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It is Tuesday, but there's still a lot of mmah to talk about Tuesday. Yeah, murder Tuesday. Although this one's been like in the works for so long. Now Warner Brothers Paramount Netflix looks like Warner Brothers is now open to a paramount bid, a little bit more open than it was before. It is reopening talks with Paramount as Paramount signals a higher bid, but has not actually raised.
I'm glad you've been You reported it correctly because they haven't raised their summit yet.
They said, you know, we could, so I guess that's good enough for them to reopen discussion. Stephen Flynn is our senior credit end list on this developing story. So Stephen, how are you looking at this development?
Yeah?
So you think a couple of weeks ago, on February tenth, Paramount actually came out. They reiterated a thirty dollars per share cash offer for the entire Warner Brothers Discovery, but they did add in a few other things. Number One, they said that they would pay the two point eight billion dollar termination fee that Warner Brothers would owe Netflix
for breaking that deal. They'd said that they would help with the fifteen billion dollars of bridge loan that Warner Brothers has outstanding from a bond tendor.
Deal that they did mid last year.
They'd also fully reimburse Warner Brother's Discovery for a potential one point five billion dollar fee that Warner Brothers could owe certain bond holders if they do not do a debt exchange by the end of this year. So this is a complicated story that keeps getting more and more layers of complexity on top of it.
Remind us, Steve, if Paramount were to win this deal for Warner brother this would be a very highly indebted company.
You guys don't like that.
Correct, Yes, So, Warner Brothers Discovery would have about eighty five billion dollars of total debt pro form for this deal, a combination of Paramount and Warner Brothers. Right, So, Warner Brothers has about thirty one billion dollars a debt Paramount has about fifteen. This deal would add about thirty nine,
so you're talking about eighty five billion. If you just look at the combined EBITDAT for both Warner Brothers and Paramount for twenty twenty six combined, they're about twelve billion dollars, you know, just just space math, you're talking seven times levers.
That's obviously huge.
But Warner Brothers Paramount expect about six billion dollars of cost synergies. So if you give them credit for that, that turns it gives you about eighteen billion dollars.
VIPA DOT still get you credit well over four times synergy credit.
You guys are pretty stinchy.
Well, yeah, we can give it, but we give you a certain amount of time to actually show it.
Right.
So, and this is really important because what will the rating agencies do and for the fifty four billion dollars of debt financing that they have in place to support this deal, to what extent will it be ahead of the other debt through either guarantees and or security. So if you could argue that it is ahead of all the other debt and you give them pro former credit for the synergies, you're talking about three times leverage through that fifty four billion dollars, which could potentially get you
IG credit ratings. Right, So if we look at Charter as a comparable, So Charter for many years had a total net leverage target of four to four and a half times, but they had.
A split capital structure.
The secure bond debt was IG, the unsecured debt was high yield, and the secure debt they kept that a little bit over three times. And so if you use that as a comp and give them credit for the synergies, you know, you could say that.
There's a lot of ifs there. Yes, there is, there's a lot of ifs there.
That Starter's cash a little better and I like that.
Yeah, but you know, pro form powermount Warner Brothers should generate a lot of free cash flow, and they, you know, they should.
I assume they will commit to use all that to reduce the debt.
And typically grating agencies will give the company a few years to kind of hit their targets and show the delaveraging.
So Warner Brothers when it merged with Discovery also took on a lot of debt. How does this potential Warner Brothers and paramount debt profile look compared to what Warner Brothers look like after emerging.
You know, it's total in thinking about the leverage, it's not too different.
But let's hope that this works better, right, So, because it didn't.
Work so well and Zoslov was kind of just preoccupied with bringing down the debt for years.
Correct, correct, So when they emerged Discovery with Warner Brothers, they purchased it from AT and T effectively and it had a high leverage and they promised to d lever and it did not deliver as quickly as anticipated. So then that's when last summer you had the whole announcement of the split and they decided to launch a tenor off or where they got some new financing in place and told the existing bond holders will buy the bonds
back from you. But you know, you're taking some pretty big haircuts to the mount that you're owed, and they still had very good participation.
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Anthropics PPC talks about extending and contract with the Pentagon are being held up over additional protections to the artificial intelligence company wants to put on its clawed tool.
Absolutely no idea what that means.
Mandeep Seeing does mandep Seeing, Global Tech research head for Bloomberg Intelligence, what's going on with our friends at Anthropic because I know they do a lot of work with the US government.
