Kimberly-Clark to Buy Tylenol Maker Kenvue for $40 Billion

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1:20Bloomberg Audio Studios. Podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Kimberly Clark buying Kenview in a cash and stock deal worth about$40 billion. To include debt in there, the enterprise value blows up to$48.7 billion. Diana Gomez, a senior equity research analyst for Bloomberg Intelligence and has been covering this deal. Diana, what's your first take on it? So it is surprising in many ways from the perspective of Kimberly-Clark, I must confess.

2:09It shows that Canview really has a lot of work to do to turn around the business since it split from J &J about two years ago. And the third quarter miss just added up to a pile of disappointing results. Diana, I'm looking at the Kimber-Clark stock trading down 11%, 12 % here. What's that telling you? Are they overpaying? Is the market skeptical about synergies? What do you read into that? I believe more the later in terms of the synergies. It is quite a steep climb. Obviously, there's a ton of low-hanging fruit, let's say, in terms of efficiencies that can be gained in terms of plugging the great, iconic, well-known, trusted brands from Canview into Canview's system that is running at a more efficient level at the moment.

3:09But there is skepticism there because we are talking about revenue synergies as well as cost synergies. And this will be quite a complex new company at the point when Kimberly-Clark was just simplifying as they were, they are aiming to close the transaction on their international business that includes segments like tissue by mid-2026. And now this merger expected to close around the same time just seems to complicate the picture a little bit. Oh, yeah. That does sound complicated. Yes. And we know our Kenview has been dealing with some crisis in the last month with Tylenol and then with talk lawsuits outside the U.S.

4:00as well. So I'm glad you went there. The Tylenol situation, the Trump administration has been attacking Tylenol overall. Do you think that's something that might complicate this deal? Could regulators step in and hold things up or raise questions that will just drag things out? Quite different questions, I would say, but great questions. So in terms of Tylenol, the legal risk is there. The Kenview was already fighting in the courts some lawsuits, but we now have a Texas state lawsuit on top of it. The Kimberley Clark's price, when we look in terms of, for instance, an EBIT to enterprise value multiple and I'm taking 2025, 2026, 2025 sorry, that they will report.

4:57So that will come at about 14 times, whereas historical transactions in the consumer health space were in the range of 16 to 20 times. So 14 times comes below that. So really reflecting not only the struggles of Canview where their organic growth is still declining, but also that liability risk with lawsuits that are ongoing and that's a new lawsuits that can be added as well. In terms of the, say, antitrust competition, regulatory approval, as I see it, they don't really overlap directly, but it really depends on a country region by region basis, because we know the US stance can be very different from the European Commission one.

5:45Deanna, should we expect more consolidation in the consumer product space, do you think? Yes, so that's a team that I've been watching very closely. Obviously, we had other large pharma groups with significant consumer health businesses. So we are talking not only over-the-counter medicines, but also the more personal care that deals with wellness. Sanofi decided to sell it to private equity. So at least for the next few years, that is that. Buyer is still considering, well, not considering, as management says, puts it, but buyer still has their consumer health business and they could be looking into either listing it or further consolidation within the current players.

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8:33to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Paul and I were just joking about how there was this headline that was basically clickbait. Amazon inking a$38 billion deal with OpenAI for NVIDIA chips. You've got Amazon, you've got OpenAI, you've got NVIDIA, and you've got a massive number, 38 billion. So let's bring in Mandeep Singh, Bloomberg Intelligence, senior tech industry analysts on these latest developments. Mandeep, I've lost track of how many companies OpenAI has signed deals with.

9:11It feels like the bigger question is who has it not signed a deal with at this point? That's a good way of framing it. But look, I mean, they have announced their intentions very clearly that they want to add up to 30 gigawatts of capacity. So in the end, it is all tied to that bigger goal of, you know, adding 30 gigawatts. And just to put it in perspective, I mean, the entire gigawatt capacity of all the hyperscalers combined is around that ballpark, 30 gigawatts. So they are talking about, you know, some big numbers in terms of capacity additions, how they will do it. One is through a deal with Oracle.

9:48So that was a$300 billion deal. Then they signed a$250 billion deal with Microsoft. So when you look at it from that perspective,$38 billion is not that big. And look, I mean, I can see what OpenAI is doing because they've seen, you know, Entropic sign a deal with Microsoft first, and then they signed a deal with Google TPU. So Entropic and OpenAI are the purest plays when it comes to LLMs. And if Entropic is getting all that compute capacity from the two hyperscalers that, you know, OpenAI was doing business with, it was mostly Microsoft. And then Microsoft added Entropic. So from that perspective, I can see why OpenAI wants to go to Amazon, which they haven't done so far.

10:34It's an arms race, essentially. Anthropic, OpenAI, these are private companies, correct? Yeah. Where are they getting this cash for all these big purchases and investments and things? Am I missing the funding rounds here? Well, so look at what they have done in terms of their valuation. OpenAI has grown to$500 billion in valuation this year. They started off the year at around$200 billion. So that just goes to show that every funding round, they have attracted more money. In fact, people are lining up to give them money. Now, I mean, granted, their revenue is still, the latest numbers are close to$15 billion in ARR.

11:16That's growing over 100%. What they have promised to investors is they'll get to$100 billion in ARR by 2027, 2028. What is average annual revenue? And recurring revenue. So that's how we measure all the software companies. When you think about even$15 billion in ARR puts them among the top 10 software companies. So already, OpenAI is among the top 10 software companies. You walk in and I want to poke holes in it, but he's got such conviction about this. I know. I'm shaking my head as he's talking about this. He's got such conviction. Mandeep, is there a point where OpenAI gets so big that it has to go public that it can no longer stay a private company?

11:54I mean, they already changed the structure where Microsoft got a 27 percent stake now. And so they're like multiplying in growth. So this will last for a little bit. And then the same question arises again. It does. But they are separating out the nonprofit part with the profit entity that will go public and then they will sell their shares. I don't know how much money they would want to raise, given how much they are already raising in the private market. So, look, I mean, it's inevitable. table, a company like OpenAI, if they get to$100 billion in revenue over the next three years, they have to be a public company.

12:30I just can't imagine them being private. Are there regulations that push them in that direction? I mean, isn't it you have a certain number of shareholders and at some point you have to list? I mean, think about the backers of the company who are participating in these funding rounds. They would want an exit strategy. You know, you're kind of becoming an investor right now with the hope that you can get a return. And so once a company gets to$100 billion in revenue, I'm sure a lot of those investors would want an exit. Google announces big CapEx raise, stock goes up. Facebook announces big CapEx raise, stock goes down.

13:09Why? Because at the end of the day, you have to show ROI and you have to show revenue. In the case of Meta, they are planning to spend over$100 billion in CapEx next year with no explicit cloud revenue. So think of what Amazon's$38 billion deal does today. It will add$5 billion in revenue starting late 2026 and 2027 onwards. Every year, this$38 billion means they'll add$5 billion in revenue. That's how much OpenAI will end up paying Amazon. In the case of Meta, they're spending$100 billion plus with no promises that somebody will pay for their infrastructure. Yes, they're getting some lift in their ad pricing, but that's not enough to justify$100 billion in CapEx.

13:58So that's where the ROI question is the most obvious in the case of Meta, because obviously they keep raising their numbers and they keep buying supply. What does Meta say they're going to do other than advertising? What does Meta say they're going to give from that$100 billion in CapEx? Their pitch is, we've got this family of apps with over 3 billion monthly active users where people are spending 40 minutes a day, we will give them more AI functionality. Look at what OpenAI has done with AI-generated content. What Meta is saying is our AI-generated content will be better than these LLMs, and that will drive engagement and we'll monetize it for your ads.

14:33Right, but they aren't able to provide explicit numbers in the same way that others are able to. So isn't that a good sign that equity investors are discerning, are making a distinction between Meta and Amazon and Alphabet and Microsoft that they're poking holes in some of these narratives that the companies are telling. Absolutely. I think right now the market is making that distinction, which is why Amazon actually trails so far. It's only after their recent print that you got a lift in Amazon. And now with this deal, suddenly they're starting to see some more monetization for Amazon. So does that show that even if you're kind of late to the party as Amazon was, you can make up for lost ground?

15:11that the race hasn't gone too far ahead of you? I mean, the path right now is through AI infrastructure, renting AI infrastructure, whether it's power or data center capacity or GPUs. That's where everyone is convinced there is revenue and there are profits. When it comes to applications, it's still very hazy in terms of which business model will actually generate profits or not. So I think the market has done a good job in terms of discerning where the monetization is so far. Stay with us. More from Bloomberg Intelligence coming up after this.

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16:53You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. Or watch us live on YouTube. Berkshire Hathaway reported really strong earnings. And they also reported that they have about$382 billion of cash on the balance sheet, which begs the question, as it does every quarter, as it has for years, what do you do with all that money? Matthew Palazzola, Senior Analyst of Property and Capital Insurance for Bloomberg Intelligence, joins us here in our studio.

17:27I'll tell you what you do. You buy back stock and you put a 3 % dividend yield on. You give that cash back to shareholders. That falls on debt fears at Berkshire Hathaway, right? I think so. I mean, look, certainly a good problem to have. And I would make quibble a little bit so that that 382 includes 20-ish billion in treasuries that didn't settle. So it's probably 360 billion. Still a lot. Still a lot. No, I would say the interesting thing is the stock has underperformed the market by like 30 % since Buffett announced that he was stepping down in May. And they haven't bought back any stock over that entire period.

18:05Wow. Yeah, I turn my mic on. I say, why? Yeah. So Buffett used to have a rule when the stock was above 1.2 times price to book, they wouldn't buy it back. They kind of kicked that out and they said, we're just going to buy it back whenever we see intrinsic value below. So, you know, I know to me, it begs the question. I mean, maybe he sees the stock as kind of fully valued, even down, you know, year to date. Even with the lagging performance as well. So does that change when Greg Abel, the handpicked successor to Warren Buffett, takes the reins officially at the end of the year? You know, Scrawler, he walks a fine line between putting some sort of stamp on the company, maybe over time, and then kind of respecting the ethos of Berkshire and how they've operated.

