 CBS is a you know, it's it's the really the 0:10:36.600 --> 0:10:41.120 only standalone broadcast network, UM that investors can can play. 0:10:41.400 --> 0:10:43.760 The other broadcast networks are embedded in big media companies 0:10:43.800 --> 0:10:46.640 like Disney and Fox UM and CBS does own the 0:10:46.640 --> 0:10:49.920 Showtime premium net network as well. But if you're buying CBS, 0:10:49.920 --> 0:10:54.120 you're really buying a play on US broadcast television. UM. 0:10:54.160 --> 0:10:57.200 It's been a great business for them. Television advertising has 0:10:57.240 --> 0:10:59.520 generally been pretty decent over the last you know, coming 0:10:59.559 --> 0:11:02.080 out of the last ten years after the financial crisis. 0:11:02.280 --> 0:11:04.480 And what's really changed for the better for CBS has 0:11:04.520 --> 0:11:07.120 been a new revenue stream for them and for the 0:11:07.120 --> 0:11:11.400 broadcast industry, and that's retransmission fees. Uh. The broadcast networks 0:11:11.440 --> 0:11:14.720 are finally getting paid by the distributors the Comcast of 0:11:14.720 --> 0:11:17.520 the world to carry their programming. They never got paid 0:11:17.520 --> 0:11:20.600 for it before. Es Pianos got paid for their programming 0:11:20.640 --> 0:11:23.240 by the distributors, but the broadcast networks never did up 0:11:23.320 --> 0:11:25.840 until about seven or eight years ago. And CBS has 0:11:26.000 --> 0:11:28.760 really been a big beneficiary that that's been a driver 0:11:28.840 --> 0:11:31.120 of their revenue and profits. That looks to be a 0:11:31.120 --> 0:11:33.800 pretty good story going forward for CBS. So so why 0:11:33.840 --> 0:11:36.320 do you believe maybe the stock has not really performed 0:11:36.360 --> 0:11:38.160 that well this year. I mean the stock of CBS 0:11:38.280 --> 0:11:40.559 is basically unchanged. I mean that's not to say that 0:11:40.600 --> 0:11:42.920 hasn't had big moves. I mean this was, you know, 0:11:42.960 --> 0:11:47.880 a stock trading at fifty uh, let's say back in September. Yes, 0:11:48.080 --> 0:11:50.240 the media stocks, you know, they've had a great run 0:11:50.280 --> 0:11:52.760 over the last eight nine years after the financial crisis, 0:11:52.840 --> 0:11:54.600 but really in the last year or so, it's been 0:11:54.679 --> 0:11:56.880 kind of flattish and and year to date, you know, 0:11:56.920 --> 0:11:59.559 the media stocks are pretty flat up a little bit. 0:11:59.600 --> 0:12:02.199 But the real concerns are chord cutting. That is d 0:12:02.280 --> 0:12:04.880 number one issue out there for the media sector. If 0:12:04.880 --> 0:12:09.240 consumers really are cutting the chord in mass, everybody's economic 0:12:09.320 --> 0:12:11.920 model as is at risk. The affiliate fees that the 0:12:11.960 --> 0:12:15.600 content companies get paid, that's at risk. The advertising revenue 0:12:16.040 --> 0:12:18.880 that's built upon a large audience that can be delivered, 0:12:19.000 --> 0:12:21.160 that's at risk. And so what I think you're seeing 0:12:21.160 --> 0:12:23.480 media investors do today is try to pick some winners 0:12:23.480 --> 0:12:27.120 and losers within the group in general. Um, but right now, 0:12:27.120 --> 0:12:29.240 I think we've had a rough third quarter results coming 0:12:29.240 --> 0:12:31.559 out of the media sector. Maybe they can turn it 0:12:31.559 --> 0:12:33.880 around tonight with CBS, who tends to be very bullish 0:12:33.880 --> 0:12:36.959 about the prospects for the sector. Will see Disney tomorrow 0:12:37.000 --> 0:12:40.240 night after the clothes, see what it has to say. Uh, investors, 0:12:40.280 --> 0:12:42.360 they are particularly concerned about ESPN and the fact that 0:12:42.440 --> 0:12:45.920 chord cutting is having on the great ESPN. Anything on 0:12:45.960 --> 0:12:48.280 the horizon that you would point to as far as 0:12:48.360 --> 0:12:51.760 someone may be making an acquisition or a run at CBS. 0:12:51.800 --> 0:12:54.520 I mean, it's a twenty six billion dollar market cap 0:12:54.640 --> 0:12:56.320 right now. Right Well, we just had a you know, 0:12:56.480 --> 0:12:58.120 a big m and a trade in the media sector. 