Credit deflation and the reflation cycle to come (part 2)

[leonardratso]

re morrisons: i wouldnt worry too much about it, even though PE always promises lots of things, it will be the death knell for the company and it will turn into a piece of shit in the end as it gets hollowed out, i know ours is, and it wasnt even listed publically to begin with, everyone wants to leave now, and they are. Id be glad if i was one of the other supermarkets, since it kicks a competitor in the balls and they'll be penny pinching as soon as they are taken over.

But yes, as you said, another one bites the dust, i wouldnt want to invest in the parent to be honest, they might well do well but ive come across or rather been caught up in all this before, having worked for a few other companies that got PE'd, always the same road map, never changed, all cash up front and promises to the moon, always ended the same. Hollowed out and a shadow of their former selves.

[Loki]

Shame, I can always rely on Morrisons for decent grub when I am working away

[Harley]

3 hours ago, jamtomorrow said:

What happens to REITs in lieu of gating? Do they just tank harder when the open-ended funds go a bit "gatey"?

Private equity buys them!

2 hours ago, MrXxxx said:

It's gonna hurt?....think of all those local councils that invested council tax in REIT `investments`...that's really gonna hurt!

Er, more like I'm gonna hurt, twice!

[Harley]

2 hours ago, Majorpain said:

They will have no choice but to lock the doors if you don't get out quick enough.  I checked the T and C of one i was interested in, and it did say they reserved the right to gate the fund at their discretion if property (fire) sales couldn't keep up with withdrawals.

I'm well out of funds.  Shares only.  But I think I'll leave the "party" early!

[Harley]

1 hour ago, leonardratso said:

re morrisons: i wouldnt worry too much about it, even though PE always promises lots of things, it will be the death knell for the company and it will turn into a piece of shit in the end as it gets hollowed out, i know ours is, and it wasnt even listed publically to begin with, everyone wants to leave now, and they are. Id be glad if i was one of the other supermarkets, since it kicks a competitor in the balls and they'll be penny pinching as soon as they are taken over.

But yes, as you said, another one bites the dust, i wouldnt want to invest in the parent to be honest, they might well do well but ive come across or rather been caught up in all this before, having worked for a few other companies that got PE'd, always the same road map, never changed, all cash up front and promises to the moon, always ended the same. Hollowed out and a shadow of their former selves.

TBH Morrisons as a supermarket was on the ropes and going down.  I took my Aldi receipt with me once, abandoned my trolly, and walked out.  They've also tried a few things without success.  Shame but it is what it is.   All they have is the real estate so PE sharks clearing the carcass is sort of fair enough, no loss.  RIP.

[Don Coglione]

4 minutes ago, Harley said:

TBH Morrisons as a supermarket was on the ropes and going down.  I took my Aldi receipt with me once, abandoned my trolly, and walked out.  They've also tried a few things without success.  Shame but it is what it is.   All they have is the real estate so PE sharks clearing the carcass is sort of fair enough, no loss.  RIP.

Will they manage a sale and lease-back though, given the ongoing car-crash that is CRE?

[Hancock]

49 minutes ago, Don Coglione said:

Will they manage a sale and lease-back though, given the ongoing car-crash that is CRE?

Isn't that the entire point of buying a low debt company with assets .... so they sell all assets, award huge bonuses to the bigwigs for the huge profit that is made when selling these assets, load it full of debt to buy back shares and award even bigger bonuses ... then wait a few years and watch it go bankrupt.

Capitalism innit.

[Castlevania]

18 minutes ago, Hancock said:

Isn't that the entire point of buying a low debt company with assets .... so they sell all assets, award huge bonuses to the bigwigs for the huge profit that is made when selling these assets, load it full of debt to buy back shares and award even bigger bonuses ... then wait a few years and watch it go bankrupt.

Capitalism innit.

Yes. Sell and lease back the shops. Sell the abbatoirs; food processing and packaging plants. Take out all the money raised from the sales, load up with as much debt as possible and relist as a shell of it’s former self in a few years time. Kerching.

[leonardratso]

exactly, usualy roadmap. You say a few years but i think theyve accelerated that these days, call it a year.

