Ryan Vaughan on Mergers in Media, Tech, and Telecom

Ryan Vaughan on Mergers in Media, Tech, and Telecom

00:00:00 → 00:01:20

Scott Wallsten: Hello, and welcome to Two Think Minimum. Today is Thursday, June 8th, 2023. I’m Scott Wallsten, President of the Technology Policy Institute, and I’m here with my co-host, TPI Senior Fellow and President Emeritus Tom Lenard. Today we’re going to talk a bit about mergers in the media, tech, and telecom space, building off the recent attempted Standard General-Tegna merger. As a little bit of background, Standard General, a hedge fund, had planned to purchase Tegna, a broadcaster with stations around the country, for about 8.6 billion dollars. The merger required FCC approval, since it involved transferring a broadcast license. SEC Chairwoman, Jessica Rosenworcel decided to send the matter to an administrative law judge without a vote which effectively killed the deal. The deal officially died a few weeks ago, when Standard General financing expired. There were rumblings that this happened because former House Speaker, Nancy Pelosi, intervened on behalf of a donor, but also once tried to purchase Tegna. We’re excited to talk about that and related issues today with Ryan Vaughan, who is senior tech media and telecom, or TMT, and event-driven desk analyst with Needham and Company Investment Bank. Ryan started his career on Wall Street in 2004 as a high yield and distressed bond analyst. He joined Lombard Odir Asset Management in 2008 as a senior analyst, investing primarily in TMT and consumer sectors across credit and equity. In 2016 he joined Needham, where he is today. Ryan, thanks for joining us.

00:01:20 → 00:01:22

Ryan Vaughan: Great, thank you, Scott. Glad to be here.

00:01:23 → 00:01:41

Scott Wallsten: So why don’t we just start off? Give us a little bit more background. Tell us about Tegna, and why you were following the deal in the first place, and how you and others on Wall Street viewed the FCC’s, let’s say, just lack of approval on it.

00:01:41 → 00:03:11

Ryan Vaughan: Yeah, so first things first, I picked up the broadcast TV space in 2010, and if you remember, for the next several years, there is kind of quite a bit of a M&A wave where you might have– I’m just gonna make up numbers– 30 or 40 smaller TV broadcasters. And I think they recognize the need for size and for scale, and you saw a series of mergers during that time. The big names that I’m sure you’ve heard of are obviously like a Tegna, Sinclair, or a great TV deck star and even scripts, for that matter, those are pretty much the last kind of 5 large standing TV broadcasters. Today they’re all public companies. And this transaction with Tegna had been contemplated late 2019 early 2020, right before the pandemic. At that point in time it was reported that Great TV was interested, who else? Obviously talks in Apollo were interested, Byron Allen, it was reported, was interested in the assets. And then we were also dealing with a Republican led administration at that time which we could get into if you’d like to, there certain ownership rules that the depending on who’s in charge are more mindful or respective of versus others, but fast forward, the pandemic hit things kind of went to the back burner to see where the dust settled, and then and I guess, what, the back half of 2021, rumors started to circulate that Tegna was back out there on the market. 

00:03:11 → 00:03:35

Ryan Vaughan: And you know the one thing about this one is that Standard General ended up, obviously being the winning bidder, but Standard General was involved in Tegna for years and years and years. At different points of time had a 10% stake. They actually went to different proxy fights. I should say it was quite a contentious relationship. And then, sure enough, the two sides came together. They announced the merger, and this would have happened in February 2022.

00:03:36 → 00:03:43

Scott Wallsten: And when that was when it was first announced, did you view the deal as effectively done? Did you, did you see any controversy on the horizon at all?

00:03:44 → 00:04:38

Ryan Vaughan: Yeah, it’s a great point. So to bridge from the back half of 2021 to the early parts of 2022 in my view, and probably the view of a lot of others is that it was really working out the mechanics. Like I said, we had a new chairwoman in place again, certain rules would be evaluated differently, the UHF discount. So the structure was important. So, as far as I’m concerned, I don’t know if it was so much Tegna board, saying, hey, no, we want 25 instead of 22 or 24. I think that part was probably a little bit easier. 24 was probably the right price, and you could look at like I said, a decade worth of transaction multiples to arrive at that price. I say all that because the most important thing was the structure which is what you were alluding to. And I I think people were well aware not to bring anything to the FCC that required the UHF discount. 

00:04:39 → 00:05:18

Ryan Vaughan: So the way that this was structured was that standard General and Sue Kim would be the sole voting owner of the new entity, and despite having the involvement from Cox, and Apollo, and other financial investment firms as well, they would own preferred stock that is non-attributable, i.e. therefore not going to brush up against those ownership rules, even though it might be, you know, a little bit, I shouldn’t even say it’s gray. I think they legally or correctly found a way to structure the transaction that would get approved– could get approved– based on the rules. 

00:05:19 → 00:05:45

Scott Wallsten: So let me just interrupt you for a second to take a little tangent here because I think a couple of things that you said here are particularly interesting, not even just for the Tegna deal. But I mean, you mentioned the UHF discount. So just, you know, to remind people what that is, but also it’s an example, I think, of how various regulations, whether they make sense or not, end up affecting, how investors think about what types of deals to come to Washington with in the first place.