Yeah, and look, I think Palenteer is the company that really made a name for themselves in the kind of work that all these LLM companies are being tasked to do for the Department of War. And look, it's going beyond analytics now. So what Palenteer did was you could look at unstructured data like the GPS coordinates tie intelligence in terms of you know, finding about some source or some entity, and that was heavily used in a variety
of use cases. Now, I think these llms are trained on we know, fifteen trillion tokens and they can ingest large amounts of data and do analytics at a level.
That you know, we have not seen.
So in this case, the company Inthropic has talked about their AI constitution or in other words, putting guardrails around the kind of surveillance activities they want the llms to do. And obviously from a government perspective, they want to do whatever it takes from a national security perspective. So I think that's where there is a discussion going around the kind of guardrails that they want to see and the level of I guess work that the government wants them to do.
Okay, So the Department of Defense or a Department of War as it's now known, this relationship with Anthropic, it's not limited to just using anthropics models, is it, Because it wants to make sure that it's got kind of a wide source of AI large language models to draw from. So what is that relationship like with I don't know, chat, GPT or Gemini or even Grock.
Yeah, all of these companies have a contract with the Department of War and like for example XAI is Grock has a two hundred million dollar contract. So you know, the department is using all the possible tools that are available, and from that perspective, Enthropic is one of them, but no one else like chatchipt hasn't talked about you know, guardrails in such a big way as Entthropic has, So
that's the big distinction. And obviously SpaceX is a defense contractor for the Department, and now with Xai merger, I think they can do more work around the drone side. So at the end of the day, I think you have to think of it from a geopolitical standpoint. What China is doing, you know, with that infrastructure and similar concepts, and what I think the US defense is looking to
do in terms of surveillance and national security interests. And these llms will play a pivotal role because, as I said, they can help you find that needle in the haystack that the current technology wasn't able to do.
Who Isntropic? Who are these people?
Well, they just raised thirty billion dollars in their latest funding round sound fundraiser, and they'll most likely go public this year. There is a very high likelihood of both and Tropic and open Ai going public. And that's why you know they're out there in terms of establishing the use cases and the utility is not just a coding agent.
They want to show you know that they are addressing a lot more areas in terms of you know, where these models are touching and the companies that they are interfacing with, So there is a very high chance that we'll see IPOs.
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I' let's switch gears to the healthcare space, and to do that on a Tuesday morning, we check in with Sam Fazelli, director of Research for Global Industries and a senior pharmaceuticals analyst for Bloomberg Intelligence.
He's based over there in London.
So Sam, I see that Moderna and Merk they're working together on a melanoma drug.
Here, cancer drug. What's the status there?
Yeah, so Paul, thanks for having me back on. Look, they have a trial coming up which is a very innovative approach to trying to treat cancer. I e. I'm going to take miss a drug that releases your immune system and at the same time I'm going to give it stuff from your tumors so that you can recognize the tumors. So you got vaccine, that's what a vaccine is, right, and the immunotherapy drug y true that everybody's used to. And they've had some really strong Phase two data that's
come out. So what we've done here is that we've gone and have a look. That's one of the key catalysts for twenty twenty six and everyone's waiting for this trial to read that as to what are the chances of what are the issues that this trial might face? You know, that's our job, right We look for problems, look for trying to measure up if there's any risk here, and we've identified three. One is that the phase two data wasn't as easy to interpret because the control army
in it. That initial data that looked great didn't behave as we thought it should have done. The second issue is that in the Phase three they're unrolling some healthier patients. What is that going to? Can you therefore use the phase two to bridge your thoughts to the phase three? And on top of that, here's an interesting part. Who
makes COVID shots well, Fizer, BioNTech, and Moderna. Another study showed that if you use COVID shots within one hundred days, of one of these immadiotherapy drives in cancer patients, they survive longer, they have better survival rates. What if that happened in the MODERNA trial the control arm has COVID shots in it, and that lifts up the survival if that data was correct. So all these things makes us
a little bit worried about this data coming. And of course WADERNA has other issues to deal with, which I'm sure you're going to come up to, which is that i FDA rejection to accepting their file for the flu vaccine, which is blew my mind.
I have to.
Say, well, this administration doesn't like vaccines period. So and it's been a brutal flu season, right Sam, I mean it's nothing kind. I mean I think something like twenty two million Americans have fallen ill to the flu.
Yeah, they have, and to be just called it. The issue is now they're deciding what flu vaccine to give us in the US and Europe in a couple of months of bicht in nine months time, as nonsense. This is the flu. These are viruses. They change all the time.
We've learned that.
