US Inflation
US CPI has fallen to ~3.00% while core CPI is sitting at 4.8%. The bond market is pricing in more cuts than it did previously, and now it is almost universal consensus that inflation has peaked. The more interesting question is whether CPI is stickier for longer than anticipated – while 3.00% sounds pretty good, 4.8% gives room for pause (ex-food and fuel makes a huge difference). We still don’t see any rate cuts this year, but we’re starting to take the view that the Fed may cut mid-next year. On a read-through basis we’re still waiting for the “e” (earnings) to fall at major US companies – less consumer spending and rising mortgage rates are potential catalysts here.
Core CPI – still sitting at 4.8%
Bond market expectations – Fed rate.
Activision
A judge in a federal court in San Francisco refused a request from the Federal Trade Commission for an injunction preventing Microsoft’s acquisition of Activision-Blizzard from closing.
Within less than an hour, the UK’s Competition and Markets Authority, which had been a “hard no” on the deal, appeared to backtrack, saying it had agreed with the companies to put the legal battle over its decision on hold. Quite an about-face for a merger that was starting to look dead in the water (and testament to Microsoft’s lobbing dollars at work). The stock is sitting at ~$90 as of writing as the equity market prices in a higher likelihood of the deal going through.
It’s a major setback for FTC chair Lina Khan, who rose to prominence with a “hard on tech” rhetoric.
Her record is more mixed: she declined to challenge Amazon’s acquisition of healthcare chain One Medical, but she mounted a challenge of the company’s acquisition of iRobot. Lots of bark, little bite.
As we’ve written before we feel good about ATVI stock either way: as a stand-alone it’s doing well with releases like Diablo and Call of Duty.
As an acquisition target it looks increasingly interesting and “juicy” for Microsoft, who sees “cloud gaming” as a key-lynchpin of its strategy in a post-console era (“the cloud is the console”).
RBNZ – OCR
RBNZ’s OCR decision came as no surprise to the market, keeping it unchanged at 5.50%, as they previously said, “they have done enough”, as inflation starts to slow down. Unfortunately for mortgage holders, this high level will remain for some time. All eyes will be on NZ’s second-quarter inflation data to see if that’s true, and the RBNZ would want to see a big slow-down like in the US. But like the US moving in the right direction but still far from their goal of ~2%.
NZ
The NZ market (NZX50) was flat on Wednesday following the RBNZ’s no surprise announcement.E-road shares jumped +5.4% after its board rejected Volaris Group’s $1.30 per share, stating the offer undervalues the business. Bid was a large premium to what Eroad has been trading over the second quarter of this year, but well below what the shares traded at this time last year. Constellation Software (the ultimate bidder) has deep pockets and the E-road board appears to be playing hardball with the bid price — will be interesting to see if Constellation/Solaris ups their bid.
On the other side Kathmandu Brands shares fell -8.7% after revealing total sales are expected to reach $1.1b and operating earnings (Ebitda) $105m-$110m with three weeks of trading remaining. However, KMD said fourth-quarter trading has been challenging through softening consumer sentiment and Kathmandu experienced a slower start to its winter trading. Its main market Australia has had a warmer start to the winter
Music royalities
A couple of years ago Hipgnosis was a mover and a shaker: they were a pure-play song fund: they own Justin Bieber’s catalog, Ed Sheran’s, etc! The economics of song royalties are compelling – they pay an annuity-like stream of money on the yearly, and there’s no maintenance or employees or capex – it’s just collecting cash. From the start Hipgnosis paid mind-boggling sums for music catalogs – $100M for Justin Timberlake’s! It fueled it with a lot of debt (aprox $600M, at ~7.00% as of writing, though worth noting they’ve engaged in interest rate swaps to hedge it).
Now the stock is doing badly. Its stock sits at ~75 pence. It is close to all time lows. Shareholders are calling for stock to be bought back and pieces of the catalog sold. A lot of senior management has left. What went wrong?
Partially its due to how Hignosis values its catalog – 20x net royalties (it values acquisitions at 16x net, so there’s an immediate 4x premium). It means the fund’s assets trade at a deep discount to NAV, but the question, as always, is who is the willing buyer for assets at 20x net royalties? If the answer is nobody, then the whole thing starts to look like mere puffery.
We prefer exposure to UMG and WMG (collectively they control the bulk of the music market). Two advantages: deep back catalogs that they haven’t paid the world for, and powerful negotiating clout with the streamers as they control so much. It’s hard to build a catalog business from scratch.
We note that Blackstone has already invested in separate partnerships with Hipgnosis, and from here we wonder if the alternative asset giant simply scoops up the remainder of Hipgnosis for pennies on the dollar.