Happy merger Monday! T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) are trying to tie the knot again this week with an all-stock deal worth $26 billion. But just because the companies have decided to play nice doesn't mean the Trump administration will, too.
In this episode of MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss what we know about the deal so far and why the market is selling off shares of both companies on the news. Also, McDonald's (NYSE:MCD) stock is having its best day in over a year on a nice earnings report; Chipotle (NYSE:CMG) is shelving the breakfast conversation (for now); and Disney (NYSE:DIS) shares pop a little on a record-breaking box office weekend.
A full transcript follows the video.
This video was recorded on April 30, 2018.
Chris Hill: It's Monday, April 30th. This is MarketFoolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, Bill Barker. Happy merger Monday!
Bill Barker: Oh, thank you!
Hill: I like it when Wall Street tropes live up to their name. I like when merger Monday happens. It makes it a little easier to decide what we're going to talk about.
Barker: It wasn't a long weekend this weekend, but it was long enough for everybody to get the lawyers together and iron out some details while the market's closed. So, yeah, you'll see more of this. There's been a lot of mergers this year.
Hill: We're going to talk about McDonald's and their latest quarter, and yes, we will get to the weekend box office, which was record-breaking, but we have to start with T-Mobile and Sprint. T-Mobile buying Sprint for $26 billion in stock. It's an all-stock deal. The combined company is going to stick with the T-Mobile name, and more importantly for entertainment purposes, John Legere, the CEO of T-Mobile, will remain as CEO of this new entity.
"This new entity," I say that as though it's a done deal. Yet, when you look at what's happening to shares of both T-Mobile and Sprint, both of which are down right now, for all the temptation to say, "The third time's a charm, they're actually going to make this work," right now, Wall Street is acting as though this deal is not going to happen.
Barker: Yeah. This has been a long time coming. There have been a lot of variations over the years on it, going back to 2014 when they first discussed it and proposed it, and ultimately dropped it because they were given the indications that it would not be approved. That was a different administration, 2014. They got back to talking about it last year, 2017. That hit some bumps. But today, in their minds, according to them, it's on. And according to Wall Street, there's nothing that's really changed here.
Hill: I thought that, from a messaging standpoint, the folks at T-Mobile and Sprint did a great job of, in their announcement of this deal, laying the groundwork for as smooth as possible an approval from the U.S. Justice Department as they possibly could, in terms of talking about competition, what it's going to be not just in terms of competition with the leaders in this industry, AT&T and Verizon, but also the wins for consumers.
I thought everything was spot on with one exception, and that was talking about how this was going to create a lot of jobs. And I just thought, come on. Come on, guys! Please don't act like there aren't going to be layoffs involved in a merger of this size. Please don't act as though there are zero redundancies between the third and fourth largest telecoms in America.
Barker: Well, the announcement sort of read like a checklist of what you're trying to get in front of this Administration to get their approval, citing the tax cuts being helpful to this deal, and as you mentioned, jobs, we'll come back to that in a second, competition with China. There seems to be a very specific audience that you're working toward. Now, whether that audience, that being the top of the administration, really is the deciding vote here, I wouldn't speculate on. But, the positive spin for the jobs is that they're going to get together and throw a lot of money at the 5G network, and that's where the jobs are. So, your points, that this would obviously involve some redundancies, is accurate. They're seeing that and raising the, "Oh, but look at the 5G and how much we're going to devote to that."
Hill: And I'm not a tech person, but as I understand it, 5G, that's one better than 4G, right?
Barker: It's 25% better than 4G.
Hill: Now I'm interested. I wasn't before, but now I am. Can we talk about these two CEOs for a second, Marcelo Claure, who's the CEO of Sprint, and John Legere from T-Mobile? I'll give you a minute to think about this, in terms of animosity between CEOs. Because, if you didn't know anything about these two and their history going at one another, and you just watched them on the set of CNBC's Squawk on the Street, if you just saw them sitting on the set with Jim Cramer and Carl Quintanilla, you'd think, "Oh, my goodness, these old pals have gotten their businesses together. Isn't this great?" And you would have no idea the names they have called each other in the past, Claure calling John Legere a con artist, Legere dismissing Claure and saying, and I'm quoting here, "Stay in the shallow end of the pool, you don't want to come in the deep end where the big boys are," I mean, just, really getting personal with one another. But, I suppose, in the hopes that this deal gets approved, money solves everything. There's a price at which Claure says, "Alright, sure, we'll sell this company and you can be the CEO."
Barker: Yeah, everybody has their price, and the price today seems to be $146 billion, the combined company would have, when you include all the debt, depending on where the stock price is at any particular moment. Right, they've called each other names, but for the right amount of money, they'll stop calling each other names and be friends. And that's not too dissimilar from plenty of things that we've seen in the political world lately.
Hill: It's true, although I was spending a little bit of time trying to think of the last time, in the business world, we saw CEOs who just flat-out didn't like each other, or at least, the public-facing versions of them didn't like one another. Maybe behind closed doors, there's a little bit more friendliness toward one another. But we're talking about years of history of these two just openly mocking one another and their overall businesses.
Barker: Yeah. CNBC has a page on its site right now that goes through a number of the Twitter insults over the years, so if you want to be entertained, you can look that up. Some of which are not ... you run a tighter ship here, there are some words in here you're not allowed to say on your network here, in their tweets.
Hill: Oh, really?
Barker: Their tweets that CNBC is publishing.
Hill: We try and run a tight ship around here, in terms of our language.
Barker: Unlike some establishments that I can think of, including CNBC and other things that made the news over the weekend.
Hill: [laughs] Although we did have a recent snafu here --
Barker: Oh, right!
Hill: Yeah. But, let's move on from there. So, at the end of the day, when you look at these stocks, do you look at this and think, "Do you know what? The market is speaking," granted it's the short-term, "loudly and clearly, this deal is not going through." Would you be at all tempted to throw down a couple of bucks on shares of Sprint, just thinking, maybe this doesn't go through, but at some point, someone is going to buy them, because the stock's on sale today? Or would you just stay away altogether?
Barker: I would stay away. In terms of investing for the discounted cash flow of the company over the long term, it's being controlled by ... not rumors, there are legitimate concerns about whether this can go through. If you think you have insight that goes deeper than the markets on the percentage chance that this goes through, that being the market's discounting -- there's some percent chance that it goes through, but it's less than 50-50, is the way the betting looks right now. Why I would have a better read on that than the market after looking at this for a few minutes today, I don't know. Plenty of people will, though. They'll decide that they think they know what the outcome is going to be and bet accordingly. But that's what it is, it's a bet.
Hill: Let's move on to McDonald's. McDonald's shareholders, congratulations! You're having your best day in over a year. Shares of McDonald's up 5% after first quarter profits came in higher than expected. Their same-store sales in the U.S. were, at least in terms of that metric, the shining star of the globe, because U.S. comps were a good bit higher than international comps. I found it interesting that what was really driving that was the larger ticket price. Interesting in the sense that McDonald's really does push the value proposition of their menu. So, the fact that they were able to raise comps in the U.S. on a larger ticket order, one, is interesting, and two, good for them.
Barker: Alright, well, one thing is, I'm going to possibly correct you, or at least try to get at the source of your information --
Hill: Or misinformation.
Barker: Well, I have the U.S. comps at 2.9% and global comps at 5.5%.
Hill: Oh! Then, clearly, that's misinformation, because I saw global comps up not even 1%. But, clearly I misread that.
Barker: Well, there may have been some currency translation things, or you might just be wrong.
I don't know! I'm trying to figure it out or find out whether the data that I'm looking at is wrong, which I hope is not the case. Anyway. 2.9% up in the U.S., how good is that? Well, it's definitely good. They have a lot of restaurants, and most of that is from inflation on the ticket price. They would say this is raising prices, not that they're getting more traffic, but that they successfully raised prices, and they raised prices a little bit more, but not a lot more, than inflation. Let's round 2.9% to 3%, inflation over that time period has been close to 2%. Still doing a good job raising prices.
Internationally, some parts of the world are growing 7-8% on comps. Again, I don't know if that's affected in a large chunk by the currency translation or not, but there are a lot of restaurants. They have successfully refranchised a lot. If you look at their total numbers, revenue for the company is not really going up over time. They're getting more profitable by refranchising, and they have a lower risk model that way.
Hill: I figured out my mistake. You're correct. And you know how much I hate to say those words out loud. Global same-store sales growth, 5.5%. The 0.8% number that I saw had to do with global guest counts, which enables a teaching moment, which is, when we're talking about same-store sales, there are a couple of ways to get there. One is to get more people through the door. The other is to raise prices. And, at least for this latest quarter, McDonald's is doing a little bit better job of effectively raising prices than they are at getting more people through the door.
Barker: Yes. They are doing, basically, I think, flat in terms of traffic in the U.S., and as you say, almost up 1% in terms of traffic internationally. So, that's not a lot. Still, given the number of stores that they have, 1% traffic is good, and better than a lot of the other companies in the fast-food space are doing these days.
