Episode Transcript
The Finance Ghost: Welcome to episode 253 of Magic Markets. We are starting to wrap up the year. We’ve only really got a couple of shows to go, and it’s lovely to be doing this with you, Moe.
Here we are in December 2025. It’s almost the end of the year, if you can believe it. Well, I can believe it because I know how tired I feel. I know how tired you feel, so believe it – it’s real.
And despite how tired people are, there are still some crazy corporates out there who like to run around trying to do transactions at this time of year. When I worked in corporate finance, I used to – you’d get these meetings in your diary in, like, November. Just, no. Stop it. Go away, this deal will still be there in January.
And I’ve never understood this. There are corporate execs out there who love nothing more over the festive season than putting together a group of lawyers and advisors and having a swing for a transaction. It’s beyond me.
Mohammed Nalla: Yeah, we all have our horror stories, right, Ghost? I’ve got a horror story. I remember I was working over December because I thought, you know, everyone wants to work in December. It’s nice and relaxed. Johannesburg (I was in Joburg at the time), it’s actually quite a nice place to be in December.
And literally, in that gap between Christmas and New Year’s, where absolutely nothing happens – I shall not name the person, but a certain corporate executive at a large listed South African company decided that they wanted to put a hedge over their shares in what is probably the lowest-liquidity environment you will find in the market.
This leaves the team scrambling around because you’ve got a skeleton crew on the dealing room floor (most of the senior people are on leave). I certainly don’t have any fond memories about that.
But like you say, there’s a certain type of corporate executive who wants to do the deals in the downtime, at the slow time of the year. Whether that’s strategic or not, time will tell.
But that’s a great place to start this particular discussion because even though we’re winding down, those corporate executives aren’t winding down. And hot off the press, as of this morning – I certainly saw it this morning, it was actually late yesterday – we got a new story around Netflix throwing its name in the hat to try and acquire Warner Bros. Discovery.
Now, this is something we’ve touched on in both Magic Markets Premium and here on this particular show because Warner Bros. Discovery has been ‘courted’ by a lot of companies out there. More recently, Paramount Skydance. That’s been led by Larry Ellison’s son. Lots of money coming out there.
And what’s been so interesting is Warner Bros. Discovery was offered around $25 a share by Paramount Skydance, pretty much for the entire business. Remember, Warner Bros. Discovery has some of the streaming business in there; they’ve got some old cable assets there that a lot of players are not interested in.
Paramount Skydance had actually said, "We’re interested in the entire business. Here’s our offer." Warner Bros. said, "Hmmm, we don’t quite like that number. We’re thinking closer to $30 a share."
Now, $30 versus $25 a share, that’s quite a big bump there. So, it’s now cast the net open, and we’ve now got three bidders. This is effectively the second round of bids, and we’ve got three bidders. One of those is still Paramount Skydance. The other is Netflix, and then the third one is Comcast.
And what’s interesting here is that the Netflix offer specifically – that was the news that I just saw yesterday – that’s mostly cash. Netflix is looking at raising (loose wording, here) ‘tens of billions of dollars' in terms of pursuing this deal. But what’s important is that Netflix is only really after their Studios business. It’s the Streaming and Studios piece that they want; they don’t want the legacy cable. And I guess that’s a subtle differentiation vs what Paramount Skydance is putting on the table.
Comcast, that’s the third one out here. Not a lot of people are writing about that. But Comcast, their approach – very similar to Netflix – they’re looking for the Studios and Streaming business.
My big question here, Ghost, and what we really want to unpack is when you get into this hype, when you get into this M&A fever that goes through there, there are a number of errors that can creep up.
And the first of those is, do you overpay for an asset? The other is, do you buy your own hubris? And the third is, forget overpaying, forget the price, how much leverage do you put into this deal, and does that have a material bearing on whether the deal is a success over the longer term or not?
The Finance Ghost: Ah, all of those things. Mergers are so filled with risk. Look, this Netflix – Warner Bros. Discovery one is pretty interesting because – as you say, we did speak about it recently on Magic Markets – there’s still this streaming war underway. And what people always forget to think about is YouTube.
Everyone goes, "Oh, Netflix is the biggest and baddest, and they are the market leader." And, you know, sure. Disney is strong, Prime is strong, Apple is trying some stuff in TV. All of that is great.
But actually, if you have a look at how people are spending most of their streaming hours on TV, it’s YouTube. Why? Because YouTube is free. If you’re willing to suffer through some adverts, it is completely free. And you can find just about anything, and the quality is just getting better and better everywhere I look.
Case in point, this past week, I found some amazing channels for the kids. People who build these crazy robotic solutions with Lego and do these really fun challenges. I mean, it’s great. It’s super educational. It’s free - there it is. Okay, I do pay for YouTube Premium, so I don’t have to suffer through the ads. Life is too short for YouTube ads.
So, the point is that Netflix is actually doing something probably quite sensible here, because there’s more consolidation coming in that space. It needs to happen. So, we’ll see what comes of that.
Whereas sometimes you get other transactions where the rationale is really dicey. And it’s amazing how often FMCG dishes up these dicey, dodgy deals, where you get management teams who just say, "Well, you know, we sell books and that company," (this is a terrible example - I’m going to struggle to finish it, but I’ll try), "That company sells computer hardware and these things belong together because, you know, everyone likes books and needs a keyboard, so why don’t we own these things together?"
It sounds ridiculous and facetious on purpose because that is often the type of rationale that you see out there. And FMCG is the actual worst.
So, what we’ve seen on the JSE recently is an undoing of that kind of thinking by the likes of Tiger Brands and with fantastic results. They’ve done a really fabulous job of actually saying, "Okay, where can we win? Well, let’s go win there. Let’s get rid of stuff we shouldn’t own.”
And we’re seeing a deal play out right now that I think is going to take us down that bad path, which is Premier FMCG and RFG Holdings. Because, why do they belong together? It doesn’t really make sense.
So, M&A can be so interesting. And of course, the company we covered this week in Premium – which is Dick’s Sporting Goods – they’ve just acquired Foot Locker. So, this is their first quarter that includes Foot Locker.
And (we obviously won’t give away what we are covering in Premium, but just to give our listeners to this show some idea), what we thought was most fascinating was just the change in the style of the narrative from last quarter’s call – where the deal hadn’t closed yet, and it was all this very fancy, very flowery, long-term kind of integration stuff, no real details.
Suddenly, this quarter, it’s action time. They’ve got to take some really big steps to get it done. Because M&A is scary, and when you go and do a serious transaction – especially if you buy an underperforming asset – you need to move fast. You need to move really fast.
Mohammed Nalla: Yeah, Ghost, that’s fantastic, right? At the end of the day, the action that you see in the market is what makes markets. And your analogy, with regards to FMCG, is just always so apt.
Because if you’re thinking of M&A, the biggest, baddest deal. If you go all the way back to the 1980s (there was a book written about this – Barbarians at the Gate), there was RJR Nabisco. And I think one of the perils there is that it was one of those classic leveraged buyout deals. It left the company with a mountain of debt and, at the end of the day, that really contributed to the overall ‘pressure’ that you saw on that deal.
But you’ve mentioned, “Do these businesses belong together?” And it’s not just FMCG that does that wrong. We’re talking about Warner Bros. Discovery, so I’m going to use Warner.
One of the earlier businesses within that Warner group was the tie-up, back in 2000, behind AOL and Time Warner. Back then, it was a really large deal. Around $150 billion, I think, thereabouts. It was an all-stock deal. And the narrative was, “We’re marrying the old media with the new economy distribution.”
And maybe timing was bad, because remember, at that time, hubris in the market. It was the dot-com boom, and then the dot-com bust thereafter. That deal resulted in almost a $100 billion write-down. Record losses.
And that’s telling you that even if these businesses supposedly, with the investment thesis, actually belong together, the things that didn’t work are that you’re buying your hubris, you’re buying it late cycle.
Let’s maybe even talk about late cycle, early cycle. Because, on streaming wars, we could argue that’s a late-cycle development as well. And then you leverage on debt. And I think those are some of the key metrics I’ve mentioned that you’ve got to look at, even if you’re looking at businesses that arguably have some sort of synergies.
Now, it’s not always bad news, right? We’ve given examples like this in the past. There was Disney – Pixar. That’s really a deal that worked out quite well. Maybe not the same kind of scale, it was only around $8 billion. But that really was bringing together two very ‘related’ businesses. But what Disney got out of the mix is that they got this really premium animated business, and it helped them really build out some of their technical capabilities in that space.
So, again, I’m not out here pooh-poohing M&A in general. I’m just saying, with regards to some of these deals that are on the table (specifically this one around Warner Bros. Discovery), my concerns are: are we late cycle on some of these deals?
It’s interesting. You’ve mentioned how YouTube is fantastic, yet I don’t see Alphabet’s name on the list of potential bidders for Warner Bros. Discovery. So, maybe there’s something there that they don’t like, or maybe they’re just busy building it out organically.
The fact that there are three bidders here, that we are late cycle, that there’s some debt starting to creep into the narrative – that leaves me very concerned, overall.
The Finance Ghost: No, for sure. And it’s amazing to see how often the same sort of themes play out when these deals close. So, in a turnaround, it’s almost always a change of management. That is, like, first thing.
Because obviously, you need to turn the business around, right? There are very few management teams that survive a change of ownership in a turnaround situation. That’s just a reality.
And then inevitably, it’s kitchen sink time. It’s like, “We’re going to take all of the pain right now.” If you’ve worked in corporate and you’ve worked with corporates, you will realise just how much earnings management goes into the thinking around reporting.
So, case in point, not M&A related, but recently Vodacom released quite good numbers. Actually, in fact, all the telcos have been doing really well because of everything going on in Africa. And now, guess what? After a gazillion years of fighting in court, now they settle the Please Call Me thing.
Why now? Yes, there are a lot of questions around where they are in the legal process, etcetera, etcetera. But there’s no doubt in my mind that somewhere there was a conversation that went along the lines of, "It’s a really good period. This can be absorbed into the numbers. It’s going to be okay."
So, the opposite of that, when you’ve bought a turnaround story, is to say, “If it’s going to be a bad period, it may as well be an awful period.” Because you’re going to be telling people to just, "Oh, no, don’t worry about it. That’s never going to happen again. You know, those were legacy problems. We didn’t really buy that problem. It’s going to be okay now."
And of course, the cheekiest thing about this is that in real life, if you’re running a small business, you can’t just say, "Well, I’ve had this absolutely horrendous quarter, but it’s going to be fine because next quarter is going to be half as good, but the trajectory is going to be good. So, even though I lost my house this quarter, next quarter, I can buy another house. It’ll just be much smaller.”
But in corporate land, where it’s execs earning bonuses based on specific financial periods, specific milestones, there is a lot of earnings smoothing that goes on. So, inevitably, when you see these turnarounds, you can probably expect to see this really bad initial period. And what else does that do? It creates this beautiful base year.
I’ve seen so many charts that go like this in analysts’ presentations: a section where it’s going OK, and then "Oh, no, we bought this thing. And look, it was awful. But since then, our compound annual growth rate is spectacular. Please don’t ask us about our CAGR starting one year prior, because we’re not going to answer that question, and as soon as we can drop the prior years from all the charts in our presentations, rest assured, we will do that as well. But let’s just focus here, everyone. CAGR from this year, and/or adjusted profit growth.”
You know, “Take out that thing we bought. Don’t you worry about it. It’s just a little blip. Don’t worry. Just go through with this earnings CAGR, adjusted EBIT, adjusted EPS.” I mean, it happens all the time. It’s just how the game works.
You can’t avoid this stuff because otherwise you’re going to have to invest in companies that never do M&A. I’d love to actually see some data on that, that might actually be the best way to invest.
But there is some great M&A out there, there really is. It’s relatively few and far between. That’s a fact. And you’ve got to especially be careful of deals done at the relative top of the cycle or where you’re seeing huge premiums paid for the target. Because the money (as with buying a house, as with buying a car, as in private equity), the money is made on the way in, not on the way out of the deal.
You’ve got to buy right, and then you’ve got a good chance. If you’re overpaying in the beginning, the chance of digging yourself out of that hole? Not super high.
Mohammed Nalla: Yeah, you’ve said so much that I agree with, right? I’m casting my mind back to the days when we both worked at an investment bank. And you see all these tricks. You see them in the US, you see them in South Africa. There’s the poison pill, right? Effectively, they take all the pain in a single year – give yourself a nice, beautiful base.
Remember, though. You raise another interesting point, and that is, quite often, when there’s an acquisition or a merger, there’s a bit of a management clean-up. Now, that comes with a very different dynamic because there’s the management, there’s the culture aspect that comes through. Sometimes they bring in new faces. Other times, yes, maybe they do keep some of the executives from the acquired target. Or not.
This actually reminds me of a very good example. You may enjoy this, Ghost. It was the late 1990s. It was the merger of Daimler and Chrysler. You’ll remember that – DaimlerChrysler. That was a company at some point in time. Now, obviously, it doesn’t even exist in that form. I mean, that industry’s been so interesting.
But the reason why this actually pops up in my mind is that I recall that this was really sold to the market as a ‘merger of equals’. Literally, if you looked at a Daimler and you looked at a Chrysler at that point in time (both the companies, but also some of their cars out there), merger of equals.
But in practice, it didn’t end up being that. It actually ended up being a German takeover – Daimler being German, Chrysler being American, there. And this was a great example of a chronic culture clash. Because if you’ve worked in North America and if you’ve worked with Germans and Europeans, you’ll realise how different they can actually be.