0:12:58.200 --> 0:13:00.600 Last week when Discovery Communications and out they are buying 0:13:00.600 --> 0:13:04.000 Scripts Networks Viacom, which is a sister company to CBS, 0:13:04.120 --> 0:13:06.400 it was rumored to be a buyer for Scripts Networks, 0:13:06.400 --> 0:13:08.880 which really caught people by surprise. Most people didn't view 0:13:09.000 --> 0:13:12.360 Viacom as a buyer. But ultimately, when you talk about CBS, 0:13:12.400 --> 0:13:15.320 you talk about Viacom, you're talking about Subner Redstone and 0:13:15.440 --> 0:13:18.679 his common ownership of both companies. And the question remains, 0:13:18.720 --> 0:13:21.520 does do these two companies should they be uh, you know, 0:13:21.600 --> 0:13:24.040 maybe in a better position if they were to merge, 0:13:24.040 --> 0:13:25.920 and remember they used to be together than they split 0:13:25.920 --> 0:13:28.400 apart about ten years ago. The question is now in 0:13:28.440 --> 0:13:31.239 a consolidating media world, in a world that's being disrupted 0:13:31.240 --> 0:13:34.679 by the Internet like Netflix, Um, do these companies need 0:13:34.720 --> 0:13:38.520 to be bigger, stronger, have more heft in the marketplace. 0:13:38.600 --> 0:13:41.679 If so, then the easiest transaction for both of these 0:13:41.679 --> 0:13:44.920 companies via common CBS to simply kind of merge back together. 0:13:45.120 --> 0:13:47.200 All right, now, you mentioned Disney, so let's move on 0:13:47.280 --> 0:13:48.840 to there because I want to get your thoughts on 0:13:49.240 --> 0:13:52.600 ESPN that has been both an achilles heel and a 0:13:52.640 --> 0:13:55.800 gold mine for Disney at different times. Right it it 0:13:55.840 --> 0:13:58.319 continues to be by far the largest profit generator for 0:13:58.360 --> 0:14:00.880 the Walt Disney Company, and really over the last twenty 0:14:00.960 --> 0:14:04.199 years it has been the most consistent profit generator for 0:14:04.240 --> 0:14:06.920 the company. Um, those days are over. UM. So what 0:14:07.000 --> 0:14:10.319 you have at Disney now is cord cutting h impacting 0:14:10.360 --> 0:14:12.480 the growth of their revenue, so putting pressure on their 0:14:12.480 --> 0:14:15.440 revenue growth. That's a problem, but it's compounded by the 0:14:15.440 --> 0:14:18.160 fact that their costs are primarily fixed. I mean, think 0:14:18.160 --> 0:14:20.240 about the cost for ESPN. You think about these huge 0:14:20.240 --> 0:14:23.280 sports contracts with the NFL, with Major League Baseball, with 0:14:23.280 --> 0:14:26.720 all the college sports U leagues around the country. Those 0:14:26.760 --> 0:14:29.120 are big, big ticket items and they are a fixed 0:14:29.120 --> 0:14:32.400 cost over many years. And so if you're at at ESPN, 0:14:32.480 --> 0:14:34.960 you're seeing your revenue pressured and your costs you know, 0:14:35.040 --> 0:14:37.960 continuing to go up. So that's a real profit issue 0:14:37.960 --> 0:14:40.360 for this company. It's been you know, really developing over 0:14:40.400 --> 0:14:43.200 the last two years, and quite frankly, investors are are 0:14:43.400 --> 0:14:47.000 very concerned about that. It's definitely impacted Disney, who you know, 0:14:47.080 --> 0:14:50.480 despite you know, the concerns at ESPN, the other two 0:14:50.480 --> 0:14:53.440 main businesses of the Walt Disney company. It's theme parks 0:14:53.880 --> 0:14:57.560 um and um uh it's movie business are both doing great. 0:14:58.040 --> 0:15:01.120 But again investors are really focusing on on ESPN. All right, 0:15:01.160 --> 0:15:04.480 you want to do Fox, uh, twenty one century Fox 0:15:04.520 --> 0:15:06.800 because they're waiting on a deal in the UK for 0:15:06.840 --> 0:15:10.520 a Sky Yeah. The next big trade for the twenty 0:15:10.520 --> 0:15:12.520 one century Fox and Rupert Murdoch. You know, one of 0:15:12.520 --> 0:15:15.000 the great media moguls is to get even bigger, and 0:15:15.200 --> 0:15:17.520 that is to own complete control of be Sky b 0:15:18.320 --> 0:15:20.920 which is this big satellite provider in the UK and 0:15:20.920 --> 0:15:24.440 in Italy and Germany. UM and that is being that 0:15:24.520 --> 0:15:27.320 is under review. It was he was kind of thwarted 0:15:27.360 --> 0:15:30.320 in this transaction about seven years ago. He's now come 0:15:30.360 --> 0:15:33.600 back and the expectation is that transaction will be approved. 