Advertising & Media (Desperate Times Call for Desperate Measures)

It's one thing to see a flying car whisk by a Coca-Cola ($KO) sign in Blade Runner 2049. Or Vin Diesel crush a Corona ($BUD) before crushing a skull in Fast and the Furious 2049 (how many of these are there?). Or Mark Wahlberg mention a motorcycle he likes in Big Daddy. It's pretty obvious that those are placement ads. But its an entirely different story when a large corporate partner like Proctor & Gamble ($PG) purchases a plot line and dialogue. That isn't so obvious. But so it is. This week, Variety reported that P&G has done precisely that in a "unique advertising pact" with American Broadcasting Company ($DIS). The network will create an episode of "black-ish" that will - as a central plot device - discuss a P&G-produced short film and its implications on race merely because that's "an issue that the advertiser is trying to burnish." Well, ok, then.

Cord-cutting is getting aggressive and we get that Disney needs to act in-kind to ensure revenues. ESPN is under siege, Netflix ($NFLX) has a head start on stand-alone streaming, and even Star Wars toys have underperformed. But how this is handled will be a bellweather of things to come.

For instance, Instagram influencers are under strict guidance from the FTC on how to handle sponsored posts. Failure to comply has gotten various influencers - the Kardashian's being one notable example - in hot water. Remember the Fyre Festival? Riiiiiiight. To what degree are P&G and DIS required to alert viewers that the dialogue they are listening to is paid for? To the extent there is an alert, should it be noted at the bottom of the screen at the time of the dialogue (makes sense) or noted in the end credits (doesn't make sense). This may very well be another instance where regulation has to play catch-up to innovation.

Meanwhile, there's been a notable rise in corporate venture capital (CVC) arms over the last several years. What we haven't noticed, however, is the blatant weaponization of the CVC's distribution channels to help scale product. Yet. We wouldn't be surprised to see a rise in (shameless) native plugs of new apps or hardware in future mainstream broadcast content. And that - on the basis of scale opportunity alone - could be a real competitive advantage for corporate-backed startups relative to venture-backed startups. Query, however, what that would do to the viewing experience. Netflix ($NFLX) and HBO ($TWX) don't serve ads for a reason. Yet. We'd be shocked, though, if it doesn't come eventually (our money is on NFLX first). 

P.S. Elsewhere in advertising, Amazon is coming ($AMZN) and coming fast with ad revenue growing faster than Google ($GOOGL) and Facebook ($FB). 

1.21 Gigawatts (What is Dead May Never Die)

All Herald the Inglorious Return...

What a strange week.

Henrik Fisker of once-bankrupt Fisker Automotive unveiled the Fisker Inc. EMotion this week at the Consumer Electronics Show in Las Vegas in a dramatic attempt to compete with Elon Musk and Tesla's ($TSLA) Model S. Or, more accurately put, he unveiled a pre-production model, because, well, it's CES and that's what people do: build shiny models to show off with bold statements and abstract availability dates. Just ask Faraday Future. Target price for the EMotion? $130k. "With a target price of $130,000, the EMotion won't be a mass-market car, and suggests that Fisker Inc. could go the way of Fisker Automotive." Right. Good luck with that. 

Thank you Disney ($DIS) and Netflix ($NFLX): the two are largely to credit (blame?) for the recent resurgence in...wait for it...cassette tapes. Yup, you read that right. Thanks to Guardians of the Galaxy, Stranger Things and 13 Reasons Why, cassettes enjoyed a 74% increase in sales in '17. While this may be hipsterific AF, we don't expect to see this "growth" listed as a "risk factor" in Spotify's coming direct listing. 

The resurgence of Nintendo.

Finally, we'd be remiss if we didn't mention once-bankrupt Kodak's ($KODK) foray into cryptocurrency (KODAKCoin). Because the more we read about it, the dumber it sounds and the more the company seems screwed, term loan rally be damned. But, hell, why not? Coming soon to Coinbase account near you: iHeartCoin, JCrewCoin, CenveoCoin, SearsCoin, Bi-LoCoin, etc. After all, there's THIS CHART (followed by a chart of blockchain-related stocks)...

