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Paramount updating.
It's bid for Warner Brothers, but it did not increase its price. It's sticking to that thirty dollars a share offer for Warner Brothers. But what they did do is offer some more commitment on financing. Forty one billion dollar new equity backstop.
KEITHA.
Rongenathen is Bloomberg Intelligence analyst on US Media and she's.
Here with us. Now does this move the needle at all? Here?
Gita for Paramount to basically talk about the financing and how it's going to backstop it by the Ellison family, but not change the actual price.
Yeah, not completely sure, Scarlett. I do think that they need to up the price. You know, Warner Brothers Discovery. Of course, the main concern that they raised was financing, but they also called the proposal inadequate, inferior to Netflix, and illusory. The inadequate really stems from the fact that they feel that Paramount Skuid Dance is undervaluing their TV
network business pretty substantially. Plus they also talk about the extra almost two dollars a share that they would need from Paramount if they were to walk away from a Netflix. This is for this is to cover both the termination fee that Warner Brothers Discovery would own would owe Netflix, as well as, you know, some of the financing costs.
So there's all of that.
You know, you kind of put all of that match together and we come up with at least a thirty two dollars fifty cent increased bid that Paramount would need to present in order to kind of get the Warner Brothers Discovery board back to the table. So, yes, the financing helps a little bit, but not sure it really changes the conversation.
We haven't heard a whole lot from Netflix recently. Are they just quietly sitting on assign lines and confident in their bid?
So they did, you know, put out a letter to employees shareholders just kind of reiterating their commitment to the deal. They think that it will go through. They don't think they will have, you know, huge problems with the regulators. And it was interesting today even in the Warner Brothers Discovery letter that they put out suggesting that you know, they don't see or they rather that they view both
of the deals as equal from a regulatory perspective. And one of the key numbers that they highlighted the Warner Brothers Discovery team was the nine billion dollars in synergies. So Paramount Skydan's basically talking about three billion dollars in centergies from its Skydance deals six billion dollars from the you know, Warner Brothers Discovery deals, saying that that will actually put a lot of you know that that's bad
for Hollywood. Sure, it would result in a lot of job losses, whereas the Netflix deal might actually be better.
So who knows, And I mean, this is something that's going to play out over the next year and a half to two years. Githa. We know that Jared Kushner, the President's son in law, his private aquity firm, Affinity Partners, was involved in the Paramount Skuydance deal. It was supposed to contribute two hundred million dollars to the financing, but it has since pulled out of this bid, perhaps because
of potential conflicts of interest. Does this change the scope of Paramount Suiddances offer, Does it make it more attractive, less attractive, or does it not really do much?
I think yes, you're right, Scarlett. The optics were definitely bad and it kind of, you know, looked a little bit questionable. So now they're kind of removing that, which is which is definitely good. I think it's more positive for the Paramount Skydance deal. That said, though, I think they really really need to deliver a knockout bid, and the knockout bid that we're kind of looking for is
something like thirty five dollars. I think that really then gets Netflix thinking about, Okay, do we need to re up our offer, and everybody gets excited at the Warner Brothers Discovery board again until they do some thing really significant on the pricing front. I don't think the Warner Brothers Discovery board is going to want to come back to the table to re engage Keith.
Have one of the comparable deals out there for a spin off of Warner Brothers. Cable Networks is what Comcast is spinning out. It's cable Networks and a company called Versant is that publicly traded yet have they done that?
Spin out.
Yeah, they did. You know, they have a when issued trading. The actual the complete distribution will will happen sometime in January when it will start trading, but we do you know they with the when issue trading, we do have
some price discovery for that stock. So right now, if you kind of look at where versus just trading, we get a d or a forward EBIDOM multiple of about five point two times, which is higher than what paramount Skydance had suggested for the valuation of the Warner Brothers Discovery at four point five x. So already there we're kind of seeing some signs that the valuation of the global networks business should be slightly higher.
Do you see any other m and A taking place in media? I know we're all fixated on the bidding war for Warner Brothers Discovery, but at one point Comcast was a potential bidder and it dropped out fairly early. But are there any other deals kind of percolating in the background that you would keep your eye on.