0:15:34.040 --> 0:15:36.720 That would be a net positive for twenty one century 0:15:36.720 --> 0:15:38.960 Fox because a lot of those markets in Europe there's 0:15:39.000 --> 0:15:40.880 still more growth to go there in terms of pay 0:15:40.920 --> 0:15:43.840 TV subscribers. It is not saturated like the US market, 0:15:44.120 --> 0:15:45.720 and so a lot of investors believe that is a 0:15:46.000 --> 0:15:48.960 better organic growth market than the US. Right now. Hey, Paul, 0:15:49.000 --> 0:15:51.360 you know, as as something that's been doing this more 0:15:51.400 --> 0:15:53.520 really more years than I know, you care to care 0:15:53.560 --> 0:15:55.640 to admit, is can you give some advice to people 0:15:55.640 --> 0:15:57.720 that are trying to sort of value these businesses When 0:15:57.720 --> 0:16:00.680 you've got companies like Amazon getting into con tent and 0:16:00.840 --> 0:16:03.520 you know, music from from Apple and so on, it's 0:16:03.520 --> 0:16:05.600 hard to kind of get your fingers around this, it 0:16:05.680 --> 0:16:07.360 really is. I mean, we have, you know, the traditional 0:16:07.400 --> 0:16:10.520 metrics for media companies, whether that's price, price to earnings, 0:16:10.600 --> 0:16:13.440 or enterprise value. But those are well established and we 0:16:13.480 --> 0:16:15.800 know how to value you know, the Disneys of the world, 0:16:15.800 --> 0:16:17.720 in the Foxes the world, in the Comcast of the world, 0:16:17.760 --> 0:16:20.640 and we have historical benchmarks for when these stocks are 0:16:20.640 --> 0:16:23.680 expensive or when they're cheap given their growth outlook. But 0:16:23.760 --> 0:16:26.120 when you bring in some of these new disruptive stories 0:16:26.160 --> 0:16:29.440 like Netflix, like Amazon that are coming into the movie business, 0:16:29.720 --> 0:16:31.560 and you take a look at even at the internet companies, 0:16:31.600 --> 0:16:34.200 the Internet companies are more media companies than they are 0:16:34.280 --> 0:16:37.080 technology companies. They are driven by advertising revenue, and they 0:16:37.080 --> 0:16:40.360 trade at different valuation multiples multiples revenue, and it's really 0:16:40.360 --> 0:16:43.120 hard to compare. Thank you very much, Paul Sweeney. Here's 0:16:43.160 --> 0:16:46.400 our expert US Director Research, senior Media Internet analyst for 0:16:46.480 --> 0:17:02.640 Bloomberg Intelligence, Berkshire Hathaway. The shares are up nearly nine 0:17:02.720 --> 0:17:05.879 percent so far this year, but what will move them higher? 0:17:06.040 --> 0:17:08.480 Here to tell us more is Tara La Chapelle. Our 0:17:08.520 --> 0:17:12.320 Deal's column is for Bloomberg Gadfly and you can follow 0:17:12.320 --> 0:17:16.320 her on Twitter at Tara l. A c. H. Great 0:17:16.359 --> 0:17:18.920 to have you with us, Thanks for coming into the studio. UM. 0:17:18.960 --> 0:17:22.400 The report from Berkshire Hathaway last Friday not greeted by 0:17:22.400 --> 0:17:25.560 the market with much enthusiasm. But this is a company 0:17:25.560 --> 0:17:28.600 that has what a hundred billion dollars in cash right 0:17:28.600 --> 0:17:32.359 which is almost exactly why it's not being greeted with enthusiasm, ironically, 0:17:32.440 --> 0:17:36.200 because the results were a little lackluster. We saw another 0:17:36.280 --> 0:17:40.400 underwriting loss in the insurance division, dragged down overall results. 0:17:40.560 --> 0:17:42.800 So you know, the whole point of Berkshire's conglomerate is 0:17:42.800 --> 0:17:45.720 that all these other businesses offset the ones that are having, 0:17:45.960 --> 0:17:48.639 you know, going through difficult times, and this time it 0:17:48.680 --> 0:17:51.080 did drag down earnings a little bit um nothing to 0:17:51.119 --> 0:17:53.119 be concerned about, of course, but I think what it 0:17:53.160 --> 0:17:55.440 comes down to is they have almost a hundred billion 0:17:55.480 --> 0:17:58.159 in cash now and they're not really spending it, and 0:17:58.200 --> 0:18:00.520 so what are the high return opportunities out there, what's 0:18:00.560 --> 0:18:03.359 the reason to own the stock and what's Buffett thinking next? 0:18:03.840 --> 0:18:07.720 So what do you believe is necessary for Berkshire Hathway, 0:18:07.760 --> 0:18:13.320 Because you know they Burlington Northern Santa fe uh acquisition. 