00:05:45 → 00:06:50

Ryan Vaughan: Yeah. So first things. First, I think. From Jessica to every other current and former CC Commissioner, I think they would all agree that these UHF discounts just don’t fit in today’s media ecosystem. I think everybody knows that former Chairman Pai was, you know, evaluating going down that path, we that it from 39% ownership meaning, you’re only allowed to reach a certain percentage of the population. Do we raise it to 60? That was contemplated for a while. And I think it was probably, you know, this is going to take a lot of work. You’re going to need Congress to ultimately approve this. What’s the chance? And then, do you really open up that potential can of worms? And I don’t think they, I think, former Chairman Pai just said, look, we’re gonna honor. This is the rule, it’s the UHF discount. And I say that because, you know, there were a couple of transactions, larger transactions, like a Next Star Tribune that might reach 65 or 70 percent of the population, but on a UHF discount basis, and I’ll tell you what that means in a second, might only hit 39 percent, which which meets the criteria. 

00:06:51 → 00:07:30

Ryan Vaughan: So again, that rule goes back probably 20 or 30 years, and it just from, from the old days where you were gathering your, your signal, your feed from an antenna. Some signals were stronger than others. The UHF was stronger than the VHF. And because of that, if you owned a VHF station it would only count as 50 percent of the population, because it only could reach, you know, officially, unofficially, 50 percent of the population. But for a long time, that’s how transactions have gotten done. And I think everybody that is seeing what’s going on, we’re seeing the news lately with just about every major sport and media.

00:07:30 → 00:07:59

Ryan Vaughan: The fact that the TV broadcasters are still subject to this, they can only reach 39%, when Facebook has Facebook marketplace. That’s heavily local. I mean, we use it all the time, for example. And then Google obviously is local. I mean, the playing field is totally changed versus 20 or 30 years ago. But it’s, it’s still… it would take, you know, the FCC to pick up that issue and notice. Of course, rule making and go on that path. It’s going to take a long time, and it doesn’t appear that anybody would like to do that.

00:08:00 → 00:08:17

Scott Wallsten: Ok, so that we go back to the story. So they have to, no matter what the most efficient merger would be, they’ve got to structure it in a way that doesn’t run afoul of the UHF discount. Okay. So this old rule is affecting the way mergers have to take place, or at least be structured. Okay. Sorry. Sorry to interrupt you. I just thought that was an interesting sidebar there.

00:08:18 → 00:09:06

Ryan Vaughan: I often equate it to. Would it be any problem if one day, you know, Next Star, Tagna, Gray, or someone said, “Hey, I want to go buy a 10% stake in one of these public companies.” Would that be an issue? I don’t think it would be, in many ways. I think that’s kind of how they structured it. Sure, in an ideal world you would just put the two companies together and in front of Cox Apollo today. It’s not even that big. They don’t even own that many stations, they don’t reach that much. However, it’s above that 39%, and Standard General, who’s been around this space for what, I think, I think Sue Kim came into the space in ‘09. ‘08 or ‘09, if I’m not mistaken. He’s been around here. He owns TV stations. So I think this was just perhaps, again going to what you were asking, the structure that meets all of the rules.

00:09:06 → 00:09:13

Tom Lenard: But was that a major issue? And in referring it to an administrative hearing and essentially scuttling the deal, or was…

00:09:13 → 00:09:55

Ryan Vaughan: So maybe maybe I’ll start up with this because, forgive me, Scott, you had asked me before, what did people think initially? And it’s a good point, because any of the deals out here today, there’s an entire investment community, and I communicate with that community regularly, that evaluates merger deals. And what does that mean? You know, Company A is buying Company B at $40. It was trading at $30, and back in the news. It trades up to $36. But there’s that $4 spread that your traditional, long-time fundamental investor might say, “hey, look, you’re now in deal limbo for the next 12 months. That’s not really what I do. I’d rather reallocate that capital into other assets in the space.” 

00:09:55 → 00:11:20

Ryan Vaughan: So they sell it, and then in comes the merger, our, what we call community, that is sophisticated, experienced in dealing with regulatory matters. Among other things, you have to get financing and certain things like that, that will look to capture that last remaining what could be on, on, on super type deals one or 2%, or riskier deals, which maybe we’ll touch on a couple of them, could be as much as you know, I’m working on one that’s 50% today, for example. Again, it’s all a measure of risk and what the likelihood is a deal that gets done. And just again to answer your question on Tegna, I don’t really need to go back and look at it for saying I want to say it was always, maybe it was trading in the high single digit percentages initially, but it didn’t take long. I would say, for the majority of the time period it was trading at 15 or 20%, which is, it would be on the higher end of where spreads trade. And again, the spread is going to be a mix of the likelihood that a deal gets done on top of if it doesn’t get done? What that fundamental or or or should that deal break what the companies were? So it was trading for a while, I’d say, on average, 15, 20% for a majority of that, suggesting that investors were quite skeptical or concerned that this might not get through the FCC.

