Jan 13, 2019

Axios Capital

By Felix Salmon
Felix Salmon

I wrote about the World Bank this week. If you have an idea who will be the next president, let me know. And please encourage your friends and colleagues to subscribe to this entirely free newsletter.

As for executives making a base salary higher than the $18 million that Ted Sarandos is earning at Netflix, so far I've found no precedent for such a thing, outside professional athletes.

1 big thing: De-branding

Illustration: Sarah Grillo/Axios

This week brought news from WeWork, the co-working unicorn, that it has decided to downgrade its main business to a mere subsidiary. WeWork has a famously complex corporate structure, but lift your eyes above the newly demoted WeWork to the very apex and behold — The We.

I am not making this up.

WeWork is not the only company to demote its flagship brand and name the holding company something silly, or worse.

  • Google is now just one part of a company called Alphabet.
  • Snapchat is just one of the brands operated by Snap.
  • Aol and Yahoo both found themselves part of something called Oath, before Oath was renamed Verizon Media Group.
  • And who can forget the Tribune Company, named after the 170-year-old Chicago Tribune newspaper, renaming itself Tronc.

Historically, companies were proud to name themselves after brands they had managed to elevate to a place of global name recognition. If you had a weird non-brand name like Gulf & Western or MacAndrews & Forbes, that was a sign that you were mostly in the business of buying and selling companies — that ultimately you weren't committed to your brands.

  • The new un-brands aren't conglomerateurs; neither are they corporate raiders. They're just distancing their investor-facing corporate selves from their consumer-facing identities.
  • There are many reasons for doing such a thing, but it does tend to look as though the CEO is a bit ashamed of the main product. Google, Snapchat, Yahoo and Tribune all have connotations of being either problematic or outdated.

The bottom line: This kind of move is generally presented as a way of telegraphing ambitions much greater than owning a single consumer-facing brand, no matter how successful that product might be. But it often comes across as a signifier of ambivalence and shame. In some ways, it's the modern-day equivalent of the rentier distancing himself from his coal mines.

Bonus: The decline of WeWork's bonds
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Data: FactSet; Chart: Naema Ahmed/Axios Visuals

WeWork timed its April 2018 bond issue perfectly, receiving $2.5 billion of orders for what turned out to be a $702 million bond priced to yield 7.785%. Since then, high-yield bonds in general have sold off, but WeWork's bonds have tumbled even more: By Monday, they had lost 14.5% of their value and were trading at $85.50. That's a yield of 11.13%.

  • WeWork has never made a profit, and its bonds were rated Caa1 by Moodys, which is seven notches below investment grade. Buyers were relying less on cashflows and more on the idea that WeWork is so valuable that it will always be able to raise new equity capital if it needs to.
  • WeWork's latest capital raise, however, was a bit of a kludge, with SoftBank buying $1 billion of stock from employees at a $20 billion valuation and then buying another $1 billion of stock from the company itself at a $47 billion valuation. The investment was much smaller than the originally mooted $16 billion.

Our thought bubble: The main prerequisite for success in real estate is deep pockets. WeWork has a large balance sheet — but it has an even larger corporate footprint, claiming "more than 400,000 members at 425 locations in 100 cities across 27 countries". If the equity does run out, then don't expect the recovery value on the bonds to be very high.

2. The death of department stores
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Data: FactSet; Chart: Chris Canipe/Axios

In a sign of the times, the Lord & Taylor department store has closed its flagship New York City location; the building will become a WeWork. Other department stores are struggling too, not least Sears, which is in bankruptcy and is also this close to liquidation. (Sears includes Kmart, which declared bankruptcy in 2002.)

  • Macy's stock imploded this week after the department store reported disappointing holiday sales and said it expects sales to be flat in 2019.
  • Other department stores followed Macy's shares south: JC Penney closed Friday at a mere $1.32 per share, down from $11.85 in early 2016 and a high of $87 in 2007.
  • Meanwhile, Amazon is eyeing shuttered Sears and Kmart locations as it looks to to expand the reach of its Whole Foods subsidiary.

The big picture: As Deloitte detailed in an influential 2017 report on "the great retail bifurcation," brick-and-mortar retail as a whole is not suffering. But all of the growth is either at the low end (stores competing purely on price, like Walmart or 99-cent stores) or at the high end (stores offering premium experiences, like free beer for people who pick up their Nordstrom orders in person). Stores in the middle, attempting to be all things to all people, are in a long secular decline.

Go deeper: Axios has a great deep dive on the future of retail.

3. American Brexit

Illustration: Sarah Grillo/Axios

The head of state wants to renegotiate a major free-trade agreement, and there is a deal on the table that has been agreed to by all parties. Now all that's needed is for domestic lawmakers to approve the deal. There are signs they might not be willing to do so. In order to concentrate the legislators' minds, the leader exits the old agreement, leaving a stark choice: Either accept the new one, or embrace the chaos of a no-deal exit.

