Yahoo Finance

But the main trust 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. 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. You 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. In that sense, Dylan, yes, it makes a lot of sense because Redfin has been moving into mortgage financing, title, all of the things. They 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.

Dylan Lewis: 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 highly qualified people who will be looking for mortgages probably at some point soon after visiting Redfin.

Tim Beyers: Yes, exactly. That's the whole point. 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. They have that, what they acquired through rent pass, and they have a whole bunch of rentals that they can orchestrate and they earn fees on that. 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. 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. That is just incredibly annoying. But Redfin is saying, hey, if it's all under one roof, we can make it less annoying and maybe give you some cost synergies, which is something they've talked about before. There's definitely something here. This is the way the market works. The company that controls most of the takes along the way to executing the transaction, is more likely to win. This gives them more opportunities to win. It doesn't mean they win automatically, but it gives them some scale.

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 100% premium on where shares were at last week. I think a lot of people have 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 company 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 expressed out in the market now. We're not at the premium that was originally discussed because it's an all stock.

Tim Beyers: 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. 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. This helps with things like taxes.

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. They're going to collapse this structure declare a special cash dividend of 80 cents per share. That's to be paid on April 3rd. I don't think that the deal closes before April 3.rd 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, it's not unseemly, Dylan, but it feels like, boy, I'd like that dividend. That'd be nice. That would help me.

Dylan Lewis: It's cheaper do it that way, right, Tim?

Tim Beyers: It would sure be nice if I could get. 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 just going to be all common stock. But I think the Rocket Companies shareholders are going to get the benefit of that, not the Redfin shareholders. 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 going to go inevitably up to $12.50 a share just because that's what the initial price was based on the prior weighted average of Rocket Companies stock. You need Rocket Companies stock to recover from the downdraft we're seeing today.

Dylan Lewis: One of the things I was a little curious about was, the market reaction down 15% today Rocket Companies. 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?

Tim Beyers: Well, 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, for example, one thing we know is, 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's harder to build homes in California. The regulations are tighter. This is a big deal. We know that we don't have enough supply. We know we need to build more, but you have the macro just working against us and working against a lot of people getting laid off. If you're laid off, are you going to be in the market for a home?

I don't think you are, Dylan. That's the thing. In addition to that, we have the regulatory barriers. In order for this deal to really thrive, you need to have more home supply. 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 and the residential real estate market has just been under a cloud for a while, because of the supply demand imbalance.

Dylan Lewis: 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&A activity, but this would be their biggest deal. What do you think they see here?

Tim Beyers: They better see some real value because let's be clear about this, Dylan they are paying roughly 28, not 2.8, 28 times annual recurring revenue. That is a lot. That is a big premium. This is a big deal. It's a front end AI assistant and it has some enterprise search cooked in. You can think of this as if we use a car analogy here, the steering column and the dashboard in your car, the controls to the drive train and the engine underneath. Moveworks is interacting with the car, and ServiceNow is the automation engine underneath. 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 Fool 24 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. 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 Moveworks as a way to start with it because that's what ServiceNow is about. This is a workflow automation platform. 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.

Dylan Lewis: Tim, I am open to suggestions. If you have an alternate name for the trend and for the technology movement.

Tim Beyers: I just hate it.

Dylan Lewis: If you want to through something out there.

Tim Beyers: I'm being grumpy old man. Agentic AI just sounds like a disease. It just doesn't sound great.

Dylan Lewis: We'll use it until we come up with something better. How about that? 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. Unfortunately, I didn't have the benefit of this news item when I spoke with him last week.

Tim Beyers: One of us did.

Dylan Lewis: But one of the big things that came up was, you're competing in this space with Microsoft. Those are two big heavyweights in this industry. Really, how do you think you're competing? 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 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.

Tim Beyers: 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, can I tell you about the deal that we just did?

To satisfy what Marc Benioff is talking about, 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 service now 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. It's Bill McDermott saying, I see what you're saying, Marc, and we're going to get there before you are.

Dylan Lewis: Bill McDermott's a listener of the show. I appreciate that. [laughs]

Tim Beyers: But you know what I mean? Everyone should take Bill McDermott seriously because he's a serious competitor, and he has just served notes.

Dylan Lewis: Tim Beyers, appreciate you wading through these deals with me, helping me make sense them. I know that this one was tough with Redfin, but I appreciate you talking it through with me today.

Tim Beyers: Thanks, Dylan. Going to miss Glenn Kelman. But you know what? At least he will be with Rocket Companies, so we'll see him just in a different role.

Dylan Lewis: There you go. Thanks, Tim.

Coming up on the show, Vail Resorts kicked off the winter season with some rough conditions, despite having snowy slopes. Up next, Motley Fool analyst Anthony Schiavone joins Mary Long to check in on the ski resort owner and hospitality company before the company's quarterly report after the bell today.

Mary Long: There was, 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 four-dollar-an-hour raise for a number of workers at Vail, a win on that front. But the hold a buckle 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 this 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?

Anthony Schiavone: The conditions are not good right now for Vail Resorts. If we 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 regions and too little snow in some of the other regions. But this year, 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 a wrinkle here. If we think about some of the main stakeholders for Vail's business, we have the shareholders, have the skiers and the guests, and then you have the employees. Well, right now, all of those stakeholders are not happy. For a business like Vail's, it shouldn't be that difficult to create an enjoyable experience for their visitors. I think their mission statement is literally to create an experience of a lifetime, and in my opinion, management just doesn't seem to be delivering on that right now.

Mary Long: 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 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. Now when the stock has declined more recently, how do you grade Lynch's performance?