Hill: Interesting that all-day breakfast, which was such a big driver when it was first unveiled for the first year or so, in this latest quarter, McDonald's admitted, "Yea, we're dealing with some higher competition on the breakfast front." So, that's something that presumably they will look to work on over the next year or so.
Barker: Yeah, success invites competition. Everybody is not going to just watch McDonald's succeed wildly at that and not copy them.
Hill: The exception being Chipotle. [laughs]
Barker: As we've indicated, now that there's new management, there may be some reconsideration of whether breakfast could be part of their structure. I don't understand why not.
Hill: And Brian Niccol, the new CEO at Chipotle, on the latest call, he essentially put the question of breakfast to the side. He didn't dismiss it outright, but he basically said, "There are other things we're going to focus on, and we'll revisit that sometime later." So, I would be surprised if, two years from now, we were sitting here and Chipotle, if they hadn't unveiled breakfast, they were not at least in the process of it.
Barker: I would agree that it seems to be an obvious opportunity for them. It's seemed that way for years, though, and they have their reasons, seemingly having to do with the turnover of the ingredients and the transition issues that they would have going from breakfast to lunch. I don't know, I think they're smart enough to figure that out.
But, they need to get people coming in, and that's what they're focusing on, increasing the traffic. And they do have a lot of things to solve on their plate. So, I can see not taking on breakfast as well at the moment, given new management and a decision to focus. They have opportunities in advertising there as well.
But, getting back to the competition in the all-day breakfast, who else is doing that? Nobody else, I think, has gotten the same bang for getting into that.
Hill: Not so much, but just in terms of those hours, I saw one analyst talking about Burger King making some strides in the traditional breakfast hours. As you said, when they see the success, it invites competition. And to go back to Brian Niccol for a second, as we've talked about before, it's always been a little mystifying that Chipotle appears to be the only restaurant in America that cannot figure out how to do breakfast and then follow it up with lunch and dinner, when pretty much every other restaurant, whether it's a national chain or not, has figured out how to do that. That being said, if you're Brian Niccol and you walk in, when it comes to food items, isn't it fixing queso No. 1 on your list? Isn't it No. 1 through five, where you just go, "My God, what is this? If you tried to serve this at Taco Bell, where I used to work, you'd be thrown out and arrested."
Barker: I suppose. Although, one fears what he might do with queso if he follows the Taco Bell script. It could be Doritos-flavored queso, or something like that.
Hill: You know what? If they rolled that out, I would be first in line.
Barker: You would be first, but I'm not sure that all of Chipotle's audience would like a Taco Bell-ization of the Chipotle experience.
Hill: I'm not saying across the board. But come on, it's queso. Nobody's looking for healthy queso, no one wants healthy queso. Even when they rolled it out and they were like, "Oh, it doesn't have stabilizers in it!" I just remember thinking, "I don't know what stabilizers are, but I now know that they are a key ingredient of queso, because this is terrible."
Barker: [laughs] Well, I haven't tried the queso there. You have.
Barker: And you're appalled by it.
Hill: "Appalled" is too strong a word.
Barker: No it's not. [laughs]
Hill: I just thought, "No, this isn't doing it. This is not doing it." Quick thanks to Jack (unclear 16:32), who's a Stock Advisor member from Florida who came by on Friday of last week, along with Lee Fry and his wife Lisa, also Stock Advisor members. They came and caught our taping of Motley Fool Money on Friday. And Jack was very kind to bring a bottle of Palm Ridge Reserve Whiskey. I was unaware that any place in Central Florida was producing whiskey, but this is a fine-looking bottle that I will be breaking out at some point before FoolFest.
Barker: You have not finished it yet.
Hill: I haven't even opened it yet. But, thank you to Jack for that. We should, really quick, mention Walt Disney shares. Up about 2% this morning, which makes sense when you realize that Avengers Infinity War set new records for opening weekend box office. $250 million here in the U.S., $630 million worldwide. I haven't seen it, you haven't seen it, but clearly plenty of people have. I'm hoping to get there this week. But, this is just one of those times where you sit back and go, "Oh, right, yeah, there was that time that Bob Iger bought Marvel." [laughs] And whatever they paid for Marvel, I think the number was $4.4 billion or something like that, but whatever, whatever they paid -- maybe it was more than that. I should look that up.
Barker: That was a good buy. Star Wars was a good buy. Pixar was a good buy. When they get all those universes together, meeting on the Disney screen, that'll be awesome.
Hill: All of them?
Barker: Like, I don't know, The Incredibles vs. The Avengers on Tatooine.
