1) In yesterday's e-mail, I analyzed my college buddy Bill Ackman's proposal to merge Universal Music Group ("UMG") with his shell company, Pershing Square SPARC Holdings, in a nearly $65 billion deal.
You can read his letter to UMG's board here and watch his presentation and Q&A here. And here's a good summary of the deal by MarketBeat.
The stock – trading under the ticker UMG on the Amsterdam index – closed at around 19 euros yesterday. That's well below where it would be if the deal goes through, so investors are clearly skeptical that it will happen.
I'm more bullish. As I concluded yesterday:
Having known Ackman for 40 years, I can say that he's not only one of the smartest and most creative investors in the world, but also one of the most persistent. So I'm more optimistic than the market that shareholders will approve the deal.
But we also need to think about what the stock would be worth if UMG shareholders reject Ackman's proposal.
So let's take a look at the company's historical financials (which only go back to 2018, and all figures are in euros)...
We can see that revenue and operating income have grown strongly over the past seven years – by 108% and 152%, respectively:
The business has almost no capital expenditures ("capex") and generates robust free cash flow ("FCF"), though it has been flat for the past three years:
UMG has very little debt relative to its size and cash flow:
In summary, I don't doubt Ackman's calculations in the below chart from his presentation.
He estimates that UMG will generate 12.8 billion euros of FCF over the next five years and can take on 6.1 billion euros of additional debt. This would result in 14.9 billion euros that can be used for investments, acquisitions, and/or share repurchases after paying out dividends (it's currently yielding 2.7%):
Now let's turn to valuation...
The stock closed yesterday at 19.06 euros, and analysts estimate that the company will earn 1.07 euros per share this year and 1.18 euros per share next year. That means the stock is trading at 17.8 times this year's estimates and 16.2 times next year's.
That's a modest multiple for a global, market-leading company that gushes FCF.
In his letter to UMG's board, Ackman cites the following reasons he thinks the multiple is so low:
- Uncertainty concerning Bolloré Group's 18% stake in the company
- The postponement of UMG's U.S. listing
- The underutilization of UMG's balance sheet, which has led to reduced returns on equity
- The absence of a publicly disclosed capital allocation plan and earnings algorithm
- The lack of investor credit in UMG's valuation for its 2.7 billion euro stake in Spotify Technology (SPOT)
- Suboptimal shareholder investor relations, communications, and engagement
Ackman writes that "none of the above issues relate to the company's execution of its music business, and importantly, all of the above issues can be addressed in a merger transaction."
I think he's right. The stock's primary listing should be in the U.S., which would undoubtedly result in a higher multiple. And the company should be buying back stock like crazy at today's levels.
If Ackman persuades them to go through with his proposal, that sets a path for the stock to potentially double in the next two years.
2) In yesterday's e-mail, I wrote:
I think [President Donald] Trump will likely extend the deadline again and eventually strike a deal to end the fighting. And this would likely give stocks a big boost.
Sure enough, just before his 8 p.m. deadline last night, Trump announced a deal with Israel and Iran for a two-week ceasefire and the reopening of the Strait of Hormuz. As a result, the price of oil plunged, and stocks are ripping higher.
I think this will play out similarly to what happened a year ago when Trump announced his "Liberation Day" tariff plan. After stocks plunged, Trump backed away from a trade war and stocks rallied strongly for more than six months.
3) Pulitzer Prize-winning journalist Ronan Farrow just published a bombshell article in The New Yorker about the founder of OpenAI, Sam Altman.
In this X thread and three-minute video, Farrow summarizes his in-depth investigation where he reviewed internal, private documents and interviewed more than 100 people for the past year and a half:
OpenAI was founded on the premise that A.I. could be the most dangerous invention in human history – and that its C.E.O. would need to be a person of uncommon integrity. We lay out the most detailed account yet of why Altman was ousted out by board members and executives who came to believe he lacked that integrity, and ask: were they right to allege that he couldn't be trusted?
As Farrow continues, Altman's former colleagues accuse him of a high degree of deception, which is dangerous for a leader of AI technology:
Some former OpenAI researchers argue that the company has forfeited its original safety mission and accelerated an industry-wide race to the bottom.
The piece details a set of public and internal safety commitments that former researchers say were abandoned. Several safety-related teams at the company have been dissolved.
Farrow also highlights OpenAI's cash burn, which I've warned about multiple times:
OpenAI has one of the fastest cash burns of any startup in history, relying on partners that have borrowed vast sums. A board member told us, "The company levered up financially in a way that's risky and scary right now." (OpenAI disputes this.) If the bubble pops, much more than one company is at stake.
I'm now even more convinced that OpenAI is going to blow sky-high before the end of the year.
4) I'll be attending the Berkshire Hathaway (BRK-B) annual meeting in Omaha, Nebraska for the 27th time on Saturday, May 2.
It won't be the same without Warren Buffett on stage as CEO, answering questions and dispensing his timeless wisdom... But I'm looking forward to hearing from his successor, Greg Abel, and three of Berkshire's top executives: Ajit Jain (insurance), Katie Farmer (BNSF Railway), and Adam Johnson (NetJets and retail).
If you're coming to Omaha too, be sure to sign up for my friend Guy Spier's ValueX BRK meeting, which will take place from 10 a.m. to 3 p.m. on Friday, May 1 at the Omaha Marriott Downtown. It's an invitation-only event, and Guy just let me know that there are still a few seats available. So if you'd like to come, you can enter your information here.
Afterward, I'll be attending a value-investing and corporate-governance discussion by my old friends Larry Cunningham and Paul Johnson at the Omaha Press Club from 5 p.m. to 8 p.m. To RSVP, you can e-mail Larry at cunning@udel.edu.
Then on Sunday, May 3, I'll be running the Berkshire 5K race at 8 a.m. and going to a breakfast hosted by my friend Vitaliy Katsenelson at the Omaha Marriott Downtown (click here to RSVP and access his helpful guide to the weekend).
Finally, I'll attend and present a stock idea at the 2nd Annual IdeaHouse Value Investing Best Stock Ideas Conference starting at 1 p.m. (tickets here).
I hope to see you there!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.