And so you had that chronic culture clash. You had a very hierarchical, engineering-driven approach from Daimler, versus what was arguably a scrappy Detroit operation coming through from Chrysler. And so, the combination was eventually unwound within nine years at a fraction of its initial value.
And I think that’s very important. When you’re looking at deals, when you’re looking at M&A, we’ve mentioned late cycle, but we also have to, in that same argument, look at egos. Management egos, CEO egos. Because let’s not gloss over this: there are big egos in the room here. Quite often, it’s seen as ‘empire building’.
You’ve got to be very careful around that, and certainly if it results in the merger or acquisition of companies where there’s a chronic culture clash, that could actually then misalign the operational performance in the business, or effectively just scupper any of that fancy management talk around synergies. You know, “We’re going to get cost savings and synergies.” A lot of things can actually kill those.
And again, just be sensitive to some of those talking points. Because when you’re looking at M&A, yes, it might make sense, but we’ve mentioned a couple of touchpoints there. There’s the leverage, there’s the culture, there’s the are-you-late-cycle-or-not. Just tread very lightly.
Last point I want to land on here, Ghost. There’s a whole other dimension that we haven’t even been speaking about, and that is the rise of private capital. We’ve covered private capital on the show in different ways and forms with some of our brand partners out there. But in the US specifically, lots of concerns around some of the private equity (PE) companies that are out there – can they actually exit these deals as they reach that seven- or eight-year vintage?
And again, as they’re looking to exit, someone’s got to buy that. That’s going to mean M&A. Is it the big listed company that’s buying that? How willing are they to actually pay up a high multiple? Do they run the risk of overpaying? And is that risk in the listed market, or is that risk with the private capital market?
Again, time will tell, but just pay attention. Some of those risk flags are actually popping up.
The Finance Ghost: Yeah, lots of good points there around thinking about where you are in the cycle and what that means for deals. And of course, as we head into a new year, 2025 was a pretty wild year from a geopolitical perspective. A lot has happened. It’s seen some huge shifts, and that’s typically what drives M&A.
Because, for example, if you wake up and you say, "Okay, it’s a good year for emerging markets. This is going to be their year."
You can’t now wake up in your office in London or in New York (or take your pick) and say, "Okay, now we’re going to go and start a business in an emerging market." No, it takes 20 years. It’s way too long. No one has time or patience for that in corporate. So, that’s when acquisitions happen.
People look at it and say, "Okay, the world is changing. We need to position ourselves accordingly. We want exposure to this region or that region or this specific product. Let’s go and find companies that already do that, and then go and acquire them."
So, that’s why you will be able to actually use M&A stats to see what’s really going on in the world from a geopolitical perspective in terms of the shifts, where activity is happening. It’s why you’ll see lots of headlines around, for example, deal activity in Europe.
And then you’ll always see stuff like the IPOs, which is really just further down the journey. That’s all. Today’s angel investment and tomorrow’s private equity deal is an IPO ten years from now, or seven years from now, or whatever the case may be. So, there’s this entire ecosystem around connecting capital and assets.
And a lot of M&A is good. But you’ve just got to be super careful of those corporate deals where, as you’ve said, there’s ego in the way, it’s a bad fit, they’ve overpaid, it’s the wrong point in the cycle, it just doesn’t make sense. If it doesn’t pass the smell test, that’s probably for a very good reason, Moe.
Mohammed Nalla: Indeed. And so, I think the jury’s out on Netflix. We're probably going to have to go - that’s a new development, this Warner Bros. bid - Netflix, we’ve covered as a company, but are they actually now looking at a slightly different strategy? How does that actually matter? We could probably go and do another deep dive on Netflix in Magic Markets Premium at some point in time as the details emerge. But yeah, certainly that’s what makes markets interesting.
Ghost, as we wrap up, as we head towards the end of the year, I think those points you’ve raised are so valid. You don’t wake up tomorrow and all of a sudden it’s a new year and a new market. A lot of these themes seem to carry through.
It has certainly been an interesting year, but this isn’t our last show for the year. We will get to that next week. That’s where we’ve got to leave this show this week, though. I hope you found it interesting. Lots of activity. M&A, certainly interesting.
Whether you’re in the private markets or you’re in the listed markets, just know what’s going on behind the scenes. Because that’s really just so important in terms of being able to calibrate your own risk tolerance to the risk profile that’s out there in the market with both a macro lens, as well as a bottom-up lens coming through there.
To our listeners, we hope you’ve enjoyed that. Let us know what you thought of the show. Hit us up on social media. It's @MagicMarketsPod, @FinanceGhost and @MohammedNalla all on X, or go and find us on LinkedIn. Pop us a note on there.
Until next week, same time, same place. Thanks and cheers.
The Finance Ghost: Ciao.
