Shownotes Transcript
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Good morning, Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, Coca-Cola may owe $16 billion in taxes to the IRS. Better start saving those bottles. Then a defense tech startup wants to rebuild democracy's arsenal. And Silicon Valley is very much on board. It's Friday, August 9th. Let's ride. Let's ride.
If you're craving a reasonably priced rotisserie chicken right now, you better have your Costco card on you. The retailer announced this week that it is conducting a Netflix-esque crackdown on membership sharing by installing card scanners to all front entrances over the coming months.
That means no more flashing your mom's card and sneaking in. No more blustering your way through by saying, oh, I forgot my phone inside. You got to have your ducks in a row to get into bulk buying paradise, Neil. Yeah, well, that is a huge bummer because tomorrow my entire plans are going to Costco and eating all the samples for lunch. But yeah, this makes sense. We've seen it across industries. The great password sharing crackdown, the great membership crackdown.
But you can see why they're doing this, because it brings in a lot of money for them. In 2023, Costco earned $4.6 billion in revenue from those memberships. So they're cracking down on those of us who are just, you know, working off of our parents' cards. By the way, I have used that move before. It's like, oh, I just left my phone inside. Could I run in? Of course you did. It totally works, but you didn't hear that here. Now a word from MBD sponsor Beehive.
For a while, I was confused why Beehive was called Beehive. I mean, it's a newsletter platform after all. Where do the bees come in? It's perfect though. Think about it. One bee on its own, not that strong, but a hive, a force to be reckoned with.
And same with a newsletter. On its own, it's tough to grow, but supported by a network of other newsletters, then it can flourish. And Beehive has built features to help your lonesome bee interact with other bees from the hive. There's Boost, which can help put your growth into overdrive with paid recommendations and other newsletters. Then there are the monetization features like an ad network that lets you fill in your advertising pipeline without lifting a finger. The hive is there to support you, but instead of making honey, it makes you money.
All right, I'm fully bought into the beehive metaphor now, but it begs the question, who's the queen bee? It's whatever newsletter you spin up right now by heading to beehive.com slash brew. That's B-E-E-H-I-I-V.com slash brew and get a 30-day free trial plus 20% off three months with code brew.
For most of you listening to this, Andruil is a significant sword in the Lord of the Rings series. But for a select group of venture capitalists, Andruil is a defense tech startup that is building the future of autonomous weapons manufacturing. Andruil Industries just raised $1.5 billion in new funding at a $14 billion valuation to soothe Pentagon officials' worries that the defense industry can't produce military equipment like it used to anymore.
It plans to use the funds to build a 5 million square foot mega factory it's calling Arsenal One. The mock-ups make it look like an Avengers HQ, and it's remaining tight-lipped on where the actual location of the factory is. But if Arsenal One works, expect more to follow. Its pitch to investors is that America is falling behind in the race to build enough weapons and ammo to stay ahead of
enemies like China and Russia. But Andreuil thinks in Arsenal 1, it has found a way to quote, hyperscale defense manufacturing by emphasizing scalability and simplicity. And they hope to manufacture tens of thousands of autonomous weapons and vehicles every year.
Neil, this company is founded by Palmer Luckey, the dude who brought us Oculus headsets. He's younger than you. And Silicon Valley and the military are very pumped up about this. Thank you for reminding me. Well, yes, this industry, the defense contracting industry in the United States...
is hasn't changed in a very long time. You have these prime defense contractors, Lockheed Martin, Raytheon, General Dynamics and Boeing. And there really hasn't emerged a startup or anyone else to disrupt this industry for a very long time. Andreuil thinks that it can do that by borrowing techniques from
from Tesla, from Apple, from the tech hardware manufacturing world and bring them to defense tech. And it's doing a pretty good job. It already scored some wins in a way a startup has not from the government. It was awarded a $1 billion contract in 2022.
to provide anti-drone technology. And then it beat out Lockheed Martin, Northrop Grumman and Boeing to win a large U.S. Air Force contract for small unmanned fighter jets. So it really is doing something no one thought possible, which is disrupting this defense contractor industry.
