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Through Kimberly Clark buying ken View in a cash in stock you're worth about forty billion dollars. To include debt in there, the enterprise value blows up to forty eight point seven billion dollars.
Diana Gomez a.
Senior equity research analyst for Bloomberg Intelligence and has been covering this deal.
Diana, what's your first take on it?
So it is surprising in many ways from the perspective of Kimroy Clark, I must confess it shows that ken View really has a lot of work to do to turn around the business since it's split from Change about two years ago, and the third quarter miss just added up to a pile of disappointing results.
Diane, I'm looking at the Cambrian clarkstock trading down eleven twelve percent here. What's that telling you? Are they overpaying? Is the market skeptical about synergies? What do you read into that.
I believe more the later. In terms of the synergies, it is quite a steep climb. Obviously, there's a ton of law hanging fruit, let's say, in terms of efficiencies that can be gained in terms of plugging the great iconic, well known trusted brands from Canview into Caneview's system that is running at more efficient level at the moment, but it will there is septicism there because we are talking about revenue synergies as well as cost synergies, and this
will be quite a complex new company. At the point when Kimberly Clark was just simplifying as they were, they are aiming to close the transaction on their international business I think was segments like tissue in mid twenty twenty six, and now this merger expected to close around the same time.
Just seems to complicate the picture a little bit. Oh yeah, that is the TI And yes, and we know how Kenby has been dealing with some crisis in the last months with tailan Ore and then with talk all suits outside the US as well.
So I'm glad you went there. The tailanol situation.
The Trump administration has been attacking Thailand a overall. Do you think that's something that might complicate this deal? Could regulators step in and hold things up or raise questions that will just drag things out?
Quite different questions, I would say, but great questions. So in terms of Taileno, the legal risk is there. The can View was already fighting in the courts some lawsuits, but we now have Texas State wall suit on top.
On top of it, the humor re quarks price when we walk in terms of, for instance, and a bit to enterprise value multiple and I'm taking twenty twenty six, twenty twenty five sorry that they will report, so that will come at about fourteen times, whereas history call transactions in the consumer health space were in the range of sixteen to twenty times, So fourteen times comes below that.
So really reflecting not only the struggles of can View where their organic growth is still declining, but also the viability risk with lawsuits that are ongoing. And that's a new lawsuits that can be added as well. In terms of the say antitrust competition regulatory approval, as I see it, they don't really overlap directly, but it really depends on a country region by region basis. Because we know the US stands can be very different from the European Commission one.
Yeah, I should we expect more consolidation in the consumer product space, do you think.
Yes? So that's a team that I've been watching very closely. Obviously, we had other large form of groups with significant consumer health businesses, so we are talking not only over the counter medicines but also the more personal care that deals with wellness. Sanofi decided to sell it to private equity, so at least for the next few years, that is thought buyer is still considering while not considering, as management says,
puts it. But buyer still has their consumer health business and they could be walking into either wasting it or further consolidation within the current employers.
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Paul and I were just joking about how there was this headline that was basically clickbait, Amazon inching a thirty eight billion dollar deal with open ai for in video chips.
You've got Amazon, you've got open.
Ai, you've gotten video, and you've got a massive number thirty eight billion. So let's bring in man Deep Singh Bloomberg Intelligence senior tech industry analysts on these latest developments.
Mandeep, I've lost.
Track of how many companies open ai has signed deals with. It feels like the bigger questions who has it not signed a deal with at this point.
That's a good way of framing it. But look, I mean they have announced their intentions very clearly that they want to add up to thirty gigawatts of capacity, So in the end, it is all tied to that bigger goal of you know, adding thirty gigawats. And just to put it in perspective, I mean, the entire gigawatt capacity of all the hyperscalers combined is around that ballpark thirty gigawats. So they are talking about, you know, some big numbers
in terms of capacity editions. How they will do it, one is through a deal with Oracle, so that was a tree hundred billion dollar deal. Then they signed a two hundred and fifty billion dollars deal with Microsoft. So when you look at it. From that perspective, thirty eight billion is not that big. And look, I mean I can see what open ai is doing because they've seen you know, and sign a deal with Microsoft first, and
then they signed a deal with Google TPUs. So Entropic and open ai are the purest place when it comes to llms. And if Entropic is getting all that compute capacity from the two hyperscalers that you know, open ai was doing business with, it was mostly Microsoft and then Microsoft added Entropics. So from that perspective, I can see why open ai wants to go to Amazon, which they haven't done so far.
It's an arms race essentially.
Yeah, yeah, Nthropic, open Ai. These are private companies, correct, Yeah, where are they getting this cash for all these big purchases and investments and things? Am I missing the funding rounds here?
Well?