[Barnsey]

Brilliant.

 

[Ash4781b]

32 minutes ago, Castlevania said:

Yes. Sell and lease back the shops. Sell the abbatoirs; food processing and packaging plants. Take out all the money raised from the sales, load up with as much debt as possible and relist as a shell of it’s former self in a few years time. Kerching.

 

21 minutes ago, leonardratso said:

exactly, usualy roadmap. You say a few years but i think theyve accelerated that these days, call it a year.

Yep a real shame. Morrison’s IMO had good quality products. I thought Sainsbury’s might be the one as IMO they seem a bit underwhelming. Argos bit seems to be integrating better I think.

[janch]

10 hours ago, Harley said:

I've been waiting to exit my UK REITs which have been on a rise despite the macro.  Looks like they may be topping (or just pull back?) on the monthly, plus this, so probably time to take the loss.  It's gonna hurt.

I don't have any REITS but as I understand it, the ones which invest in warehouses are doing well because of all the internet shopping. 

AJ Bell's shares magazine was tipping WHR Warehouse REIT PLC the other week and that looks to be doing well (or has done well).

[Bobthebuilder]

51 minutes ago, Ash4781b said:

Yep a real shame. Morrison’s IMO had good quality products.

One of the few left that has a decent fish / meat counter with someone to serve you. I expect them to be the first to get the (lamb) chop.

[Harley]

For sale and lease back I bought something a bit like that:  SUPR on the LSE.  Was a bit pricey then and even more so now.  A bit lower cap than I normally go for but a good yield.  Newish so normally I would buy after the typical dump but so far so good.  This is not a recommendation, I did very little due diligence, etc so DYOR, more a question:  anyone know of similar type stocks (not necessarily supermarkets)?  I like a sector focus.  I guess the warehouse one mentioned is another.  Also if anyone thinks it was a totally cr*p buy!

[Castlevania]

Hang on. Morrison’s is being bought by a consortium involving a company called Fortress owned by SoftBank, the Canadian Pension Plan Investment Board and Koch Real Estate Investments.

You know what I think they may just run it as a company and collect the dividends/cashflow.

[JMD]

2 hours ago, Harley said:

For sale and lease back I bought something a bit like that:  SUPR on the LSE.  Was a bit pricey then and even more so now.  A bit lower cap than I normally go for but a good yield.  Newish so normally I would buy after the typical dump but so far so good.  This is not a recommendation, I did very little due diligence, etc so DYOR, more a question:  anyone know of similar type stocks (not necessarily supermarkets)?  I like a sector focus.  I guess the warehouse one mentioned is another.  Also if anyone thinks it was a totally cr*p buy!

Harley, not sure if I am answering your question?  I think that Reits are worth a thread disscusion in their own right, anyway here are some of my thoughts, hope generates some feedback.                                                                           I did some cursory research few years back into the REIT sector, but I started buying oil, telcos, gold and silver instead, have not regretted it!! But the Healthcare REIT sector still looks interesting. There are also some specialist ones like Crown castle international which is phone mask/cable infrastructure. I think REIT sectors like those ones could be very good but still requires a deep dive to discover what they own and debt profile and if their income stream is sustainable.                                                                                                              I agree with the CRE consensus of the thread and with @sancho panzathinkingpanzathinking and regular posts on the subject, ie it is going down big time, etc. However grabbing 'certain sector' reits with good fundamentals after a BK would surely be a no brainer? ...plus I'm always on the lookout for where bond money will flow to next in search of regular yield and long term assets.                                                                                    Actually I wish I knew more about the reit sector as i think it ticks many of our next-cycle, asset heavy, decomplex (if buying the 'right' REIT, is not commercial) plays? 

[leonardratso]

3 hours ago, Castlevania said:

Hang on. Morrison’s is being bought by a consortium involving a company called Fortress owned by SoftBank, the Canadian Pension Plan Investment Board and Koch Real Estate Investments.

You know what I think they may just run it as a company and collect the dividends/cashflow.

suppose its possibel, but either way you wont be seeing it listed anymore eh.

