☀️☕️ Koch on Ice ("Texas two-step" challenged)

21 February 2023

Happy Tuesday! 🥞

📝 Focus

• Koch on Ice ("Texas two-step" challenged)

📊 In the Markets

• Colour Meta Blue

• Airbus deal hits an air pocket

• Munger Games

• Buffett Spread (TSMC)

📝 Focus

Koch on Ice ("Texas two-step" challenged)

A unit of privately held Koch Industries’ "Texas two-step" bankruptcy move has been challenged in a North Carolina court, another test case that could help determine the legality of the controversial scheme that companies use to limit the cost of personal injury claims. A filing to dismiss the Chapter 11 bankruptcy of Bestwall, a unit of the billionaire Koch (pronounced "Coke") brothers' building materials subsidiary Georgia Pacifica has been made claiming it was done in “bad faith” because the company was not in financial distress.

Shockingly (maybe), the motion noted that Georgia Pacific distributed US$5.38 billion in dividends to its parent Koch Industries since the bankruptcy petition was filed in 2017 while thousands of asbestos claimants remain uncompensated. It characterized Bestwall, Georgia Pacific and Koch Industries as having engaged in a “years long strategy of delay”, depriving alleged victims of their rights to fair resolution in the tort system.

A Chapter 11 bankruptcy allows a company to stay in business and restructure its obligations without automatically selling all its assets to settle its debts. Georgia Pacific was the first company to use the “Texas two-step” in which it divided itself into two separate businesses before placing Bestwall, the one containing all the asbestos-related cancer claims (mesothelioma), into bankruptcy. Proponents of the “Texas two-step” claim that the jury-based mass tort system is inefficient compared to bankruptcy court, which is presided over by a specialist judge.

The motion to dismiss Bestwall’s bankruptcy follows the landmark dismissal of Johnson & Johnson's talcum powder and asbestos-related cancer subsidiary, LTL (see the MFM from 1st February).

📊 In the Markets

US markets were closed for Presidents' Day while markets in Europe were choppy, though the STOXX Europe 600 🎓 closed little changed overall, with attention split between an increase in Eurozone consumer confidence in February, the fifth consecutive month (though still at "minus 19"), and Wednesday's publication of minutes of the January US Federal Reserve meeting after which rates were hiked by 0.25%. (Three weeks after the day of each of the 8 decisions a year, the minutes of the meetings leading up to it get released. Market watchers really care about the minutes, even with the next FOMC meeting three to five weeks later!)

Reinforcing the consumer confidence survey reading, the outlook in Europe's looking brighter overall. The European Commission, the executive arm of the EU, said that a recession (two consecutive quarters of falling GDP) was no longer the most likely scenario for the Eurozone, thanks to government support and an easing of energy costs, with an expected 2023 growth rate of 0.9%, sharply higher than the 0.2% forecast just three months ago. Even 2022 turned out better than they'd originally expected, with growth of 3.5% vs 3.2% estimated in November.

The view of strategists at the end of last year was almost unanimous that Europe and the UK were either about to plunge into a recession or were already in one. Those were the two scenarios. While we do need to point out that, as everywhere, the economy is not the stock market and the stock market is not the economy (there's a forward-looking element in stock market prices besides a host of other factors), it's telling that since the start of the year ("year to date", or YTD) the STOXX Europe 600 has been the strongest of the broad indexes we list at the top of the MFM daily (excluding tech sector-heavy Nasdaq, which is up 13.5%.)

• US large-cap S&P 500 - 6.7%% UP ▲ 

• Pan European STOXX Europe 600 - 8.3% UP ▲ 

• HK's Hang Seng Index - 3.7% UP ▲ 

• Japan's Nikkei 225 - 7.1% UP ▲ 

(See today's 🎓 Explainer for why we choose the STOXX Europe 600 Index for our quick view of Pan European markets.)

Colour Meta Blue

Why always blue? Over the weekend, in something of an attempt to offset US$10 billion in lost revenues from ads due to Apple's 2021 OS privacy changes, Meta decided to move into the subscription space by allowing users to verify their accounts with a government ID for up to US$14.99 a month. Yes, give Mr. Zuckerberg more of your personally identifiable information and thank him every month for the privilege.

"Meta Verified" will let users “get a blue badge, get extra impersonation protection against accounts claiming to be you, and get direct access to customer support.” Similar, of course, to Elon Musk's Twitter Blue, which would allow users to verify Twitter profiles for US$8 a month (and Snapchat Plus for $4/month.) 

