Empty Shelves
Albertson’s
Last week, four state attorneys general sued to prevent a merger of two of America’s largest grocery chains, Albertson’s and Kroger. In an unexpected twist, a federal judge blocked the deal until hearings could be held.
Albertson’s is owned by private equity firms who plan to sell the chain for $25 billion dollars to another private equity conglomerate. It would create a massive, five thousand store nationwide chain, which the parties involved claim is good for consumers. But is it?
Writer Moe Tkacik says no, not at all:
Albertsons has been far and away the most aggressive markup-wielder of the major grocers. Its 27 percent gross margins tower over Kroger’s 22 percent and Costco’s 13 percent. A San Francisco Chronicle survey of the prices of 15 grocery staples found that Safeway’s were the single-highest of 10 area grocery chains, including Whole Foods; a Retail Watchers user in Irvine, California, compared the prices of an order of groceries from Albertsons they had purchased in 2019 to the same order in 2022 and found that the prices had risen 75 percent in three years.
We talk a lot about ‘inflation’, but it’s clear Alberston’s has been out-gouging its rivals, artificially driving up food costs in pursuit of profits. Consumer food prices have risen far faster than those paid by restaurants:
Such gouging helps explain the baffling disparity between the price hikes Americans have been forced to endure on their groceries (up 13.5 percent in August 2022) versus those of restaurant food (up just 8 percent the same month). One industry is heavily concentrated and monopolistic, while the other is fragmented and competitive.
We don’t often think of the grocery industry as highly concentrated, because large conglomerates have purchased multiple brands over the years, giving the appearance of diversity. Albertson’s owns Acme, Safeway, Jewel-Osco, Vons, and others. For years, grocery giants - especially those run by PE firms - were allowed to consolidate their holdings and weigh themselves down with debt in the name of growth, expansion, and, evidently, greed. Now they’re attempting to consolidate further while dumping gasoline on the consumer inflation tire fire.
If you’ve seen the Albertson’s sale in the news it’s likely because of the eye-watering $4 billion dollar dividend payout included in the deal, which the lawsuit seeks to block. This shareholder windfall comes despite the company carrying a massive debt burden:
Now in its defense, Albertsons needs to gouge customers because 16 years of private equity ownership have left the company with $7.2 billion in long-term debt, $5.5 billion in operating lease obligations, billions more in underfunded pension obligations and $1.75 billion in a debt-like “hybrid” bondage to Apollo. The company spent more than $1.5 billion on rent and interest expenses in 2020, and those costs are likely to rise fast as interest rates continue to rise.
Private equity firms often buy companies with significant real estate holdings and sell the land to pay themselves fees, leaving companies on the hook for the resulting leases. It may seem self-destructive, but private equity often doesn’t care whether a company survives or not - they receive their reward up front, and another firm can always buy up troubled assets at a discount. Believe it or not, there are legal benefits for a PE firm tanking a company:
Back in 2014, when Albertsons acquired the then–publicly traded Safeway, it volunteered to divest 143 stores in overlapping regions to a Seattle-based “competitor” called Haggen, a regional chain consisting of 18 Pacific Northwest stores that had (surprise, surprise) been recently acquired by a private equity firm. Haggen paid about $300 million for the stores, then turned around and sold the underlying real estate of about half of the stores for about $300 million, which the private equity firm used to pay itself a special dividend. The Haggen deal unraveled within weeks, and by the end of 2015 the whole chain was in bankruptcy court, where it sued Albertsons for deliberately sabotaging the divested stores (by allegedly screwing with its computer systems, raiding all the canned and packaged goods in the stores and leaving Haggen with all the perishable inventory) and then sold off half of them for pennies on the dollar to … Albertsons.
So: Albertson’s bought Safeway, sold off some stores in overlapping markets, then that PE buyer sold the real estate - capturing the proceeds - and immediately claimed insolvency. Then it sold the newly distressed stores to Albertson’s at a discount under special “failing firm” exemptions. Cool!
This case may represent a new frontier for antitrust, because rather than making the argument that the sale robs consumers of choices it highlights how the deal will saddle the company with debt which will force it to lay off workers, raise prices, or enact other emergency measures that will make it less competitive in the future. It’s a good - and true! - argument, but it remains to be seen whether federal judges, and perhaps the Supreme Court, are at all sympathetic to the argument that private equity vultures should not be allowed to openly loot the country’s food stores while price gouging the populace to death.
Warner Bros Discovery
If you watch HBO, or CNN, or Food Network, you may have puzzled at a recent spate of popular show cancellations. If you have children, you may have been outraged at HBO removing hundreds of Sesame Street episodes from its library.