Andrew Left and Short-Selling a Company Into Bankruptcy

The recent New York Times profile on Andrew Left (@CitronResearch) is fascinating and worthy of a solid read. There are a ton of little nuggets in there even if, in some cases, it begs certain follow-up questions. The comments following the article are equally interesting, many of them decrying the author for pitching Left as this savior of the little man without any regard whatsoever for who might be affected by a stock decline of the sort suffered by Valeant Pharmaceuticals ($VRX)(spoiler alert: lots of Moms and Pops...but also a lot of hedge funds who checked into the "hedge fund hotel").

A few things left us curious:

1. Track Record. The article notes that Left has a positive track record. But unlike Jim Chanos, another reputed short seller, Left needn't disclose his holdings and manages his own money. So how does the author KNOW this? He backs up the statement with this: "On average, the value of companies he writes about drop 10 percent in a year, and some drop as much as 95 percent." Well, on average, how many of Left's investments does he actually write about? Isn't the denominator there important? 

2. Abstract References. Why not more detail behind the referenced jewelry chain masquerading as a subprime lender? Presumably this is Signet Jewelers ($SIG)(which has now sold its financing business)? Wouldn't it make sense to highlight a business that caters to that demographic?

3. Lacking Disclosures. Left's observation that companies don't disclose information for a reason is interesting. With negative free cash flow and increasing heaps of debt AND no transparency behind viewership of original content, Netflix ($NFLX) comes to mind. If the numbers were bananas, they'd presumably justify the high content costs, yeah? We'd think that, as a basic matter, any analyst trying to understand the billions spent on such content would want to know what some of the metrics are there. Similarly, Apple ($AAPL) doesn't line-item Apple Watch sales; instead, it embeds those sales in a catchall line-item of "Services." That, too, should give some cause for concern (though Mary Meeker says 25% of Americans now own wearables). 

Interesting Restructuring News

• Busted Tech. This is becoming a regular topic. After LivingSocial (remember LivingSocial?) and its $6b valuation sold for bupkis, serious doubts now surround its acquirer, the publicly-traded Groupon. 

• Lit. Google released the results of a survey showing what is currently considered "lit" (read: "cool") among the teen and millennial demographics. A few observations: 1) Ivanka Trump's brand was conspicuously missing and so clearly there is a high probability of this being "fake news" (yes, we're joking); 2) Netflix and YouTube are the two highest rated brands in both demographics which certainly raises questions about conventional media companies; 3) Tesla is considered the coolest auto company despite not necessarily having the highest brand awareness (nevertheless a positive leading indicator for electric vehicles assuming a) these idiots will drive, b) they'll have money to buy a Tesla, and c) Tesla can manufacture enough cars to meet the supposed demand); 4) Still, car brands across the board are cooler to millennials than teens which raises questions - in the face of autonomous cars - about what car ownership may look like in the next decade; and 5) there is little to no consumer products representation in the "cool" zone outside of footwear and electronics (gaming, Apple, GoPro) which speaks volumes about why we're seeing as much pain in the retail space as we have been. Notably, Uniqlo, Zara and H&M - favorite excuses for why conventional retail is, gulp, out of fashion, are all middling in the 6.5 area. Footnote: Quicksilver looks to have subpar awareness and "lit" ratings which begs the question: how long before Oaktree Capital Management flips it...?

• Post-Reorg Equity. Apparently filing for bankruptcy hasn't turned out too badly for certain oil and gas executives who find that they're realizing a lot of upside value through the reorganized equity of their companies (WSJ firewall). Elsewhere, upon release back into the market, Peabody Energy's equity initially traded up 3.5% only to flip-flop and go negative by over 12% by market close on Tuesday. #MAGA baby! Coal is, uh...back??

• Professional Fees. The American Lawyer seems to have it out for bankruptcy professionals these days as it seems freakishly obsessed with professional fees: in this instance, Weil's fees representing Westinghouse. 

