Disney-Fox Deal Would Be Defining Legacy For Bob Iger: Sweeney

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. So it sounds like Comcast has fallen out of the running to buy some assets of twenty one century Fox, which leaves Walt Disney Company as the remaining suitor here and they are expected to announce a deal any day. Now Here to talk about that is Paul Sweeney, US director of Research and senior Media and Internet analyst for Bloomberg Intelligence. Paul, you have been covering this company for twenty seven years.

You know this place inside and out. What exactly is Disney going to go after Century currently has and why? Well, this is a If they buy these assets from twenty century Fox, it will be a obviously a significant deal, you know, probably fifties sixty billion dollars of value there um. But it's really going to be the defining legacy deal

for Bob Eiger. Uh just in the past two or three years, the media business has been tremendously disrupted by the Netflix is of the world and the whole unbundling and a chord cutting associated with the pay TV package. That's really upended everybody's business model, including UH, the Walt Disney Company, and the mighty ESPN. So if you're Bob Eiger, um, you really have to position your company for the next

ten to twenty years. And I think the way they feel like they need to do that as they need to do a couple of things when they need to bulk up on even more content, even though Disney arguably has the best content in the world. By buying the twenty century Fox Film and Television Studio, you get even more UH film and television production, plus an amazing library. They can use that content to create our program their direct to consumer offering that they announced for next year

their version of Netflix. UM. You also get a lot of international assets too, big assets one in Sky for Europe and Star India in India, which really helps Disney increase its international exposure, which I think they've been under exposed internationally before in terms of their percentage of operating income.

So that's a big plus for them. And then third is they get a controlling interest in Hulu, which is a direct competitor to Netflix, and maybe you know, having direct control over Hulu will allow Disney to really drive that business afford and try to make that a much bigger competitor to Netflix. So do we have any idea why Comcast dropped out because we talked a lot about why the acquisition of the Sky Network in particular was really beneficial for Comcast. Yeah, yeah, I think Comcast and

Verison was also mentioned there. I think kind of from the get go, the Murdochs have kind of sent out some signals that they prefer to sell their assets to Disney for a variety of reasons, some regulatory um and some cultural. I think the cultural one is that the rumors that James Murdoch, who was CEO of twenty one century Fox, will get a leadership role within Disney, potentially setting himself up for, in an ideal world in his mind,

to be a successor to Bob Eiger, is real. It seems incredibly far fetched that a the Murdox would ever sell their company and be that they would ever quote unquote work for anybody else but we're in very crazy times here in the media space. And uh and I think if you're Disney, one of the real shortfalls into disney story is that they do not have a succession

plan for Bob Biker. They had a very well defined one up until two or three years ago when it all fell apart, and since then they've been scrambling and they have not been able to identify, you know, an external candidate or an internal candidate, and it doesn't really seem to be anybody on the horizon. So this might fulfill one of their needs if it all were to work out. So crazier things seems to have happened, but

this would certainly be right at the top. What do you think the price tag is going to be for Disney? It depends kind of what assets they buy. But you know the numbers that we've run, um, you know, you've put all the assets together that presumably that they're looking at. It could be fifty to sixty billion dollars of enterprise value. So um. And then what Fox will be left with would be kind of a remain code, which would be

the Fox News cable network, the Fox uh broadcast network. UM. And you know, a couple of other assets there, and that would be in the Fox Sports one, and that would be a much much smaller company. Um. And then the question be what do the Murdochs do with that smaller company? Uh And then I think the expectations they would probably re emerge it into uh News Corporation, which is the company that houses all of their print businesses, the Wall Street Journal and all their papers around the world.