Back in April, Discovery and WarnerMedia merged, creating what its executives promised would be an unstoppable media juggernaut. Six months later, things are looking grim:
As of Wednesday’s close, the stock was down about 48% since the deal closed on April 8, and the company disclosed it expects to incur as much as $4.3 billion in restructuring charges by the end of 2024. It also has nearly $50 billion in debt.
Not great! Generally when giant companies merge they claim it’ll create efficiencies and synergy or whatever, but if anything the deal and its extravagant costs have created such financial pressure it’s instead cutting staff and popular programming to stem the bleeding. In fact, the company is going to spend four billion dollars more as a result of the restructuring. I guess it costs more to become streamlined?
Unlike tech firms, which can integrate or combine software and staff, media properties have complex licensing and contractual agreements that can be expensive to exit:
At the Turner networks—TBS and TNT—the bulk of the original programming team was let go, sending a signal to the remaining workers and Hollywood that the channels were out of the scripted content business as part of the cost cuts.
However, Turner’s agreements distributors have covenants that call for original scripted programming. The company is attempting to walk back its earlier moves and says it will remain in the scripted business despite having gutted most of the team that would develop such shows.
Perhaps someone should have read the agreements before firing the people in charge of making the content required in said agreements? I realize laying off staff without understanding what they do is popular these days. Then there are Warner’s sports deals, which are only going to get more expensive during renegotiation with new bidders like Amazon and Apple inexplicably trying to get into the broadcast business:
Another challenge will be holding on to TNT’s NBA rights deal when it is up after the 2024-25 season, and the league is expected to seek a significant increase over the more than the $1 billion TNT currently pays to air games.
Management’s big brain wave is merging HBO Max and Discovery+ next year so if you’ve been thirsting for episodes of Ghost Brothers: Lights Out or We Bought a Funeral Home congratulations, you’re in luck.
As with grocery stores, our overly-financialized country needs to take a step back and decide whether we’re going to allow gigantic, debt-laden firms to continue to play musical chairs with the few remaining things we can enjoy as Americans - easy access to every conceivable junk food, and poorly-lit TV shows about dragons.
Self-Driving Cars
For years now, we’ve been hearing about self-driving cars, how soon they’ll be arriving, and all the problems they will solve. Elon Musk has sworn his cars will drive themselves every year for half a decade - he’s now facing lawsuits and criminal probes over said claims.
But, like, what’s actually going on with real self-driving cars? The ones tech firms are using to clock millions of miles to train their software?
It all sounds great until you encounter an actual robo-taxi in the wild. Which is rare: Six years after companies started offering rides in what they’ve called autonomous cars and almost 20 years after the first self-driving demos, there are vanishingly few such vehicles on the road. And they tend to be confined to a handful of places in the Sun Belt, because they still can’t handle weather patterns trickier than Partly Cloudy. State-of-the-art robot cars also struggle with construction, animals, traffic cones, crossing guards, and what the industry calls “unprotected left turns,” which most of us would call “left turns.”
Yikes. Left turns are only a ‘problem’ when there is oncoming traffic which, again, yikes. None of this has stopped investors from pouring over a hundred billion dollars into self-driving, or financial markets giving crazy valuations to companies trying to solve the, uh, left turn problem:
In 2018 analysts put the market value of Waymo LLC, then a subsidiary of Alphabet Inc., at $175 billion. Its most recent funding round gave the company an estimated valuation of $30 billion, roughly the same as Cruise.
Intel recently IPOed its self-driving company at a cool $17 billion market cap. With the GDP of a small country locked up in three self driving start-ups it’s worth asking - what is all that money doing? The industry has the stated goal of replacing human drivers with robots for…reasons. For Uber’s abandoned autonomous unit it was to create a fleet of robotaxis that would extinguish its cash inferno. Other companies are tackling the goal of automating long-haul trucking or construction, but they face an uncomfortable fact: humans are really good at driving, and robots are not:
Throw a top-of-the-line robot at any difficult driving task, and you’ll be lucky if the robot lasts a few seconds before crapping out.
“Humans are really, really good drivers—absurdly good,” Hotz says. Traffic deaths are rare, amounting to one person for every 100 million miles or so driven in the US, according to the National Highway Traffic Safety Administration. Even that number makes people seem less capable than they actually are. Fatal accidents are largely caused by reckless behavior—speeding, drunks, texters, and people who fall asleep at the wheel. As a group, school bus drivers are involved in one fatal crash roughly every 500 million miles.