[JMD]

Oops, re reits above, i meant to write - 'ie not high street retail/commercial office space'  NOT  'not commercial'.

[JMD]

Haulage sector is saying UK is short 60,000 hgv drivers. They say 15,000 EU drivers went home last year (because Covid) but won't return because can earn more in Europe. The other shortfall is partly historic and partly due to a backlog of hgv testing because of lockdown (again because Covid). They had a haulage owner saying he had recently increased wages by 25%.                                                                                                         Very inflationary of course. But the other thing is that the building industry has been talking of even bigger numbers in terms of required numbers of trained people their own sector needs. And this is before the anticipated next cycle national infrastructure big build has even gotten underway.                                                               I find these developments very striking. So might this mean that unemployment will not be a policy concern for government over say the next 5/8 years? (After then all bets are off if we get monetary collapse!!) I ask because last year out of work actors/cabin crew were forced to take up new careers as electricians/nurses - btw, those were actual examples I remember seeing reported. Good for them I say, but my point is if they can change careers - so drastically - then surely most other unemployed can also do similar?.... I'm thinking the challenge will be around the government effectively managing people into the right jobs, plus as @DurhamBornfrequently comments, coming down very hard on the work-shy/benefit claimer culture.

[sancho panza]

 

14 hours ago, invalid said:

Petrol prices now at an EIGHT-YEAR HIGH and up 18p-a-litre in just eight months - here's why they are set to head ever higher...

And the increase in costs at the pump look set to rise as the Organisation of the Petroleum Exporting Countries has told its biggest producers to increase outputs more slowly than expected in coming months, while rising global fuel demand causes supply to tighten.

I saw this earlier.Inflation starting to look a little more entrenched than 'transitory'.

13 hours ago, Majorpain said:

They will have no choice but to lock the doors if you don't get out quick enough.  I checked the T and C of one i was interested in, and it did say they reserved the right to gate the fund at their discretion if property (fire) sales couldn't keep up with withdrawals.

In 2008,I always remember karl denninger ,back in08, with the immortal phrase

'he who panics first,gets his money back.'....Wise words.

12 hours ago, DurhamBorn said:

I took a whack on selling some down as well.I do think some areas might come back,but im not sure that can happen before rates increase and they have to re-finance at higher rates.

Notice today another of your warnings coming true.Morrisons agree private deal.Now a 50% gain in a few months is nice,i had a small holding,but im actually in two minds.The fact as you say income producing assets are being removed one after the other so that ordinary investors end up with nowhere to invest.

This big private money is slowly taking out all the real assets while the young are putting all their money into things that will likely be worthless in the future.

Maybe they just want us in green bonds.

 

Listed REITs are mostly common shares and their values go up and down on demand,they dont need to sell anything or lock up.If they have a net asset value of 50p the shares can be 10p or 90p it doesnt matter,its just what investors think about the future etc.

Some REITs are managing to sell assets at close to book value,yet their shares are half asset value,so in theory they should double,but its likely those assets are the best ones,the tail is probably much worse.The biggest hit to values will likely be to big pension schemes etc.They tend to own individual stores or small blocks in high streets,those are the worst hit.REITs tend to own whole centres etc so at least can re-purpose them.Our local park is hugely busy,but the high street is dead and almost everyone leaves as the lease ends.Iv noticed a lot are being done up as bars etc.

Lot of experience in that post there DB.

Private equity is one of the financial caners of our time.From what I can see,they borrow to buy,sell and lease back the real assets,have a few round of bonuses before it goes bump.Except for th the first ones in,noone does well.not least the taxppayer who generally picks up the pieces in terms of bank loans being market to market and people getting laid off.

If anyone has a private equity success stroy,please feel free to share it.

 

 

One of the daavantages of REITs genreally is that they're easy to get out of CRE funds are a differnet matter.

When I do my footfall research going to Leicestermarket and when out and about,you'd have to be trying really hrad to msiss the empty shops in cities.Alot of which have laons sat on them marked at par ...for now.