Maybe create a little bit of a bigger company that way. So there's lots of pieces out there. The bankers are working crazy hours, I'm sure trying to make sure everybody, uh you know, all the pieces fit together. I'm just trying to wrap my head around James Murdoch and the cultural fit or lack thereof with Disney. That's that's kind

of mind Bogle, It really is. And you know that Disney being the family uh friendly company and and Fox uh you know, on across all of its portfolio assets kind of being much more at their own edge in terms of the programming that it's studio produces, the TV shows, the Bart Simpsons of the world, and uh so they're very very different culturally. UM. But I think the the assets that uh, you know, Disney would be buying I

think actually would fit very well with the company. And then what remains to be seeing how the other people fit in and frankly, I mean maybe Disney wants that diversity, that sort of edge. I'm just wondering about the timing when you think Disney is going to announce this, Well,

this is very interesting the company. I'm I'm about to head out to Burbank on Thursday morning after Disney They're having an analyst meeting there where they were going to kind of uh screen their new Star Wars movie, which is gonna be a big driver for their company and their for their stock, they hope. So that was already

established for Thursday. I think what they'd like to do is once, since they already have their analysts and their investors in the room at at in the Burbank studio, is let's announce the deal then, and you know, let's bring the Murdoch h Robert and his son's up on stage and let's try to really sell this deal as a as a great deal. And I think that's the event that Disney would like to to to do there.

Nobody does events better than Disney, so I think that's kind of how they like to announce the deal to the world. Yeah, my heart's really bleeding for you. He's gonna go out to California to watch movies, to watch the premiere of Star Wars and having an amazing presentation, an incredibly interesting announcement, hang out with your friends, and uh, go out for a few drinks. Well, Paul Sweeney, it's

been real. Please bring me back a souvenir. Absolutely. Paul Sweeney, US director of Research and senior Media and Internet Analyst for Bloomberg Intelligence. I'm struck by the high yield bond market. How people have been calling for its demise for almost a decade now, almost as soon as it started surging after the after the credit crisis. And yet here we are with another year of pretty impressive gains, up more than seven percent so far this year, following a seventeen

and a half percent game last year. So what's ahead for next year? And uh has it already gotten to be too good to be true? Should we expect losses? Here to explain it all to us is Ken Monahan. He is Director of high Yield for a Moondi Pioneer in Durham, North Carolina. Nobody joins us here in our New York studios. So, Ken, what's your projection for next year? You know, Lisa m our crystal ball at this point is so foggy it looks more like a snow globe. So, um, well,

we're we're we're working on it. You know, I think that the first half of next year is much easier to predict than the than the back half. And I think the first half of the year, you know, today we're waiting for news from the FED. Our expectation is we're going to get several more moves, probably three next year. Uh. And the question is what the e c B does as well, and what kind of an impact that ultimately

will have a high yield marketplace. So you think that still the high yield bond market is highly dependent on actions of the central banks more than anything else. I think that I'm not saying highly dependent. I think that that's just one major variable. And with rates as low as they are, we haven't been in this situation before.

You know, theoretically the high yield market should earn should earn its coupon next year, so it should earn somewhere around five percent plus or minus a little bit the current high yield bond market is currently yielding about five and three quarters percent. As you indicated, it earned a little bit more than seven percent this year if you look at the Bloomberg Barkley's index. I don't think it will match that next year, but if it earned a

five percent return, that would be actually pretty reasonable. Um. The question really is is how much headwinds do we have out there and to what extent is the well the activities of central banks contribute to that. So moving beyond the macro story, one thing that I found fascinating this year is that within the high elk bond market, you've seen a number of potholes. Companies are just all out of bed suddenly tank uh. There have been some resurrections.

We look at Valiant, for example, which seems to be doing all right. But going into next year, which companies do you expect to be the next potholes? Well, I'm not going to name specific companies. There are certainly industries. There's certainly industries that were watching. You know, Telecom is an obvious one. Retail I think is an obvious one as well. So in other words, you don't think the retail carnage is over. I think that the juggernaut known

as aman Amazon is going to continue. Um. Having said that, I don't think we were as nervous as some uh you know, coming out of the third quarters numbers, or really the second quarters numbers, which are perhaps a bit weaker, and people had panicked and a lot of the retail names had sold off. I don't think, um, Amazon is going to replace the entire retail market. Uh. You know, I said to my analysts earlier this year, I said, you know, I've lived through environments where Internet was post