I think there's just a lot of consolidation that's waiting to happen. Scarlett. I think people first want to wait and watch a little bit see what happens with the Warner Brothers Discovery situation kind of test out what's happening with the regulators. But yeah, there are absolutely a lot of smaller players, and you know, Netflix becoming bigger or Paramount becoming bigger really kind of forces everybody to take a hard look at their portfolios and see what they
should do next. As you rightly mentioned, NBC is the one name that definitely comes up to mind. Comcasts NBC they need something. Their Peacock platform is really subscale, so it's really going to depend on whether they want to do some kind of partnership or they actually need to go out and acquire some other smaller networks, maybe AMC networks,
maybe some other kind of you know, streaming business. So a lot of deals waiting to happen, but I think this is really the big one that everybody's focused on at the moment.
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Let's switch gears to the airline business. Bankrupt Spirit Aviation Holdings, you remember them, is in revived discussions to merge with front Tier Group Holdings in a deal that could rescue the deep discount airline from insolvency. Let's break this potential deal down. But George Ferguson, senior airspace, defense and airlines analysts for Bloomberg Intelligence, George, does it make sense putting these two I'm going to call them struggling regional airlines
or discount airlines? Does it make sense to put that together?
You know what?
I think it might actually so this is you know, back to the future. Originally sort of I think, you know what we saw sort of set off a little fight for Spirit Airlines was the initial uh you know
merger purchase from Frontier. Frontier taking the Spirit, jet Blue decided they didn't want to let that those two you know coalesce, you know, merge together and become a major competitor to them, So they stepped in the middle, tried to grab Spirit and after that everyone Spirit Frontier jet Blue just went through some pretty rough times as fairs
weakened in the market. I think, you know, the economy Flyer kind of faded out a little bit on higher inflation and other problems, and so, you know, I think where we're back to, though, is that Spirit and Frontier had very similar business, uh you know, types, similar cultures. I think if you put the two airplace airlines together, now you have an airline that have something like three hundred and fifty seats, I think there's enough other markets
they could go after. I mean, in comparison, you know Southwest, which is is a domestic and sort of near to the US kind of market airline, they have seven hundred airplanes. They find a place to put all those airplanes. So I think it could sort of charge growth up pretty quickly for Frontier, sort of help them lay in an extra hundred airplanes might not be a bad idea, and they might get a really nice price on it.
But do two week airlines make a strong airline.
I mean, look, right now, I think the economy portion of the business is reeling. It has too much capacity. Spirit is shedding. Some of those airplanes are going to go elsewhere. So we're you know, we're talking about an airline that only has one hundred and I think if you want to be competitive in the market. You have to be able to fly sort of coast to coast off of your customers, you know, a full comple men
of destinations. I think you need more half for those loyalty programs that helped drive some better results as you sell them, you know, credit cards and they buy their groceries and things like that that on it. So I don't think it hurts for Frontier to try to get larger and to do it, to supercharge it through taking one hundred airplanes out of Spirit. I don't think it's a I don't think it's a bad idea.
Will the regulators allow this church, I.
Don't think it's going to be a problem, right. I don't think it was originally a problem when when Jet Blue was looking at Spirit and when Frontier was looking at Spirit. But now Spirit's even smaller. We kind of put them together today, looking at available seat miles in one queue, a combined airline looked to us to be the sixth largest in the country.
It was just.
Ahead of Jet Blue. If it adds I don't know. If it adds you know, some premium seating and knock some seating out of some of those airplanes, it might not even beat Jet Blue. I don't think this is a big issue for the US market.
What would this mean for jobs? Jobs at Spirit, jobs at Frontier.
I mean, I think it could probably preserve some jobs, because I don't think they're going to want to shrink the airline operations. But I do think if Spirit doesn't find someone to go with soon, that they may cease to exist, and that obviously hurts jobs.
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Marry Scarthoompaul Sweeney live here in our Bloomberg and Director Brooker Studio in New York City streaming live on.
YouTube as well.
Well. Home Builder Leonar reported some earnings today, A little bit disappointing here on stock down five percent today, down eighteen percent year to date. It's a big company, it's kind of market capped for like twenty eight billion dollars. But I'm looking at some of the homebuilders, a lot of them are down double digits on a a year to date basis.
Yere.
Let's break it down with Drew redding Hope, building analyst for Bloomberg Intelligence. Drew talk to us about Leonar. What did they say to the street here with their latest earnings?