And for a long time, venture capitalists essentially annoyed this industry because it is just so dominated by those five heavy hitters that you mentioned. And it is very hard to win these contracts. But now their ears are perking up because Andreuil is beating this drum that there is this anxiety around U.S. defense right now. There is this recent national security expert, a bipartisan group, who in July warned that a World War II-style industrial mobilization effort in the U.S. is not going
currently feasible. So here comes Andrew saying, hey, we're going to Silicon Valley-ify defense manufacturing. So everyone is very excited about this. For a while, no one was quite sure. It was kind of a chicken and the egg type scenario where they needed the funding in order to build the factory. But in order to get the funding, you need to prove that you can build these weapons that they're saying. So they've threaded that needle very nicely by winning some of these contracts. And now Arsenal One is in the works. And this area has boomed, especially because of
the war in Ukraine when Russia invaded Ukraine in 2022. All investors in Silicon Valley and the larger defense industry was like, wow, are we prepared for something like this? While all venture investment kind of stagnated over the past couple of years, investment into defense tech doubled to $33 billion between 2019 and 2023. And the guy who's doing a lot of this, who has his fingerprints everywhere, is Putin.
Peter Thiel. And so he is a his founders fund is a major backer of Andreil and he co-founded Palantir, which is a similar new defense AI style startup that is now a public company. And both of those, you can see his passion for Lord of the Rings because both Palantir and Andreil have Lord of the Rings names to them.
I will say, too, that Andreuil is certainly being valued like a startup much higher than any of its peers in the industry. I mean, its latest revenue came in around $500 million last year, so that means its current valuation is at a 28x multiple. If you just look at Lockheed Martin's, for instance, that revenue multiple is 1.9x. Boeing's is 1.3x. So it's clearly got a little bit of that Silicon Valley aura around it because it is
saying that, hey, we are going to focus on the actual manufacturing. The weapons themselves are definitely going to be innovative, but the manufacturing, this modular approach, this very simple approach that they've stolen from the likes of Tesla is the real reason why Silicon Valley is so bullish on this company.
Bangladesh is beginning a new chapter in its history, and to lead it, they've turned to an 84-year-old Nobel Peace Prize winning professor, Muhammad Yunus. The country has experienced extreme unrest in recent weeks. Student-led protesters began rallying against a jobs quota, setting aside positions for certain groups.
But after a crackdown by the government that led to hundreds of deaths, the protests expanded with an even more ambitious goal, taking down Bangladesh's authoritarian leader Sheikh Hasina. And...
It worked. Earlier this week, she resigned and fled the country. So what now? Call up the legendary economist Yunus, fly him in from Paris where he'd been working with the Olympics, and make him the caretaker prime minister until new elections are held. Bangladesh is at an inflection point. It had been one of the biggest development success stories of the past few decades, with one of the highest economic growth rates ever.
anywhere. In 1972, 80% of the population was in poverty. In 2021, it was just 13%. Just incredible progress. But even as Bangladesh's economy was growing, its democracy was sinking as Hasina tightened her grip on power and turned the country into a de facto one-party state. And then last week, things changed.
totally combusted. This could be a reset Bangladesh needed. Right. It's created an awkward situation over in South Asia, though, because the U.S. was critical of how Hasina ruled, but she was seen as this stabilizing force in the region. She kept some of the radical Islamists in check. She had a good relationship with neighbor India. So she was a stabilizing force, even though she had
turned a little bit authoritarian. That being said, too, the real concern on the business side of things is just Bangladesh has this very high dependence on the textile industry. Ready-made garments account for 90% of its annual exports. It's a major player. It's the third largest consumer
clothing manufacturer in the world. So that's when you look at a geopolitical scope, companies like Uniqlo, Zara, H&M have this huge reliance on Bangladesh. So they were all nervously watching the situation unfold. It looks like things have stabilized a little bit and that manufacturing can kick up. But that from a geopolitical and also just macro view is why people are focusing on Bangladesh. Yeah, from a supply chain perspective, everyone's looking at the factories there. And they were shut down for weeks while these protests happened.
In comes Yunus, who is pledging to just restore stability. A little biography on him. I mean, he did win the Nobel Peace Prize in 2006 for his anti-poverty measures. And he is known as the banker to the poor. He pioneered a concept called microfinance or microcredit, where you hand out small loans to people in poverty. And they use that to start up really small businesses. Maybe they lend out a phone to their friends.
