What will Trump do tonight?; Bill Ackman's bid for Universal Music Group
1) Markets are volatile today as investors try to figure out whether President Donald Trump will follow through on his threats to escalate the war with Iran at 8 p.m. Eastern time tonight.
This morning, he posted on Truth Social:
As this story on the front page of yesterday's Wall Street Journal reports, U.S. officials are doubtful that a deal will be reached before the deadline:
Negotiators are pessimistic Iran will bend to meet President Trump's demand to reopen the Strait of Hormuz before his Tuesday-night deadline, paving the way for the U.S. to target Iranian bridges and power plants in a fresh escalation of the war...
"Only President Trump knows what he will do, and the entire world will find out tomorrow night if bridges and electric plants are annihilated," said White House spokeswoman Anna Kelly.
Hopes for a deal soured Monday morning after Iran rejected a U.S. cease-fire proposal, claiming Washington sought maximalist concessions, including on its nuclear work. Trump later told reporters Tehran's counter wasn't enough to secure an agreement.
Yet the article also includes this graphic, showing that Trump has extended his deadline multiple times:
With markets on edge, prices at the pump up nearly $1 per gallon in the past month, and his poll numbers plunging, I think 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.
But I don't claim to have any unique insights, so I say this with a low level of confidence. There's a wide range of possible outcomes.
And I don't make investment decisions unless I have a high degree of confidence...
So instead of obsessing on what's happening in the Middle East, my team and I are focusing on what we do best: bottom-up company and industry analysis to identify the occasional mispriced stock.
When we find one, Stansberry's Investment Advisory subscribers are always the first to know. You can become one by clicking here.
2) Here's an example that just popped up on my radar screen this morning, when my college buddy Bill Ackman of Pershing Square released a letter to the board of record company Universal Music Group ("UMG") proposing a nearly $65 billion deal.
UMG is the biggest music company in the world, representing bestselling artists like Taylor Swift, Drake, Billie Eilish, The Weeknd, Kendrick Lamar, Post Malone, Ariana Grande, Elton John, and Coldplay. It's the largest of the "Big Three" record labels, alongside Warner Music Group and Sony Music Entertainment. They collectively control roughly 84% of the global music market.
The deal, among other things, would merge UMG with Ackman's shell company, Pershing Square SPARC Holdings, and move UMG's primary stock listing from Amsterdam to the New York Stock Exchange. (Here's a WSJ article with more on the proposed transaction.)
UMG's stock popped more than 11% after the news. But it remains well below its 2024 highs and even its IPO closing price in September 2021, as you can see in this chart:
I last wrote about UMG on September 22, 2021, the day after its IPO, where I highlighted what an exceptional business it is. And Ackman released a presentation about the company on June 23, 2021.
He hosted a conference call this morning to explain his proposal and answer questions, including an updated presentation. As outlined in the slide below, he believes his plan will unlock value in four primary ways:
Ackman also believes that UMG can increase margins over time, as shown in this slide:
As a result, he believes the stock can roughly quadruple over the next five years:
Pershing Square's proposal offers a minimum of 22 euros to current shareholders who choose to take 100% cash, and it projects a share price above 30 euros by the end of the year.
So why is the stock, even after today's jump, trading around only 19 euros?
Because investors are skeptical that the deal will go through...
A two-thirds majority of shareholders would need to approve it, and there are large shareholders who could likely block it. Billionaire Vincent Bolloré via his family company is UMG's biggest shareholder, with a more than 18% stake. His media holding, Vivendi, owns another 10%. And Chinese company Tencent controls about 11%.
As this Financial Review article about the deal notes:
Unless Bolloré supports the move, the "proposal looks very much dead from the start," Nicolas Marmurek, an analyst at [merger and acquisition] specialists Square Global, said in a note. "We doubt Bolloré will accept such terms, and had Bolloré been on board he would be recommending the transaction. This is very much a move by Pershing Square to put the proposal in front of shareholders."
In his conference call, Ackman said he shared his proposal with Bolloré, who replied, according to Ackman, "This is music to my ears."
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.
I'll share UMG's historical financials and my additional analysis in tomorrow's e-mail. Stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.