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Redfin is “Under Contract”
00:31:02
Deals are back! Rocket Companies sees a fixer upper with Redfin and ServiceNow steps into the agentic AI era with Moveworks.
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- [00:06]
Dylan Lewis
Who knew Redfin had the for sale signup? Motley fool money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley fool analyst Tim Byers. Tim, thanks for joining me.
- [00:26]
Tim Byers
Fully caffeinated, ready to go.
- [00:27]
Dylan Lewis
Dylan, I'm glad we have so much to talk about. It is a merger Monday in the truest sense. Tim. I feel like I'm on cnbc. Deals to kick off the fresh week real estate platform. Redfin apparently on the market. This whole time, we had no idea. Financial services company Rocket Companies, owner of Rocket Mortgage, will be buying Redfin for what was initially announced as an all stock $1.75 billion deal. Tim, you surprised to see this one?
- [00:53]
Tim Byers
I'm very surprised. I'm also mourning it a little bit because even though I get the deal and I get the rationale for the deal, Glenn kelman as a CEO of Redfin has been one of my favorite full CEOs really, since I've been covering stocks. I love his transparency, I love his honesty, I love his earnestness. He's not a founder, but he acts like a founder. And so if Kalman is willing to make this deal happen, he must really believe in it. And so that gives me some confidence that there's the right thing here. Even though structurally, you know, investors, I don't know that this is going to be as amazing for investors as I certainly would like it to be, because it's an all stock deal. We could talk about that. But the main thrust is that Rocket Companies is really good at originating and selling loans, particularly mortgages. They're really good at mortgage the aspects of mortgage financing. That is a business that Redfin has wanted to be in. So Redfin, but their primary business is buying and selling homes and orchestrating that process on the brokerage side of it, the financing side of it is where Rocket has been traditionally quite good. Bring those two together, you own more of the home buying and selling life cycle from two companies that are coming at this from positions of strength in their respective markets. So in that, in that sense, Dylan. Yes, it, it makes a lot of sense because Redfin has been moving into mortgage financing title all of the things they've wanted to own the life cycle. This is an acknowledgment that we can't do it all ourselves. And Rocket is much bigger and better at this than we are. So let's join forces.
- [02:50]
Dylan Lewis
Yeah, I think the ties here of a vertical integration story are pretty easy to see. They were very quick to point out redfin gets nearly 50 million monthly users. That is going to be very helpful to Rocket Mortgage and their suite of products. Just as a front end, top of the funnel for, for highly qualified people who will be looking for mortgages probably at some point soon after visiting Redfin, right?
- [03:15]
Tim Byers
Yes, exactly. That's the whole point. Like they want to in an ideal world for a Redfin strategy, they would like to get you into an apartment before you are in the market to buy a home. So they have that through what they acquired through Rent Pass and, and they have a whole bunch of rentals that they can orchestrate and they earn fees on that and it's a pretty good margin business for them. Then they can get you into a home. And then what they'd like to do is when you are interested in buying a home, they would like to orchestrate the loan for you. They would like to orchestrate the mortgage. And there's. So every step of the way in this part of the market, there are fees and fee takers at every step, which, if you've ever bought a home, you know how frustrating that is. Like, that is just incredibly annoying. But Redfin is saying, hey, if it's all under one roof, we can make it less annoying and you know, maybe give you some cost synergies, which is something they've talked about before. So, yeah, there's, there's definitely something here. This is the way the market works. So the company that controls most of the takes along the way to executing the transaction is more likely to win. So this gives them more opportunities to win. It doesn't mean they win automatically, but it gives them some scale.
- [04:43]
Dylan Lewis
Let's talk a little bit about some of the terms of the deal you mentioned. All stock. The offer initially priced the deal at $12.50 a share, which was over an 100% premium on where shares were at last week. I think a lot of people have kind of looked at where Redfin was trading and thought there's the possibility that someone might be interested. But this being all stock, we're in a spot where there's a fixed ratio, just about 0.8 shares of Rocket Co. Per Redfin share. We saw the Rocket shares dip after this was announced. That is also affecting the way that this deal price is being communicated out in the market, expressed out in the market now. So we're not at the premium that was originally discussed because it's an all stock deal.