[sancho panza]

10 hours ago, Hancock said:

Isn't that the entire point of buying a low debt company with assets .... so they sell all assets, award huge bonuses to the bigwigs for the huge profit that is made when selling these assets, load it full of debt to buy back shares and award even bigger bonuses ... then wait a few years and watch it go bankrupt.

Capitalism innit.

jsut wrote the same thing without reading your post.QUite agree.

[Castlevania]

13 minutes ago, sancho panza said:

If anyone has a private equity success stroy,please feel free to share it.

Worldpay. It was ignored as part of RBS. Sold off on the cheap to private equity who actually invested a load of money before they relisted it. The last time I checked (and admittedly after a couple mergers) Worldpay had a bigger market cap than RBS.

[leonardratso]

8 minutes ago, Castlevania said:

Worldpay. It was ignored as part of RBS. Sold off on the cheap to private equity who actually invested a load of money before they relisted it. The last time I checked (and admittedly after a couple mergers) Worldpay had a bigger market cap than RBS.

ive got a bigger market cap than rbs.

And ive only got £58.65.

[DurhamBorn]

1 hour ago, JMD said:

Haulage sector is saying UK is short 60,000 hgv drivers. They say 15,000 EU drivers went home last year (because Covid) but won't return because can earn more in Europe. The other shortfall is partly historic and partly due to a backlog of hgv testing because of lockdown (again because Covid). They had a haulage owner saying he had recently increased wages by 25%.                                                                                                         Very inflationary of course. But the other thing is that the building industry has been talking of even bigger numbers in terms of required numbers of trained people their own sector needs. And this is before the anticipated next cycle national infrastructure big build has even gotten underway.                                                               I find these developments very striking. So might this mean that unemployment will not be a policy concern for government over say the next 5/8 years? (After then all bets are off if we get monetary collapse!!) I ask because last year out of work actors/cabin crew were forced to take up new careers as electricians/nurses - btw, those were actual examples I remember seeing reported. Good for them I say, but my point is if they can change careers - so drastically - then surely most other unemployed can also do similar?.... I'm thinking the challenge will be around the government effectively managing people into the right jobs, plus as @DurhamBornfrequently comments, coming down very hard on the work-shy/benefit claimer culture.

https://www.dailymail.co.uk/money/markets/article-9752431/Bosses-say-Britains-entitled-young-wont-mop-floors.html

Why work?

They import millions,then they pay those millions tax credits.Then they pay the council workers etc with their BTL housing benefits for those millions.Young decent Brits trying to get on,work,buy a home fucked over.Now the cycle changes.Tell them to fuck off,im not working for that,whats the point.

There is zero difference in the UK earning £400 a week or nothing because they reward scroungers at every point so now they can reap that.Welcome to the reflation.

Just wait until the BOE is forced to stop QE,i think round October,then the big structural deficits emerge and they cant finance them.

[sancho panza]

10 hours ago, Ash4781b said:

 

Yep a real shame. Morrison’s IMO had good quality products. I thought Sainsbury’s might be the one as IMO they seem a bit underwhelming. Argos bit seems to be integrating better I think.

Ash,nice to see you psoting.I thought Sainsbury's would have made more sense for PE.

Interesting to see the following,almost prophetic statement in the article,cash genereation my @rse.They want sh1t they can sell off and have a round of bonuses before softbank realsie tehy're getting hosed....again.....

https://asia.nikkei.com/Business/Business-deals/Britain-s-Morrisons-agrees-to-8.7bn-takeover-by-SoftBank-led-group

The Fortress deal underlines the growing appetite from private funds for British supermarket chains, which are seen as attractive because of their cash generation and freehold assets.

 

SOftbank have had a torrid time over the last few years.But going forwards they can reap the dividends from winners like Uber/We wok.From Mar 2020 ...the values may have changed but the thesis likely won't have.

Why are Softbank buying Morrisons??? WIll each ship get a wewok/uber concession?

 

https://www.valuewalk.com/2020/03/softbanks-worst-startup-investments/

SoftBank’s top 10 worst startup investments

Back in 2000, Masayoshi Son met with 20 Internet entrepreneurs during a trip to China. He decided to invest $20 million for a 34% stake in only one of them. That startup was Alibaba, which currently has a market value of $530 billion. Even though SoftBank sold off part of its stake three years ago, it still owns more than $100 billion worth of Alibaba shares. It was one of the biggest venture capital bets of all time.