Right, here's a technology that could have potentially enabled you M R and A vaccines to react much quicker, nearer the time, when you know what training need to target. This could have been the approval that the world needs. I mean, in this world we need to be able to deal with these infectious is that we've learned our lessons,
haven't we. Unfortunately, the person at the head of the division of the of the FDA called Sieber, made a decision unilaterally by the look of it, based on what people have reported, that he doesn't want to review this file having they Mona had all the right things in place, they had discussed with the FDA, they had the allowance to go ahead, They did the trial that's in line with other people's trials. It just doesn't make any sense. And I tell you what that really worries me about
any company interacting with the FDA. How can you know that you're not going to get a next week or six months, or ten months or twelve months down the road, a random rejection despite the discussions you've had.
So how are these big healthcare companies, pharmaceutical companies, biotech companies, how are they dealing with the FDA? Because it seems to be a very difficult relationship at the moment.
Paul only a week before we were talking about the FDA showing its teeth when he came out and said, HYMN says to stop selling copycat drugs, which it had no right to sell. And now we have this this uncertainty is a problem, and they're all trying to manage it. The larger companies can manage it because they have teams
of people, et cetera. But it's the biotechs that suffer because they have limited amounts of cash on a relative basis, and we've had several of these things that have hit the block with regards to irregulatory pushback, which you didn't expect to have. So it is a problem for the biotech sector're more than the pharmacy.
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Let's switch gears here talk about the real estate business here in the United States. We can do that with Jeff Langboun. He's to read analyst for the US Is it all just data.
Centers today, Jeff?
Is that all people want to talk to you about because it seems like that's the AI play in real estate.
Well, that's that's one way to play AI from a positive perspective, okay, But right now what people are thinking about is what the impact is going to be on office space If AI makes all of these industries that lease office space irrelevant, Okay, what does that mean for
demand for space? And you know, we saw last week that you know, that started with software and then it went to you know, industry after industry and ended up with the real estate brokers and eventually the office roads getting hit hard.
So so far, this is just kind of fear that's wafting across the market. Have we actually seen any evidence of this happening.
Not yet, And in fact, we've seen some of the opposite. Leasing velocity has been at the highest level since before the pandemic in markets like New York and San Francisco. The reats that we follow, names like sl Green Bornado, Boston properties are now BXP. These guys are reporting very
strong leasing volumes. We're starting to see occupancies tick up off the bottom in their portfolios, and you know, one of the one of the dynamics at play is that AI firms are leasing space as they grow, and to the extent that companies being impacted by AI start to receive a little bit, there's an offset there.
So your office rate stocks last week sold off on this fear.
Yeah, and it's not a new fear. I mean, it's it's been at play for some time now. You know, work from home kind of worked its way through and everyone kind of got comfortable with where hybrid kind of settled in, and then you know, what was the next thing to hit office? And it was this And it's been you know, it's been out there for probably a couple of quarters. Now, what is the impact going to be? But last week when when software rolled over, it's just compounded.
Is this something where because of the evidence that companies are still leased in quite a bit of space, that we're going to see a just as sharp recovery.
Well, that's possible, but you know, there's also the risk that you know, the equity markets are turbulent and forecasting right, and so there is the possibility that there will be negative leasing news to come. It's certainly not showing up in the numbers now. And we do think and this is backed up by some survey work that we just did last week of office workers in both New York
and San Francisco. We actually think that they're there's still a period of time to come where firms are actually leasing more space, they're expanding their headcount to try and figure out how to take advantage of AI and to grow their business. And that could actually, you know, I don't know about a sharp snapback, but it could you know, prolong the positive vibes for some time.
What's the sector of the remarket that you like the most right now?
Senior housing is I mean, you know, it's it's the one aspect where you cannot refute the demand story at all. And at the same time, where real estate guys typically love to build what to take advantage of those demand stories. There's not a there's not much senior housing coming out of the ground, so there's a huge supply demand imbalance.
Okay, but is senior housing more attractive in certain markets over other markets? How do you pick between winners and losers when it comes to senior housing.
It's really more about the local operator than it is about the specific market. I mean, obviously if you're in a place where you know, the economics aren't as strong and you don't have this affluent a potential resident base, and that's going to you know, potentially impact but.
Local strong, local operators.
When there's not a lot of supply coming out of the ground, and you know you basically just have an aging American population that is going to need housing solutions. It's really a play across the board thirty seconds. Why isn't there the supply cost of capital is still a little bit elevated, and it's tough to get It's tough for developers to get capital and and underwrite new deals to make sense. Really, man, you want to you want
to start putting capital to work. Yeah, I'm sure there are developers who would who would take your money.
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