Tidbits

[ValueArb]

No idea what happened here, but it sure seems like a self inflicted trainwreck by Bhargava to destroy a business he was buying before he finished buying it.

 

Quote

The Arena Group Holdings Inc. is a small publicly traded media company that owns titles including TheStreet, Parade and Men’s Journal. Since 2019, it has also published Sports Illustrated, though it doesn’t own it: The Sports Illustrated brand is owned by a thing called Authentic Brands Group, which acquired it in 2019 and then licensed it to Arena for 10 years.[1]  So Arena “owns” the magazine; it employs the people who write and publish it and runs its website. But Authentic owns the “Sports Illustrated” brand and its intellectual property, and Arena pays Authentic some rent for the rights to use the name. The rent is $15 million per year.

 

As of last summer, Arena had an equity market capitalization of around $100 million. Its chief executive officer was Ross Levinsohn, a longtime media executive, and about 40% of its stock was owned by affiliates of B. Riley Financial Inc., a financial services firm that has come up around here before. B. Riley also owned most of Arena’s debt, in the form of $110 million of bonds.

 

And then in August Arena signed a letter of intent to merge with a company called Simplify Inventions LLC, which was founded and run by Manoj Bhargava, “founder of 5-hour ENERGY,” the caffeine shot or whatever. The deal was sort of complicated: Simplify and Bhargava would not just buy Arena, but would instead merge some of their media assets (“the video programming, distribution, and production assets of Bridge Media Networks, including its two 24-hour networks, NEWSnet and Sports News Highlights, as well as the automotive and travel properties Driven and TravelHost”) with Arena, invest $50 million of cash, and commit to buy $60 million worth of advertising over five years for “a group of consumer brands also owned by Simplify, including 5-hour ENERGY.” In exchange for the assets, cash and advertising, Bhargava would get control of Arena.

 

On Nov. 5, they signed a merger agreement for the deal; under the agreement, Bhargava (through Simplify and 5-Hour International Corp.) would end up owning about 65% of the post-merger company. The $50 million cash investment would partly buy common stock at a stock price of $5 per share, a premium to the stock price ($3.86) at the time. The merger hasn’t closed yet, though; in particular, Arena’s shareholders have to vote on the deal before it can close, and Arena hasn’t yet filed the proxy statement for that vote.

 

But then Bhargava … got antsy? I don’t know. On Nov. 30, he bought all of B. Riley’s Arena stock and bonds, paying about $27.3 million ($2.90 per share) for the stock and about $78.8 million (70 cents on the dollar) for the bonds. The stock closed at $2.32 that day, so Bhargava was paying a premium for the stock; the bonds don’t trade — B. Riley owned them all — but it, uh, seems fair to say he paid a premium for them too. At this point he became effectively the controlling shareholder of Arena, with about 44% of the stock. And on Dec. 1, in connection with that purchase, two B. Riley-appointed directors stepped down from Arena’s board and were replaced by two Bhargava-appointed directors.

 

Simplifying to the end of the story.

 

Quote

And then he made himself CEO for about three weeks, and in that time he fired the executives, put the company into default on its debt (to him?), and stopped paying the rent on its main asset, the right to publish Sports Illustrated, causing that asset to disappear (and turn into a $45 million debt). And now all of Arena’s stock is worth less than $20 million, and it sure looks like Bhargava overpaid. Twice? 

 

[Spekulatius]

@ValueArb $RILEY involved in this as well. They seem to have a knack to align with dubious characters.  Marc Cohodes is on them and think it’s a terminal short. Wouldn’t mind seeming them becoming roadkill personally.

Edited January 24 by Spekulatius

[Sweet]

I think the risks mentioned here, not the prescription, are about right:

 

I remember Buffet one time said that the value of Berkshire would rise when he and Charlie dies on the prospect of it being split up.  Not sure that’s true anymore - the value rising part.

Edited January 24 by Sweet

[bizaro86]

I think reducing the size of the investment portfolio would be a good choice for a post-WEB world. I'm not sure about the "paying capital gains" taxes part of it, that doesn't seem like a great plan to me. 

 

If their insurance subs are overcapitalized, couldn't they move a chunk of Apple to the holdco, and then do a swap with shareholders for their BRK shares on a tax free basis? That seems like it would function as a buyback, reduce concentration in Apple (which is no longer cheap, imo), and reduce the size of the securities portfolio which helps the successor be successful. 

[gfp]

It's funny how much ink is spilled obsessing over Berkshire's "Apple problem!"  Like an investment working out perfectly and (perhaps) getting ahead of itself is some kind of big problem.  I don't think Buffett frets about the position being $177 Billion.  I think the rest of Berkshire will continue to get larger and nobody will care about $177 Billion any more.  The numbers are going to get larger.  When Berkshire is allocating capital over a $2 Trillion asset base and Apple is 15% of it and still buying in shares and growing their dividend I don't think people will obsess over the insane 15% concentration.

 

Imagine Warren makes a new public market investment with a $50 Billion cost basis this year.  That would not be unexpected or crazy.  You would hope it would work out and be a good investment.  So you would have another huge $200 Billion problem to obsess over!

 

Some things at BRK never change.  #numberGoUp

[hasilp89]

22 minutes ago, gfp said:

It's funny how much ink is spilled obsessing over Berkshire's "Apple problem!"  Like an investment working out perfectly and (perhaps) getting ahead of itself is some kind of big problem.  I don't think Buffett frets about the position being $177 Billion.  I think the rest of Berkshire will continue to get larger and nobody will care about $177 Billion any more.  The numbers are going to get larger.  When Berkshire is allocating capital over a $2 Trillion asset base and Apple is 15% of it and still buying in shares and growing their dividend I don't think people will obsess over the insane 15% concentration.

 

Imagine Warren makes a new public market investment with a $50 Billion cost basis this year.  That would not be unexpected or crazy.  You would hope it would work out and be a good investment.  So you would have another huge $200 Billion problem to obsess over!

 

Some things at BRK never change.  #numberGoUp

100% Wasn't Coke some significant part in the past?

 

it's really a broader problem (and this has ticked me off for years now). It's the fact that people think they know better than Warren when it comes to BRK.

Sure you want to give some parenting or spouse advice, yeah maybe i'll listen. But about how to run Berkshire Hathaway. Seriously? The guy built this enduring business with 1 trillion of Assets from practically nothing. He knows it better than anyone. Probably won't ever be done again. Even more he's built it specifically to endure long after he's gone.

 

And still every year or so some joe shmo or barrons chump comes along and thinks they know better than him. They come along and make a grand recommendation of how he should restructure the company or portfolio. It really is one of the more asinine topics to venture into. i think the people that do so are relegating themselves to the intellectual level of primates. 

Edited January 25 by hasilp89

[Sweet]

It’s not that it’s a ‘problem’ it’s whether it’s the best use of Berkshires money.

 

Somebody else said on the board recently that Apple might be the new Coke for Berkshire - Spek I think.  Fair enough.

 

But the SP-500 has outperformed KO for over 30 years, and by a significant margin in the past 20 year or less.

 

Apple isn’t growing much at the moment and sitting at a PE of 30.  That 177 billion could be sub-100 billion if revenue or earnings don’t start growing again.

[Gregmal]

Nothing screams “I do not value my time, at all” quite like someone indicating they’ve spent time trying to find a reason to short Berkshire Hathaway. 

[gfp]

Well the fastest and surest way to destroy a bunch of money would be realizing a $140 Billion capital gain and paying the tax to the treasury.  There goes $30 Billion that won't work on your behalf ever again.

 

So now he's turned $177 Billion of Apple stock into $147 Billion in cash.  Now what?  He is not in any way constrained by his cash levels when it comes to buying back Berkshire shares currently.  God forbid he invests the $147 Billion in a stock that might go down!

 

Pretend this chart is the pretax earnings of a wholly owned Berkshire subsidiary like the Railroad or something.  Pretend it's called Acme and Berkshire bought it in 2018 and it's doing well.  There is no daily quote or capital gain or deferred capital gains tax, just a wholly owned subsidiary that is doing well.   Would you think it was a problem?  Would you need to IPO BNSF for $140 Billion in taxable cash tomorrow just because you could?

 

Warren spends so much time with Ted and Todd discussing what really makes a good business.  They are super rare and even rarer at size.  Not easy to replace.

 

 

[LC]

Well, he could do another tax free swap similar to what happened with Berkshire and Graham holdings.

 

I wonder - could Berkshire fund a credit line to Apple, allowing Apple to buy some asset(s) Berkshire desires (perhaps including Berkshire's own stock). And then they can affect a tax free swap?

[Sweet]

I once had a fat gain on options which I was desperate to split across years for tax purposes.  So I waited and exercised them.  I ended up waiting too long such that any savings I might have made in tax was lost many times more in not just selling earlier.  So it’s easy to make the exact argument you just made in the moment but it can be a mistake even just a few months later.

 

18 minutes ago, gfp said:

Well the fastest and surest way to destroy a bunch of money would be realizing a $140 Billion capital gain and paying the tax to the treasury.  There goes $30 Billion that won't work on your behalf ever again.