SoftBank’s worst startup investments

These are some of SoftBank’s worst startup investments. We don’t know how these or other investments will turn out in the future. But it’s worth looking at what has happened with them so far.

10- Slack

Slack is a workplace software company that allows teams to collaborate easily. It has grown rapidly and has carved out a niche for itself. In September 2017, SoftBank invested $250 million in the startup. Slack went public in June 2019 via a direct listing on the New York Stock Exchange. The listing was priced at $38.50, but it has failed to impress investors. The stock has since declined to $25 currently amid concerns that it was overvalued.

9- Katerra

Founded in 2015, Katerra is a Silicon Valley-based construction technology startup. It is optimizing every aspect of the building design, construction, and manufacturing. Katerra has raised about $1.2 billion from investors, according to Crunchbase. Data from CB Insights shows that SoftBank invested $865 million in Katerra in January 2018, and another $134 million in September of the same year.

8- Zume Pizza

If you are confident, charismatic, and brash, you could raise a staggering $375 million from SoftBank. Zume Pizza aimed to disrupt the pizza delivery business by using robots to make pizzas that people would want to eat.

7- Wag

It’s one of SoftBank’s worst startup investments. Wag was supposed to be the Uber of dog walking. Just like Uber, the on-demand dog walking service connects independent contractors with clients via its mobile app. The Los Angeles-based dog-walking as a service (if that’s a thing) raised about $300 million from SoftBank. The investment shocked the VC community. Masayoshi Son seemed confident that Wag would become a decacorn.

Wag never really took off. After a series of setbacks including lay-offs and management changes, SoftBank sold its stake back to the company at a massive loss. The company had ambitious plans to expand worldwide, but it hasn’t happened yet.

6- Fair.com

Launched in 2016, Santa Monica-based Fair.com is a car-as-a-service provider. It raised $385 million from SoftBank in December 2018 at a valuation of $1.2 billion. It had also raised over a billion dollars in debt funding to expand its business. Fair.com seemed all set to disrupt the car market. It purchased Uber’s unprofitable leasing business in 2018 and Ford’s Canvas leasing business in 2019.

But things started to change towards the second half of 2019. The company laid off 40% of its workforce. Fair.com also removed its CFO Tyler Painter, brother of the company’s co-founder and CEO Scott Painter. The company started selling its cars instead of scaling up the fleet. Scott Painter stepped down as the CEO. According to Fortune, the toxic ‘bro’ culture, chaotic record-keeping and unprofessional management hurt the company. The company is now trying to figure out how to survive.

5- Brandless

Founded in 2016, Brandless was an e-commerce platform that sold simply branded products at low cost. The startup raised $240 million from SoftBank in Series C funding round in July 2018. Last year, Brandless co-founder and CEO Tina Sharkey resigned from her job.

Evan Price and then John Rittenhouse were named the CEO as SoftBank kept pushing the startup to turn profitable. SoftBank was desperate to see some positive outcomes as WeWork and Uber turned out to be disappointments. That’s one of the reasons Brandless became one of its worst startup investments.Last month, Brandless announced that it was shutting down operations while it still had some money left to cover the severance packages of employees.

4- Snapdeal

Founded in 2010, Snapdeal was a rapidly growing e-commerce startup in the world’s second most populous country. In October 2014, SoftBank invested $627 million in the e-commerce platform. It poured another $500 million in the Indian startup in August 2015. SoftBank invested a total of $1.2 billion in Snapdeal.

Snapdeal tried hard to compete with Flipkart (now owned by Walmart) and Amazon India, but couldn’t. It continued to suffer heavy losses in 2017 and 2018. SoftBank then diversified its bets by investing in Flipkart. The Japanese company sold its Flipkart stake when Walmart purchased Flipkart. Meanwhile, Snapdeal’s valuation has declined to around $100 million.