to the village, maybe they buy livestock and then they pay the loan back and then you can give them a bigger loan. But he was a big pioneer in this area. He created this bank in 1983 called Bameen Bank and that has grown to be a pretty large organization. He actually, so he grew up in Bangladesh and then he graduated
with his PhD in Vanderbilt. He was teaching economics classes in college and he was looking at the poverty that I mentioned, what was happening in Bangladesh. He's like, I got to go over there and actually get my feet on the ground and actually make change. And that's when he started going back to Bangladesh and doing these anti-poverty measures that by all accounts
worked and were replicated elsewhere. And he's got his work cut out from him because Bangladesh's economy is in a bit of a precarious situation. In July, the S&P global ratings downgraded the country's long-term sovereign debt rating. Its currency, the Taka, is pegged to the U.S. dollar, so they've been having issues since the monetary tightening by the Federal Reserve. And then
Also, inflation has been an issue as well. It's been hovering around 10% for the last year or so. So Yunus certainly notes his stuff, but also has his work cut out for him. And I said Bameen Bank, I meant Grameen Bank. Little ad hoc correction.
Yesterday was a bloody one in the entertainment business world as Warner Bros. Discovery and Paramount had a competition to see who could take a bigger write-down on their legacy media assets. First, it was Warner Bros. who took a $9.1 billion hit for writing down the value of its TV networks. That led its stock to plunge to its lowest level ever.
Then, a short time later, Paramount wrote down the value of its cable TV business by $6 billion. It said part of its decision to reassess the value of channels like Comedy Central and MTV was due to its impending merger with Skydance Media. Merger or not, you can probably guess the reasons why these massive body blows to entertainment giants just keep happening.
coming. Cord cutting is accelerating. The advertising market is softening and ratings are declining. That is a bad combo, which led to these really ugly and really big write downs. Totally. I mean, we've been watching this slow train wreck of the TV, the traditional TV business for years, but this was the first time where you actually put some numbers to it and a nine billion write down for one company, a six billion dollar write down for another company. And you sort of take scope of just how much carnage
There is for this. I mean, Warner Bros. Discovery, they were the result of a merger between Warner Media and Discovery in 2022. And this was expected to bulk up. They would, you know, release this streaming service, which is now Max. And they could, you know, do some damage against Disney.
the Disneys of the world. And it just hasn't panned out. This has been an utter failure of a merger. Shares are down 70 percent since they merged. And now the CEO, David Zaslav, has some really tough questions to answer. He thought he said recently that he said a couple of years ago that they didn't need the NBA and now they don't have the NBA because they got beat out by Amazon. They're currently suing the NBA to keep their contract. But without the NBA, this nine ball
$9 billion, Ragtown seems like it could just be the start of a flood of more. Some people have been saying that the company could be a target for activist investors, but then you take a step back and go, I don't really know what other possible strategies there are right now because the writing has been on the wall for a long time and Max is doing relatively okay. Same with Paramount Plus. Paramount Plus actually recorded its first ever quarterly profit. It's something that we just talked about with Disney as well. These streaming services are
are doing their best, but they're just not quite as profitable as their linear assets were. So they're trying to adjust to this new paradigm. Warner Bros. Discovery shares are down 70% since April of 2022, the day that the merger closed. So clearly things have not been going well over there. It's just tough. What are you supposed to do right now with these linear TV assets? Here's an M&A rumor that I've heard. Apple buying HBO. Yeah.
Because Apple TV Plus is good, but no one really watches it. They don't have a lot of content. And Warner Bros. Discovery has HBO, but they need to start. They have tens of billions of dollars in debt and need to start selling stuff. So it's possible there's some rumors out there in the Hollywood circles that Apple could scoop in and buy HBO, both very premium brands. Seems like a decent match. That's always the get out of jail free card. But sell to Apple? Yeah, that's...
That rumor is always around. For a while, Disney was being floated as selling to Apple. But you're right. I mean, it makes sense. Both these companies are just in major cost-cutting mode as well. Warner Bros. has laid off 2,000 people. They also raised the price of their subscriptions, so they're really focusing on profitability. So, I don't know. David Zaslav always thinks he's got an ace up his sleeve, but this time it might be hard to pull off. Coming up next, the billionaire founder of Blackstone has met his match in the great crested newt.
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I don't have any teeth.
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Well, it's time for my favorite segment, Stock of the Week, Dog of the Week, because it means Friday is here and you don't have to set an alarm tonight. Today's edition is a delicious mashup like hazelnut and blackberry gelato. Our Stock of the Week is Eli Lilly, and the Dog of the Week is Novo Nordisk. These two companies are leading the pack in making those blockbuster weight loss drugs, but recent results show Indianapolis' Eli Lilly nudging ahead of its Danish rival.
