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Deal or No Deal

By Chris Hill – Jun 14, 2020 at 7:30PM

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The food delivery space is heating up with twists and turns on the merger and acquisition front.

In this episode of MarketFoolery, Chris Hill chats with Motley Fool contributor Dan Kline about the latest news from the markets. They discuss the latest market swings and dispel some trends, and they examine failed and new mergers in the food delivery space. We also get their take on sports and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 11, 2020.

Chris Hill: It's Thursday, June 11. Welcome to MarketFoolery. I'm Chris Hill. Joining me, once again, it's Dan Kline. Good to see you, my friend.

Dan Kline: Very nice to see you.

Hill: It's palindrome week here on MarketFoolery. We start the week with Dan Kline, we've got some Jason Moser in the middle, and we end the week with Dan Kline. We're going to be talking about, when I think about our stories [laughs] today, Dan, it's almost like our version of Deal or No Deal. We've got some mergers and acquisitions, or lack thereof, to get to, but we're going to --

Kline: No, I would have brought a briefcase with me, that [laughs] absolutely would have been a fun way to do it. I don't actually own a briefcase, [laughs] but I could have gone out to get one.

Hill: We're going to start with the market in general, because as you and I are recording this around lunch time, S&P 500 down more than 3%. And, you know, this is one of those situations where you've got a combination of things going on, part of it, on the health front, is a rise in COVID cases in some states west of the Mississippi. But I have to believe part of this is Jay Powell, the chairman of the Federal Reserve, the press conference he gave late on Wednesday where he basically said, in terms of the economy, this is going to take a while.

And maybe I shouldn't be confused by this, Dan, but I'm a little confused [laughs] why there are some people on Wall Street who are astonished by this, at least when you look at the way the market is trading off today, it seems like there are some people on Wall Street who just said, wait! what? You mean we're not going to immediately bounce back from 40 million people filing for unemployment?

Kline: So, let's normalize this a little bit. We had some crazy upswings last week because there was a tiny sliver of good news and people were allowed to get haircuts and go to restaurants in some limited capacities, and everyone went, "Oh, good, the pandemic is over, back to normal, Disney World to be followed in a couple of weeks. We are good." That was never the reality. The reality was always that we're making a calculated decision that more people are going to risk exposure, and in some cases get infected, but we've decided that that's worth the risk.

We always knew this was going to happen, that cases were going to go up. We're exacerbating that here in Florida, where people just aren't having a lot of regard for social distancing or mask-wearing, though I will say that's not true at places like Universal Studios or at Disney-owned properties. So, some places are doing it really well, but it's definitely true here in downtown West Palm Beach. So, the market is seeing these things and they're going, "Oh, no, it's going to take longer than we thought to get back to normal." We always knew that. Restaurants operating at half capacity are not going to be doing as well as when they can operate at full capacity.

When a certain percentage of the population is afraid to leave their house, correctly so here in Florida, where there's a lot of vulnerable older people, this is really just something that the market knew. Something a little bit good happens and it goes up to 1,000 points. Something a little bit negative gets reported. There was actually some really good news today about two potential treatments moving into second-phase trials. Treatments are more likely to happen than a vaccine. If we have successful treatments, this becomes less terrifying. It'll be easier to bump into someone or get a cruise ship or take a plane or whatever it is, if we have a treatment for it.

So, I don't look at the market on a day-to-day basis anymore, because people are, you know, careening -- what's down today? Airline stocks, you know, retail stocks. Did we really think airlines were going to be doing great? You know, Delta came out yesterday and said, hey, look, we need to amend some of our loans or else we're going to be in default. That is not a great sign, but we already knew that. We've talked a bunch of times about how airlines could use strategic Chapter 11 as a way to restructure their debt.

So, this is really just, you know, the market panics in one direction, the market panics in another, it doesn't change my strategy in any way.

Hill: Yeah, I'm the same. I'm interested in what happens every day, but this is one of those days where I think, "God! It must be so exhausting to be a day trader."

