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May 17, 2021
Discovery and AT&T announced on May 17 that Discovery and AT&T’s WarnerMedia will merge to form a large standalone media company. The new firm (which was not named) will have tremendous reach via the combined networks, including TNT, CNN, Discovery, and HGTV, along with a massive content library of some of the best known scripted and unscripted programming. We are relatively confident that the deal will be approved by regulators and close in 2022 since it removes one vertically integrated player from the market and the overall merger size is smaller than the 2019 Disney/Fox acquisition that largely sailed through albeit under the Trump administration. We expect the Discovery shareholder vote will be largely painless as the two major holders with almost 50% voting control agreed to support the deal.
Apr 20, 2021
Tobacco stocks seem likely to move lower today following media reports that the Biden administration is considering lowering the nicotine and menthol levels in cigarettes in the U.S. The introduction of such measures does not form our base-case assumption for the purposes of forecasting cash flows, but it is one of the ESG risks we have identified, and is captured in our bear-case valuations. There is little evidence to suggest the change in administration has increased the probability of these events occurring, so we maintain our valuations and wide moat and negative trend ratings for the cigarette makers with exposure to the U.S. cigarette market: Altria, British American Tobacco and Imperial Brands. Negative headlines such as this have spooked investors since 2017, and the tobacco group is undervalued relative to our estimate of intrinsic value. Our picks remain Philip Morris International, whose exposure to the U.S. is limited to a revenue share of its ma
Apr 15, 2021
Thermo Fisher Scientific announced on April 15 that it will acquire the contract research organization PPD for around $17.4 billion (including $3.5 billion in debt). This news doesn t surprise us. Thermo Fisher, being one of the biggest financial beneficiaries of the coronavirus pandemic, has significant capital to deploy, ample interest in the contract research segment, and acquisition-fueled growth ambitions. The price of $47.50 per share doesn t strike us as particularly egregious; while it represents a roughly 30% premium to our stand-alone valuation of PPD, it is unlikely to make a meaningful impact on our valuation of the firm that generated more than $8 billion in operating cash flows in fiscal 2020 and is sitting on more than $10 billion in cash. Thermo Fisher also expects annual cost synergies of $75 million, which are not unrealistic. Importantly, this acquisition supports our thesis on the overall attractiveness of the contract research segment: PP
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