TheChek News Flow

How a little-known short seller spoiled Reddit’s big debut.

Reddit’s long-awaited coming-out party is over. After more than doubling to a high of $74.90 in the days after its public debut, the stock is now trading at a still-respectable $47 or so. The man who turned down the music is 35-year-old Andrew Freedman, a partner at Stamford, Conn.–based Hedgeye Risk Management, a investment-research firm that sells its data to retail investors as well as institutional clients.

A week ago, Freedman publicized a thorough short-selling case on Reddit, arguing that its engagement and monetization rate didn’t justify its stock’s premium valuation (at around 14 times sales then). That apparently made some exuberant investors sober up: Shares fell 10% the day he made the call, and they have kept falling—$2.8 billion in market value gone. Poof!

Going short on Reddit is a bit of an irony and possibly a dicey situation. After all, Reddit is the platform where meme-stock traders planned the gigantic GameStop short squeeze in 2022, and it’s pretty easy to imagine Redditors rallying again to protect their home base, tightening a vice around any shorts following Freeman’s advice. More fundamentally, Reddit shareholders will face volatility simply because of the limited supply of Reddit shares. Any share-price movement—up or down—will have dramatic effects.

Of course, Freeman knew all this when he made the call. “Look, it’s not my first rodeo. We’ve done these things before,” he said this week between client meetings in Boston. “But I am surprised by how fast the stock went down.”

His firm, Hedgeye, has been around since 2008, but it’s a small shop compared to the short-selling world’s big names (the Chanoses, the Ackmans, the Einhorns). Little outfits like Hedgeye don’t typically get such an outsize impact as Freeman did with his Reddit report. So how’d he managed to do so in this situation? Seemingly it was a combination of two factors: some luck and good timing. Freedman publicized the call right as the stock took off and tapped into existing skepticism about its growth prospects and unprofitable tech companies more generally (as you can see from Reddit’s valuation falling from $10 billion as a private company in 2021 to $7.4 billion today). To Hedgeye’s credit, the company doesn’t have the glaring conflict of interest inherent in most short selling, where short-sellers go out in public to talk down a stock—thereby increasing the value of their own position. Hedgeye doesn’t trade at all.

Freeman is a lot like how you imagine a Redditor: young, male, very online. He started trading in elementary school—“I can still hear the AOL dial-up tone,” he said—selling stocks through the college savings account his parents had opened for him. In his first role at Hedgeye, he covered boring ol’ health tech.

In 2020, he switched over to tech and media. “Then Covid hit and things got crazy,” he said. As the pandemic sparked a loop of panic and mania in those industries, Freeman made a number of thoughtful calls—a short on Pinterest that rode the stock from roughly $70 to the low $20s from 2021 to 2022; another short on Snap, tracing it from over $80 to under $15; and a well-timed long bet on Meta Platforms, which went from $150 to $400. Obviously, no one gets it right all the time. Freedman went long on Warner Bros. Discovery in January 2023 when shares were around $12—they’ve since dropped to around $8.40—and doubled down on a Netflix short in June 2022 just as the stock shot up from under $200 to more than $600.

As for Reddit, Freedman hopes the critics of his short see it as “nothing personal,” he said, so much as a case of “stock prices getting divorced from reality” as anything else. In short selling, “the only time it gets personal is when management is so liberal with the truth, they start to hurt people. Like in the case of AMC. I think Adam Aron is a horrible CEO. People have lost a ton of money.” That sound you hear is investors sharpening a whole other set of pitchforks for him.

The Ad-Hoc Committee will review the situation with all interested parties (including the Consortium composed of EQT, TCV and Mr Denis Ladegaillerie, as well as the historical shareholders of Believe1) to determine next steps in relation to the possible evolution of the Company’s control and will inform the market accordingly.

Galeria, which is the combination of the Kaufhof and Karstadt retail chains in Germany, recently went bankrupt in the wake of the financial collapse of its owner, the Vienna-based Signa retail and real estate group.