00:11:20 → 00:11:25

Scott Wallsten:  So then, was it less of a surprise to some when it was referred to the ALJ?

00:11:25 → 00:12:12

Ryan Vaughan: That’s a great point. I think that’s really important. I wouldn’t say it was a surprise, as much as how it happened. Let’s say it wasn’t surprising that the FCC didn’t want to approve it, it was really more surprising how they did that. And again, that would be the one thing, and in our merger community that would have caught some investors by surprise is just that they went through the media bureau, and I think we all know we had, we always have different points in time that we communicate with the Commissioners, and they’ve been very clear that larger transactions get reviewed at the commission level. And this is an 8.5 billion dollar transaction. So certainly this one would fall under that criteria, and we had some conversations along the way that suggested, yeah, that’s where it goes.

00:12:12 → 00:12:59

Ryan Vaughan: Each has their own team, and then each will vote. And obviously, I think, Tom, to answer your question. This is where Standard General, what Standard General was asking for, even until the very last days and hours, which is saying, just take it to a vote, take it to a vote, but they don’t want to go that way, and I think that was the surprise part in February 2023, where the media bureau then sent it to the ALJ. For us investors that have been around the space for a while, we had seen it once before for different reasons. But it was all perfectly clear. The intention was that we’re not going to approve it. Anybody can go look at how long the cases take at the ALJ. On average, it’s 12 or 15 months. So you know, to have 3 months from there to potentially get something done, it just, it wasn’t going to happen by way of the ALJ. 

00:12:59 → 00:13:08

Tom Lenard: Was the reason for doing that, because it was a split commission, they didn’t have a majority? I don’t know what happens if it’s a 2-2 vote on something like that. Which way does it go?

00:13:08 → 00:13:47

Ryan Vaughan: You know, Tom, it’s a great question, because we were hearing mixed things as well. At least one former Commissioner had said, “hey, 2-2 blocks it, or you can’t transfer it with 2-2,” but the one thing that Standard General has been arguing from the very beginning was just, give us a vote. Give us a vote. Which leads me to believe if they were to vote along party lines, it would still be 2-2, which kind of gets us to the same point, I think at the end of the day. I just did remember some other reason, Tom, whether it’s you can’t block it or you don’t want to be on the record having blocked it. It’s, it’s, it’s one of those two, as far as why they went the way that they did.

00:13:48 → 00:14:19

Scott Wallsten: Plus obviously, this was a huge blow to Tegna and Standard General, and anybody who had money riding on the deal. But if, if the surprise was really about process, then it also sort of suggests it may have caused investors concern about future deals. Or you know, big people, companies, investors, others think about what deals might go through at all. If you had an idea of how this would happen, how this is supposed to happen. And suddenly it happens in a different way. What does that do to how people think about these issues going forward?

00:14:19 → 00:15:21

Ryan Vaughan: So this one in particular versus some of the other major deals out there, not only require the FTC or the DOJ approval, but also require the FCC approval. So if I were to look at some of the large pharma deals. For example, if it’s the FTC slash DOJ that would need to approve it, there is no FCC component. So this one was a little bit more specific because it’s the transfer of licenses. So there’s no question. I talked to a lot of the TV broadcasters, the management teams there, and I started to wake them up. You know they’re all busy. They all have their own focuses during this time period of managing their own businesses. But to that exact point, I was saying, look, if this doesn’t go through like it definitely is gonna affect, you know, the perception, the valuation, potential access to capital and I think that’s probably why some of them took a little bit more of a close eye on on what was going on here. I think most would say, Hey, look at the way that they structured it. It should serve as a way for the FCC to approve it.

00:15:21 → 00:16:15

Ryan Vaughan: It didn’t. So the net coming out of this or going into it was certainly don’t bring any transactions that require the UHF discount, that’s number one, and then number 2, you know, if you’re going to get, you know, a little bit more complex with the structure, you’re gonna have a tougher time. But with that being said we could talk about ultimately why they went that path, you know what the reasons might be specifically. Because what they said, especially Thomas, you’re asking about the notice going to the ALJ, was the focus on the newsroom job cuts as well as cost to consumers. The rise of Retrans. However, Standard General could not have been more clear on remedy offers that say, hey, we’ll fix these. We’re not going to let anybody go for two years, no, we won’t let anybody go for three years, and it doesn’t take too much reading in the Wall Street Journal to realize that job cuts have been happening pretty regularly in a lot of these TMT companies today.

00:16:15 → 00:16:37

Tom Lenard: Well, and also that. But obviously, if you read the I’m sure you have the Wall Street Journal editorial page, you know, the allegation is that this was a highly political decision, and you know, for a variety involving various interest groups, the Communications Workers Union as well as major political contributors. So I mean, how did, how was all that viewed in the investment community?

00:16:38 → 00:17:52

Ryan Vaughan: I thought that this one, the way that they structured obviously Standard General, very sophisticated, been around the space for so long. They bought and sold stations before that they would know their way around navigating the FCC. Same with Cox and Apollo. Cox has been here for a long time. Apollo bought a large stake in Cox not too long ago, so I thought you know, they were savvy enough to put something forward that could get approved. But you know, I think in this case the whole political, I definitely underestimated. I started focusing more on okay, they checked the boxes for the structure. Right? It seemed to be that that should be okay. And then just having followed the space for so long, there’s always been such an emphasis on diversity. And that was really what I thought was going to be the catalyst to carry this. And I mean, look, thinking about new media versus old media, a lot of the old media, it just so happens to be owned or dominated or controlled by older white men. It just so happens to be. And I think it just might be, you know. Look at some of these companies that have been around for 10 to 50 and 100 years. It just, it’s that’s the way it is. 

00:17:52 → 00:19:36

Ryan Vaughan: And I thought that going into this, oh, wow! Asian American owner! as well as a female CEO. And again, I just don’t, I don’t really have any of my corporates that have that sort of set up today, and I really thought that would be something that would kind of win out so long as they, you know, whatever objections the FCC had, that they could solve those problems. But I thought that that would ultimately win out. And I ended up just being wrong. It, it just if that was the thing, that is it in the public interest? That’s the test, right ultimately, is it in the public interest? Once you’ve satisfied the ownership, and I think they did satisfy the ownership, is it in the public interest? And I really thought that part would win out. But, Tom, to get to your point. Yeah, there was clearly something more political here which I just guess I didn’t dig into whether it’s one of those buyers ties into one of the sides. I mean that I guess that was probably something that I just missed. I didn’t, I didn’t, I didn’t understand that part so much going into that. This is a far right leaning, new buyer. I I don’t know, I didn’t, I didn’t see it. I didn’t think of it that way, and even after being sent to the ALJ we saw parties on both sides come to defend Standard General. We saw the Senator from New Jersey. We saw obviously Ted Cruz and Kathy Rogers come out and support really just looking more into how the FCC handled this. But you saw it from both sides, so I didn’t see that going into it. But, but I think you’re, you’re absolutely right. Whether it was something political or something hedge funds, private equity, I don’t know. It was, it was a little bit, it’s a little bit surprising. But it’s certainly one of those two. 

00:19:38 → 00:19:47

Scott Wallsten: Do you, do you look at this and think, well, okay. So now, decisions are likely, does this mean decisions are likely to be more capricious and arbitrary going forward, or that this is a one off? 

00:19:47 → 00:20:18

Ryan Vaughan: It’s funny you say that because, conveniently enough, the day after the, the cover bid, Byron Allen, or one of the interested parties, was doing an interview with Bloomberg. It might have just been coincident timing. But he said, hey, I’m still interested. And I think, I know how to structure this, that it could– and again, I’m just paraphrasing– the structure that it would approve. And I think I would say the same thing where I think ultimately, whether it’s political or you know, the structure is something along or hedge funds be structure.

00:20:18 → 00:21:00

Ryan Vaughan: If you clean that part up, I do think he has it, he would have a better chance of, and I could go into detail on, on how that would work. But I don’t think anything would change bringing, you know, corporate A corporate B together. I don’t think that’s happening, right? Because they’re all like I said, they’re basically 5 that are larger ones that are, they’re all too big. They can’t come together without the UHF discount. That’s not happening. And then there’s just, there’s not that many other parties that are looking to get into TV today. So, so long way of saying, I, I think it can get done but, and maybe this was a little bit of a one-off. I do kind of feel that just because there is a better alternative structure, I think, having learned from this, that probably could get done.

00:21:01 → 00:21:27

Tom Lenard: So I just because, I was a little, I wasn’t exactly clear on what you were saying about the Byron Allen thing. Do you think that’s possible? He will come back after that he will, now that the other deal is that the standard general deal is that he will, he will come back. And  is he one of the parties? Are they one of the parties that could make the deal work and the fact that I mean, if you look at the political connections, the fact that the House is now in Republican hands rather than Democratic hands, what impact would that have?

00:21:28 → 00:22:29

Ryan Vaughan: Yeah, so like I said, I think there are just a limited number of potential buyers overall for the space we just haven’t really seen private equity here in, in a long time. Obviously, Apollo, a large investment fund, taking a stake in Cox. We just haven’t really seen too much PE. But with that being said I, I do think Byron Allen, the biggest issue, and and I’m sure you guys read about it along the way. I imagine Standard General probably would have stuck around to fight this longer if they had more time. The issue was they had affordable financing that was from February 2022 that was expiring in May 2023, and I say that because those rates today, and again I’ll make up numbers, it might have cost them 7 or 8% at that point in time. In February 2022 that would probably cost upwards of double digits. And when you’re borrowing on a, on a 8 billion dollar transaction, and you’re gonna borrow a huge, you know, 75% of it, maybe more. 

00:22:30 → 00:22:57

Ryan Vaughan: It’s still the that you know, 2 billion or 6 billion dollars times the difference of 5,

it’s, it’s substantial. And it kind of changes the whole thing. So I say all of that, because if you’re Byron Allen today and he’s potentially pursuing, I think he, I think he would. I think he still wants the assets, he sees value, and he wants to be larger in TV– these are his words, not my words. And he’s been consistent with that thing for a long time. The simple structure, as you call over to Cox and Apollo. All right, guys, which stations do you really want?