Kline: I don't understand it, because I had my brother, who I'm actually going to have on The Rundown at some point either this week or next week, who's a big-time sports executive, was talking to me about some trades he'd made. And I had to, kind of, talk him down on DraftKings, and I sort of explained what my argument was on it, that I think the actual casino companies just have a bigger leg up. And he said, I bought this and this and I made some money. And I said, like, I get it, you can't gamble on sports, you can't really work right now, this is becoming your activity. He said, oh, yeah, I'm just spending my entertainment budget on this, I'm not spending my investment money. My investment money is in, you know, Target and Disney and Walmart or ... [laughs] And I said, OK, that's kind of a difference. If you want to play with a few hundred dollars and play that game, like, I might go play blackjack, I totally understand that. But when that's your investment strategy, "Oh, God! I don't have time to keep up with it." You know, you're buying Hertz shares? I wouldn't buy Hertz shares when they were healthy.

Hill: [laughs] Let's get, Dan, to some mergers-and-acquisition activity. Grubhub (GRUB) is being bought by Just Eat, a food delivery business based in Europe. This is an all-stock deal worth $7.3 billion. And if you're thinking to yourself right now, "Hey, wait a minute, what happened to the deal with Uber (UBER 0.83%)?" That fell apart. And so, let me start with this, Dan. Did Uber dodge a bullet in not closing the deal with Grubhub or did they blow an opportunity?

Kline: So, I think Uber dodged a bullet. I'm not sure that the combined Uber and Grubhub made a ton of sense. It would've been about 70% market share, but I think you immediately lose some of that market share to people that just go look at adding a competitor. You know, "Hey, maybe I don't want all my eggs in this basket, I'll get DoorDash or Postmates," or whatever it is.

So, I think it was going to be really hard for the combined company to make money. And this new combined company, which operates in two totally separate markets, they say this is a profitable company from the get-go. And I love the idea of them being able to combine back-offices, get rid of a lot of programming. They can offer the same products in two different parts of the world without cannibalizing their own business and it just seems like the Just Eat people and the Grubhub people have done the best job of monetizing in this space.

I don't like a lot of what Grubhub does, we talked about that, adding restaurants that didn't choose to be there is not a great practice. They're canceling your order and not telling you. There's a lot they don't do right. But these two companies have made the most right moves. And I like the economy of scale when they're in markets that don't compete.

Hill: It's interesting, because I actually think Uber blew it. [laughs] Not that this was going to be the deal that fixes Uber, but everything we hear about Uber's business, you know, since they became public was, well, look, the best part of their business, if you're just looking at the numbers, is UberEats. So, that was what the genesis of this deal was all along, right? We're essentially doubling down on UberEats.

Shares of Uber selling off today, down nearly 10%. So, I guess we will see in time, if nothing else, and I realize this is a very small thing, I'm glad that Grubhub will no longer be a stand-alone, public company, so that I don't have to hear their made-up metric of average daily grubs. That's just one of those too-cute-by-half metrics where it's like, OK, good, the Just Eat Takeaway people, they've probably got their own metrics and we don't have to hear about the grubs anymore.

Kline: Yeah. I also want to see with Uber, they need to figure out how to make more deliveries on the same trip, and that's economy of scale with restaurants, like, they should have a way to say, "Hey, Dan, it's dinner time, you usually order about now. Three people in your building just ordered from this place you've ordered from, if you order now, I'll give you 10% off." "And, oh, by the way, if you can wait five more minutes for your delivery, we'll give you a little deal, because we're going to deliver a package for CVS," or whoever it is. They have to figure out how to get more trips.

It makes zero sense to drive 35 minutes from my house to bring me barbecue, which is what happened earlier this week, and only make one stop along the way. I think there's a lot they can do with technology and maybe they'll focus on that a lot more now.

Hill: So, where does Uber go from here, if we are seeing this sort of consolidation in food delivery? Uber is, I don't want to say back to square one, but they are -- you know, I get why the stock is selling off today, because people who were more excited about the business if Grubhub is part of the picture, are left, sort of, looking at Uber just as itself and thinking, "Nah, I don't want this."