NRDC Equity Partners, the private investment firm controlled by Richard Baker and his family, is expected to win a bidding process to acquire the bankrupt Galeria in Germany, according to sources.

NRDC is said to be partnering with Bernd Beetz, the former chief executive officer of Coty, in the deal. A winning bid could be revealed as soon as Monday, the sources said.

The New York-based NRDC is led by Jack Baker, the son of Richard Baker, and Lucas Evans. NRDC invests in retail, real estate and consumer brands.

NRDC is a separate and unrelated business from the retail group HBC.

Richard Baker is CEO and governor of HBC, which is the majority owner of Saks, the luxury e-commerce site; The Bay e-commerce marketplace in Canada, and Saks Off 5th, the upscale off-price e-commerce company. HBC also wholly owns the Hudson’s Bay, the operating company for Hudson’s Bay’s brick-and-mortar stores in Canada, as well as SFA, which operates Saks Fifth Avenue stores, and O5, which operates the Saks Off 5th stores.

In addition to potentially acquiring Galeria, there has been widespread speculation that Baker is close to a deal to acquire the Neiman Marcus Group, through HBC.

Representatives from NRDC could not be reached.

Galeria filed for bankruptcy after its Austrian parent Signa, headed by René Benko, collapsed in a financial crisis.

HBC in 2016 bought Kaufhof in Germany for 2.6 billion euros and sold it to René Benko’s Vienna-based Signa Group for 3.8 billion euros in 2019, leading to the merger of Kaufhof and Signa’s Karstadt retail business, forming Galeria Karstadt Kaufhof. HBC reported at the time that it made a $1 billion cash profit on the transaction.

During the pandemic, Galeria Karstadt Kaufhof went bankrupt, its real estate was sold off, and now the government of Germany is selling the business out of bankruptcy. The business operates 90 stores in Germany, generating 2.2 billion euros in sales annually.

Other investments made by NRDC Equity Partners include FoundRae, the fine jewelry collection founded by Beth Hutchens in 2015. NRDC made that investment last year.

Blackouts spark fears of grid ‘collapse’ in Brazil’s biggest city

Power outages in São Paulo reflect chronic underinvestment in country’s infrastructure

São Paulo faces the collapse of its electrical grid following years of under-investment, officials have warned, as widespread blackouts disrupt activity in the largest city in the Americas.

A key financial and economic hub whose metropolitan area is home to almost 23mn people, São Paulo has in recent months suffered multiple large-scale outages that have left hundreds of thousands of people without power for consecutive days.

City officials and the federal government have pinned the blame on Enel, the Italian energy group that has operated the grid for six years, but the blackouts highlight the damaging impact of chronic underinvestment in Brazilian infrastructure.

“It is something very serious. It is very clear that Enel is unable to continue,” said Ricardo Nunes, the centre-right mayor of São Paulo, adding that he had been told by experts that the city’s grid was at risk of “collapse” within three years without significant investment.

Last year leftwing president Luiz Inácio Lula da Silva made infrastructure a key area for spending, unveiling a four-year $76bn public works programme.

But projections from consultancy Inter B suggest that infrastructure investment this year will still account for less than 2 per cent of gross domestic product, down from just under 2.5 per cent a decade ago under previous leftwing administrations, and far from enough to meet the country’s needs.

Moreover, the lion’s share of this investment is being driven by the private sector. In the electrical power sector alone, more than 90 per cent of expenditure is projected to come from private companies, according to Inter B.

Alessandra Ribeiro, a partner at consultants Tendencias, said infrastructure investment totalling 1.8 per cent of GDP was “well below what is needed” in Brazil.

Nunes’s criticisms of Enel were echoed by Alexandre Silveira, Brazil’s energy minister, who has asked regulators to start a disciplinary process that could result in company losing its operating concession. Under the terms of the current concession, which is due to run until 2028, Enel is responsible for investing in and maintaining the grid.

The furore was sparked by a blackout late last month that lasted about three days and predominantly affected the city’s poorer central region. Businesses, hospitals and schools were forced to shut, causing widespread public discontent.