Eli Lilly said sales of a ZetBound weight loss injection came in way ahead of projections, pulling in $1.2 billion in revenue last quarter. Its stock surged nearly 10% yesterday to cross $800 billion in market cap, widening its lead as the biggest pharma company in the United States. It's pretty much unheard of for a pharma company this big to grow this fast, and it's all because of insatiable demand for those weight loss drugs.
Novo Nordisk, meanwhile, spooked investors by missing forecasts by its weight loss and diabetes drugs, Wagovi and Ozempic. Like Lilly, Novo Nordisk stock has boomed due to excitement over those obesity meds, but shares fell 7% on Wednesday after this extremely rare miss. Toby, everything coming up USA.
I feel like there's some sort of House of Dragons reference to be made here, but I haven't seen it because we have these great houses vying for control of the same market. But let's be clear here. Novo Nordisk has not been suffering from lack of demand. Its lower sales were due to supply chain issues. They just really haven't been able to ramp up production like they want to. Conversely, Eli Lilly has been able to scale up production. They've built six new factories recently. They've gotten their drug off.
off the FDA's drug shortage list. Meanwhile, Novo Nordisk still has some doses of Wagovi sitting on that list. So this really is an arms race to see who can scale up production fast enough. And right now, Eli Lilly seems to be handling it a little better. I mean, sales of Wagovi for Novo Nordisk rose 53%, which was well below analysts' expectations. I know.
I mean, that's tough. Fifty three percent growth over a year and you still miss. I mean, that just shows how high expectations are for these drugs and how fast this market is growing. And Novonordisk also, in addition to having, you know, sort of limiting supply because of production issues, said it had to offer lower prices because of negotiations it had with those pharmacy benefit managers which purchased Novonordisk.
drugs from manufacturers and negotiate certain rebates. And it said those rebates came in a little higher than it thought. So it just wasn't making as much money. But as you mentioned, demand is just not an issue. I think that there was concern when Nova Nordisk reported earnings on Wednesday. They were like, oh my God, has demand plateaued? Or have we reached peak weight loss pill? And then Eli Lilly came the next day and just reported those blockbuster results and said, nah, we're all good. Everyone still wants these. Right. The two things that Eli Lilly is winning on is
availability, but then pricing as well, because they were able to charge higher prices than Novo Nordisk because there was actually a decreased use in some of those savings card programs compared to a year earlier. So it really is sometimes just how things shake out because this is a very complex puzzle, the healthcare system with a lot of different companies influencing pricing. So maybe Novo Nordisk does come in next quarter with a little bit better pricing figured out. But
This industry is still growing. It's still ripping. Somehow they're both our Stock of the Week, Dog of the Week, but they could be Stock of the Week every week.
Coca-Cola makes for a great mixer, masking the taste of a shot of Jack Daniels here and there. But even its crisp Coca-Cola flavor isn't enough to mask a potentially $24 billion hit in back taxes the company might owe to the U.S. Apparently, the soft drink maker has been hiding astronomical levels of profit in tax-friendly countries like Ireland to shield it from the IRS's watchful gaze.
If this feels like a big thing to just drop out of the sky given that Coca-Cola is a massively publicly traded company, it is. Coca-Cola has been able to hide away the impending payments through some fancy bookkeeping. As long as its auditor, EY, agrees that there is a greater than 50% chance that Coke can win an appeal against the court order, the payments don't have to be put on their profit and loss statements.
But if Coke is wrong and it's misjudged its chances of winning, then oh boy, it ain't pretty. A loss would wipe out an entire year and a half of income. Plus the IRS could jack up its tax bill leading to a billion dollars in more payments each year. Neil, we've all put off
paying the bills before, but not quite on this scale. No, let's talk about what Coca-Cola is accused of doing. It's called something called transfer pricing. And if you're a massive multinational manufacturing company with subsidies, subsidiaries all over the world, this is something that you can do to try to lower your tax bill. And the IRS might come after you for it, which it's doing right now. But basically they have these concentrate manufacturers that make their syrup in places like Eswatini, Brazil, I
Ireland, places that have very low tax rates. So they make the concentrate for Fanta, Sprite and Coke. And when the IRS looked at these businesses, they should just be regular contract manufacturers with relatively low margins. This is a pretty standard business that you can spin up. It's not very lucrative. They looked at them and then found that they were the most
profitable food and beverage companies in the entire world, these syrup manufacturers. And they're like, what is going on? And what is going on is that Coke seems to have shifted a lot of the profits from its entire international business to these concentrate manufacturers in these low-tax industries.