So look at what they've done in terms of their valuation. OpenAI has grown to five hundred billion dollars in valuation this year. They started off the year at around two hundred billion dollars. So that just goes to show that every funding round they have attracted more money. In fact, people are lining up to give them money now, I mean granted, their revenue is still the latest numbers are close to fifteen billion dollars in ARR. That's growing over
one hundred percent. Of what they have promised to investors is they'll get to one hundred billion in ARAR by twenty twenty seven, twenty twenty eight. What is average annual and recurring revenue? So that's where that's how we measure all the software companies. When you think about even fifteen billion dollars in ARAR puts them among the top ten software companies. So already openy is among the top ten software account You.
Walk in and I want to poke holes in it, but he's got to.
I know, I'm shaking in my head as he's talking about this conviction.
Mandy, is there a point where.
Open ai gets so big that it has to go public that it can no longer stay a private company?
I mean, they already changed this structure where Microsoft got a twenty seven percent stake.
Now and so yeah, but they're like multiplying in growth, so this will last for a little bit. And then the same question arises again, isn't it does?
But they are separating out the nonprofit part with the profit entity that will go public and then they will sell their shares. I don't know how much money they would want to raise, given how much they are already raising in the private market. So look, I mean it's inevitable a company like open Ai, if they get to one hundred billion in revenue over the next three years, they have to be a public company. I just can't imagine them being private.
And are the regulations that's push them in that direction? I mean, isn't it.
You have a certain number of shareholders and at some point you have to you have to list.
I mean, think about the backers of the company who are participating in these funding rounds. They would want an exit strategy. You know, you're you're kind of becoming an investor right now with the hope that you can get a return. And so once a company gets to one hundred billion dollars in revenue, I'm sure a lot of those investors will want an exit.
Google announces big Capex race, stock goes up. Facebook and ounces big Kapex raised stock goes down.
Why Because at the end of the day, you have to show ROI and you have to show revenue. In the case of Meta, they are planning to spend over one hundred billion dollars in capex next year with no explicit cloud revenue. So think of what Amazon's thirty eight billion dollar deal does today. It will add five billion dollars in revenue starting twenty late, twenty twenty six and twenty twenty seven onwards. Every year, this thirty eight billion
dollar means they'll add five billion in revenue. That's how much open ai will end up paying Amazon. In the case of Meta, they're spending one hundred billion plus with no promises that they will somebody will pay for their infrastructure. Yes, they're getting some lift in their app pricing, but that's not enough to justify one hundred billion dollars in capex. So that's where the ROI question is the most obvious. In the case of Meta, because obviously they keep raising their numbers and they.
Keep costing some say they're going to do other than advertising. What does Meta say they're going to get n one hundred billion dollars.
Yeair pitches, We've got, you know, this family of apps with over three billion monthly active users, where people are spending forty minutes a day. We will give them more AI functionality. Look at what open ai has done with AI generated content. What Meta is saying is our AI generated content will be better than you know these llms, and that will drive engagement and will monetize it for you ads.
Right, but they aren't able to provide explicit numbers in the same way that others are able to. So isn't that a good sign that equity investors are discerning are making a distinction between Meta and Amazon and alf BET and Microsoft that you know, they're poking holes in some of these narratives that the companies are.
Are absolutely I think right now the market is making that distinction, which is why Amazon actually trails so far. It's only after their recent print that you got a lift in Amazon, and you know now with this deal, suddenly they're starting to see some more monetization for Amazon.
So does that show that even if you're kind of late to the party as Amazon was, you can make up for lost ground, that the race hasn't gone too far ahead of you.
I mean the paths right now is through AI infrastructure. Renting AI infrastructure, whether it's power or data center capacity or GPUs. That's where everyone is convinced there is revenue and there are profits. When it comes to applications. It's still very hazy in terms of which business model will actually generate profits or not. So I think the market has done a good job in terms of discerning where the monetization is so far.
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Berkshire Hathaway reported really strong earnings and it also reported that they have about three hundred and eighty two billion dollars of cash on the balance sheet, which begs the question, as it does every quarter, as it has for years, what do you do with all that money? Matthew Polozola, Senior Analyst, Property and capturin the Inschurch and Bloomberg Intelligence Droids is here in our studio.
I'll tell you what you do.
Your buy backstock and you put a three percent dividend yield on You give that cash back the shareholders. That falls on dep fears at Berkshire Hathaway, Right, I.
Think so, I mean looks certainly a good problem to have, and I would make e quibble a little bit so that that three eighty two includes twenty ish billion in treasuries that didn't settle, So it's probably three sixty billion.
Just a lot.
It's a lot now, I would say.
The interesting thing thing is the stock has underperformed the market by like thirty percent since Buffett announced that he was stepping down in May, and they haven't bought any stock over that entire period.
Yeah, it does that.
I turned my mic on, I say why.
Yeah, So.
Buffett used to have a rule when the stock was above one point two times priced to book, they wouldn't buy it back. They kind of kicked that out and they said, we're just going to buy it back whenever we see intrinsic value below.
So, you know, I don't to me it begs question.
I mean, maybe he sees the stock as kind of fully valued, even down you know.
Year to date, even with the lagging performance as well. So does that change when greg Able, the handpicked successor to warn Buffett, takes the reins officially at the end of the year.