It followed another days-long outage in November, which was initially caused by a storm. Experts estimated that the outage drove a 6.5 per cent fall in retail revenues compared with the same period the previous year.

Enel said it was in “full compliance with all contractual and regulatory obligations” and that the “threat of revocation of the concession could raise concerns among foreign investors [in Brazil and] harm relations between Brazil and Italy”. Rome has a stake of about 24 per cent in the utility.  

With Brazil hosting the COP30 climate conference next year, “it would not be in the country’s interest to jeopardise the good relations it has always had with Enel”, it added. The company is one of the world’s largest private renewables operators.

Claudio Frischtak, president of Inter B, said responsibility for the blackouts was partly on Enel, which despite meeting its obligations under the concession had been slow to repair the infrastructure during outages.

But he also said that the government should shoulder the blame for not closely auditing the company and for not providing new proposals to improve the power sector’s resilience.

“It’s a multiple failure. The situation we’re experiencing in the country doesn’t have a single cause,” he said, adding that extreme weather linked to climate change would make blackouts increasingly likely and the only long-term solution is a programme to lay cables underground.

The city’s power problems will probably feature heavily in campaigning for municipal elections in October.

Claudio Sales, president of the Acende Brasil Institute, said Nunes and the city government were looking for “things that can motivate the population” to back their re-election bid, while opposition politicians are using the crisis as a platform to burnish their credentials.

But he added that “Enel has almost doubled investments . . . to about R$1.5bn [$300mn] a year, compared with R$800mn invested by the previous concession holder. [Enel] has demonstrably met its quality targets.”

UK’s largest battery storage fund says electricity system is not taking advantage of crucial technology that can cut emissions

The UK’s largest battery storage fund has warned that investment in the sector is at risk because the way the country’s electricity system is run means the technology is not used widely enough. 

Ben Guest, managing director of the new energy division at Gresham House, said National Grid is underusing battery storage that is already incorporated in the system, although it is seen as a crucial part of efforts to cut carbon emissions. 

“The underutilisation of batteries by the ESO [National Grid’s electricity system operator] risks reducing investment,” Guest told the Financial Times, adding that this was “throttling the development of battery solutions in the UK . . . not to mention slowing the UK’s legal commitment to meet net zero[carbon emissions] by 2025.”

Battery developers have also been affected by falling power prices and increased competition from a surge in capacity, hitting revenues and share prices. 

Batteries are an increasingly important part of the electricity system, because they help smooth out surges and lulls in the supply of electricity from wind and solar power. 

Their number has grown rapidly in recent years in Britain as renewable power production has increased, with about 130 sites providing 4GW of total capacity, according to industry group Regen. 

Battery storage facilities earn revenue by buying and selling power in the wholesale market and can also be paid by National Grid’s ESO to store and discharge power to smooth out supply and demand. 

However, the ESO frequently ends up buying electricity from other sources, such as gas-fired power plants, even when batteries are available. In some cases this has been for technical reasons such as older computer systems that are ill-suited to running multiple small assets such as batteries.

Lower volatility in the wholesale market has also affected battery developers’ revenues, while their earnings from providing other services to ESO have also fallen.  

Sachin Saggar, an analyst at Stifel, calculates that battery storage revenues had fallen to about £50,000 per megawatt by the end of 2023, down from £150,000 per MW in 2022. 

“If it’s sustained at this level, they aren’t making enough money [for it] to make sense to build a new battery,” he said.

Gresham House, which has a battery storage portfolio of about 640MW, scrapped its fourth quarter dividend in February, and warned it would be “challenging to generate the cash required to cover the dividend this year”.

National Grid has been making changes to try to use batteries more. However, Olly Frankland, an electricity storage specialist at Regen, said they had been “a little bit slower than they should have been”. 

“There is encouraging messaging and good direction of travel, but I think what we’re asking for is a wider role for battery storage.”

The industry had been to an extent a “victim of its own success” he said, with about 1.6GW coming online last year.

“There’s been a lot of battery storage coming on to the system,” he said but noted that demand had not kept pace.

National Grid ESO declined to comment.