Kline: So, Uber is going to spend this money on attaining customers, that's pretty much been their money-losing model and at some point they have to flip that switch. I'd love to see Uber put some of this money into the feasible autonomous delivery. And I don't mean, like, pie in the sky drones, but, you know, look, I live downtown, it is reasonable for a pizza place to put a pizza in and drive half-a-mile to my house in an autonomous vehicle. That work is being done, that stuff is out there, obviously, Uber eventually doesn't want to have drivers, and that's not going to happen anytime soon, but they should be looking at efficiency. And that could be everything from more ride pooling, more -- you know, their new service where for $50 you can go anywhere you want for an hour. There's going to be a lot of stuff like that. They have to figure out every way to monetize their workforce, because they have an enormous capacity that's mostly sitting in parking lots waiting for orders and that's not a great use of time, especially as we live in, you know, what I think of is, we're now in a delivery culture, and that's not going to change post-pandemic.

I always got my kitty litter, my water, a lot of stuff from Amazon delivered, now a lot more people know that's possible. And I don't know about you, Chris, you have a dog, if I remember correctly. Dog food is --

Hill: You do not remember correctly; I do not have a dog.

Kline: I don't, you don't have a dog, sorry. OK. So, let's pretend you had a dog. Bags of dog food are really heavy, you're not going to want to pick those up, if you've had the option of having them delivered to your door. So, those kinds of things are not going to change and Uber could absolutely capitalize on that. They're a company that could move people, they could move food, they could move stuff. And it's a lot of optionality, they just have to use it better.

Hill: Simon Property Group (SPG 1.37%) is the largest operator of shopping malls in the United States and shares of Simon Property are down more than 10% today after they terminated their agreement to merge with Taubman Centers, which is a rival mall developer. Taubman is rejecting the termination notice. This seems a little bit like, I'm breaking up with you and the other is like, no, you can't break up with me, I won't allow it. I mean, like, what is this? [laughs]

Kline: So, this is posturing on a renegotiation of this deal, in my opinion. I don't think Simon wants out of this deal; and that is pure speculation. Their reasons that Taubman breached are very speculative, it's one of those scenarios where, you know, we don't know their true meaning, but they basically said, oh, you know, they didn't do this, they didn't mitigate the COVID-19 response. And Taubman is coming back and saying, yes, we did.

They want a better price. Taubman is not worth what it was when this deal happened. We saw the same thing happen with Sycamore Partners and L Brands. They were going to buy Victoria's Secret, take them private, and they went, "Umm, yeah, in this market, I'm not sure Victoria's Secret is worth what we're going to pay." And in that case, they really didn't want it, even at a lower price. I think this is probably going to lead to a lower deal.

This is a lot like when the market crashed in Florida for housing, there were some people that had put nonrefundable, significant deposits down that walked away from the deal because they might lose $25,000, but the $500,000 house they were going to buy is now only worth $300,000, so they could sign a new contract someplace else, and that's what I think is happening here.

Hill: So, you're expecting, because now I'm thinking about early to mid-May when on this show Jason Moser and I talked about Uber and Grubhub getting together. [laughs] And it was like, "Oh, here's this deal, yeah, they still have to close it, but you know, let's talk about the pros and cons of Grubhub being part of Uber's empire." I don't know, are we going to be back here in a month talking about how actually this did get broken up, or are you confident, like, no, this is just posturing?

Kline: I think it's just posturing, but that's just a guess. Combining those assets makes a lot of sense, and I don't think Simon Property Group stopped believing in A-class malls. I don't think they stopped believing in their top-tier outlet centers. So, they might be saying, "You know what, you now have 10 properties we're not interested in. We want to change this deal, because we think something has fundamentally shifted, and in these certain markets, we don't believe we can bring in the right tenants."

You know, Simon is an incredibly advanced company, we've talked about this before. They were working on the diversification of the mall well before it became clear that that was going to be necessary. So, Simon was already talking about hotels and coworking and grocery shopping. The Simon Mall -- I think it's a Simon Mall here in Boca, I really should check that because I've referenced this a lot of times -- the Sears is closing and it's becoming high-end residential. Well, you know what's really great for the Cheesecake Factory, or whatever else is at the mall? When 350 high-end units move in and on a lazy Wednesday night are using you as room service. You know, that's going to be really good news for the Starbucks, for the Peloton, for the stuff that's in that very high-class mall.