areas in order to pay a less tax bill. And that's something called transfer pricing. And that's what the IRS is going after Coke after. And this has been going on for decades because there was a dispute all the way back in 1996 around the same thing, reallocating some of these profits to these very favorable tax havens in countries. But
they apparently agreed to a deal where they said that, okay, the concentrate manufacturers should be making no higher percentage returns than Coke's bottlers. So they tried to put this formula in place. But the interesting thing is that Coke took that basically as law and said, all right, you told us the formula. We're just going to follow that without really reexamining it anymore. And so they were just hoping that the IRS wouldn't look back over their shoulder. But
A lot of analysts are saying that Koch was just relying on the strategy of hope, and hope in a legal situation is not going to do very well. And then meanwhile, this is a very big deal for the IRS, because if this tax bill comes due, it could cover their entire budget for a year. So it's a lot of money. And also, the IRS is trying to put this new foot forward and say that it can go toe-to-toe with these megacorporations. So there's a lot on the line here. And if Koch misjudged it, if they are going to lose this, then it's not going to be pretty for them.
What better way to wrap up our show this Friday than with the saga of a Wall Street billionaire with a new problem? Yes, the amphibian. The Wall Street billionaire in question is Stephen Schwartzman, the CEO of private equity giant Blackstone. You see, he recently paid one hundred million dollars for a country estate in Israel.
England, but frankly, it's been around since the 17th century and could use an upgrade. So he wants to build a lake, renovate the stables, and add a three-story wing, and he got that approved by the local planning commission. However, the renovation comes with some hoops to jump through, in particular, hoops that aim to avoid habitat loss for the great crested newt, a protected species in England.
A habitat protection strategy requires a weekly biodiversity audit, an on-site ecologist, and at the start of each working day, construction crews who need to comb the entire site for newts. If they see one, they have to capture it with a gloved eye.
Shortsman just wants his dang leg already and is asking for help from the highest reaches of the UK government. According to the Financial Times, he met with the new finance minister, Rachel Reeves, this Tuesday in New York for the third time. And in previous chats, he raised concerns about the new issue. Toby, whose side are you on, the Wall Street Titan or the new? Well, at first, when you see the headline, you're like, of course, I'm on Team Great Crested Newt. But then you see those restrictions. It is it.
incredibly, it feels punitive in a way, especially because another report found that there have been no newts detected on the property so far. So he's jumping through all these hoops, even though there's no newts. The newt is endangered across Europe. It's relatively a lot more common in Britain. So that's just another thing that is probably making Schwartzman shake his head. This is a story about the Great Crested Newt, but it's also a story of just how hard getting things built in Britain is. Some are hoping that when Britain gets
Brexited back in the day, it would loosen some of these restrictions by doing away with some of those ecological surveys. That hasn't been the case at all. So it is a very funny headline, but it speaks to deeper issues about the way things are in Britain right now. Absolutely. So you know how Schwarzman's meeting with Reeves. I'm sure they're touching on the new, but I'm sure 90% of those conversations have to do with this data center that Blackstone wants to build in the northeast of England, which will cost much more and is much bigger deal than his estate. And
And the conversation is about loosening those planning restrictions, making things easier to build in Britain. That was one of when, you know, this labor, this labor administration was just elected on July 4th, about a month ago. And one of their main tenants of their campaign, one of their main promises, especially Rachel Reeves, the new the new finance minister, was just making things easier to build and cutting a lot of red tape. And so that this is you're right. This is a story about a new but it's just really a microcosm of how things change.
how hard things are to build, and the promises that the new administration is making to loosen those restrictions and hopefully get Blackstone, its data center, and Stephen Schwartzman, his lake. I can't believe we're coming out inside of Blackstone. Let it be known that Morning Brew Daily is generally team crested new, but also we're not fans of over-regulating business projects. We're going to thread the needle right there.
Let's wrap it up there. Thanks so much for starting your day with us and have a wonderful Friday and an even better weekend. For any questions, comments, feedback, send an email to [email protected]. Let's roll the credits. Emily Milliron is our executive producer. Raymond Liu is our producer. Olivia Graham is our associate producer. Ed Lewis is our technical director.
Billy Menino is on audio. Hair and makeup is remaining neutral in the Stephen Schwartzman dispute. Devin Emery is our chief content officer, and our show is a production of Morning Brew. Great show today, Neil. I wish you all well.