00:22:57 → 00:23:47

Ryan Vaughan: It’s 8.5 billion dollars. We know 24, 25 somewhere around there is plus or minus the right price that you already said, okay. But which stations? And let’s help kind of reduce that price a little bit, and, and make it a little bit more palatable for a buyer. I really think it’s, it’s sometimes in some way that simple. And then, you know, just being able to address some of those, whether they were really the issues, or they kind of cover for the issues. Again, the retransmission step up. This is standard. This is a contract. This is a contract between a TV station and a hundred billion dollar cable company. And, and all of a sudden it’s like, oh, wait! You’re raising. This is where I just, and I’m saying it in this way, because I’ve never seen that before. This is, I mean they don’t– the FCC has never really gone into contractual matters. 

00:23:47 → 00:24:55

Ryan Vaughan: They really want the parties just to resolve them. And again they’re, they’re a contract. If you don’t like it you should sign the contract, and I know I’m being overly simplistic when I say something like that. But that’s what it is. And it’s, it’s common when these companies come together, that you kind of reset your rates at whoever has the best, the better rate. One’s at $3 per month. Once, at $4 you’re going to jump to $4 per month. It’s been common for a decade. And does that ultimately affect the consumer? I mean, yes and no. But again, it’s a contractual matter. It’s an SEC matter, and I say that because the other issue was the with the like, you said the potential cuts at the station side of things that really spook, the the unions, the news guild that you know that to be fair, they are a relatively small percentage of the total employee base. I think it’s something like 10% or less. But certainly that appeared. Those two issues appeared to be the two that those that didn’t want this transaction to go through really leaned hard on as opposed to what might have been like you said Tom, maybe it was political. Maybe it was private equity, hedge fund, you know, as, as really kind of the dominating issues.

00:24:55 → 00:25:06

Scott Wallsten: I mean the job loss thing. Anybody who opposes a merger will bring that up because it’s a political winner for them, I guess. Even though, of course, if you’re talking about efficiency job losses, you know, improve it.

00:25:06 → 00:25:15

Tom Lenard: And just to just to be clear for people who you know this was not something that was of interest, particularly to the antitrust agents. Right?

00:25:15 → 00:26:16

Ryan Vaughan: They were not. Yeah, that’s a great point, Tom. So like I said, you needed to get the DOJ, and you needed to get the FCC approval, like in order for this deal to clear and to conclude. Standard General owns, I think, 4, 5, 6, stations, something like that, small market stations. And their rule is, it’s, it’s more of a market share rule. So if you own two stations in a market all of a sudden, you own 50 percent of the ad revenue in that market. They’re not going to allow that. That’s too much market share, for example. So it was never really a DOJ issue, even though that was kind of reported a couple of different times throughout this. And that’s what, threw a little bit of a curve ball into you know, us here as investors and me communicating with investors where the DOJ period expired, which means they the the deal was essentially clear from that perspective, Standard General started to run a bond tender because they’re getting closer. 

00:26:16 → 00:27:09

Ryan Vaughan: There’s a wait on the FCC. But the stock jumped from like $20 to $21.50 on a $24 deal, something a lot, and maybe you see a little bit better than that up to $22 because of the anticipation. Okay, they had DOJ, and if it was going to get sued it was probably going to get sued. Because that’s what we’ve been seeing a tougher regulatory overall from the FTC, DOJ. That came and went. I don’t think there was any case there. I don’t know what the case would be, again on market share. But then you got to, I think that that warmed people up. It provided the FCC with cover. Look, they approve. Now we’ll approve, I think there was some built up potentially, excitement. Or hey, we’re heading closer to a potential approval with the drop dead date happening in May. Then we got the curve ball Friday at 405. You know we see the Media bureau send it to the ALJ. That, that all happened within a week or so.

00:27:09 → 00:27:30

Scott Wallsten: How do you all view broadcasting as a business in general? I mean, I still, my brain updates so slowly, I still think of it just as they hold spectrum and that’s, that’s what their value is. But clearly it’s a lot more than that, right? I mean, there’s still, there’s some inherent underlying big market for broadcast. How do you, how do you look at that like? What’s the time horizon for broadcasters? 

00:27:30 → 00:28:30

Ryan Vaughan: Yeah, it’s, it’s a great point. And I remember first investing in the space. And I want to say it was what? 2012, 2011, and thinking, gosh! What does this business look like in 2013? And in 2013 thinking, what does this business look like in 2015? And here we are. We’re talking about broadcast in 2023 and Standard General, Cox, Apollo. Smart organizations that we’re willing to pay 26 billion dollars for this asset. So certainly some sort of see a lot of value in the ownership, whether it’s you know, your own stations. But your spectrum was definitely a unique catalyst several years ago, a lot of them were able to monetize that and bring in some attractive dollars. But the way to think about broadcast is that it’s heavily local. And when you think about where newspapers are today, when you think about yellow pages where it is, that it’s kind of one of the last standing ways to touch your local community in mass quantities and the business models are very straightforward, even though it’s a complex industry. It’s very straightforward, half the business is advertising.

00:28:30 → 00:29:30

Ryan Vaughan: The other half is just collecting fees from your cable or satellite, or what we call virtual, is like the Youtube, TV. So it’s happened half. And I say that because the half on advertising it’s very heavily local. So your local auto dealership, your local Services company, your local client store. That’s who’s advertising because they’re trying to hit those in the low community. So you know, it’s actually fared a lot better. And I think what’s really jumped out on that part of it is that just the amount of political dollars that continue to come to broadcasting and in record levels. So you could have easily seen it go in the other direction, which might have been a little bit of a signal that oh, okay, things are certainly slowing, we know. On the other side of the business board cutting has been happening and out there for years and years, and years. That’s certainly still there as that’s that’s turning over about 5, 6, 7% year over year. But yeah, it’s I know. I like, I told you guys at the onset, I I do a lot in the technology space.

00:29:30 → 00:29:54

Ryan Vaughan: If I were to reach out to 10 different investors, you know, I could probably get a lot of people’s attention on a software company that has a great future growing at 10, 15, 25%. Broadcast, you know, it’s a little bit different. It’s, it’s old, it’s old media. It’s a, you know, I think, those that do invest in the space, believe in the hyperlocal nature of that business, and that it’s here for many years to come.

00:29:54 → 00:29:59

Scott Wallsten: So, that means that it’s also benefited from the decline of local newspapers.

00:29:59 → 00:30:26

Ryan Vaughan: I think so. I think that yeah, I think it’s some of the other. Yeah, yeah, some of the other what I want to say, forms of distribution have changed. Radio, obviously, the radio still, okay. But you know, it seems like TV. And then, you know, you have, all, all the major sports get all the big, biggest numbers when they’re on broadcast TV, which is really helped out, and those deals are locked in for 10 years, for example, with the NFL, so that certainly helps. So yeah, it’s a combination of those factors.

00:30:26 → 00:30:41

Scott Wallsten: So we don’t have a lot of time left. But I know you, you follow lots of mergers. you know what’s one that you think is particularly interesting, that’s going to require either affirmative government approval or the government to not, to not block it.

00:30:41 → 00:31:45

Ryan Vaughan: Yeah, I was thinking about this, which one do I mention, because there are, you know, high profile, big pharma deals, or a couple of big tech deals out there. But maybe the easiest one to think about, and again, I’m gonna use a Needham name that’s been around for a long time is iRobot that’s getting purchased by Amazon. And I’m on using that, because then, who is listening to this? Everyone probably has a better idea what iRobot is and the Roomba. But we happen to have two in our house, for example, that clean the floors for us. But this was a deal that was announced in August. So let’s call it 10 months ago. It’s one that’s going to require FTC approval. It’s gonna require some European approvals as well, including the UK. But the buyer is Amazon, and there are two issues there. One is just the collection of data. So they know in my home again. I think, I think this is what the problem is. But I’ll say so. They know the square footage of my home. I suppose they’re in my home and all multiple floors. Something along those lines on the data side of things. 

00:31:45 → 00:31:50

Scott Wallsten: But then that’s public knowledge, anyway. Right? It’s all real estate records.

00:31:50 → 00:32:59

Ryan Vaughan: I– you think about, they have a security system. We have an Alexa in our home. I don’t know. I think it along those lines right of just it, being something tied into all those on the data side of things. And then the other side is on the competitive side. If Amazon is iRobot’s largest customer, they sell a lot of products on Amazon, would they disproportionately favor iRobot products relative to other, you know, robotic vacuums or automatic vacuums. Right again, I’m saying all this because iRobot’s are a really small, relatively small company. Granted, they do a billion dollars of revenue. But the total transaction is a billion seven. And again, in my world. I’ll just give you guys some of my numbers. Without this deal the stock trades at $40. If the deal gets done, you’re gonna get 61. So there’s a 20. There’s a, what is that? A 50% spread? if that deal gets done as I told you before, it really, if, if investors feel very highly confident it’ll trade it one or two percent. If investors are confident and concerned about– again, this is purely regulatory as well as balancing out what that company’s worth without Amazon’s bid.

00:32:59 → 00:33:29

Ryan Vaughan:. It’s, it’s the 2 prompt. But here’s an example. Same kind of thing in the UK. Has just opened up to phase one that they’ll look into this, this transaction and you know it’s one of those that I kind of scratch my head, as far as, however, you want to define that space. I don’t think it’s just robotic vacuums, and forgive me for continuing to use examples in my house, but you know we have a Shot Vac. We have a couple of MeLays. We have a couple Dysons, you know. You just go on and on, and we happen to have a couple of Roombas. So–

00:33:30 → 00:33:32 

Scott Wallsten: So you’re a vacuum cleaner aficionado. 

00:33:34 → 33:37

Tom Lenard: Your house would be very clean. 

00:33:49 → 00:34:04

Ryan Vaughan: It’s just one of those situations where you’re just surprised that there’s just that much risk. It’s been 10 months already. What is the FTC really looking into, concerned about, for example, but that’s one to monitor, and again, it’s not just the FTC, it’s the UK. As well, that they just opened up their phase one. There’s a lot of time left, and unlike Standard General that was running out of financing timing there, there’s no issue with Amazon, for example.

00:34:05 → 00:34:25

Scott Wallsten: So you know you’re being, you’re being very charitable and you’re thinking of possible competitive issues and so on. But you know we all know that, you know Chairwoman Kahn built her career on an anti- Amazon platform. I mean, that was her famous Yale Law Review article. Do investors worry about that? That that’s something she’s going to pay particular attention to, just because it’s Amazon?

00:34:26 → 00:35:22

Ryan Vaughan: 100 percent that. That’s the dominating factor, the one issue here in the US. It all comes down to the FTC regulatory whether or not they will allow this transaction to go through. Like I said, if you drill down a little bit deeper, it’s the data side of things as well as the competition side. If they would be one of the one of those two issues where I think they would, you know, sue on. But yeah, it certainly comes back to Amazon overall, and probably the view: too big, too powerful, etc., etc. And look, I use this example sometimes, and, by the way, I don’t have any skin in the game whatsoever. But when Amazon went out and bought Whole Foods. You know, I lived in New York City for 15 years. You know, Whole Foods, it’s just really expensive, you know. It was the best. It was one of the best out in Union Square and really, really expensive. But now, like, since it’s been under Amazon’s umbrella, and again, I’m not hyping Amazon as much as it’s actually benefiting consumers in a great way. 

00:35:22 → 00:35:45

Ryan Vaughan: When you think about the iRobot, the Roomba, for example. They’re high price points. I’m pretty sure that Amazon will probably find ways to cut that 8 or 800 or 1,000 dollars down to 500 or 600 or 200 or 300. So if you really want to peel back the onion I honestly think it’s a beneficial transaction for consumers, for that reason.

00:35:45 → 00:35:35

Tom Lenard: So what I haven’t been following. What, what stage is this at? Has, has Amazon made an offer? Or has there been a second request for data? Is there? I mean, what stage is it at?

00:35:35 → 00:36:22

Ryan Vaughan: Yeah, it’s a great point. So yeah, you so, Tom, to answer your question, Explicitly. There was a second request that time has now lapsed, and I believe it was last week. I don’t remember exactly what the date was that Amazon confirmed that they put forward all the necessary documents. I forget exactly which day it was. But  now I believe there’s unofficially, like a 30 day period where the FTC. Can come back and make some decisions. That’s where we stand here in the US.

00:36:22 –-> 00:36:26

Tom Lenard: So we’ll know soon whether they’re going to try to challenge it right? 

00:36:26 → 00:37:06

Ryan Vaughan: Right, so find out over the next few weeks, whether or not they try to challenge it, and then separately in the UK. They, I want to say, about a month ago, a month and a half ago maybe, they opened phase one of their review, which is more than likely to go to phase 2. Phase one, tt’s probably not too dissimilar. It’s a shorter period, and then phase 2 can take anywhere from what? Four to six months, something along those lines so net, net we could be toward the end of the year before we get official approval. But to answer your question, Tom, where we’re at in the US. I believe it was just last week that we got news that Amazon has submitted all of the necessary information. FTC has that today.

00:37:06 → 00:37:17

Scott Wallsten: So I mean the FTC right now has 3 Democrats and no Republicans. Do investors worry about that sort of thing, or do they figure, you know, if you’ve got 3 votes, you got your 3 votes, and the dissents don’t really matter, anyway.

00:37:17 → 00:39:05

Ryan Vaughan: Yeah. So it’s interesting, because I would say mindset has shifted so much in M and A around regulatory. That the question is not even at this point are you gonna get a second request. It’s almost like a given. You’re gonna get a second, like if you don’t get it, if you don’t get a second request, you’re almost like, you know, in surprise. But I say all of that, because it just comes down to how strong is their case. Right? And are the buyers willing to argue in court for the merits of their transaction? So that’s in many ways, especially these big pharma deals. For example, we just saw that with Horizon. And AmJen, for example, that the FTC, I want to say, what was that a couple of weeks ago that they are suing to block, and for the stock went, you know, went down 15 percent that day. Definitely caught people off guard any time you see a move like that. But you also sit there and you wait. You, you say, wait! A second is, AmJen going to fight this or not? The buyer, and sure enough, they said they would. And then you know what’s important is who’s going to be the judge? And you start thinking about some of these things. And that one started to come up a little bit. Still, you know, $100 stock today, which means what? Which is left on this one, Horizon. Still, 17% spread today. So still, quite quite a bit of a spread there. But yeah, now that’s gonna go to the judge, and we’ll see how strong is the case. So I guess the easiest way to answer, I think second requests are almost really expected at this point. And then it really comes down to how strong of a case do the regulators have in court. So I think that’s something that investors are weighing heavily much earlier than what we had ever really seen before.

00:39:05 → 00:39:09

Scott Wallsten: Is that affecting the types of mergers that are being proposed, or are sought?

00:39:09 → 00:39:56

Ryan Vaughan: For sure. I think you don’t know for sure. But Murk was looking to buy C Jen, I think this is sometime, last year I think they had some conversations. Whether it’s been asked or the ability to get regulatory clearance. They ended up walking away. Pfizer came in in March, and ended up announcing a transaction. Same kind of thing. You know, 40 billion dollars, it’s a huge number. It’s big pharma. But as far as overlap, I think the investment community feels pretty good about where they’re at, as far as what could, they could potentially point to what kind of novel theories and what what, what are some other things that will they hold up in court. So there are a ton of. I mean, it’s not as close to like the black night in Intercontinental Exchange. That’s another name. Similar type of situation that we’re waiting to see, you know what happens in court.

00:39:56 → 00:41:24

Ryan Vaughan: So there are a lot of these. This is definitely totally different than what we’ve seen before. And obviously our focus here is in the US but even in the UK right now, with this Microsoft Activision in the UK, I won’t go into too much detail, but they found the reason to block on cloud where the gaming industry is going potentially in 5 to 10 years. But Microsoft’s not stopping. I mean, they are taking out top law firms, the top senior executives are flying over to the UK to meet with anyone and everyone. So we’ll see what happens there. I say that because we all know Microsoft, one of the most, the biggest and most valuable and and most powerful companies in the world, and we’ll see if they’re able to find a way to get that done. But that’s another situation, you know, 19% spread expires, you know, sometime over the next couple of months. So you know, a lot of these names, big spread, big regulatory risk, it’s really just the common theme where we are today. And probably why, you know, I would say, it’s two issues overall why more M and A is not happening. One is access to financing as I’m sure you guys are seeing what’s happening with interest rates, or just a lot more you know, high yield rates are, you know, 8 and a half percent, which means you’re probably borrowing at, you know, 10-12 percent for new deals. And then the uncertain regulatory. How long is this going to take? And what’s the likelihood it gets challenged? And do we really want to take that on right now? I think that’s why you’re not seeing as much.

00:41:24 → 00:41:29

Scott Wallsten: I imagine if you’re Lina Khan, you look at that and say, that’s great. That’s what I wanted.

00:41:29 → 00:42:01

Ryan Vaughan: Yup, Yup, and you know, that was the thought. Even with C. Jen, would they, would Pfizer, move forward with something like that, and they said, hey, we’re willing to take that risk. And again we talked at the onset about the airlines, for example, you know, JetBlue and Spirit’s out there. So yeah, it’s an unusual environment. Maybe some feel more confident than others. But I think anybody that’s entering any definitive agreement recognizes that like, expect more challenges, expect more time and more scrutiny. Obviously.

00:42:01 → 00:42:19

Tom Lenard: But I was just curious about whether you think and it may depend on the industry or the particular particulars of the merger, you know, hypothetically, if a deal was blocked in the UK but not elsewhere. Oh, in particular, not in the US. Would the transaction still be likely to go through, or would it be effectively blocked? I guess it is probably industry specific. 

00:42:19 → 00:43:11

Ryan Vaughan: Yeah, yeah, it’s a good question. Let me answer it this way. Technically, you need to get every regulatory body to approve. Sometimes you don’t get a decision and the parties just close. We’ve seen that before. In this case, with Microsoft and Activision we’re seeing the lengths that they’re willing to go to. And, by the way, they don’t have US approval, and US approval is going to be challenging as well. I think everyone’s watching to see. The EU said okay, the European Commission said, okay, waiting on the UK, and the US is probably gonna just see what happens there first. But The fact that Microsoft’s spending so much time there, I mean, do they see doing business, and some of that? I don’t know. I don’t know if that’s possible. I don’t. I don’t. Obviously it becomes a lawsuit and that’s what happens here in the US, certainly. And I imagine it’s similar.

00:43:11 → 00:43:23

Tom Lenard:  I mean, you could visualize with this sort of maybe a simpler product like vacuum cleaners or robotic vacuum cleaners, you could say, well, we’re just we’re just not gonna I mean– this is hypothetical– we’re just not going to sell vacuum cleaners in the UK.

00:43:23 → 00:43:24

Ryan Vaughan: Right.

00:43:24 → 00:43:25

Tom Lenard: I guess…

00:43:25 → 00:44:01

Ryan Vaughan: I think that’s possible.I think that I think it… it’s possible again. Then it would come down to the buyer right? Thinking, assuming, that’s okay. Comes down to the buyer. Are they saying, are they willing to say, hey, you know, we agreed to pay this price. However, we just lost 10% of our business like… I don’t see it very often. I remember with Google and FitBit. They just never got anything back. They never got a decision. They just closed it, you know, it was one of those those situated, it was here in the US. Something I was thinking about. But yeah, I think that’s why, there are these processes there. There is a legal system for potential buyers.

00:44:01 → 00:44:20

Scott Wallsten: The UK does specialize in shooting itself in the foot these days, so you never know. We should definitely leave it there. Ryan, thank you so much. This was really interesting. It’s like hearing about the interactions between Wall Street and DC, and the effects of regulations. Really appreciate your time.

00:44:20 → 00:44:22

Ryan Vaughan: Great thanks. Thank you.

Share This Article

View More Publications by Thomas M. Lenard, Scott Wallsten and Ryan Vaughan

Recommended Reads

Related Articles

Sign Up for Updates

This field is for validation purposes and should be left unchanged.