And I think Simon Property, they are going to figure it out. There's going to be mini shipping and distribution centers to help mall-based stores do more e-commerce. Simon's going to be at the forefront of doing it, and I think they still want these properties. And, look, wouldn't you try to make a better deal? Right now, if something is worth less, try to pay less for it.

Hill: Last thing and then I'll let you go. How confident are you that Major League Baseball is actually going to have a season in 2020?

Kline: So, I'm 100% confident that they're going to have a season, because the commissioner, under the terms of their deal, is allowed to mandate a season as long as players are paid on a prorated basis. The problem is, they're going to have a 50-game season, which is a bit of a farce because they want the players to take less money. That is going to damage the popularity of baseball. Baseball had the ability -- it's a largely socially distant sport anyway. It's not tennis. It's not golf. But still you're pretty far apart. As long as you don't spit, you're good.

Baseball could've been playing July 4. Imagine what that would've been like, Fourth of July, you're having your solo barbecue with your family, everyone's a little sad and you hear "play ball." It makes me choke up to think about it, and they're not going to play until late July, you know, if that soon.

This is an opportunity lost for a sport that was dying in the first place, where people were aging out. They could have seized the narrative and they didn't. So, UFC is gaining a lot more fans. The NBA is going to look like heroes. The NHL is going to be way more popular than it ever has been, and baseball is going to be a giant asterisk.

Hill: Yeah, I'm getting flashbacks to '94, when basically the season just stopped and there was no World Series, there were no playoffs that year, and fans were essentially "a pox on both your houses," in terms of the players and the owners.

In this case, when I hear these different proposals going back and forth, and look, I don't have a dog in this fight, but I think to myself, it almost seems illogical for the owners to put a proposal on the table that says anything other than we're going to pay you on a prorated basis. It's just like, no, no, no, no, that's ...

Kline: The players are correctly making the argument that they don't share in the upside. So, if they give the owners, you know, "Hey, all right, we'll pay at 75% and a prorated basis and we'll play 90 games." When that franchise was bought for $400 million, and it sells 10 years from now for $3.2 billion, they don't go back and give the players a cut. There are a lot of things the owners could have done. They could have gone to the highest paid 20% of players and said, we will pay you on a prorated basis, but we'd like you to defer some of that money 10 years down the road.

The No. 1 thing they should have done is come out and said, the players at the bottom, we are going to pay you fully prorated, because those are people -- and I know this sounds like a lot of money, but if you were making $400,000, that's what you expected to make. And on a 50-game season, you're going to make $125,000? [laughs] You know, that's a really big cut and that really impacts your lifestyle more so than the guy making $20 million, who's now going to make $5 million or $6 million, you know, saying, "Hey, I'll kick $3 million of that down the road. There's a lot that could have been done cleverly.

I think you're also going to see -- and I'm borrowing a little bit of this from my brother -- this is going to open up all sorts of new kinds of advertising. You're going to see baseball players wearing advertising patches on their jerseys, which we've seen in the NBA; you're going to see a lot more in-game digital advertising as they try to make up some of this revenue. But the owners are the ones that I consider to be at fault here, because they signed a deal with the players to use prorated and now they're trying to renege on that, but they will play, it just won't be what it could have been.

Hill: Dan Kline, thanks for being here.

Kline: Thanks for having me.

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 on Monday.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon, Starbucks, and Walt Disney. Daniel B. Kline owns shares of Starbucks and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Peloton Interactive, Starbucks, and Walt Disney. The Motley Fool recommends Delta Air Lines and Uber Technologies and recommends the following options: long January 2021 $60 calls on Walt Disney, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Walt Disney Company Stock Quote
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Delta Air Lines, Inc. Stock Quote
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Hertz Global Holdings, Inc. Stock Quote
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Taubman Centers, Inc. Stock Quote
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Simon Property Group, Inc. Stock Quote
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The Cheesecake Factory Incorporated Stock Quote
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iShares S&P 500 ETF Stock Quote
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Uber Technologies, Inc. Stock Quote
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Peloton Interactive, Inc. Stock Quote
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