Yeah, this was a This was a tough print for Leonard at this cord. They came into the quarter with a pretty low bar. Investor expectations had been coming down, but they still disappointed on both orders and margins. And even more concerning was the guidance they issued for the first quarter, which was short on orders, closings, and margins. So we think that consensus needs to come down pretty
sharply here. You know, what this tells us is that even though rates have fallen to kind of that low six percent range, I think we're about six point three now, it doesn't appear that they're significantly catalyzing demand, which was what a lot of people had been expecting. So I think that points out that, you know, there's other things going on. It's you know, we've we've said in the past it's not just rates, but its prices and overall affordability.
But something we've heard pretty consistently from the builders is that consumer confidence is really holding the market back. There's concerns over the direction of the economy and concerns about the labor market. If look, if you don't have a job, you're you're certainly not buying a house. So we expect in this environment the use of sales incentives to remain elevate it and that's going to continue to pressure margins.
Yeah, I mean, they get volume, but they don't get the profitability. So home builders are facing a lot of challenges. They also face competition from the resale market. Talk a little bit about the numbers involved here in terms of new construction versus existing homes.
Yeah, that's a that's a great point. You know, the lack of force sale inventory in the resale market was a huge benefit to the builders over the last couple of years. There weren't a lot of options with funneled buyers into the new home market, where you know, builders have been able to make monthly payments more attractive for
their use of buydowns. That dynamic has shifted over the last year where we're starting to see pretty significant increases in for sale listings in the resale market, particularly in the most important markets for the builders. You know, think Florida, Texas, California. So all of a sudden, there's this new competition for them, and in order to get a sale, they're having to fight harder for each one, which means higher incentives, more pressure on pricing. Drue.
I'm looking at the existing home sales in the United States. It has been been running at about a four million home rate for the last few years, but historically that's been a lot higher, hasn't it. So there just there's just not a lot of supply of existing homes out there in the marketplace.
And is that an interest rate story?
Yeah, it's partly an interest rate story. You know. The one thing that we've consistently pointed out is that if you look at the composition of outstanding mortgages, you have a majority of current mortgage holders who have something well below the prevailing mortgage rate, which is around six percent. Now, a lot of people during the pandemic, we're able to lock in rates in the fours and even you know,
the high threes, some perhaps in the twos. So, you know, the existing home market has really been frozen if you look at total volumes, you know, you mentioned we've been hovering around this four million annualized rate for about three years now, that's that's about twenty percent below what a normalized market would look like. So you know, I think
rates coming in will certainly help. As we look out to next year, we do think that you're going to see perhaps mid to highest single digit growth in the existing home market. But keep in mind we're coming off you know, historically low levels, so some improvement, but I think context is certainly key there well.
And are certainly not the only builder facing these these challenges. How is the company specifically saying or explaining to investors how it's adapting to this new normal of persistent affordability concerns due to softening consumer confidence and a weakening job mar get all these macro headwinds that it has no control over.
Yeah, Lenar has been a pretty interesting example. Remember they're the second largest builder by volume in the country, and they run a production first business, which means their goal is to push volumes, and over the last couple of years they've been willing to sacrifice margin to get volume. So you know, they'll tell you they're bringing a more affordable product to the market, But what we've seen is
a dramatic drop in their gross margins. In just three years, they've gone from you know, a gross margin in the high twenty percent to something in the high teens percent in twenty twenty five, so a very sharp ball. And what they told us last quarter is that, you know, they can only push so hard on this market. The demand just simply isn't there. So in order to get
more sales, the incentives have to keep ratcheting up. So what they told us is that they're they're making some sort of a pivot into where they're looking to sustain their gross margin. So what we want to hear from them on the call is, you know, where do we think that gross margin floor ultimately lands and is the pullback in production that we've started to see it has it normalized?
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The biggest IPO of the year priced last night, Medline. It's not really sexy. It's like a medical device company. But it's like a six plus billion dollar IPO. It's just extraordin. It got some blue chip private equity of folks behind it. I have no idea what this company does, but I know who does, and that's Jonathan Palmer. He's an analyst at Bloomberg Intelligence. He covers all the healthcare
device companies and things like that. And the good thing about Bloomberg Intelligence, We're not an underwriter, we're not a broker dealer. We could write on private companies. We can write research on private companies, we can write research on IPO companies.
And that's exactly what Jonathan did.
So he's out there with a definitive view on this company for investors. Jonathan, what does Mendline do here and why are they coming public?
Thanks Paul for having me.
So.
Medline is what's traditionally thought of as a distributor, but I'd argue it's more than that. So really, this company's been around for decades. It's started by the Mills family in the sixties. In twenty twenty one, they sold to private equity and now they're coming back to the public markets. You know, what they traditionally did was provide distribution and logistics to hospitals.