0:18:13.720 --> 0:18:16.720 They just got eight hundred million in cash in the 0:18:17.520 --> 0:18:21.240 from the railroad. Um. Also I understand you know that 0:18:21.400 --> 0:18:24.080 they want to be even bigger in the energy business. 0:18:24.080 --> 0:18:27.879 They're trying to acquire the Texas utility Encore, right, So 0:18:27.960 --> 0:18:31.240 that deal makes a lot of sense for Burlington Northern 0:18:31.320 --> 0:18:33.719 and that business has been great for them to total 0:18:33.760 --> 0:18:37.640 home run of an acquisition for Berkshire. But with all 0:18:37.680 --> 0:18:39.960 this cash, a deal like Encore, which I believe is 0:18:39.960 --> 0:18:42.600 around nine billion dollars, really isn't enough to move the 0:18:42.600 --> 0:18:45.160 needle that much anymore. It's it's great for that division, 0:18:45.240 --> 0:18:47.720 but overall, when you have a hundred billion dollars of 0:18:47.760 --> 0:18:50.600 cash and it's just sitting there with these low returns, 0:18:50.640 --> 0:18:53.960 it makes sense for Berkshire to start thinking about bigger acquisitions. 0:18:53.960 --> 0:18:56.120 I mean, we could see the fifty billion to even 0:18:56.119 --> 0:18:59.280 a hundred billion dollar range. Realistically, it's not crazy to 0:18:59.320 --> 0:19:01.200 think that they could do something like that. The problem 0:19:01.240 --> 0:19:04.359 is finding a target that's worth that price and would 0:19:04.359 --> 0:19:08.000 fit in with the conglomerate. Well, you mentioned in your 0:19:08.040 --> 0:19:10.640 story that you know, the equity investments that warm Buffett 0:19:10.680 --> 0:19:13.639 has made, whether it's craft Hinds, whether it's airlines, Apple 0:19:13.680 --> 0:19:16.360 and so on, that's all been they've done pretty well. 0:19:16.440 --> 0:19:18.399 Oh those have been great. I mean Apple, It's so funny, 0:19:18.440 --> 0:19:21.040 right because Buffett for so long was opposed to investing 0:19:21.080 --> 0:19:25.080 in things that really didn't um weren't his expertise industrial 0:19:25.119 --> 0:19:29.159 companies or insurance businesses, right, So to to have Apple 0:19:29.280 --> 0:19:32.480 be sort of this incredible investment for them, and in 0:19:32.560 --> 0:19:35.760 kudos to their UM investing lieutenants there. But it's just 0:19:35.840 --> 0:19:38.439 been really fun to watch. But even though those are 0:19:38.480 --> 0:19:40.400 doing really well again, it's like they need to think 0:19:40.440 --> 0:19:43.000 about a big acquisition to take in house, not just 0:19:43.119 --> 0:19:46.160 these equity investments that are doing well. But in doing 0:19:46.160 --> 0:19:49.480 your research, you find that investors in Berkshire Hathaway have 0:19:49.560 --> 0:19:52.240 a different criteria when it comes to what they do 0:19:52.320 --> 0:19:54.440 with their money. They want to be there because warm 0:19:54.480 --> 0:19:57.679 buffets there, right, And I think that's where the issue 0:19:58.280 --> 0:20:00.840 is now because if the and you own the stock 0:20:00.880 --> 0:20:03.199 is because Buffett can take that money that all these 0:20:03.240 --> 0:20:06.560 businesses are throwing off and invest it far better than 0:20:06.840 --> 0:20:08.600 your return would be if he had paid, you know, 0:20:08.680 --> 0:20:11.600 a dividend or was buying backstock at these levels. Then 0:20:11.640 --> 0:20:13.920 I mean, we're looking at this and we're waiting for 0:20:14.000 --> 0:20:16.199 him to do that, and there really hasn't been a 0:20:16.240 --> 0:20:18.840 whole lot of deal activity in the past year. So 0:20:18.920 --> 0:20:20.880 I mean, he did do the Precision Cast Parts deal. 0:20:20.960 --> 0:20:22.800 Now that's clothes. That's been doing very well for the 0:20:22.840 --> 0:20:25.720 manufacturing division. But it's like, Okay, well, what's next now? 0:20:25.760 --> 0:20:28.680 Because the reason the shareholder's own the stock is because 0:20:28.720 --> 0:20:30.239 they want to see him invest the money. And if 0:20:30.280 --> 0:20:32.920 he's not going to find a great target that's really 0:20:32.920 --> 0:20:35.440 going to move the needle, then it begs the question, 0:20:35.440 --> 0:20:38.399 you know, do does Berkshire start to pay a dividend? Right? 0:20:38.400 --> 0:20:41.000 But but I guess my point is do investor's care. 0:20:41.720 --> 0:20:44.400