• Restaurants. "There's been an oversupply for 10 years in our industry," says the Darden Restaurants CEO Gene Lene upon announcing the acquisition of Cheddar's Scratch Kitchen. Still, the fast casual space is showing signs of strength: most notably, Panera Bread's stock popped upon acquisition news earlier this week.

• Retail. We really tried to stay away from retail this week because, like you, we're just tired of the story. But, here (video), Jason Mudrick of Mudrick Capital Management provides some interesting thoughts on how to trade the space. This isn't new ground, necessarily, but for the less-initiated, his comments on the difficulty of shorting retail debt may be educational. Note, however, that his views are disputed by analysts at Citi who claim the CMBX trade is over-crowded and that CDS is, in fact, the way to go. Either way, his overall thesis seems a bit inconsistent to us. On one hand, he indicates that the "Amazon effect" (lazy) is leading to a secular decline in retail, generally, but on the other hand he leaves us with the impression that only the lower tier malls will be affected. If the "Amazon effect" is what it is and our parents will die and our kids only shop online (paraphrasing here), why isn't he mentioning the A tier malls as well? This seems to be a blind spot within the restructuring space generally. As we've noted, General Growth Properties and Simon Properties are appearing in the vast majority of these retail cases - even the little ones that nobody appears to have heard of prior to the last few months. Now, granted, there's something to be said for the "replacement value" argument: but are these mall operators really filling vacancies fast enough to maintain revenue and, if so, who is filling the void? Warby Parker currently has 47 "retail locations" (a term we use loosely because this includes small kiosks like the one in the Los Angeles Standard Hotel - basically a cart). Bonobos has 31 locations. Cuyana has three locations (one a pop-up). Birchbox has one location. And most of these are in major cities so not even necessarily in malls. And, directing you back to "Lit" above: we don't see much mall-based retail on that survey - "A" mall-based retail included. So then what? Chiropractors, dentists and clinics? Seems thin. All of this said, the WSJ reported that "the national retail-property market is holding steady," using flat vacancy rates as its measure across shopping centers, regional malls and neighborhood and open-air shopping centers. And mall operators, naturally, are talking a big game. Curious. (*Note: if anyone is interested, we do have a 50+ page hedge fund presentation outlining the CMBX thesis. Let us know).

• Retail II. DAMN IT, retail, we just can't quit you. More from this past week: 1) Citi cut both L Brands and Urban Outfitters from buy to neutral, 2) Ralph Lauren announced the closure of its Fifth Avenue flagship store (with additional closures to come), 3) Bebe Stores announced the closure of its 34th Street store (great quotes within) and 4) the discount space saw some consolidation as Dollar General scooped up Charlotte-based Dollar Express, a Sycamore Partners company. We can therefore add this to our #MAGA! sub-category given the 2700 jobs slated to be cut. SO. MANY. JOBS. LIKE. REMARKABLE.

• Second Order Effects....of advancing car tech. We previously covered Benedict Evans' presentation on the rise of mobile and made some abstract statements relating to second order effects of mobile phones and electric/autonomous cars then. Here, Evans goes a bit further in what makes for a long but interesting read about industries that ought to brace for change (thanks to our friends at Hilco for forwarding to us). TL;DR: car suppliers, machine tooling, car repair, gas stations, convenience store retailers (and, by extension, snack & tobacco providers), building power generation providers, safety equipment manufacturers (i.e., airbags - this is thin, we think, and airbags will probably still be in cars for the foreseeable future), parking operators, truck stops, etc. Of course, this all presumes mass adoption in the time frame the herd generally suggests: 5-10 years. There are notable naysayers.

• Sungevity, a Piece of the Solar Story & Real World Ramifications. Yikes. This is a STINGING synopsis of the downfall of Sungevity, a solar company that recently filed for bankruptcy (our summary and case roster is here). To be fair, the writer seems to have some sort of ax to grind with the company but the comments taken from Glassdoor are, in many respects, heart-breaking and serve as a real-world reminder that while they may line your pockets and juice your bonuses, these cases hurt people. Remember that. 