to replace automo auto car dealers. Uh. And then um, the flat screen TVs in our home, We're going to replace all the movie theaters. And yet those businesses continue. It doesn't mean they don't have to re reconnect or re engineer their businesses, but it doesn't mean that they go out of business either. Well, and with telecom, before I let you go into other sectors that you see

as as potentially experiencing some pain next year. Telecom is fascinating because you have some behemoths like I Heart Communications that's trying to bang out some kind of debt restructuring agreement. And then you also have Sprint, which with its on and off again, a deal with T Mobile that fell through. Left at the altar, that's right, left at the altar. There's a question of how it can continue in the future alone, without a bigger footprint and without better technology.

It does not have the cash, it has tons of debt. What is Masio show uh Masioshi's son going to do from soft Bank, the big investor? Right? These are all huge questions. But you think that the route that we've seen and frontier, the route we've seen so far this year is not over. Is that what you're saying. I still think we're gonna get We're gonna have a very bumpy road in telecom for two thousand and eighteen. But doesn't mean if the sector can't earn a good return.

In fact, because if you look at where the yields are for that sector right now, and those bonds are trading at pretty significant discounts to bar So if we can get, for example, some asset sales from some of the large players in that space, UH, if our friends spent sprint connect with somebody else or some how able to monetize or show value for their enormous bandwidth, uh, that that could change the the outlook for the sector

in terms of returns. So one big question that I have is the field of triple B rated companies has expanded pretty wild wildly in the past few years. This is the lowest rung of investment rate. Yes, what is the likelihood in your mind that they will get downgraded to high yield and that you could see a rush of debt kind of move into your world that is unexpected? Well, if you if you look at a couple of things, it's interesting you bring this up because there's two things

we would note. One, if you look at the at the percentage of corporate debt outstanding that's investment grade versus GDP, it's exploded, uh since the end of the recession, so it's moved up by about threefold. If you look at the percentage of high yield that it's increased as well, but by a much smaller percentage. So there's a lot

more investment great debt that's been issued. A lot of it's been used as well, particularly for triple V companies, for shareholder friendly activity, so whether it's repurchasing shares or paying out dividends or for acquisitions, and those are the places you're right where you could have this risk of downgrade going forward. I'm so interested in this. Thank you so much for joining us. I could talk about this

all day long with you. Ken Monahan, co director of High Yield at a Mundi pioneer, talking about what to expect next year. We shinned up his crystal ball and we got some insight. It's really interesting to me that the telecom route is not over. We will be discussing more about this. I'm sure a lot of people think of the Federal Reserve as being an independent body that is trying to maintain financial stability and keep the economy afloat.

Desmond King and Oxford University professor seeks to dispel that notion with his new book, FED Power, How Finance Wins. It was published last month and it was co authored along with Lawrence Jacobs. Desmond joins us. Now it Doesmond, thank you so much for being with us. Can you just start. Can you just start with this idea that a lot of people have with the FED as a neutral player, and explain why you think that is inaccurate.

The FED is clearly trying to make decisions on the basis of objective economic data and to do the best to manage the economy. But but the way in which this occurs is more tightly related to financial markets and to the needs of certain economic interests than is commonly

recognized UM. And we developed this argument really about the feds um extraordinary response to the recession in two thousand and eight and the way in which it UM began the processes and the unconventional monitary measures, including, for instance, UM propping up money financial institutions and then going into

this expanse of quantitative easing process. These are measures which UM are never scrutinized by UM a body such as Congress to ask whether they are the most appropriate, or they are measures which may or may not have various

unexpected distributional consequences. So the idea here is that because the FED took these moves that directly propped up big banks, it shows that they're biased toward a market in which the biggest banks are the way they are and dominate finance and are not open to another way of the system running. Is that correct? Yes, I think biases may

be a very too stronger term. But UM, in the way in which it responded, there were other options, for instance, trying to do more for the mortgage market, for the relief of mortgage holders UM, who had been allowed to acquire many borrowers have been allowed to acquire mortgages which they couldn't afford in the six to seven years before the crisis of two thousand and eight, which was in large part a regulatory failure UM and then when it

acted in this dramatic way since two thousands and eight UM, we we think in the book that the processes of accountability around this were really very weak and remain quite weak, and we have at the moment then a situation which central banking is really in quite a new era. And it's not just the FED that the FED is by far the most important. The supplies also to the ECB and the Bank of England in terms of its there

interventions in the financial markets through quantitent of easing. The sorts of measures that have been undertaken would be more commonly associated with fiscal policy, or at least they have fiscal policy implications in a way which moves beyond traditional understandings of monetary policy. Well, so I'm wondering what are the measures that should be taken to have better oversight

of the federals serve and other central banks for that matter. Well, I think we need to think about who is appointed to the federal banks. Whether there might be a broader range of UM members of the FOMC, for instance, who are more familiar with different aspects of financial markets. UM. Whether there should be UM members of the economics profession who aren't quite so much part of the consensus about

monetary policy. UM. So, whether there might be independent reviews of the Congress by sorry, by the Congress of UM of federal policy. You know, this is tricky because we're coming at this at a moment when a lot of people have raised concerns that the FED will become even more political in the US, given some of the demands on what we would like to see from growth from our from our current president. So, uh, you know, it's sort of tricky when you start to say, well, they

should have more oversight from potentially political operatives. Right, Yes, I think it is, and I'm fully alert to that, and I entirely agree with you. But central banks are now, including the FED, are part of a of a quite extraordinary financialization system that has occurred in the last three decades UM. And so the way they operate, the importance of markets, the way that policies have effects on markets is deeper than it was, so we in some sense

I have to think about new institutions of accountability. There is a there's a very strong argument that you know, Congress dominates the FED, that that the idea that the FED is independent is a myth, and that this is a common scholarly view, and that the Congress is able to um really exercise powerful control over it. I think if you look at history it's rather different. The The FED has been very good at maintaining itself as as a neutral technical agency or UM and showing its capacity

to develop policies as it thinks most appropriate. But it's hard to see processes of accountability there in these institutions. Thank you so much for joining us, and your book is fascinating and it's certainly emily right now, Desmond King. Andrew W. Mellon, Professor of American Government at Oxford University, joining us from Oxford UH. He is the co author of a new book, Fedpower, How Finance Wins. A fascinating argument and an important one at a time when the

FED is changing hands with respect to the chairmanship. It is time to throw our crystal ball to Chicago, where Jack Avalan is. He is chief investment officer at BEMO Private Bank, which overseas about sixty eight billion dollars. Jack, thank you so much for joining us. We've been talking about what to expect for eighteen and uh the most important question of the day, of course, is are you going to be buying bitcoin? I don't know it. I

can't afford it. All right, in all seriousness, next year, a lot of people are seeing pretty sanguine economic pretty sanguine economic backdrop, synchronized growth. Pick the phrase that you will. What's your most contrarian call for the year. I'm going to say that, you know, if I'm looking for things that could potentially upset the apple cart, it's it's going to be a trade. Um. You know, we still have these open items on NAFTA and some other trade agreements outstanding.

And I can't think of a single economist who stood up and said, you know, ending our current trade agreements going to help our economy. UM. So you know we still have, um, you know, some of these lingering issues outstanding. And I guess i'd call that contrarian in that, you know, that's the one thing that could you know, run counter to this, uh, you know, positive momentum on on growth. Alright, So as an investment manager, how do you head you endst that risk? Well, I'm not sure I want to

do too much of that right yet. Um, these are things I'm gonna be watching for. I'm watching for that any indications there. But we're still gonna you know, stay in um. Uh, we're watching for inflation. Um also um, but we we believe we're not going to really run out of production capacity or even labor capacity until probably mid two nineteen. So I think you know, right now, our base case scenario is that we're still in the clear. We're bunting along and around, you know, a little bit

more than potential GDP. While this is the one of the longest recoveries that we've had on record, it certainly the shallowest and so um, you know, it's it's uh, certainly recovery not built on a lot of excesses, which is its probably a good thing. So Jack, if you are watching for inflation, I take that to mean that you expected to pick up more next year. How are you positioning to capture some of the gains from that and to avoid some of the losses that say, may

come with the longest the longest term bonds. Right. UM, So right now, we're you know, still somewhat um, you know, under our target duration. So you know, we we are you know, somewhat cautious there. I think what we're watching for, for example, any evidence that the European Central Bank uh takes it's it's uh photoph the accelerator would perhaps uh,

you know, raise rates in Europe. You know, keep in mind, one of the main reasons we believe why the tenure treasuries two point three, seven or two point four and not three or more is because the German bonded zero point three. Uh. So as we start to see rates abroad move higher, uh, that probably raises the floor on

you know, on our rates here. So yeah, so we're still somewhat cautious on interest rates UM, and we're still fully invested in equities UM, but would be looking for evidence that UM either inflation rise, as credit spreads widen, anything that would drive interest rate growth faster than profit growth would prompt us to reduce our equity risk. We don't see huge evidence of that soon, but that would be something that would suggest perhaps were either the end

of the business cycle end of a credit cycle. The other thing that some people are watching is the yield curve, the differential between long and short term rates. And when you talk about the e c B and whether European rates are going to raise, a lot of people think that the ECB is going to keep its deposit rate where it is next year and just work on potentially tapering some of their asset purchases. So let's say they

don't make a move at all. Could we see a yield curve in version because the Fed is going to be raising short term rates and that longer term rates going to be pegged. Yeah, we could, but I wouldn't necessarily read a ton into it. Um. I think that you know, it would invert for more more or less technical reasons than anything. Um, you know, economic per se um.

You know, we still have a lot of distroy in the bond markets, and um, you know, it's sending a signal that you know, may not really be telling us what we've traditionally interpreted in the past. Well, you know, this is an important point because a lot of people are saying, look, even if the U s you old curve inverts next year, it won't necessarily be a harbinger of a recession the way it has in the past.

And yet when I go back and I look at the meeting minutes from Federal Reserve meetings back in two thousand and six and two thousand and seven, a lot of the FETE officials at the time, we're saying the exact same thing. Yes we're seeing yield curve flattening, Yes we're seeing inversion, but it means something different. It is technical,

it was not. Does that give you pause? Well, there was no quantitative easing going on back then, so um, you know, I'm not sure exactly what they were necessarily drawing on to suggest that an inverted real curve would have sent the wrong signal effect for us, it was, it was a concern. In fact, credit spreads widened to a point where they broke out in the third quarter of two thousand and seven, which to us was a signal to say, we do need to reduce our risk.

When momentum finally broke down in January of oh eight, that was a clear signal for us to say, let's, you know, watch the play out of this year from the sidelines. With respect to credit, you said you're still fully invested in equities, you've had you have lowered the duration of your funds, meaning the exposure to interest rate risk. I'm wondering where you stand on credit. Yeah, I mean, that's that's really remarkable to me. Um. Credit spreads are

still remarkably narrow. Um. So there could be a little technical factors. They are also as investors are clamoring or yield. One of the things that you know, we're noticing though, is that down grades are outpacing upgrades now and they have not for the last two or three quarters. So UM, I'm not necessarily flapping my arms and saying this is the end of the credit cycle, but it is something that we're watching, and it's a certainly a metric that I want to pay attention to. Where's the more risk

in the lowest rung of investment grade or in high yield? Um. You know that's probably a good question, I would say in high yield. UM. In fact, you know, it's funny, investment grade actually is outpacing high yield so far this year. Um. So um, you know this this blind um uh, you know, blind reach for yield is really starting to fall apart in the notion that perhaps investors are really starting to

look discern, you know, what's a better value. Um. So we're seeing it in the in the bond market, not seeing it so much in the stock market. But it sounds like good. Appears like we're going to get a sector rotation going into next year. Jack Aplin, thank you so much for joining us. Jack Avelin, Chief investment Officer at BEMO Private Bank, which overseas sixty eight billion dollars and is based in Chicago. Thanks for listening to the

Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.