18:55I would hope something happens. I mean, they did a$10 billion deal in the fourth quarter. They bought the OxyChem business from Occidental. They just don't have things that can move the needle very much. Even in the quarter, their net stock buys and sells were a negative$6 billion. So they were negative on other equities as well. Yeah, there were net seller stocks for 12th straight quarter. And that cash and equivalents was at a record high at the end of September. Is that a signal that they're waiting for the market to tank, that they see a correction? Maybe not tank. That might be too strong.

19:30They see a correction or consolidation in the near term and are ready for it. They're always ready for it. Buffett has always said, we're not looking to time the market. We're just looking for good companies. He's also been, when I talk to people, the thought is, is he just hoarding money for Greg Abel and kind of setting the company up and just handing it over? He said he's not doing that. So, you know, unfortunately, they don't talk to investors. So we can't really pick his brain besides at the annual meeting. So we don't exactly know what's going on there. I think he's just, I don't know, extra conservative in his old age, I guess.

20:09All right. Here's my cynical Wall Street perspective. One Mr. Buffet passes, 3 % dividend yield, massive stock buyback. Do you think that's a scenario? I think dividend yield, hopefully, some sort of dividend, maybe special dividends. The buyback, I think, will also kind of weigh on what ABLE sees the intrinsic value. So I would say probably, hopefully dividend, I would say maybe more steady buyback. There's also, they can't buy back a ton of shares on volume because there's rules on how much they can buy back and how active they can be in the market. So that limits them a little bit. That's plan B.

20:49Don't you have to split the stock like a gajillion to one? Well, they have the A shares and the B shares, but there's, I don't have all the exact rules, but they've talked about we can only buy back so much at a time. They bought back none. So I think a steady buyback plus some returns of capital in forms of, I would hope, special dividends. Maybe they don't want to be beholden to a regular quarterly dividend. Yeah, makes sense. Okay, so that's something we'll watch for when that eventually happens. In the meantime, how are the businesses of Berkshire Hathaway performing, especially insurance?

21:21Yeah. So all good in the quarter. The insurance business made much more money than the year ago, but that was because they had a bunch of large losses in the year ago. They also had this favorable reserve development, which means they write business and those losses come in better or worse than they expect over time. And that was those losses were coming in better than they expected. So that is, it's a good thing, but it's not a super high quality source of earnings beat. So the insurance business performed well on those two things, which aren't super high quality, in my opinion. The underlying business and the insurance doing well.

21:58The problem is it's hard for it to get much better next year. The underwriting side, the prices in that are going down. So I think it's tough to see the insurance underwriting doing better next year. It's also tough to see the investments doing better next year. And we're talking about really just the fixed income investment. So like the equities, who knows what happens. But in terms of the interest income, we saw that decline in the quarter as well. The business fundamentals of the underlying businesses, did they move the stock historically? Not really. It's tough. Scarlett asked the one fundamental question.

22:32That's enough. Let's get back to the main point of the story here. It's also my job, too. Is there an activist investor who's ever mentioned one word about this company? So historically, there have been investors very vocal about it. I don't have names, but no one's ever been able to move the new. Buffett's always the majority shareholder. So there's really been no one who's ever been forcing them to do anything. So why would they even listen? And can you do that with a company that has an A-class share and B-class share? What is his voting control? I haven't done a match. I don't know off the top of my head.

23:06I thought it was something like 60 % of the shares, something like that. and other insiders will hold more. So there's almost no way of wrestling control from him. The A shares and the B shares, they did. So the A shares are several hundred thousand dollars and then they instituted the B shares and they're going to peg to each other. So you couldn't buy up the B shares and kind of take control either. They've come up with all kinds of rules to make sure that all the things you just proposed can't happen. I know, I know. I'm not the first one to do it. He's not a dumb guy about it. Yeah, that's the way he's going.

23:37Exactly right. But it's been an extraordinary run. Is there a sense that the law of large numbers over the last several years, if not the last decade, has kind of caught up to this name? Yeah, for sure. I mean, they bought a company for$12 billion, Allegheny, and it barely moves the needle. They bought this Oxychem for$10 billion, barely moves the needle. They bought like$20 billion of Chevron stock two years ago. It didn't even come up at the annual meeting. People didn't even ask about it. I was sitting there. I couldn't believe it. I said, no one's going to ask about this. um so you know there's just things that are are tough for them to move the needle from having so much money they're making those investments in japan which i think are interesting so they invest in the trading houses in japan it's hard to for me to know a ton about those businesses some of them are like mini berkshires maybe this is stuff that they kind of do in the future also the energy business greg abel's an energy guy aon is an insurance broker they talked about last week, this huge opportunity with the hyperscalers needing risk transfer services and other things.

24:38So like those are things that fit right into Berkshire's wheelhouse, right? The risk transfer and the energy businesses. So those are opportunities for them in the future. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also So watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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