32. Disney Proxy Fight and Trump Media
Bob Iger and Nelson Peltz enter the octagon; a look at how the market views Trump Media
A lot of interesting things are happening in the markets now. We’ll look at a few of these situations, including Disney’s proxy fight and Trump’s DJT SPAC.
I haven’t gone particularly deep in either of these topics, so we’ll keep the discussion fairly high level.
Let’s start with Disney.
Norman Rockwell — What Makes it Tick (The Watchmaker)
Bob Iger vs Nelson Peltz
This was a big week for Disney and Trian Partners, specifically Bob Iger and Nelson Peltz. Iger beat Peltz at Disney’s annual meeting on Wednesday in a proxy fight that started in January, but has been in the making for much longer.
Disney reportedly spent $40 million battling Trian Partners and prevailed in blocking all of Trian’s proposals through substantial support from shareholders.
In 2022, Nelson Peltz’s Trian Partners acquired $800 million of Disney stock for ~$88/share. In January, Trian nominated Peltz and former Disney CFO Jay Rasulo for seats on the board.
In addition to this stake that is directly owned by Trian, they control additional shares by partnering with Isaac Perlmutter, a former Disney executive. He is now one of the largest individual shareholders in Disney and secured his stake when he sold Marvel to Disney in 2009 for $4bn.
Perlmutter apparently owns 78% of the shares that Trian claims beneficial ownership of (coming out to 25 million of the 33 million shares).
This is an interesting tactic often used by activists. Perlmutter was ousted by Disney in 2023 and has long voiced his opposition against Iger… so an obvious partner to Trian. Partnering with Perlmutter gives Trian additional voting power without having to spend hundreds of millions on acquiring additional shares.
This really seems like a battle between Iger and Peltz.
Iger previously served as Disney CEO from 2005 - 2020 and was promoted to executive chairman before retiring in 2021. He then returned to Disney a year later to serve a 2-year term as CEO. Iger’s succession has become a key point in this proxy battle.
On the other side is Nelson Peltz, co-founder of Trian Partners. Trian was founded in 2005 and is a multi-billion dollar investment firm focused on shareholder activism. They control a $3.5 billion stake in Disney.
So how did this play out earlier in the week?
Well, interestingly, leaked reports before the annual meeting indicated that Disney was ahead by a wide margin. It seems that Disney and/or its advisors leaked results of the proxy before the annual meeting…which is illegal.
Proxy results cannot be disclosed while in-progress because knowing who’s winning could influence the remaining votes.
Why? Because, like most other campaigns, you don’t want to vote with the losing side, lose, and then have the winner find out you didn’t support them. You will lose access to the winning campaign (i.e., management).
So, what did Disney do? Let me pause and say this is speculation. But… since they were ahead, it appears they leaked the preliminary results to sway the remaining institutional investors to vote in their favor.
Why would Peltz leak the results if he were losing? All paths point to someone at Disney and or its advisors.
So, as we know, Peltz ultimately lost the proxy fight. But what does it mean to lose a proxy fight? It’s not entirely black and white.
Sure, Peltz didn’t receive votes to nominate himself and Rasulo on to the board. That’s a direct loss in terms of board nominations.
But throughout the entire course of this fight, Trian’s pressure has pushed Disney to take direct action to improve its performance. This pressure and influence on changes has sent the stock much higher… see below.
It’s reported that Trian made ~$300 million in profit on its 16-month investment in Disney. That’s net of the $25 million of expected expenses to fund the campaign.
The profit figure includes the 10% that Trian earns on any gains on Perlmutter’s stake, which has increased ~$850 million since this fight began… adding ~$85 million to Trian’s winnings.
They made ~40%… not bad… especially after years of underperformance in their main fund.
But, we’ve said before that everything is relative. Here, the question to ask is how does this 40% compare to a benchmark… the S&P?
The benchmark gained 30-40% over the same period, so the jury is still out as to how good this return is for Trian on a relative basis…
What can Peltz tell his investors? Well, his pressure forced Disney to improve its operations and address the succession issues, which improved the stock price, so he lost the proxy contest… and made $300 million in the process.
Trump Media
Trump Media closed its transaction with Digital World Acquisition Corp on March 26. This is known as a de-SPAC since Digital World is a SPAC that went public in 2021.
Shares of DJT fell 12% on Friday, falling to the lowest level since the company went public last week. The selloff has erased $2bn from Trump’s stake in the business.
On March 26th, shares peaked at $79.38, the day trading began on the NASDAQ. But, since then, shares have fallen ~50% to ~$40/share.
What do the ‘fundamentals’ look like? There aren’t really any…
Let’s take a quick look through the 10k from April 1st, 2024.
The front page shows 137 million shares outstanding.
The equity incentive pages shows that Devin Nunes, Phillip Juhan and Andrew Northwall will each receive a $600k retention bonus contingent on the closing of the transaction. Interesting…
Also not entirely confident in a congressman of ~20 year serving as CEO of a social media business… but that’s for another day.
Looks like Trump directly owns 58% of the shares.