You know, Scarlet, he walks a fine line between putting some sort of stamp on the company maybe over time and then kind of respecting the ethos of Berkshire and how they've operated, I would hope something happens. I mean, they did a ten billion dollar deal in the fourth quarter, they bought the oxycam business from Occidental. They just don't
have things that can move the needle very much. Even in the quarter, their net stock buys and sells or negative six billion dollars, so they were negative on other equities as well.
Yeah, there were net seller stocks for twelfth straight quarter, and that cash and equivalence.
Was at a record high at the end of September.
Is that a signal that they're waiting for the market to tank, that they see a correction, maybe not tank that might be too strong, they see a correction or consolidation in the near terment.
Are ready for it.
They're always ready for it. You know.
Buffett has always said, we're not looking to time the market. We're just looking for good companies. He's also been you know, when I talk to people that the thought is is he just hoarding money for greg Abel and kind of setting the company up and just handing it over.
He's said he's not doing that. So, you know, unfortunately, don't.
They don't talk to investors, so we don't can't really pick his brain besides at the annual meeting, so we don't exactly know what's going on there.
I think he's just extra conservative in his old age. I guess right.
And here's my cynical Wall Street perspective. When mister Buffet passes three percent dividend yield, massive stock buyback, do you think that's a scenario.
I think.
Dividend yield, hopefully you know, some sort of dividend, maybe special dividends. The buy back I think will also kind of weigh on what able sees the intrinsic value. So I would say probably hopefully dividend. I would say maybe more steady buyback. There's also they can't buy back a ton of shares on volume because you know, there's rules on how much they can buy back and how active they can be in the market, so that limits them a little bit.
That's plan B. We got it.
Don't you have to split the stock like a gajillion to one.
They have the A shares and the B shares.
But there's I don't have all the exact rules, but they've talked about we can only buy back so much at a time they bought by none. So I think a steady buy back plus some returns of capital and forms of I would hope special dividends. They maybe they don't want to be beholden too a regular quarterly dividend.
Yeah, makes sense.
Okay, so that's something we'll watch for when that eventually happens. In the meantime, how are the businesses of Berkshire Hathway performing, especially insurance?
Yeah? So all good.
In the quarter, the insurance business made much more money than the year ago, but that was because they had a bunch of large losses in the year ago. They also had this favorable reserve development, which means they write business and those losses come in better or worse than they expect over time, and that was those losses were coming in better than they expected. So that is it's a good thing, but it's not a super high quality source of earnings.
Beat.
So the insurance business performed well on those two things which aren't super high quality in my opinion. The underlying business and the insurance doing well. The problem is hard for it to get much better next year. The underwriting side, the prices in that are going down so I think it's tough to see the insurance underwriting doing better next year. It's also tough to see the investment it's doing better next year. And we're talking about really just the fixed
income investment. So like the equities, who knows what happens. But in terms of the interesting come, we saw that decline in the quarter as well.
The business fundamentals of the underlying businesses.
Did they move the stock historically? Not really.
Yeah, it's tough because I asked the one fundamental question.
That's enough. Let's get back to the main point of the story here. It's also my job too.
But is there an activist investor who's ever oh, good question, one word about this company?
So historically there have been investors very vocal about it. I don't, I don't have names, But no one's ever been able to move the new buffet's always the majority shareholder. So there's really been no one who's ever been forcing them to do anything. And so why would they even listen?
And can you do that with a company that has an A class year and B class year with this what is.
His voting control?
I haven't done it, man, I don't, I don't, I don't know, at the top of my head, I thought it was something like sixty percent of the share or something like that, and other inside will hold more. So there's almost no way of wrestling control from him. The A shares and the B shares they did so the A shares are several hundred thousand dollars, and then they instituted the B shares and they're they're getting peg to each other, so they can't.
You can't. You couldn't buy up the B shares and kind of take control either.
They've come up with all kinds of rules to make sure that all the things you just proposed can't happen.
He's not a dumb guy bother Yeah, exactly right. It's been extraordinary run.
Is there a sense that the law of large numbers over the last several years, if not the last decade, is kind of caught up to this.
Name, Yeah, for sure.
I mean they they bought a company for twelve billion dollars, Allegheny, and it barely moves the needle. They bought this oxy Cam for ten billion, barely moves the needle. They bought like twenty billion of Chevron stock two years ago. It didn't even come up at the annual meeting. People didn't even ask about it. I was sitting there. I couldn't
believe it is that no one's going to ask about this. So, you know, there's just things that are are tough for them to to move in from having so much money. They're making those investments in Japan, which I think are interesting. So they invest in the trading houses in Japan.
It's hard for.
Me to know a ton about those businesses. Some of them are like mini Berkshire's. Maybe this is stuff that they kind of do in the future. Also the energy business. Greg Abil's an energy guy. Aon is an insurance broker. They talked about last week. This huge opportunity with the
hyperscalers needing risk transfer services and other things. So those are things that fit right into berkshires wheelhouse right, the risk transfer and the energy businesses, So those are opportunities for them in the future.
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