Hill: OK, yeah.
Barker: Or on the Death Star. You're not paying for that? Of course you're paying for that!
Hill: I am, although, historically, I think we know what happens to structures called Death Star. They don't end well.
Barker: [laughs] No, but these guys all escape. They get off. Obviously, it's going to blow up.
Hill: Is it safe to say that you are more looking forward to the sequel for The Incredibles than you are to see Infinity War? Because, you've talked about The Incredibles as a Mount Rushmore Pixar movie. It's one of your all-time favorites. And I see you as someone saying, "Kids, I don't know if you're going to this opening weekend, but I am."
Barker: I think The Incredibles is one of the top four or five James Bond movies ever made. It's pretty much a Bond movie.
Hill: OK, sell me on that.
Barker: You know, the mountainlair that Syndrome is in blows up. It feels very Bond-ish. Getting in there.
Hill: Yeah, there are some James Bond elements.
Barker: Some of the music is. It hints toward it.
Hill: Like any of the classic Bond movies -- first of all, the great Bond movies have really good Bond villains, and that particular villain has plenty of henchmen who get disposed of. And in The Incredibles, Syndrome has a ton of henchmen -- who, of course, you never see their faces because they're just wearing helmets and it's like, they're taken out.
Barker: Yeah. I'm looking forward to The Incredibles and the Han Solo movie. Disney just ... they had Black Panther, they have Avengers, and I don't know -- Avengers was probably the most anticipated movie of the year on their schedule, but Han Solo is up there too.
Hill: Yes, there's a Han Solo movie. There's Ant-Man and the Wasp.
Barker: That pales to these. Black Panther was highly anticipated. Boy, it's amazing what they keep doing!
Hill: And it's nice if you're a shareholder, because it's a nice reminder that, OK, yeah, the ESPN stuff isn't firing on all cylinders as we would necessarily like, but this other stuff seems to be working out.
Barker: Well, the ESPN stuff, I think you have ... I don't want to characterize it incorrectly, but at times, it feels like you've said, "Oh, this ESPN thing, don't pay as much attention to that as you're hearing, because look at everything else that Disney is doing." ESPN is not the critical point of failure that everybody is afraid of. And having listened recently to Bill Simmons talk about his experience there on the Marc Maron podcast -- have you heard that?
Barker: It seemed obvious, certainly in retrospect to him, that they missed how big cord-cutting was going to be for them.
Hill: Aren't most things obvious in hindsight? [laughs]
Barker: I'm saying it's obvious in hindsight, I'm not sure that he is saying it was obvious only in hindsight. He doesn't claim to have superior insight into the business, but it seems like he recounts it as, "They didn't see this coming at all." Like, they had to be educated on the words cord-cutting, kind of thing.
Hill: To your potential mischaracterization, I would say you are half-right in terms of how I have thought about ESPN and what it means for Disney shareholders. I do think that the amount of coverage it has gotten is overblown. I think, the more important piece is, certainly from Wall Street's standpoint, there was a really good stretch of time where ESPN got an outsized amount of negative focus in terms of investors, and part of that was an unspoken assumption that this is a problem that Disney will never be able to fix. Like, that was the part that always mystified me.
It wasn't simply, "This appears to be a problem for the Walt Disney Corporation, that they are year over year losing subscribers, and therefore year over year losing tens, if not hundreds, of millions of dollars that they used to have coming through the front door." But, the last part of it was, "I don't think they're ever going to fix this." And I always thought that was crazy, as though Bob Iger was in an ivory tower of sorts and just saying, "Well, that was a nice run while it lasted. I guess there's nothing we can do about it now." And I just thought, no, they're going to try to figure it out. And I think with this streaming app, it's certainly a really good first step.
Barker: The middle road between those two would be, they don't appreciate how big of a problem this is. Not that they're not ever going to be able to fix it, or they're going to start losing money, or something like that. They're blindsided by what's going to happen, and they're living in this world of expecting this to turn around, and it's just going to get worse. And they don't appreciate it. Now, I don't know how much of that is the case, but they've always been more diversified. And the narrative had gotten like, "Disney is really ESPN with some other stuff."
Barker: That was the narrative shorthand that people were trying to put out there, especially while everything was going well, and ESPN was firing on all cylinders. And it was never really the case, and it's not the case today, it's not the case that they're just movies today. They're a lot of things.
Hill: Thanks for being here!
Barker: Thank you!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Bill Barker owns shares of Walt Disney. Chris Hill owns shares of Walt Disney. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Twitter, Verizon Communications, and Walt Disney. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.