Shorting
DJT is one of, if not the most, shorted stock in the market today. There are 5 million shares that can be shorted and supposedly 4.9 million have already been lent out.
In other words, there is enormous demand to short this stock.
You can also see this reflected in the cost to short.
If I own a stock, I can lend it to you if you’re looking to short the stock. You then take my stock on loan and sell it into the market, hoping to buy it back at a lower price in the future.
I charge a fee when loaning my stock to you, usually a fraction of a percentage point against the stock value.
For Trump Media, the fee to short the stock is as high as 550%.
That’s for existing positions! If you wanted to short the stock as of mid-week, financing costs would run 750-900%! That’s measured as a percentage of the price of the stock. Note, the average short cost is 70 basis points.
Okay let’s put numbers on it. The stock is currently at $40. So, $40 * 7.5 = $300 total cost. $40 * 9 = $360 total cost. On a monthly basis, that’s a cost between $25/share and $30/share to short the stock.
So if you’re short for greater than two months, the current cost would be greater than the price of the stock.
In other words, to break-even in one month, the short seller would have to see the stock fall by ~$30.
This sets DJT up to be a very interesting and potential short squeeze situation. Time will tell if these shorts gets squeezed… they’re already barely hanging on by the sky high financing costs.
For 2023, the business earned $4 million in revenue and lost $58 million net, while receiving $300 million in cash as part of the de-spac transaction. It currently has a market cap of $5.5 billion….
Okay, so we’ve seen that from the perspective of a short, things don’t look great. What if we change view points?
If we buy the stock today and lend it for 3 months, we would pay $40 for the stock and earn $75 by lending. Sure, this assumes the borrowing costs remain high… which is a big assumption.
If the stock goes to 0 after 3 months, you still make money on the trade.
Actually, assuming borrowing costs of 750%, you break-even in 49 days.
The stock costs $40.59 today and assume no additional fees.
If you lend at 750%, that earns you $304 annually, or 83 cents / day.
To find days to breakeven, take the cost dividend by earnings per day.
$40.59 / 83 cents = 49 days
You could run a little model assuming borrowing costs normalize over time and see how that changes your breakeven.
Who’s buying the stock then? Well, it’s probably a lot of meme buying as a supportive bet on Trump. But it’s also probably this trade mentioned above where you’re effectively placing a bet on stock lending markets.
So is DJT mispriced?
I don’t know.
Try running a DCF… it’s unlikely you’ll get an answer that supports a $5.5bn market cap. So the value of the stock must not come from pure business fundamentals (i.e., the discounted projected cash flows). But you can’t end the analysis there.
It could, however, partially be supported by cash flows coming from people betting against the stock! In the sense that there may be a buyer universe who is a buyer today simply so they can immediately turn around and lend to shorts, of which there is far more short demand than supply.
If you make that trade, once you break-even, you don’t really care where the stock goes. It’s effectively a free call option from that point forward. Your principal is out.
There’s something else that’s influencing how the stock is trading… and those are the warrants.
Warrants
Trump Media, upon going public, issued 14 million of warrants, allowing the holder to buy stock at $11.50/share, exercisable 30 days post competition of the merger… around April 25th.
These warrants give owners the right to DJT stock at a fixed price.. as long as regulators approve of the issuance.
How can you play the warrants?
Rather than buying the stock today for $40, you could buy the warrants for $13.80 with a strike price of $11.50 (all-in cost of $25.30).
Some are playing this arbitrage. Instead of paying $40 for the stock, you buy the warrants today for $13.80 and around April 25th, you can exercise the warrants and buy the stock for $11.50.
If you think the stock will be above $25.30 on April 25th, you would theoretically make money on this trade. Then, you could even lend out this stock to short, further capturing additional value.
The reason this arbitrage exists is that the market is telling you they believe the stock will be below $25.30 on April 25th (or around when the warrants go live).
If the market is wrong, it could make sense to hold the warrants.
What’s likely to happen? Honestly, idk. However, I wouldn’t be surprised if the stock eventually drops below the $11.50 strike price, thereby making the warrants worthless (they would be redeemed for $0.01).
Current price of the warrants is here and terms are here.
One final spin on this scenario. Let’s assume the warrants were exercisable tomorrow. You could buy the warrant for $13.80 and pay $11.50 to exercise it.. total cost of $25.30. Now you own a share of stock that’s worth $40.59, which you could sell or loan to a short.
But, the warrants are not exercisable today. You could still buy the warrant for $13.80. Then, borrow the stock for $25/month ($18.75 for 3 weeks) and sell it for $40.59.
In 3 weeks, your warrants become exercisable, which you pay $11.50 for, and deliver the stock to close your short. Cost is $13.80 (warrant) plus $18.75 (borrowing) plus $11.50 (exercise price), or $44.05… okay so maybe that doesn’t make sense with the stock at $40.59… but you get the point… we’re just seeing what’s possible.
Let’s see how this plays out as we approach the warrant exercise date.
Thank you for reading.
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Until next time.
John Galt