Also, while the Hang Seng Index finished just 0.8% higher, bullish traders drove China’s domestic markets benchmark, the CSI 300, up by 2.45%, the best one-day performance since late November when news was breaking about the end of the widely-hated Zero Covid policy and reopening. (The CSI300 is up 6.8% YTD.)

Airbus deal hits an air pocket

And today in Activist Investor news: Billionaire Chris Hohn of US$40 billion hedge fund TCI has called on the management of Airbus, in which his fund has been one of the largest investors for over a decade with a more than 3% stake, to answer 16 questions explaining why it's taking on a minority 29.9% stake in the cybersecurity spinoff of a French IT firm. 

Hohn says that Evidian is a "highly levered company" and investing in it would "dilute the quality of Airbus' business" and called the deal a politically motivated “bailout of Atos, a company that is burdened with unsustainable levels of debt and other liabilities.” 

Hohn also pointed to the statement from Atos referring to the potential transaction ensuring “technological sovereignty in France” as a clue to the motivation behind Airbus' involvement. Atos is listed in Paris (ATO) and has dropped 88% in the last 5 years.

Munger Games

99-year old billionaire Charlie Munger, legendary investor Warren Buffett's friend for over 60 years and vice chairman of Berkshire Hathaway since 1978, has a side gig. He bought The Daily Journal (DJCO) in 1977 and built it into a group of award-winning newspapers and websites focused on the legal industry, real estate and general business. 

But of course, it's the company's investment portfolio that people really care about, and at the virtual annual meeting last week, Munger spoke about it - though denying, as he does, that The Daily Journal's a mini-Berkshire. And in the meeting, he said that Tesla pales compared to the Chinese electric vehicle maker BYD and called it "his favourite stock ever."

“Tesla last year reduced its prices in China twice. BYD increased its prices. We are direct competitors. BYD is so much ahead of Tesla in China ... it’s almost ridiculous,” he continued. “At the current price of BYD stock, little BYD is worth more than the entire Mercedes corporation. It’s not a cheap stock, but on the other hand, it’s a very remarkable company.”

That said, Berkshire Hathaway has continued to trim its position in BYD as recently as February 3rd, a HK stock exchange filing showed, with a sale of 4.235 million Hong Kong-listed shares sold for HK$1.09 billion (US$139 million), reducing Berkshire's holdings in BYD's H-shares to 11.87% from 12.26%. It started accumulating BYD in 2008 after Munger was introduced to the company by Li Lu of Himalaya Capital. Munger reportedly persuaded Buffett to invest by calling its CEO Wang Chuanfu "Thomas Edison, Henry Ford, and Bill Gates all in the same person."

Buffett Spread (TSMC)

According to US filings, Berkshire Hathaway recently sold more than 85% of the US$4.1 billion stake it had taken in Taiwan Semiconductor Manufacturing Company sometime in the third quarter of last year. It sold over 50 million shares, retaining just 8.3 million shares worth a piddling $618mn. 

With the overall oversupply in semiconductors affecting the whole sector, TSMC did issue somewhat cautious guidance at its recent results and said it may trim some capex on weaker revenues in 2023. Investors are generally scratching their heads on the reasoning for the sale, though, given Berkshire's famously long-term mindset (though frequent portfolio adjustments do actually occur, as "mirror traders" - who mimic Buffett's portfolio as much as they can - will attest.)

TSMC’s competitive position within the chip industry as the leading "foundry" or contract manufacturer looks strong for at least the next generation of technologies, meaning that the company will still have pricing power and a lock on higher-end hence higher margin chips for fabless chip designers such as Nvidia, AMD, Arm and Apple. Serious competition in the foundry space from Intel and Samsung still seems remote, particularly with Intel operating at only 20-25% of the efficiency of TSMC's. So a space to watch, if Buffett sees something different (which is how he got where he is, after all.)

Fabless and Foundries - a mini-explainer

• Semiconductor companies may have their own factory (fabrication plant, or "fab", like Samsung, Micron and Intel) or not ("fabless" where they just do the microchip design, such as Qualcomm, Broadcom, Nvidia, AMD... and Apple.)

• A fabless semiconductor design house would then need its chips built by a contract manufacturer or "foundry" which invests enormous sums in its plant, equipment and, more importantly, people and processes. 

• TSMC is by far the largest, most advanced and most profitable foundry in the world. Others include Global Foundries and Vanguard, with Intel and Samsung investing heavily in the space. (Global Foundries was spun off from AMD... which is now a TSMC customer.)