• Venezuela. With a state oil company debt payment of $2b looming on the horizon, investors are speculating about the likelihood of default.

---

• Fast Forward: Someone just please put Seadrill Ltd. out of its misery. Per Bloomberg, rue21 is due any day now. Sequa Corp....finally. And metals/mining looks like its back on the map with the announcement thatA&M Castle & Co. will be filing a prepackaged bankruptcy shortly.

• Rewind I: We've been spending a good amount of time highlighting busted tech lately and so we'll add another (per Fortune): Yik Yak. For the uninitiated, Yik Yak was a high-flying anonymous social media app that garnered $73.5mm of VC from Sequoia Capital at a valuation over $400mm. Now it is effectively selling for parts (to Square?) in a manner that likely won't even cover the VC. Ouch. I suppose we can call this the "Snapchat Effect."

• Rewind II: Ashley Stewart, a plus-size retailer that was in bankruptcy in 2014 opened its first new store last weekend, a counter-narrative to the doom-and-gloom otherwise hanging over retail.

• Rewind III: We've covered Spotify at length and this week's news of a potential direct listing rather than an IPO is interesting. And goes to show what we've been saying: that convertible venture debt it took on is getting expensive.

News for the Week of 3/12/17

• Commercial Real Estate Backed Loans. Looks like J.C. Penney store closures could impair $30b of loans.
• European Elections & CDS. Investors perceive greater redenomination risk in France and Germany.
• European Retail. It seems the bloody retail phenomenon isn't exclusive to US retailers. Jack Wolfskin, a German producer of outdoor wear and equipment, is in the midst of a restructuring of its $365mm of debt. The Blackstone Group is the company's sponsor and PJT Partners is shopping the company. Meanwhile, Jaeger, a UK-based clothier is also on the block, with an administration within the bounds of possibility. AlixPartners is advising the company.
• High Yield. Valeant Pharmaceuticals, Foresight Energy and Community Health Systems all issued new high yield debt this past week and what screams of a massive yield grab. No, we're not joking: this actually happened. And demand was so strong that upsizing took place. We repeat: "demand was so strong that upsizing took place."
• Oil & Gas Fallout. Like we said last week, we're crushing Ramen so it's hard to feel sorry for a man pulling in $2mm and a $50k/month consulting fee, but its interesting to see some of the effects of the energy downturn - here, relating to Energy XXI's former CEO. 
• Power. The Westinghouse saga got juicier with Weil and the Japanese Prime Minister basically saying put up or shut up. Meanwhile, FirstEnergy is involved in shenanigans and Exelon is now getting active. 
• Private Equity History Lesson. A review of J.Crew's take-private transaction and private equity's affinity for dividends, long-term viability be-damned. 
• Puerto Rico. Sh*t is getting real and people are starting to clamor for bankruptcy.
• Television. Netflix is going after unscripted reality TV. Choice quote: "The competition should be scared out of their minds. These guys are monsters — they're coming in to play and play hard."
• Uber. Expansion in India seems to be predicated upon a mountain of driver debt.

---

• Rewind I: Five weeks ago we reported the following: "The Finish Line Inc. announced its sale of Jack Rabbit Sports this week (66 locations) for undisclosed terms. "Undisclosed terms" = GU gels and a jock-strap." Apparently, we were too generous with our characterization of the financial consideration. Something tells us this won't stop Peter J. Soloman from dutifully and opportunistically noting the tombstone on its pitch materials for the next big retail mandate.  See, also, this.
• Rewind II: Looks like Avaya Inc. has a potential buyer in publicly-traded Extreme Networks Inc. for its networking business (for $100mm).
• Rewind III: Store closures. Add Staples to the list (70 locations) and Signet Jewelers (165 stores). And here is one report on the failure of BCBG.
• Chart of the Week: 

• Chart of the Week II: