The Saturday - 6/5/21 Edition
Volume 2, Issue 21
Good morning!
Last week, a House committee launched an investigation into a few online lenders who (allegedly) processed hundreds of PPP loans to fake, single-person businesses.
There are few more odious crimes than financial fraud; these bad acts breed distrust in capitalism and robs innocent victims of their hard earned money. It’s awful.
But if you’re going to commit fraud… make it pun-y? From ProPublica:
All of these loans to nonexistent businesses came through Kabbage, an online lending platform that processed nearly 300,000 PPP loans before the first round of funds ran out in August 2020, second only to Bank of America. […]
The overwhelming majority of [fake businesses were] categorized as farms.
That was intentional, right?
Did the criminals find a flaw in Kabbage’s system and then decide that farms would make funny fake businesses?
Personally, I prefer the alternative theory: the criminals first settled on creating fake farms and then found the lender with the most farm-adjacent name to defraud.
These are the existential questions I ponder in my spare time. High IQ stuff.
It’s a miracle I can tie my own shoes.
It’s Saturday June 5, 2021.
Words Matter
On Thursday, the Federal Reserve announced that it would begin selling off the $14.2B in corporate bonds and short-term debt ETF holdings that it amassed in the Secondary Market Corporate Credit Facility set up in March 2020.
Overall, that’s small potatoes; the SMCCF facility is separate from the Fed’s main debt and mortgage-backed securities holding, which now exceed $7.3T. To this day, the Fed continues to purchase $120B per month in these debt instruments, so offloading a $14B position is hardly a blip on the radar.
Here’s a fun fact though: the SMCCF and its fellow program, the Primary Market Corporate Credit Facility (PMCCF), were setup around the same time to provide bond market liquidity at the height of the pandemic. Together, the SMCCF and PMCCF were to purchase $750B worth of debt. In the end, they deployed a combined… $14.2B.
Despite less than two percent of their funds being put to work - $0 were drawn from the PMCCF - the facilities’ mere existence helped buoy debt markets.
Words occasionally speak just as loudly as actions.
So, You’re Saying There’s A Chance?
In 2003, Concordes - the Anglo-French supersonic commercial turbojets that could fly from New York to London in 2 hours and 53 minutes - were retired due to their high maintenance costs and to safety and noise concerns. Since then, air travel has been… slower.
I, for one, am surprised that supersonic travel hasn’t made a comeback yet. Flying isn’t a particularly pleasant experience, so you would figure that some people would pay a pretty penny to cut down their flight times by 80%. Apparently, it’s difficult to build supersonic aircraft that are safe, quiet, and inexpensive.
In fact, just last month, Boeing-backed Aerion Corp. shut down after being unable to continue raising money to produce a supersonic jet. But not all hope is lost!
On Thursday, United Airlines announced that it had pre-ordered 15 supersonic jets that are currently being developed by Boom Technology Inc.
While the full-size 88 passenger version isn’t expected to be delivered until the end of this decade, Boom does intend to deliver a smaller, prototype version by early next year and, in keeping with industry practice, United’s deposit is non-refundable. That’s real progress and commitment!
From the WSJ:
Boom said its Overture jet would be capable of flying at Mach 1.7, or 1.7 times the speed of sound. That could allow the planned jet to reduce the flight time between London and United’s hub in Newark, N.J., to 3½ hours from over six hours, and cut the journey from San Francisco to Tokyo to six hours from over 10 hours.
Not quite the Concorde, but still… that’s some jaw-breaking speed for United!
Double Whammy
Another week, another SoftBank story: on Tuesday, reports revealed that proptech unicorn Katerra had imploded and would be shutting down.
This is a big failure, even by SoftBank standards.
Katerra aimed to revolutionize the construction industry by leveraging technology to make off-site, modular building the norm. In short, the company would build multi-family residences in their factory and deliver them (nearly) turn-key to their forever-lot.
“Lennar meets DoorDash” is how I imagine SoftBank thinking about it.
Despite other construction unicorns finding great success recently - such as Procore Technologies, who’s IPO we touched on a few weeks ago - Katerra wasn’t as fortunate.
Unlike Procore - that is a true technology company providing cloud-based construction-management software - Katerra looked more like a traditional pre-fab builder with a bit of tech. Case in point, the defunct company blamed rising materials and labor costs as the reason of its demise. Those are hardly tech problems.
Still, SoftBank were believers: Masayoshi Son’s firm sunk $2.2B into the company, including $200M as recently as December 2020. This is only part of SoftBank’s problems, however.
Beyond the mutli-billion venture investments, Katerra had also taken out over $400M in trade finance loans from another SoftBank fallen angel: Greensill Capital. As we discussed in March, Greensill is currently accused of running a massive, multi-billion dollar scheme where it made and sold loans backed by non-existent contracts.
