Good Morning Toasters!

Hi friends!! Happy weekend. Phews, the last week covered the full range of emotions, one day feeling the world’s about to end, and the next the complete opposite. Guess we can now say, welcome to the markets.

In today’s issue, we cover the hostile takeover bid by JetBlue for Spirit Airlines, which if the tender offer goes through will create the 5th largest airline company in the US. Spirit isn’t too keen on JetBlue, instead of holding out for Frontier, even though Frontier’s offer is lower than JetBlue’s. Wonder which direction this one will play out in?

Why are the markets seesawing? What did the most recent RBI MPC minutes tell us about future potential hikes? What’s on the US Fed’s mind with respect to rake hikes? What’s the future for US Tech stocks, which were battered this week? And how are all these factors linked? Let’s try to piece these together.

And finally, we’ve started a rollout of our newest product, Trade:able, that aims to democratise trading, via a unique and fun learning experience. There are a bunch of amazing rewards and prizes to win. Click here to know more.

Market Watch

Nifty 50: 16,266.15 | +456.75 (+2.89%)
FII Net Sold: INR 1,265.41 crore

Sensex: 54,326.39 | +1,534.16 (+2.91%)
DII Net Bought: INR 2,148.95 crore

Global Corporate News

JetBlue vs Spirit Airlines battle turns ugly; what’s up and what do you need to know?

Background

• A succession style drama (😉) in the sky, Spirit Airlines (one of the multiple budget carriers in the USA) had agreed to a buyout by Frontier Holdings (another budget airline) in Feb’22 for a reported USD 2.9 Bn
• Feeling FOMO (I think), JetBlue in order to stay relevant made a USD 3.6 Bn offer to Spirit Airlines, trumping the offer made by Frontier, in hopes of forming the 5th largest airline brand in the USA
• Now you’d expect Spirit to either accept JetBlue’s offer or leverage the higher offer to start a bidding war between the two (ie. JetBlue and Frontier), and yet for reasons only known to Spirit, the board didn’t budge, rejecting JetBlue’s offer, while sticking to the initial buyout proposal by Frontier Holdings

Plot Twist 🃏

• To get over the line (& get what they want), JetBlue has now launched a hostile takeover bid, directly appealing to shareholders to reject the Frontier Holdings offer
• JetBlue’s board has decided to launch a tender offer (RMB tender offers x Musk) to Spirit’s shareholders, in hopes of pressurising Spirit’s management to re-enter negotiations, while also initiating an out-reach that is urging Spirit’s shareholders from not voting in favour of the merger with Frontier (oh the joys of being a shareholder 😝)
• JetBlue’s tender offer of USD 30 per share is much higher in comparison to the Frontier offer accepted by the Spirit Board, and to make matters worse for Spirit (I think), JetBlue has offered to up the price to USD 33 per share
• As a consequence of this three-way tug of war, shares of Spirit were up 13.5% closing at USD 19, while JetBlue shares declined on their tender offer news was public

Why? What’s up with JetBlue? And why is Spirit holding out for Frontier?

• The US market is dominated by the top 4 players, i.e. American Airlines, Delta, Southwest and United, who together control ~80% of the market, with smaller, budget players vying for the rest
• If either Frontier or JetBlue succeeds in acquiring Spirit, the combined entity is likely to become the 5th largest airline, with a reported market share of 10%
• In addition to market share, the buyer will likely also get a roster of pilots (in high demand), more pricing power (basic economics right?), and more routes (which are generally reserved at major hubs)
• According to Spirit management, the key reason for not pursuing JetBlue’s offer is a lack of belief that the proposed merger will be regulatory compliant, which in case the deal fails, doesn’t provide enough cover to the Spirit shareholders

Finally?

• The initial buyout/merger between Spirit and Frontier made sense, given both are ultra-budget airlines, trying to survive with the established brands, who have large pilot rosters and deep routes
• With JetBlue, which functions between the two ends, the complementary nature of the buyout is questionable, with Spirit raising concerns on actual efficacy, while JetBlue is convinced of the potential success
• Tender offers very rarely ever go to a vote, with the board ultimately being forced to act to the larger choices of the shareholders; in this scenario, given the higher price provided by JetBlue (Spirit is down ~46% since last year), the Board will ultimately be forced to act and pay heed to the shareholder’s wish
• Regardless, hostile takeovers/bids become very common during supposed economic downturns, with companies available on the cheap as bear market valuations come through
• Elon Musk is doing the same with Twitter at the moment, ambling for a decreased valuation on the pretext of bots / invalid accounts, while Belgian Co. InBev acquired Budweiser producer Anheuser-Buch for USD 52 Bn during the 2008 crisis

If you’re interested in financial news & analysis, and wish to receive this email in your mailbox consistently, click here to Subscribe Now

Around the World 🌎

• Canada has had enough – Due to concerns about national security, Canada has banned the use of equipment made by China’s Huawei Technologies Co. and ZTE Corp in their next-generation 5G network, as well as in self-driving cars and other internet-connected devices. Companies currently using the same must remove it by 2027 latest. The companies in question on the other hand have argued that they aren’t beholden to the Chinese government and don’t use their gear to spy
• China using monetary tools now – In a bid to reduce the impact of Covid -19, China’s central bank has cut a key interest rate – the five-year loan prime rate (LPR) from 4.6% to 4.45%. Many lenders use this to base their mortgage rates and this move has come as a pleasant surprise with Asian stocks and US equity futures pushing higher in response. The one-year loan prime rate (which dictates interest charged to corporate borrowers by banks) remained unchanged at 3.7%
• Target, and Walmart at their lowest lows – Fuel prices, higher inventory levels and overstaffing have caused massive hits to profits at two of the largest retailers. Net income for Walmart fell to $2.05 billion (vs $ 2.73 billion a year ago) though revenue rose while EPS for Target fell to $2.19 adjusted vs. $3.07 expected with revenue exceeding expectations. The market reacted accordingly with Target hitting its worst in 35 years, and Walmart too fell 11.4% in a single day

Economy x Markets News

RBI MPC Minutes x Fed Rate Hike Fear x Global Macro uncertainties make the markets go fuzzy

• The minutes of the out-of-turn (remember that one?) Monetary Policy Committee (MPC) saw a repo rate hike of 40 Bps, reflecting an increased policy urgency and catch-up to address heightened inflation uncertainties
• Even though the economic outlook is being impacted by multiple global uncertainties, the RBI’s stance has firmly moved towards a hawkish (rate hikes) direction
• Prof. Verma who was the first in line to propose rate hikes, in true hawkish nature has called for 100 bps of hikes, soon; other members have proposed a more calibrated approach to address the inflation scenario
• Next month’s inflation is currently trending at 6.8%, much much higher than the RBI’s tolerance threshold (b/w 6-6.5%), which may push the MPC to raise rates by another 20-25 bps in the June cycle, and to ~100 bps during FY23

Damn! Sounds like we’re in for a jolly good ride 🤭. What about global markets? What’s the Fed up to?

• 8 companies are to blame for ~half of the stock market’s decline this year; FAANG, Microsoft, and Tesla were the darlings of the pandemic, accounting for ~25% of the S&P 500 heading into 2022
• And in true nature, assuming what goes up has to come down (?), the S&P 500 is down ~18.2%, with Netflix down 70%, Meta down 43% and other FAANG names correcting b/w 22-26%
• Why? Investors chase growth in relatively easier monetary scenarios when capital availability isn’t difficult and companies can spend to acquire; the pandemic was all about growth, with tech stocks in the proverbial sweet spot
• As things become apparent, and inflation was no longer transitory in nature, investors got jittery, withdrawing capital from growth stocks, as valuations looked stretched (on the back of strong runs)
• The stocks supporting the S&P 500 this year are Exxon Mobil, Chevron Corp, Merck and Abbvie, according to the Dow Jones Industrial Average, with energy stocks up 40%, as investors are now willing to sacrifice growth for consistent cash flow generation
• And to compound matters, with inflation continuing to trend upwards and limited or no information pertaining to Fed rate hike plans forthcoming, the uncertainty is causing higher panic, leading to days like the Dow Jones dropping 1164 points in a single day

Okay, I guess 😞. Going forward (any point in even asking bro?)

• Markets are bound to see-saw, down 400 points one day and up in equal measure the next, and yet with all the uncertainty, investors will likely back industry leaders with proven business models
• Tech stocks the world over were trading at exorbitant valuations, on the back of cheaply available capital and with the current crash, some may never go back to those valuations
• Capital is likely going to be scarce going forward, and yet the India growth story remains firm; lending stocks are coming off strong multi-quarter performance (both growth & asset quality)
• Core, sustainable, boring, Warren Buffet’s favourite stocks are likely to be back in flavour, we believe

What else caught our eye? 👀

GoI solving the coal issue

• Power plants will now be allowed to use coal blended with up to 30% imported content until March next year after stocks at generating stations have been declining at a worrisome rate
• Most states were not comfortable with even a 10% blending as that would increase prices by 50 paise per unit with many suggesting that the Centre bear the additional costs
• As of May 17, Indian stock is at 20 million tonnes which are adequate for only 8 days of consumption

Inflation culprit is exactly who you would expect

• High inflation in the food and fuel basket has been putting pressure on household budgets and driving down the consumption of discretionary goods like leisure and  travel
• Among the highest were cabbage (88.3%), raw cotton, radish (75.4%), and bitter gourd in the food basket while kerosene (118.2%), liquid ammonia, aviation fuel, and natural gas dominated the fuel basket
• Prices rose to a record 15.08% in April with consumer inflation inching to an eight-year high of 7.79%

Results Preview (Nifty 200)

Saturday, 21st May: BHEL, Powergrid, Shree Cement

Monday, 23rd May: BEL, Divi’s Labs, Ramco Cements, SAIL, Zomato

Educational Topic of the day

CAPEX to Operating Cash Ratio

The CAPEX to Operating Cash Ratio is a financial risk ratio that assesses how much emphasis a company is placing upon investing in capital-intensive projects. Ideally, the projects that a company chooses to pursue show a positive NPV even with worst-case assumptions regarding the discount rate used, the tax rate, or the revenue growth rate.

Edited by Raunak Karwa

Let’s connect, I always love hearing from you. Hit me up at Raunak_Karwa on Twitter or Raunak.karwa@finlearnacademy.com