 

So now he's turned $177 Billion of Apple stock into $147 Billion in cash.  Now what?  He is not in any way constrained by his cash levels when it comes to buying back Berkshire shares currently.  God forbid he invests the $147 Billion in a stock that might go down!

 

Pretend this chart is the pretax earnings of a wholly owned Berkshire subsidiary like the Railroad or something.  Pretend it's called Acme and Berkshire bought it in 2018 and it's doing well.  There is no daily quote or capital gain or deferred capital gains tax, just a wholly owned subsidiary that is doing well.   Would you think it was a problem?  Would you need to IPO BNSF for $140 Billion in taxable cash tomorrow just because you could?

 

Warren spends so much time with Ted and Todd discussing what really makes a good business.  They are super rare and even rarer at size.  Not easy to replace.

 

 

 

[thepupil]

1 hour ago, Gregmal said:

Nothing screams “I do not value my time, at all” quite like someone indicating they’ve spent time trying to find a reason to short Berkshire Hathaway. 

 

I don't think he's short. I wouldn't mind if Berkshire indexed a portion or some other form of diversified equity ownership. I mostly agree w/ the authors points. 

 

Berkshire trades for 1.6x book. AAPL stake net of DTL is about 28% of the book value. So for that 28% of the book value, one is paying like 45x earnings. Of course some of the subs aren't worth book (rathe rfar more) and the liabilities are favorable (DTL / insurance / etc) so this is the least favorable way to look at it, but it is nevertheless quite richly valued at 30x and via Berkshire one is payinga big premium to that. 

 

I've sold a fair bit of Berkshire over last year for both my and family's account. been an issue in particular for family. Have ~4% in AAPL that's up 15x and 18% in Berkshire up 2.5x,  and some QQQ as well...have to watch the look through aapl becoming too big at a seemingly stupid valuation and less painful to trim the berkshire..plus the aapl's been trimmed enough...we also use the the AAPL for donations  as another way to trim.

 

In the past when, I've done more detailed work on Berkshire, have always thought it should trade 1.8x-2.0x times (this was a combo of DTL/insurance franchise/writeup of Berkshire Energy/BNSF etc); and I've owned it for 12/14 years because it was always pretty reasonably priced.

 

But the AAPL makes me think the multiple should be lower. 

 

Edited January 25 by thepupil

[gfp]

18 minutes ago, Sweet said:

I once had a fat gain on options which I was desperate to split across years for tax purposes.  So I waited and exercised them.  I ended up waiting too long such that any savings I might have made in tax was lost many times more in not just selling earlier.  So it’s easy to make the exact argument you just made in the moment but it can be a mistake even just a few months later.

 

 

 

Because number might go down on a brokerage statement?  This isn't an options position.  The company isn't going poof anytime soon.

[gfp]

Sometimes it's just best to let Warren and Charlie explain it themselves -

 

[Sweet]

9 minutes ago, gfp said:

 

Because number might go down on a brokerage statement?  This isn't an options position.  The company isn't going poof anytime soon.

I said I exercised the options, so no, it was ended up a stock position that took a big dive whilst I was trying to be clever by splitting it between tax years. 
 

Edited January 25 by Sweet

[Sweet]

4 minutes ago, gfp said:

Sometimes it's just best to let Warren and Charlie explain it themselves -

 

That’s not like the question and discussion we are having about Apple which is one of valuation and future returns.  They answered a question about portfolio concentration.  No doubt it’s a great company, and no doubt Berkshire would have a problem deploying 140 billion if they sold, but the question is - Apple, flat revenue, 32 PE?

[gfp]

I guess you folks are just going to be disappointed then 

[thepupil]

12 minutes ago, gfp said:

I guess you folks are just going to be disappointed then 

 

I don't really think it's anything to be disappointed about, but rather a risk people can decide they want or don't want and people can bear the consequences because at the very least Berkshire's stand on the matter is pretty clear. 

 

Even indexers have to watch their concentration these days... 

 

[Munger_Disciple]

Berkshire shareholders can hedge Apple position by buying deep out of money puts if it is really concerning. But really, it is not like Coke position at its peak, much smaller as % of book value. And Apple while overpriced currently has better long term prospects than KO had in 1998.

Edited January 25 by Munger_Disciple

[Sweet]

4 minutes ago, Munger_Disciple said:

Berkshire shareholders can hedge Apple position by buying deep out of money puts if it is really concerning. But really, it is not like Coke position at its peak, much smaller as % of book value.

what % was the coke position at the peak?

[Munger_Disciple]

15 minutes ago, Sweet said:

what % was the coke position at the peak?

 

46% at the end of 1997. 

Edited January 25 by Munger_Disciple

[ValueArb]

3 hours ago, hasilp89 said:

100% Wasn't Coke some significant part in the past?

 

it's really a broader problem (and this has ticked me off for years now). It's the fact that people think they know better than Warren when it comes to BRK.

Sure you want to give some parenting or spouse advice, yeah maybe i'll listen. But about how to run Berkshire Hathaway. Seriously? The guy built this enduring business with 1 trillion of Assets from practically nothing. He knows it better than anyone. Probably won't ever be done again. Even more he's built it specifically to endure long after he's gone.

 

And still every year or so some joe shmo or barrons chump comes along and thinks they know better than him. They come along and make a grand recommendation of how he should restructure the company or portfolio. It really is one of the more asinine topics to venture into. i think the people that do so are relegating themselves to the intellectual level of primates. 

 

This is just an appeal to authority argument. Sure Buffett is the greatest investor of all time, but he isn't perfect. If we can't use the tools he's taught us to critique his own decisions, then we are just cultists.

 

One of his innate biases that have hurt Berkshire returns the last 40 years is that he prizes its size above its returns, he views it as his "painting" and has favorite positions he never sells. Coke is a great example . He bought at 16-18 PE, and over the next decade he made 10x his investment while it's PE grew to 45, well above any rational measure of intrinsic value, even discounted for tax costs. What did he do? He held, and his Coke returns have stunk ever since. 

 

It's reasonable to question whether he is repeating this mistake with Apple. The last 9 years revenues have grown 20%. Not per year, 20% total. You might say, that's okay, the Apple story is great profitability and great capital allocation growing earnings much faster than revenues. But earnings peaked two years ago, and TTM earnings are a third of the peak. You can only squeeze out so much more margin over time, esp. when the DOJ and EU are trying to legislate your business model. 

 

That enormous size traps him into positions like Coke and Apple and forces him to "hold forever". Its great he finally started doing share buybacks but he missed far better prices over the proceeding decades where he refused to do buybacks. Buybacks that would have made Berkshire a lot smaller, more nimble and created significantly higher returns today. 

[Munger_Disciple]

9 minutes ago, ValueArb said:

 

This is just an appeal to authority argument. Sure Buffett is the greatest investor of all time, but he isn't perfect. If we can't use the tools he's taught us to critique his own decisions, then we are just cultists.

 

One of his innate biases that have hurt Berkshire returns the last 40 years is that he prizes its size above its returns, he views it as his "painting" and has favorite positions he never sells. Coke is a great example . He bought at 16-18 PE, and over the next decade he made 10x his investment while it's PE grew to 45, well above any rational measure of intrinsic value, even discounted for tax costs. What did he do? He held, and his Coke returns have stunk ever since. 

 

It's reasonable to question whether he is repeating this mistake with Apple. The last 9 years revenues have grown 20%. Not per year, 20% total. You might say, that's okay, the Apple story is great profitability and great capital allocation growing earnings much faster than revenues. But earnings peaked two years ago, and TTM earnings are a third of the peak. You can only squeeze out so much more margin over time, esp. when the DOJ and EU are trying to legislate your business model. 

 

That enormous size traps him into positions like Coke and Apple and forces him to "hold forever". Its great he finally started doing share buybacks but he missed far better prices over the proceeding decades where he refused to do buybacks. Buybacks that would have made Berkshire a lot smaller, more nimble and created significantly higher returns today. 

 

Actually Buffett (a.k.a. the ) used an overvalued book (due to Coke) and an overvalued stock price (> 2X book) to buy GenRe in 1998 in an all stock transaction. In other words, he exchanged a significant portion of an over-valued stock portfolio of Berkshire for an undervalued bond portfolio of GenRe in a tax efficient manner w/o incurring any capital gains taxes.

Edited January 25 by Munger_Disciple

[Sweet]

It’s grown more than 20% over 10 years, but I agree with your thinking on it valuearb 

[ValueArb]

24 minutes ago, Munger_Disciple said:

 

Actually Buffett (a.k.a. the ) used an overvalued book (due to Coke) and an overvalued stock price (> 2X book) to buy GenRe in 1998 in an all stock transaction. In other words, he exchanged a significant portion of an over-valued stock portfolio of Berkshire for an undervalued bond portfolio of GenRe in a tax efficient manner w/o incurring any capital gains taxes.

 

And it was a disaster. Just another in a long line of examples that the intrinsic value of the investment matters far more than clever deal benefits.