Sure, the statistics are skewed by the fact that we have a hundred million humans driving around and only a handful of robots, but thus far self-driving tech has proven incapable of dealing with the complex interactions the average person barely thinks twice about behind the wheel. If tech companies need to rely on data collection to train their AIs, it could take decades to compile the necessary miles, even with billions to burn.
There’s a jarring cameo in the Bloomberg piece - the falling-over-motorcycle guy:
In the view of [Anthony] Levandowski and many of the brightest minds in AI, the underlying technology isn’t just a few years’ worth of refinements away from a resolution. Autonomous driving, they say, needs a fundamental breakthrough that allows computers to quickly use humanlike intuition rather than learning solely by rote. That is to say, Google engineers might spend the rest of their lives puttering around San Francisco and Phoenix without showing that their technology is safer than driving the old-fashioned way.
I am sure the folks who paid this joker hundreds of millions of dollars to develop their self-driving tech would have liked to have known this prior, but hey, whatever. He’s fresh off a pardon and building autonomous dump trucks, go off Tony.
Actually, you know what? The guy who got spectacularly rich selling the self-driving fantasy, then got sued into oblivion and caught fraud charges for his misbehavior might be the perfect person to snap Silicon Valley out of its obsession with robot cars.
Like many things tech is trying to sell us these days, given our current capabilities and the size and scope of the problem, an unmanned robot taxi future remains science fiction, no matter how many billions we feed into the shredder.
Robinhood
If you are a ‘retail’ investor - an individual, not a bank or hedge fund - you may look at big IPOs with a tinge of jealousy. That is because the way IPOs typically work is a company offers large blocks of shares for pre-purchase via the banks who facilitate their public offering. If a company is using, say, Morgan Stanley to go public, Morgan Stanley will sit down with hedge and mutual funds, or private wealth funds or whomstever, and sell them shares either a little or a lot below the company’s expected IPO price. Then, when the stock goes public, those buyers can ride what is called an ‘IPO pop’ and sell at a profit. It’s all very inside baseball and the average person trading stocks on Robinhood, for example, might be mad about it. ‘Why can’t I get in on the IPO offerings?’ they might say.
Well, a year or so ago, Robinhood created a program called IPO Access to allow its users to buy shares in a select number of companies before they went public. You may be thinking boy, mid-to-late 2021, that was a good time for stocks, right? Well:
All 23 IPOs that Robinhood opened up to its customers have declined by double-digit percentages since the stocks debuted. Five -- Iris Energy Ltd., Sono Group NV, Vaxxinity Inc., Stronghold Digital Mining Inc. and Argo Blockchain Plc -- lost at least 89% of their value.
Ouch. Lest you think the damage is limited to companies with names like Vaxxinity, Robinhood’s own IPO was a dud:
Robinhood’s own IPO in July 2021 was among those offered to its clients, and it hasn’t gone well. More than 300,000 users bought the shares for $38, and those who held on to their positions have gotten clobbered. The stock tumbled 10% to $10.78 at 10:15 a.m. in New York, extending its decline since the IPO to 72%.
You can sort of see where Robinhood was going with the program though, yeah? The app became wildly popular during the pandemic, because people were bored at home and trading stocks - which, for awhile, only went up. As the meme stock enthusiasm of early 2021 waned, Robinhood sought new ways to keep its customers engaged and what better way than to let them into the smoke-filled closet of an IPO offering? Unfortunately for them, buying a few shares of Allbirds didn’t help the stock avoid major losses.
It is not a good time to be a retail investor, though it never really is, because day traders - and, really, almost all stock pickers! - do not outperform market averages. If your hobby is gambling small amounts of money to cure boredom, that’s great. If you are betting your future or your retirement on a phone app, you may be reading the wrong newsletter. Try this one instead.
Short Cons
NBC News - “The scope of the car parts operation was huge: Officials said they will seek $545 million in forfeitures of cash, luxury cars and real estate.”
WaPo - “In August, Facebook said it had received feedback from users that its labels promoting reliable information were so overused that the company had decided if they did use labels it would be in a more “targeted and strategic way.””
WSJ - “”Federal officials owned millions of dollars of stock in industries most affected by the pandemic and the government’s response.”
ProPublica - “Trump’s opposition to the law banning political activity by nonprofits “has given some politically-minded evangelical leaders a sense that the Johnson Amendment just isn’t really an issue anymore, and that they can go ahead and campaign for or against candidates or positions from the pulpit,””
If you enjoy this newsletter, please SHARE it with friends, family, or anyone with a stock gambling problem. Thanks!