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Capital Calls

17 February 2021 By Breakingviews columnists

Concise insights on global finance in the Covid-19 era.


– Tribune’s “savior”

– Shopify’s strong year

Press pass. Speed is of the essence in breaking news. How about when selling a newspaper publisher? Tribune Publishing on Tuesday accepted a $630 million cash takeover offer from hedge fund Alden Global Capital, a buyer known for aggressive newsroom cost-cutting. The deal, according to Tribune’s board, beats the “available alternatives.”

That’s likely true for the sellers. Newspapers are in dire straits. In its latest quarterly earnings, Tribune said ad sales had fallen 38% year-on-year, a trend exacerbated by platforms like Facebook and Alphabet’s Google sucking up revenue. A 35% premium from the company’s largest shareholder is hard to dismiss out of hand.

But there’s something in it for the buyers, too. Take the company’s projected $110 million of EBITDA for 2021, deduct around $40 million of depreciation based on its financials for the first nine months of 2020, tax it, and it amounts to a return on Alden’s investment of roughly 8% – even without the need for brutal cost cuts. That doesn’t mean the firm won’t slash expenses – but once the sale is done, that will no longer be Tribune’s board’s concern. (By John Foley)

Out of the bag. This time a year ago, Shopify reckoned it might make $2.1 billion in revenue for 2020. It was wrong by a wide margin. The $180 billion e-commerce software firm said on Wednesday that revenue was $2.9 billion last year, an 86% increase from 2019. Adjusted operating profit was almost 10 times the previous year’s figure. Unsurprisingly, Shopify isn’t offering guidance this year.

Covid-19 was a windfall. The company processed more than $120 billion for its customers, almost double from 2019. For comparison, U.S. e-commerce sales grew by about a third in the first nine months of 2020, according to the Census Bureau. But the valuation of 47 times this year’s estimated sales, almost five times other business-software companies like Square and Salesforce.com, looks recklessly high.

The company run by Tobi Lutke is sensibly advising that revenue growth will fall in 2021. Shopify’s shares fell 8% on Wednesday morning. Even if business continues to boom, competitors won’t sit idly by. Amazon.com just bought Selz, an online competitor, having already formed a secret team to study Shopify’s success, according to the Wall Street Journal. Lutke is wise to keep his forecasts to himself. (By Amanda Gomez)

Out of fashion. French bling giant Kering has some creases to iron out at Gucci. The $79 billion company on Wednesday reported 2020 revenue of 13.1 billion euros, down 16% on the previous year. Worryingly for Chief Executive François-Henri Pinault, premium brand Gucci, which accounted for more than half of overall turnover in 2020, looks the most frayed. Its full-year sales dropped nearly 23% to 7.4 billion euros. Kering shares fell 7%.

Admittedly, much of the malaise stems from the lack of international travel, and thus consumers’ access to Gucci’s airport duty-free shops. On that front, there are some bright spots. From October to December, Asia-Pacific sales jumped 8% as Chinese domestic travel reopened. But that route leaves Gucci’s fortunes out of Pinault’s hands. To grasp the initiative, he may want to consider the acquisitive path of rivals Moncler and LVMH. With other brands under his roof, Gucci would attract less of the glare. (By Karen Kwok)

Glass half full. Treasury Wine Estates boss Tim Ford could use a drink. The $5.7 billion maker of 19 Crimes and Squealing Pig on Wednesday slashed its dividend after pouring out six-month earnings that were 43% weaker than a year earlier because of pandemic lockdowns and Chinese tariffs. They also, however, handily beat lowered expectations.

That helped lift the stricken shares by more than 2%. There could eventually be more to squish out of Ford’s plan to restructure the business into three more clearly defined internal divisions: Penfolds, Treasury Premium Brands and Treasury Americas.

The reoganisation seems like a half-step. Ford in November cancelled his predecessor’s decision to spin off Penfolds as Beijing’s broadside hit hard. The label typically accounts for more than half of Treasury’s earnings on just a tenth of volumes. If the new plan to revitalise sales ferments faster than the stock price, a breakup could easily be back on the recommended list. (By Antony Currie)

Drone drop. A company manufacturing things that go up should brace for them to come down. Guangzhou-based drone maker EHang experienced a tailspin after regular China short-seller Wolfpack Research questioned its earnings quality, including pointing to its receivables versus revenue. The shares plummeted 63% despite $2.5 billion EHang saying the report was deceptive and contained “numerous errors.”

A six-fold rally in the stock price over the last two months cushions the fall. Early backers of the December 2019 initial public offering can still enjoy a 370% gain. Even after the drop, unprofitable EHang trades at a sky-high 165 times expected profit.

Chinese companies often shrug off short attacks: A 10% fall is more typical, followed by a swift rebound. It’s easy enough for investors in drone makers, especially ones planning flying cars, to look out to a more distant horizon. This swift downward spiral could helpfully jolt the focus. (By Jennifer Hughes)

In a Sinch. Who knew that customer-service technology could be so exciting? Shares in Sweden’s Sinch, whose tools help businesses communicate with consumers via text message, voice and video, surged 15% on Wednesday after it announced a $1.1 billion acquisition of U.S. peer Inteliquent. Its rise in market capitalisation, to $12 billion, was greater than the all-cash deal’s value.

There’s logic behind the leap. By plugging in to Inteliquent’s telecom network, Sinch Chief Executive Oscar Werner can knit together a more seamless service. A delivery company like DoorDash, for example, could automatically send texts when orders are late, and then route follow-up calls from customers to delivery drivers’ phones. Werner also gets access to Inteliquent’s customers in America, where $64 billion rival Twilio dominates investors’ attention. That company is valued at 21.5 times next year’s revenue, compared with Sinch’s multiple of 6.4. Werner’s transatlantic expansion may help close that gap. (By Liam Proud)


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