- [05:29]
Tim Byers
Yes. If you are a Redfin shareholder, and I am, you are rooting heavily for Rocket Companies to recover its share price because that is going to affect what you are going to get as a Redfin shareholder once this deal closes. So you're going to get some Rocket Company stock and you want Rocket Company stock. The thing that is less clear to me, Dylan, is this thing called the collapsing of the UTC structure that Rocket Companies has. Essentially, Rocket Companies is a C corporation. So it's a holding company with operating units underneath with pass through income. And this, you know, helps with things like taxes. It's an organizing. All it is is it's a corporate organizing strategy. But they are going to collapse this. And as they collapse this, then what you end up with is a dividend that Rocket is going to pay out here. So they're gonna collapse this structure, declare a special cash dividend of $0.80 per share that's to be paid on April 3rd. I don't think that the deal closes before April 3rd. That's, that's not entirely clear to me here. When this deal is expected to close. I think it might be April 7th. Because if Rocket Companies is paying out this 80 cent per share dividend before Redfin shareholders come in, that it's not unseemly, Dylan, but it feels like, boy, I, I mean, I'd like that dividend. That'd be nice. That would help me.
- [07:16]
Dylan Lewis
It'd be cheaper to do it that way, right Tim?
- [07:18]
Tim Byers
Yeah, it would sure be nice if I could get. So I think that's going to be primarily for the. Right. So it makes it easier for the Rocket Companies to come in, orchestrate this deal, get it done. Now there's going to be all common stock, but I think the Rocket Company shareholders are going to get the benefit of that, not the Redfin shareholders. So that's a little bit of a bummer. But this is all to say there's a lot of volatility here. You should not assume that Redfin is moving. It's going to go inevitably up to $12.50 a share just because that's what the initial price was based on the prior weighted, you know, weighted average of Rocket Company stock. You need Rocket Company stock to recover from the downdraft we're seeing today.
- [08:10]
Dylan Lewis
One of the things I was a little curious about was the market reaction down 15% today. That is a pretty steep haircut. And there is some vote there by investors about what they think about this deal or what they think about Redfin fitting into their business. I look at it, it makes sense to me. The story that you laid out there of we are going to own this customer pipeline quite A bit more. Where's the pessimism coming from around this?
- [08:41]
Tim Byers
Well, I have. I'm not so sure that that has a lot to do with Redfin. I do think it may have a lot to do with the macro because we know that in this country we need to build more homes, but we need to build more homes everywhere, not just in places where. So like, for example, one thing we know is like in parts of Texas, they're doing a lot more to build a lot more homes. Doesn't matter where you are in the political spectrum. What we know is that it's easier to build homes in Texas because the regulations are not as tight. It is harder to build homes in California. The regulations are tighter. And so this is a big deal. Like, we know that we don't have enough supply. We know we need to build more, but you have the macro that is kind of working against us and working against, you know, a lot of people getting laid off. So if you're laid off, are you going to be in the market for a home? I don't think you are, Dylan. You know, so that's, that's a thing. In addition to that, we have the regulatory barriers. So in order for this deal to really thrive, you need to have more home supply. So I think this deal gets more attractive as home supply starts to unlock. That's the thing. There may be some skepticism about Redfin. I'm not going to say there's none, but I think there's more macro factors here that may influence this. The home buying market, the residential real estate market has just been under a cloud for a while because of the supply demand imbalance.
- [10:24]
Dylan Lewis
Yeah, the home buying market, not the only one seeing some matchmaking today. Enterprise software giant ServiceNow is buying Moveworks. This is maybe a name that a lot of people aren't familiar with, Tim, but they are a firm that's focused on AI tools and automation. The price tag, 2.8 billion. ServiceNow, no stranger to M and A activity, but this would be their biggest deal. What do you think they see here?
- [10:48]
Tim Byers
I mean, they better see some real value because they are paying. Let's be clear about this, Dylan. They're paying roughly 28 times. 28, not 2.8, 28 times annual recurring revenue. That is a lot. That is a big, big premium. So, yeah, this is a big deal. It's a front end AI assistant and it has some enterprise search cooked in. So you could think of this as if we use a car analogy here. The steering column and the dashboard in your car the controls to the drivetrain and the engine underneath. And so Moveworks is interacting with the car and ServiceNow is the automation engine underneath and so Moveworks. And by the way, there's a lot of joint customers, 250 of them. There's a built in integration already. So there is some synergy here. ServiceNow presumably believes there's a huge amount of synergy that they can save on duplicative costs and things like that, which is true of all acquisitions. But they must feel that there is a massive joint customer opportunity, that what's going to drive this is new revenue, that you're going to use the Moveworks AI assistant on top of ServiceNow and you're going to realize something that we've talked about on different shows on fool24 for a while now where we said the promise of AI isn't so much that I can ask a question and get an answer. Even though that's good, it's important to be able to ask a question and get an accurate answer. Even better is I ask a question or I make a request and not only do you answer my question, you kick off an automation that gives me what I want. Like that's the next step. You get me to automation, which is what AI agents are for. That's what this whole idea of agentic, I still hate that term, but it's a real thing, agentic AI, this idea of moving from ask a question to do a thing all the way through and move works as a way to start that. Because that's what ServiceNow is about. This is a workflow automation platform. So AI on the front, AI at the front of it, where you are looking for something, making a request and ServiceNow makes it happen. There's some synergy here, Dylan. There's no question, Tim, I am open.
- [13:30]
Dylan Lewis
To suggestions if you have an alternate name for the trend and for the technology movement.
- [13:35]
Tim Byers
I just hate it if you're. I'm just being grumpy. I'm being grumpy old man. You know, agentic AI just sounds like a disease. It just doesn't sound great.
- [13:47]
Dylan Lewis
We'll use it until we come up with something better. Yeah, this does feel very much like where the software industry and where the tech industry is going. I had the good fortune of being able to speak with Marc Benioff, the CEO of Salesforce about this because they are a company that is very heavily in that space and unfortunately I didn't have the benefit of this news item when I spoke with him last week.
- [14:11]
Tim Byers
None of us did. Yeah, but, but one of the big.
- [14:14]
Dylan Lewis
Things that came up was, okay, you're competing in this space with Microsoft. Those are. Those are kind of two big heavyweights in this industry. And really, how do you think you're competing? And what he focused on a lot was it has to be a simple experience. You need to create a very simple agentic touch point for, for customers. You can't have it fragmented into all of these smaller spots across your software suite. That's where he thinks that they are doing a good job versus Microsoft. I think I made a mistake by not bringing up ServiceNow in that conversation, Tim, because it seems like they're trying to hop in here.
- [14:48]
Tim Byers
Well, I don't know that you made a mistake here, Dylan. What I would say, though, is it is becoming very clear by virtue of this Moveworks acquisition that if Bill McDermott were here and listening to what you just said, he'd say, like, yeah, can I tell you about the deal that we just did to. To satisfy what Marc Benioff is talking about? This is. It is very clear that ServiceNow is coming for Salesforce. Let me just read quickly here from the press release. This is very fast following, closing together with Moveworks, ServiceNow, with thousands of AI agents already deployed, will continue to drive use of its AgentIC AI ServiceNow platform to accelerate and let me slow down and emphasize this enterprise adoption and innovation across key growth areas, including CRM. What does that say to you? I'll tell you what it says to me, and it's Bill McDermott saying, I see what you're saying, Mark, and we're going to get there before you are.
- [16:01]
Dylan Lewis
That's nice to know. Bill McDermott's a listener of the show. I appreciate that.
- [16:06]
Tim Byers
But you know what I mean. Like, they, they. I mean, he has. And everyone should take Bill McDermott seriously because he's a serious competitor and he has just served notice.
- [16:18]
Dylan Lewis
Tim Byers, appreciate you wading through these deals with me, helping me make sense of them. I know that this one was tough with Redfin, but I appreciate you talking it through.
- [16:28]
Tim Byers
Yep. Thanks, Dylan. Going to miss Glenn Kelman, but at least he'll be. You know what, at least he will be with rocket companies. So we'll. We'll see him just in a different role.
- [16:38]
Anthony Chavon
There you go.
- [16:39]
Dylan Lewis
Thanks, Tim.
- [16:42]
Mary Long
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- [17:18]
Dylan Lewis
Coming up on the show, Vail Resorts kicked off the winter season with some rough conditions despite having snowy slopes. Up next, Motherfool analyst Anthony Chavon joins Mary Long to check in on the ski resort owner and hospitality company before the company's quarterly report. After the bell today.
- [17:34]
Unnamed Analyst
And there was a, shall we say, a blizzard of news surrounding Vail Resorts for a bit earlier this winter. Part of that blizzard was due to the fact that there was a multi day ski patrol strike that closed a number of runs in Park City, Utah. That strike led to exceedingly long lift lines and also ultimately at the end of it, what amounted to about a $4 an hour raise for a number of workers at Vail. A win on that front. But the whole debacle didn't really do too much to improve Vail's reputation. Shortly after, there were whispers of an activist campaign that was calling for the ousting of CEO Kirsten Lynch. You and I were talking about this beforehand in preparation for the segment and you flagged that. I don't know if this activist campaign is really something that should be taken too seriously. But all told, it doesn't sound like the winter has been too kind to Vail. From where you're sitting, what do conditions look like for this company?
- [18:26]
Anthony Chavon
The conditions are not good right now for Vail Resorts. You know, if we just take a step back and look over the last few years, Vail had to deal with COVID They had to deal with inflation. They had to deal with too much snow in some of the reasons and too little snow in some of their other regions. But this year, you know, it finally seems like Vail got great skiing weather. We'll find out when they report earnings in a week or so. But the ski patrol strikes, that was kind of a wrinkle here. And if we think about some of the main stakeholders for Vail's business, Right. We have the shareholders, you have the skiers and the guests, and then you have the employees. Well, right now, all of those stakeholders are not happy. And for a business like Vails, it shouldn't be that difficult to create an enjoyable experience for their visitors. I mean, I think their mission statement is literally to create an experience of a lifetime. And in my opinion, you know, management just doesn't seem to be delivering on that right now.
- [19:25]
Unnamed Analyst
Yeah. So let's talk about management for a bit because you've got again, CEO Kirsten lynch. And she has focused a lot over the course of her tenure on, okay, leaning into the subscription, the recurring revenue of these epic passes of buying up new locations in the northeast and in Europe. That said, she's also made some perhaps questionable share buybacks, buying back a lot of the stock at high prices. And that doesn't look so good good now when the stock has declined more recently. How do you grade Lynch's performance?
- [19:54]
Anthony Chavon
Kirsten lynch became CEO in November 2021. So she's been in the role for about three and a half years. And we're long term investors at the Molly pool. So I don't think it's fair to put an actual grade on her just yet. But the, the early going has, has not been good in my opinion. So since she took over, you know, Vail has lost roughly 9 to $10 billion in market cap during her tenure. And to be fair, we entered a bear market like literally right after she took over. So she doesn't have control over that. But as a shareholder myself, I've really been disappointed with the capital allocation and specifically taking on debt to repurchase shares at much higher prices than where the stock trades at today. And I actually don't mind taking on debt to repurchase shares. But when you're a cyclical company, when your company's dependent on weather, when you're in a capital intensive business, I really don't like repurchasing shares with debt, especially the prices that it was made. So the capital allocation is really the big thing I'm focused on. And then circling back to the fact that this company just isn't doing a good job of delighting its skiers or employees. I think that's one of the bigger problems done with capital allocation.
- [21:05]
Unnamed Analyst
Yeah, delighting skiers and employees seems like a pretty big piece of the puzzle. If you are in the business of hospitality in particular, if you had Lynch's ear, what would you be directing her to do differently or what as a shareholder, would you like to see her do differently? To course. Correct. From here on out?
- [21:23]
Anthony Chavon
Yeah. I mean, as bad as things look at Vail Resorts right now, I think she can still turn it around. One thing that I would like to see happen is for management to actually cut the dividend. And look, I'm a dividend investor. I love dividends, I love dividend growth. But right now a large chunk of their veils, free cash flow is going to the dividend. And so that gives them less Flexibility to invest in their employees, invest in the guest experience, and improve the balance sheet, which isn't in great shape because of the past capital allocation decisions. So by cutting the dividend, that just frees up a lot of cash flow that could really put the business back on solid footing. So I just think management really needs to rethink how they're looking at capital allocation right now.
- [22:07]
Unnamed Analyst
Pre pandemic, Vail had an operating margin that had grown to nearly 21%. So then we kind of know this story. Covid hits and a. Effectively it slashes that operating margin in half. In the years since, COVID has been able to bring that margin back to previous highs with some success. It's work been working back up there. So operating margin has grown, but most recently it's hit 19%, which is putting it just shy of those 2019 highs. Is leaning on this story about an ongoing Covid recovery. Is that still a legitimate excuse for Vail or is something else kind of going on here that we should be paying attention to?
- [22:44]
Anthony Chavon
So, yes and no. I know I'm not picking aside here, but I mean, what happened during COVID You know, everybody went to work from home and a lot of people relocated to mountain towns like, like where Vail's resorts are located. And that really drove up the cost of living for, for many of Vail's employees. So Vail had to invest in employee wages, invest in workforce housing, and then at the same time, some of their ancillary revenue like dining and retail, that also took a hit. And then factor on that. The last few years have been difficult from a weather perspective too. So they're having to make a lot of snow, which cuts into margins as well, instead of just having that natural snowfall. And so I think indirectly, Covid is still having maybe a minor impact on the business, but I don't think it's the main reason why Vail is struggling today. I think the main reason is, like we discussed earlier, the, the, the, the poor capital allocation. And you know, I think this is a competitively advantaged business for sure. But I mean, it does have a lot of expenses when you think about, you know, the labor side of things, just how capital intensive it is with chairlifts and that sort of thing. And then, you know, also, you know, lease fees as well. So. So yes and no. But I don't think it's the main reason why, why Veil is struggling.
- [24:03]
Unnamed Analyst
So we've, we've mentioned the importance of the epic pass. And for those that are unfamiliar, the epic pass is Vail's all inclusive offering, you buy in for about $1,000. We'll talk more about price, but you buy in for about $1,000 and you get access basically to all of their resorts around the world rather than having to buy a season pass and you have to buy in before the season begins. It's non refundable Epic Pass prices for next season. So 20, 25, 26 came out just the other day. Next season's pass is going to cost a little over $1,000. The the official price tag is $1,051. So that's a 7% jump from last year's 982 price tag. And that itself was also a bump up from the year prior. Epic's primary competitor is the Icon Pass, which is the offering by the privately held Altera Mountain Company. That Altera Ikon pass option does remain more expensive. But my hunch, and I'm saying this as a skier who lives in Colorado and admittedly is very icon loyal, my hunch is that Epic crossing over this $1,000 mark will actually have perhaps more of a negative impact on sales than they expect. I kind of think ant that Vail is playing a tricky game with pricing. On the company's first quarter conference call in December, lynch said that the number of passes sold in North America had declined by 2%. So that's the first time that pass sales had declined since the pass was introduced in 2015. I believe it was. But importantly, revenue from passes rose due to an 8% increase. So they're playing this, this balancing act, right, of you raise prices to increase revenue but also retain customers. How would you like to see Vail balance that relationship? What matters more for a hospitality company? Is it pass retention and customer loyalty and delighting customers, or is it, hey, we have a responsibility to shareholders and we need to be consistently increasing revenue, even if it comes at the expense of losing some customers.
- [26:04]
Anthony Chavon
Yeah. So I think a company like Vail, in spite of all the struggles they've had, I still think their business has a lot of pricing power. And I think think we'll still see the Epic Pass go up at a pretty healthy rate in the future. Because if we look, we look over the last five years, Vail's Epic Pass, it's only grown at a 1% to 2% annual growth rate. And that's largely because they reset their prices lower in FY22. So the past price growth has been significantly below inflation over the last five years. And at the same time, the Icon Pass, like you mentioned is I think a few hundred dollars more expensive than the Epic Pass. But I think the Epic Pass has exposure to more resorts. So I think there's still an opportunity for them to continue raising their prices. Even if skier visits and Epic Pass sales decline, I think they can still make that up with more price increases. And another thing that's favorable for them is the supply side of the equation. So there's fewer ski areas today than there was a few decades ago, and there's more skiers today than there was a few decades ago. So I think that supply and demand dynamic gives Vail the power to continue raising their prices. And there's definitely a lot of noise around Vail's business and for good reason. But I think focusing on supply and demand, two things that really matter. I think that could possibly mean that better times are ahead for Vail's shareholders.
- [27:37]
Unnamed Analyst
We've talked a bit throughout this conversation about the troubles that are facing Vail's business. One of the most compelling things about this company in my mind is their hoard of real estate assets. They've got all these ski resorts and, and those resorts exist on really highly coveted, beautiful land. And on that land they have resorts, hotels, etc. Does it make sense to think of Vail, the holder of real estate and real real estate assets, as a separate entity than Vail, the operator of real assets, or do they have to work together?
- [28:11]
Anthony Chavon
I think they have to work together because Vail, they own the resorts. But at a lot of those resorts, they, they actually lease the land from the federal government, private landlords, Whistler Blackham in Canada, I think that's leased from the Canadian government. So a lot of the land they don't necessarily own, but they own the resorts and they operate the resorts on top of it. So I don't think it's necessarily a pure play real estate company. But they also get the benefit from it, though, because there's no new supply of ski resorts coming to the market. And I think there was one that came. I forget what the name of the resort is, but I think it cost at least a billion dollars to build. So they're still going to benefit from no supply and maybe even negative supply as we move forward. So I think they benefit from real estate in that sense.
- [29:02]
Unnamed Analyst
We're recording this on Thursday, March 6, but this segment's going to air on Monday, March 10, which just so happens to be when Vail's next earnings call is. What are you going to be listening for on Monday?
- [29:14]
Anthony Chavon
So Warren Buffett just wrote his annual shareholders letter for Berkshire Hathaway. And one of the quotes he mentioned was, he said, I have also been a director of large public companies at which mistake or wrong were forbidden words at board meetings or analyst calls that taboo implied managerial perfection always made me nervous. So, you know, when Vail reports its earnings next week, I want them to admit that they made a mistake because clearly mistakes have been made if, you know, the shareholders aren't happy, the employees are happy, the guests aren't happy. So I would just like to see them own up to that, make a mistake. That would make me feel a lot better about management in the company moving forward.
- [29:56]
Unnamed Analyst
Anthony Schmone, always a pleasure. Thanks so much for shining a light on this company.
- [30:01]
Anthony Chavon
Thanks for having me.
- [30:09]
Dylan Lewis
As always. People in the program may have interest in the stocks they talk about. And the Motley fool may have formal RA recommendations for or against certify sell anything. Based on what you hear, all personal finance content follows mouthful editorial standards is not approved by advertisers. Motley fool only picks products and personally recommended friends like you. For the Motley fool money team, I'm Dylan Lewis. We'll be back tomorrow.