But over the years they.
Actually started making their own products, so things like masks, strape, sutures, all the stuff that kind of you need into surgery or to take care of patients. It's not too sexy, but it has a much better margin than logistics. So half the company today is their own medline brand products.
Half of it is distribution services. The secret sauce here is that they basically give They don't give it all, but they can essentially give away the distribution and logistics piece while capturing all the margin on the product side.
How much market share do they have?
I mean, I've gone to hospitals before and seen the midline name attached to I don't know, like a bed for instance, or you know the canister on the wall where you get your ro gloves.
Yeah, that's a good question. I mean I think it would depend on the product category. I mean, from the distribution side, they're just a little bit bigger than their peers like Cardinal Health and what was Owen's and Minor. It's kind of a a oligopoly where those big three players are distributing to all the healthcare facilities. You know, in terms of products, you know, it's about half of revenue, so roughly twelve fifteen billion right here.
What about tariffs? How affected by tariffs are there?
Because I can't imagine that these items gloves, masks, swaps, ranges are made in the US.
Well, they do have a fair amount of manufacturing in the United States. They have talked about tariffs a couple hundred million impact this year and next year. I mean to be honest with you, For a be this size and this scale, that that's a pretty surmountable hurdle. You know, it'll get priced in in the next round of contract negotiations and it'll be you know, business as usual going off, going forward.
As a former banker, I just look at the deal dynamics here, upsized offering offering finished north to ten times oversubscribed. Top ten investors in this allocation took more than fifty percent of the shares. Top twenty five investors took about eighty percent of the deal. Here are the private equity guys, are they selling here or is this just company shares?
It's a combination of both. And then the Mills family still owns about twenty percent of the company and they're not selling any shares good.
So what what what are you suppose each here?
Do you think?
I'm sorry?
What what are the U s of proce each here? What are they going to use the money.
For primary to pay down debt? They had about sixteen billion dollars of debt. You know that they levered up on the private equity transaction, and they're paying down a pretty healthy slug of that right here.
Stock hasn't even opened yet.
I mean, Jesus, well, when I was doing this, then is the ticker to watch?
I was doing this if I didn't have it open by ten third, not till the noon hour. Now, I know my boss would come over and smack me with this tennis record. That's happened many times.
You're not allout to do that.
We're opening up this kid, Let's go, let's go.
You had mentioned that some of its traditional competitors, like Cardinal Health, for instance.
Is that still a competitor in that?
Does Cardinal Health also make its own products and sell it under its own name?
They do, but not at the same scale as Medline. And that's, like I mentioned before, really been their secret sauce and how they've outcompeted their peers. The other thing that's interesting is Cardinal. You know, Cardinal is much more of a drug distributor with this medical division. I don't think they want to be in that business long term. Owns and Minor actually just sold their business for a
couple hundred million to private equity. So Medline's the queer number one gold standard player in this space.
Fifteen to seventeen times ford EBITDA Are you kidding me? This isn't a technology company, it's a healthcare company.
Well, to put it into context, though, product companies, you know, the Medtronics, the Becton, Dickinson's, the Abbot Labs, they're all trading twenty times. So really it's getting a discount relative to product companies, and it's kind of priced in line with the healthcare distribution companies like the Cardinal Health, the McKesson and so forth.
I'm looking at the Cornerstone investors. There is at least eight of them. They lined up more than two point three billion dollars in commitments. What does that tell you about the investor base of Medline.
Well, to me, it says that this is a very stable business. I mean, they've talked about growing the top line high single digits and adjusted EBITA by the same or better. I mean, I think this is a story that's going to unfold over multiple years where you know, they're going to come out of the gate, they're going to hit their numbers, they'll pay down debt so their leverage goes down, you know, post this private equity era, and then we'll probably see some more our shareholder friendly
capital deployment, whether it's buybacks. You know, this would seem like a good business to have a divid end.
Ultimately, there's a healthcare industry broadly defined that they like this administration or they concern that maybe some o regulatory riskcty out there.
I think it depends on who you ask, Okay, I mean I think uncertain Nobody likes uncertainty in the business world, right, and there's been a lot of uncertainty around healthcare in particular. I mean, these companies in the service industry have been a lady a little less in the spotlight than let's say the drug and pharmaceutical industry. But you know, at the end of the day, people get sick, they need to go to the hospital, they need operations, they need to see doctors. It's business as usual.
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