In this particular case, SoftBank-controlled Greensill lent $440M to SoftBank-controlled Katerra and then sold the entire loan to Credit Suisse. By most accounts, both Greensill and Katerra were on the verge of insolvency when these deals were made, but SoftBank made capital infusions in the companies to prop them up.
On Tuesday, shortly after Katerra announced it was shutting down, FT reported that Credit Suisse is preparing for litigation against SoftBank.
Some problems just won’t go away…
Bill Ackman and the SPAC That Isn’t
Last year, Bill Ackman’s Pershing Square Tontine Holdings (PSTH) became the biggest SPAC ever when it raised $4B.
Since then, PSTH has been the subject of endless speculation, as Wall Streeters, Redditors, and everyone in between tried to guess its target. The size of the SPAC and disclosures in its S-1 suggested that Ackman would target a large, mature unicorn, but that’s about all we knew.
Airbnb was an early rumored target, but the company ended up doing a traditional IPO. Stripe was Reddit’s most popular guess, but as we discussed in March, the payments provider raised $600M in a private round instead. Bloomberg and Fidelity were other popular guesses, but neither materialized.
On Thursday, we (sort of) got the answer: PSTH announced that it was in advanced talks to acquire a 10% stake in Universal Music Group, in a deal that would value UMG at $42B.
Focusing first on the target, this is a big deal. UMG, a subsidiary of the French publicly-traded conglomerate Vivendi, is the world’s largest music business. Its stable includes Taylor Swift and Billie Eilish and the company also owns the Beatles’ recordings and Bob Dylan’s entire publishing catalog. Big stuff.
Still, $42B seems rich.
Streaming currently accounts for over 80% of the music industry’s revenues, so it’s in musicians’ best interests to be on as many platforms as possible. And unlike film actors and directors - whose product is extremely resource intensive - musicians have a greater ability to produce and distribute their own content and are less reliant on big production houses and their exclusivity deals.
That’s my take at least.
I know nothing about either industry, but I don’t think music streaming is as susceptible to fragmentation as video streaming, which I think makes it a more resilient business model. And the more powerful the music streaming companies, the less powerful the music production and distribution companies.
No one can take UMG’s catalog away, but will it outgrow Spotify? In my unqualified opinion - which is absolutely not investment advice - the answer is no. Yet this deal values UMG ($42B) almost the same as Spotify ($44B market cap). Take that as you will…
To The Saturday readers in the music and film industries: I welcome your feedback. Ackman’s exponentially richer than I am and the Chinese conglomerate Tencent also recently bought a 20% stake in UMG, so I’m probably wrong.
Anyways, the bigger story here lies in the structure of the transaction.
As is now well documented, SPACs are shell entities that raise money from the public with a mandate to identify a promising private company and merge with it, thereby making it publicly-traded overnight. And if the SPAC can’t close a deal within two years, it has to give investors their money back.
PSTH’s launch, at the height of #HotSPACSummer, captured the imagination of investors small and large, and for good reason: a celebrity sponsor, armed with the largest blank-check ever, was on the prowl for the deal of the century. Bill Ackman’s SPAC was going to set the new standard for SPACs.
In the end, however, PSTH effectively stopped being a SPAC.
For starters, PSTH isn’t helping any company go public. Vivendi, UMG’s parent company, was already planning to spin-off the music group into its own publicly-traded company. This plan remains in effect and PSTH is only securing a stake in the to-be-listed company before it officially hits the public markets.
So while shares of SPACs essentially “convert” into shares of the target once the deal closes, PSTH shares aren’t converting into anything. Once Vivendi completes UMG’s spin-off, PSTH shareholders will simply receive an “in-kind dividend.” I.E. shares of UMG, to go along with their surviving shares of PSTH.
Which brings us to another nuance.
SPACs typically invest all their funds into the target company, but not PSTH. If and when the UMG deal closes, Ackman’s SPAC will still have $1.5B on hand and it intends to use this cash towards a second deal. Maybe that one will look more like a traditional SPAC merger? Who knows?
What we do know, however, is that Ackman won’t be in a rush: despite not being a true SPAC merger, the UMG deal qualifies as an “initial business combination”, which stops the 2-year SPAC clock from ticking. PSTH now has infinity years to close deal #2.
Finally, Ackman added an additional sweetener: current PSTH shareholders will also receive rights to invest in a new Pershing Square SPARC. Yes, Ackman is launching a SPAC-variant called a “Special Acquisition Rights Company,” which aims to raise $10.5B for a third deal.
So there you have it.
One way to look at this deal’s complexity is as a bullish signal that the SPAC market is maturing. Another way to look at it, however, is as a bearish indicator that appetite for SPACs is waning.
For those who have nothing better to do today and would like more in-depth details, here’s the press release filed with the SEC.
For those who prefer watching to reading, here’s Andrew Ross Sorkin doing a better job at explaining the deal:
Alright. Enough. We are way past our weekend SPAC quota.
I’ll shut up.
Have a great weekend!