Anthony Schiavone: Kirsten Lynch became CEO in November 2021, so she's been in the role for about three-in-a-half years. We're long-term investors of the Motley Fool, so I don't think it's fair to put an actual grade on her just yet, but the early going has not been good, in my opinion. Since she took over, Vail has lost roughly $9-$10 billion in market cap during her tenure. To be fair, we entered a bear market 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 trade's at today. I actually don't mind taking on debt to repurchase shares, but when you're a cyclical company, when your company's dependent on when you're in a capital-intensive business, I really don't like repurchasing shares with debts, especially at the prices that it was made. The capital allocation is really the big thing I'm focused on, and then it's 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 now with capital allocation.

Mary Long: 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?

Anthony Schiavone: 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. Look, I'm a dividend investor, I love dividends, I love dividend growth, but right now, a large chunk of the Vail's free cash flow is going to the dividend. That gives them less flexibility to invest in their employees, invest in the guest's experience, and improve the balance sheet, which isn't in great shape because of the past capital allocation decisions. By cutting the dividend, that just frees up a lot of cash flow that could really put the business back on solid footing. I just think management really needs to rethink how they're looking at capital allocation right now.

Mary Long: Pre-pandemic, Vail had an operating margin that had grown to nearly 21%, so then we know the story. COVID hits, and 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 been working back up there. Operating margin has grown, but most recently, it's hit 19%, which is putting it just shy of those 2019 highs. Leaning on this story about an ongoing COVID recovery, is that still a legitimate excuse for Vail or is something else going on here that we should be paying attention to?

Anthony Schiavone: Yes and no. I know I'm not picking a side here, but what happened during COVID? Everybody went to work from home, and a lot of people relocated to mountain towns like where Vail's Resorts are located. That really drove up the cost of living for many of Vail's employees, so Vail had to invest in employee wages, invest in workforce housing. Then at the same time, some of their ancillary revenue, like dining and retail, that also took a hit. An end factor on that, the last few years have been difficult from a weather perspective too. They're having to make a lot of snow, which cuts into margins as well, instead of just having that natural snowfall. 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, like we discussed earlier, is the poor capital allocation. I think it's a competitively advantaged business for sure, but it does have a lot of expenses when you think about the labor side of things, just how capital-intensive it is with chair lifts and that thing, and then also lease fees as well. Yes and no, but I don't think it's the main reason why Vail is struggling.

Mary Long: We've mentioned the importance of the Epic Pass. For those that are unfamiliar, the Epic Pass is Vail's all inclusive offering. We'll talk more about prices in just a second, 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. You have to buy in before the season begins, it's nonrefundable. Epic Pass prices for next season, so 2025, '26, came out just the other day. Next season's pass is going to cost a little over $1,000. 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 Ikon Pass, which is the offering by the privately held Alterra Mountain Co. That Alterra Ikon Pass option does remain more expensive.

I'm saying this as a skier who lives in Colorado and admittedly is very Ikon-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 think 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%. 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. They're playing this balancing act 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 past 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?

Anthony Schiavone: A company like Vail, in spite of all the struggles they've had, I still think their business has a lot of pricing power. I think we'll still see the Epic Pass go up at a pretty healthy rate in the future because if we look over the last five years, Vail's Epic Pass, it's only grown at a 1%-2% annual growth rate, and that's largely because they reset their prices lower in FY22. The past price growth has been significantly below inflation over the last five years. At the same time, the Ikon 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. 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. 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. I think that supply and demand dynamic gives Vail the power to continue raising their prices. 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.

Mary Long: 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 horde of real estate assets. They've got all these ski resorts, 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 assets, as a separate entity than Vail, the operator of real assets, or do they have to work together?

Anthony Schiavone: I think they have to work together because Vail, they own the resorts, but at a lot of those resorts, they actually lease the land from the federal government, private landlords, Whistler Blackcomb in Canada, I think that's leased from the Canadian government. A lot of the land, they don't necessarily own, but they own the resorts and they operate the resorts on top of it. 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. 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. 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.

Mary Long: We're recording this on Thursday, March 6th, but this segment's going to air on Monday, March 10th, which just so happens to be when Vail's next earnings call is. What are you going to be listening for on Monday?

Anthony Schiavone: 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, implying managerial perfection always made me nervous." When Vail reports its earnings next week, I want them to admit that they made a mistake because clearly, mistakes have been made. If the shareholders aren't happy, the employees aren't happy, the guests aren't happy. I would like to see them own up to that, make a mistake. That would make me feel a lot better about me entering in the company moving forward.

Mary Long: Anthony Schiavone, always a pleasure. Thanks so much for shining a light on this company.

Anthony Schiavone: Thanks for having me.

Dylan Lewis: As always, people on the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. All personal finance content follows Motley Fool editorial standards and not approved by advertisers. Motley Fool only picks products that it'd personally recommend to friends like you. For the Motley Fool Money team, I'm Dylan Lewis. We'll be back tomorrow.

Anthony Schiavone has positions in Redfin and Vail Resorts. Dylan Lewis has no position in any of the stocks mentioned. Mary Long has no position in any of the stocks mentioned. Tim Beyers has positions in Berkshire Hathaway, Redfin, and Salesforce. The Motley Fool has positions in and recommends Berkshire Hathaway, Microsoft, Salesforce, ServiceNow, and Vail Resorts. The Motley Fool recommends Redfin and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2025 $10 calls on Redfin. The Motley Fool has a disclosure policy.

Redfin Is "Under Contract" was originally published by The Motley Fool