Grant's Almost Daily, submitted by Grant's Interest Rate Observer

Get your shinebox

A friend checks in from the Long Island Expressway:

Our mobile correspondent writes:

The 21st century stock tip from the shoeshine boy is the bus wrapped in an ad touting Sharespost, where anyone can “access the new private market.”

Swamp things

A trio of corporate situations unfolding in Washington, D.C. may have important ramifications for their respective investors.

A quick update on each follows:

On Friday, the U.S. Court of Federal Claims dismissed a lawsuit from Oracle Corp. asserting that the Defense Department’s $10 billion Joint Enterprise Defense Infrastructure (JEDI) procurement contract was structured to unfairly favor Amazon.com, Inc.’s Web Services unit. Judge Eric Bruggink ruled that the award has not been marred by “organizational conflicts of interest,” as alleged by Oracle, and that the litigant failed by its own admission to meet the JEDI requirements in the first place.

That decision seemingly clears the way for Amazon and Microsoft, Inc. to vie for the winner-take-all contract, one that has been beset by claims of cronyism related to three former DoD employees with close ties to AWS.

For AWS, which leveraged a $600 million CIA contract in 2013 to gain commercial deals and represents a critical part of the Amazon success story (the unit chipped in 62% of consolidated operating income in the most recent quarter), the JEDI award would be the proverbial cherry on top. But obstacles remain, as the DoD inspector general and FBI public corruption unit continue a joint investigation of conflicts of interest claims.

Meanwhile, Senator Marco Rubio (R-FL) sent a letter Thursday to national security advisor John Bolton criticizing the single award structure as “contrary to industry best practices, statutory preferences, and the Administration’s Cloud Smart guidelines” and asked for a delay to the award to “ensure a fair and open process.”

Perhaps most importantly, the CIA announced in April it will shift toward a multi-cloud strategy by 2021 as opposed to continuing to exclusively rely on AWS. Of course, Amazon is fighting to protect its turf, signing a $294 million lease for its “HQ2” in Crystal City, VA, up the street from the CIA headquarters in Langley.

Next, the ongoing merger saga involving Sprint Corp. and T-Mobile U.S., Inc. The corporate suitors continue to negotiate the spin-off of wireless assets to Dish Network Corp. in their efforts to secure approval from the Department of Justice (which is forthcoming “any day,” according to Bloomberg). On Thursday, The Wall Street Journal reported that the negotiations are “dragging” and will likely extend beyond the July 29 deadline. Hang-ups include: potential restrictions on Dish flipping the spectrum assets acquired by the pair and limitations on data traffic that Dish can send through the T-Mobile network, per The Journal.

While negotiations continue apace, a coalition of more than a dozen state attorneys general who are suing to halt the merger prepare their next move. On Friday, the Capitol Forum reported that the DoJ delay will allow the group of 14 attorneys general to potentially “request that the Oct. 7 start of the trial be delayed.” Hopes for a timely deal consummation following DoJ approval are up in the air: “If it’s up to the states, a decision in the federal case wouldn’t come for some time.”

Finally, the price-gouging saga involving TransDigm Group, Inc. continues to develop. In February, an audit from the DoD inspector general found that the company charged “excess profits” on 46 out of 47 selected spare parts, including markups of as high as 4,451%.

The company agreed to pay back the $16.1 million in “excess profits” identified in the report, but that hasn’t prevented bipartisan pushback against the TDG business model. On June 14, senior officials at the DoD issued a memo directing staff to “require the submission of uncertified cost or pricing data to support prices proposed by TransDigm and its subsidiaries.”

On Friday, Sen. Charles Grassley (R-IA) wrote a letter lamenting the DoD’s inability to ascertain pricing information from its contractors and suggesting new amendments those loopholes, while Rep. Ro Khanna (D-CA), who has proposed similar legislation, commented in June: “It’s more than evident that TransDigm can’t be trusted, so singling them out is warranted.”

As noted by the Federal News Network, current law allows vendors to refuse to provide price data for individual transactions below $2 million, a statute of which TDG was all too aware. According to a report from the House Oversight Committee, TransDigm “coached” employees to maintain prices below that threshold and avoid providing cost documentation whenever possible. Fat markups appear to be a crucial feature for TransDigm, which has long pursued a roll-up business model and which carries net debt in excess of six times consensus 2019 Ebitda.