3- Oyo Rooms

If there is one company that draws constant criticism from customers, hotel partners as well as employees, it has to be Oyo Rooms. SoftBank invested $100 million in Oyo’s Series B round in 2015. It has been the lead investor in every round since then. SoftBank poured another $162 million in 2016, $250 million in 2017, and $1 billion in 2018. Oyo currently has a valuation of above $10 billion, and SoftBank owns 42% of the startup.

Other investors such as Sequoia Capital and Lightspeed Ventures have sold roughly 50% of their stake in Oyo. It’s a red flag when long-time investors with inside information dramatically cut their stakes. The company’s founder Ritesh Agarwal borrowed against his existing shares to buy new shares in the company in the latest funding round.

The $10 billion startup is nowhere near profitable. Amid pressure from SoftBank and other investors, it’s cutting 5,000 jobs. The company has warned of more lay offs in the future. Its losses skyrocketed from $44 million in fiscal year 2018 to $355 million in FY2019. Oyo has now shifted its focus to proving that it has a viable business model.

Oyo currently faces an antitrust probe in India over its exclusive partnership with MakeMyTrip. Its hotel partners have also accused Oyo of reneging on promises and delaying payments. Oyo has also exaggerated the number of rooms available internationally. It has also been accused of bribing government officials to avoid investigation. Oyo’s ‘bro’ culture is as toxic as that of Uber and WeWork.

2- Uber

Uber’s valuation was touching new all-time highs when SoftBank decided to invest billions of dollars in the world’s most valuable startup. The Japanese conglomerate purchased $8 billion worth of Uber’s secondary shares from early investors and employees in January 2018 at a discounted valuation. It also invested another $1.3 billion directly into Uber. SoftBank’s investment valued Uber at roughly $70 billion.

 

Uber was criticized for its toxic culture. There were numerous cases of sexual harassment. Uber had spread itself too thin to become a global ride-hailing giant. Dara Khosrowshahi, who became Uber’s CEO in August 2017, has tried to address a lot of issues. Uber has exited several markets including China. It also sold the Indian Uber Eats operations to Zomato.

Uber went public in May 2019, and its stock price has declined dramatically since then. More than two years after SoftBank’s $9.3 billion investment, Uber’s market value is around $47 billion, down from the peak of $74 billion. The ride-hailing company is still struggling to become profitable. Certainly one of SoftBank’s worst startup investments.

1- WeWork

WeWork is by far SoftBank’s worst startup investment. It cost SoftBank billions of dollars and tarnished the Japanese company’s reputation. All because Masayoshi Son fell for a confident, brash, and charismatic founder and his lofty vision. WeWork is an office space provider founded by Adam Neumann in 2010.

SoftBank had invested over $4.4 billion in WeWork in various funding rounds. It was valued at a staggering $47 billion in the Series H funding round in January 2019. SoftBank was the sole investor in that round. As WeWork prepared for its high-profile IPO, JP Morgan estimated its IPO valuation between $40 billion to $60 billion. Goldman Sachs went even further, saying WeWork could be valued at as much as $90 billion!

As the planned IPO inched closer, WeWork’s accounting practices, toxic culture, and steep losses came to light. The valuations seemed too high for an office space provider, especially considering the company had almost run out of money. WeWork had around $47 billion in long-term lease obligations and only $3 billion in annual revenue.

Eventually, WeWork was forced to cancel its IPO. Adam Neumann was given $1.7 billion to leave the company. Having already thrown billions of dollars into WeWork, SoftBank threw a few billion dollars more to take control of the company as part of a rescue plan. It was throwing good money after bad money.

SoftBank’s rescue deal valued WeWork at just $8 billion. The Japanese conglomerate infused another $10 billion to give it a new lease of life. SoftBank has invested a total of $18.5 billion in WeWork. It controls 80% of the company. The future still looks dark for WeWork as well as SoftBank’s investment in WeWork.

Conclusion

In almost all of his worst startup investments, Masayoshi Son was pouring big money at inflated valuations. He was so obsessed with identifying the next Alibaba early that he happily wrote hefty checks to startups with no viable business model. He might be secretly regretting the fact that he missed investing $20 billion in Tesla at $900 per share last month.