  • Theresa May pulled this move when she triggered Article 50 in March 2017, raising the specter of a catastrophic no-deal Brexit should Parliament not agree to a deal by March 29, 2019.
  • Donald Trump is thinking along similar lines, with the support of Republican Sen. Chuck Grassley. The idea is that he should withdraw from NAFTA before its replacement, USMCA, is approved by Congress. That way, if Congress doesn't ratify the deal, the result would be a devastating no-deal exit from NAFTA, disrupting supply chains across North America.

As we're currently seeing in Britain, parliamentarians tend to react badly to such ultimatums. And as Britain is beginning to demonstrate, the implicit threat is not always credible.

  • The no-Brexit option is still on the table: May would almost certainly command a comfortable majority in Parliament should she opt to change her mind on Article 50 and stay in the EU after all.
  • Indeed, the most likely outcome at this point, according to ITV political editor Robert Peston, is that Parliament rejects May's deal on Tuesday and effectively prevents a no-deal Brexit some days later, thereby opening the door to the only other option, which is no Brexit at all.
  • In an op-ed today, May seems to say that the no-Brexit option "would be a catastrophic and unforgivable breach of trust in our democracy." Maybe this is her way of saying that if she loses Tuesday's vote, she won't stay as prime minster for very long, and that decision would have to be made by someone else.

Similarly, Trump would need Congress to ratify any NAFTA withdrawal under Article 2205, and a noisy withdrawal now should be largely shrugged off both by America's manufacturers and by Capitol Hill. It would be full of sound and fury, but would ultimately signify nothing.

The bottom line: The best way to get a legislature to pass any deal is the old-fashioned way, by persuading them to vote for it willingly. Extreme negotiating tactics have a tendency to backfire.

4. Shuttered
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Data: Congressional Research Service; Chart: Axios Visuals

The more urgent brinkmanship in Washington is surrounding the government shutdown, which is now officially the longest ever, with no end in sight.

If furloughed workers are not on the government payroll, then there's an extremely high chance that the record 99-month streak of positive payrolls growth will come to an end this month.

  • A research note entitled "No Gain, More Pain" from S&P Global Ratings estimates that the shutdown will reduce U.S. GDP by $1.2 billion per week, with that number rising as the shutdown continues.
  • Markets will increasingly be flying blind, as government data releases are canceled or delayed due to the shutdown. Timely, accurate statistics matter!

Be smart: Federal workers haven't started breaking out their yellow vests quite yet. But this shutdown stings much more than any gasoline tax did in France — and look where that ended up.

5. Fresh direct

Illustration: Aïda Amer/Axios

Slack is considering a direct listing at some point this year, according to reports in both the WSJ and the FT on Friday. The move would allow Slack stock to be traded on the stock exchange, but it's not an IPO — no new shares would be issued, and the company would not raise any money.

  • That's no great hardship for Slack, which has already raised some $1.2 billion, per Crunchbase, and has so much money that it has an in-house VC arm that invests in other companies. Whatever growth constraints it might have, they're not financial.
  • Another advantage of a direct listing: It doesn't dilute existing shareholders. If the share price turns out to be significantly lower than earlier-stage investors like SoftBank think the company is worth, then it's a great opportunity for them to increase their stake without the company having to answer pointed questions about taking Saudi money.
  • SoftBank's Vision Fund is designed as a private equity fund, not a public-equity fund. But SoftBank founder Masayoshi Son also talks about having a time horizon of hundreds of years, and he is happy to own public companies like Sprint.

The bottom line: A lot of people would love the opportunity to invest in Slack, while many others, including employees, would love the opportunity to be able to sell their stock at will and diversify their investments.

  • A direct listing is an elegant solution that brings those two sides together. And if CEO Stewart Butterfield wants to be able to show impressive long-term growth in his share price, then if anything it helps him to go public at a relatively low valuation.
6. This week: The "meaningful vote" on Brexit

Illustration: Rebecca Zisser/Axios

The big story of the week will be Brexit, writes Axios' Courtenay Brown, as the "meaningful vote" on Theresa May’s deal is expected on Tuesday.

  • The numbers are not in May's favor: If all the MPs who have vowed to vote against the deal do vote against the deal, she'll lose by 237 votes, per the BBC.

Corporate earnings season begins on Monday. Netflix, Bank of America, Wells Fargo and BlackRock, to name a few, will declare results this week.

  • One name to watch: Goldman Sachs. A CEO rarely participates in earnings calls, but David Solomon might make an appearance on Wednesday. Either way, expect talk about 1MDB.

Economic reports will be delayed this week thanks to the government shutdown. So don't hold your breath waiting for statistics on retail sales, housing starts or business inventories data.

7. Building of the Week: The Sainsbury Wing
Photo © National Gallery, London

The National Gallery's Sainsbury Wing was built by Robert Venturi and Denise Scott Brown in 1991 to house Britain's early Italian and Northern Renaissance paintings.

  • Blending seamlessly into London's Trafalgar Square from the outside, and bathed in natural light on the inside, the building this week won the American Institute of Architects' Twenty-five Year Award, "conferred on a building that has set a precedent for the last 25-35 years and continues to set standards of excellence for its architectural design and significance."
  • It's home not only to the world-famous Leonardo cartoon but also Piero's stunning Baptism of Christ; both are worth a trip to London on their own.
Felix Salmon