TheChek News Flow

More shareholders are picking proxy fights with businesses whose stock prices have languished

Companies faced a record number of attacks from activist investors in 2023 as disgruntled shareholders sought to oust directors or force the sales of businesses whose share prices had languished. 

There were 252 new campaigns globally, according to a report by investment bank Lazard, a 7 per cent increase on the previous year. Few companies were safe from scrutiny, with a broad range of activists targeting blue-chip businesses such as Walt Disney, Salesforce and Starbucks.  

Europe and Asia Pacific saw record levels of activity, with the UK and Japan leading the pack. There were 69 campaigns launched in Europe, most of which had demands related to mergers and acquisitions, and 44 new campaigns in Asia Pacific where local hedge funds were the most active participants. 

“Activism today has a very regional dynamic,” said Rich Thomas, a managing director in Lazard’s capital markets advisory group. “Global campaigns are at an all-time high because [Asia Pacific] and Europe have had a breakout year.”

Activists typically buy stakes in companies and lobby for changes they believe will help increase the share price. In its earlier years investors attacked businesses and their leadership in public letters but advisers said much of the negotiating between activists and targets now took place behind closed doors. 

However, a number of high-profile battles have spilled into the public forum, adding to pressure on executive teams dealing with slowing economic growth and higher interest rates. 

Trian Partners last year said it would seek two board seats at Disney, setting the stage for one of the most contentious proxy fights in years and pitting its co-founder Nelson Peltz against returning chief executive Bob Iger. 

Carl Icahn, whose own public investment company was attacked by activist short seller Hindenburg Research, waged an aggressive campaign against Illumina over its acquisition of cancer test developer Grail. In December the gene sequencing company said it would divest from Grail.  

While activism has historically been dominated by hedge funds such as Elliott Management and Third Point, the strategy is increasingly being deployed by other types of shareholders. More than 40 per cent of activists launching campaigns last year did so for the first time, according to Lazard, as the list of discontented investors with whom companies must deal broadens. 

Thomas said Europe in particular had seen a significant uptick in the number of first time activists, after many previously held back during the cost of living crisis and rising energy prices.

“The barriers have come down and frustrated shareholders are now launching more campaigns,” he said. “We’re seeing this landscape of activists diversify and broaden.”

Starbucks is facing a challenge from a coalition of labour unions called the Strategic Organizing Center, which has launched a proxy contest to replace three of the company’s directors with its own nominees over “severe human capital mismanagement”.

The proxy fight, if it goes ahead, is expected to be a test case for whether a larger shareholder can be won over by single-issue battles, and shows the threat companies face even from shareholders who hold minor stakes.

Universal proxy rules introduced in 2022, which guarantee that all board nominees will appear on the company’s ballot, have had little effect on the number of board seats won by activists, according to Lazard.

However, companies are now quicker to call a ceasefire with activist investors to avoid proxy contests. Just 37 per cent of campaigns that ended with winning a board seat lasted more than 90 days last year, down from 44 per cent, and 34 per cent settled within one week, according to Lazard. 

Over the past year there has also been a resurgence in multiple hedge funds swarming around the same target. At one point Salesforce had seven activists on its shareholder register, according to people familiar with the company, including ValueAct, Elliott and Third Point. 

“There had been this discussion of the wolf packs that would attack small companies but rarely would you see those campaigns at a large cap company because it was hard to get a hold of enough shares and manage the process,” said Bruce Goldfarb, founder of proxy solicitation firm Okapi Partners.

“Now there are a number of activist hedge funds who have to take larger positions to be impactful for their investors so they end up at the same targets, often without any collective action.”

Clubs are racing to transform their venues into entertainment destinations, but competing is costly and not without risk

When work is finally completed on the four-year renovation of Real Madrid’s iconic Santiago Bernabéu stadium early this year, it will boast two important new buttons.

One triggers the new retractable roof, able to close in just 15 minutes, that will protect future concert goers from the elements as they enjoy top international music acts. Taylor Swift is booked to play in May. 

The other button begins the five-hour process that splits the stadium’s football pitch into six sections and sends it to a vast underground storage space, where light, temperature and humidity controls provide optimum conditions to maintain the grass regardless of what is happening overhead.

All of this is part of the club’s €1.2bn renovation project, which includes restaurants that can serve thousands of people, a skywalk with views across Madrid and a newly expanded museum that is expected to increase visitors from 1.5mn a year to 2mn. Museum revenue is projected to hit €50mn as a result, similar to the amount some clubs in Spain’s top tier earn from their broadcast rights. 

But Real Madrid is not alone. With most TV deals negotiated at league level and new regulations that link spending to income, top clubs across European football are raising billions of euros, dollars and pounds for stadium redevelopment with the aim of creating a more diverse pool of cash flow.

The result is akin to an arms race, as owners seek to outdo each other with high-tech, adaptable venues that can grab a slice of the booming market for live music, host lucrative sporting events such as boxing and NFL games, and create a thriving food, beverage and retail business that can compete with neighbouring high streets. Even better for clubs, institutional investors and commercial banks have been lining up to finance it all.

Several top European clubs are at some stage of upgrading or replacing their stadiums in an effort to keep up. Inter Milan, AC Milan and Roma are all finalising designs for new facilities, Paris Saint-Germain, Chelsea and Manchester United are weighing up whether to upgrade or replace their cramped or ageing homes, while Barcelona recently raised €1.5bn from the US bond market to pay for a major overhaul of its Camp Nou stadium (below).

The pressure to compete in the stadium wars is stretching the finances of some clubs, which usually have to cover the mammoth cost of construction themselves. But some within the industry argue that failing to diversify their home grounds is equally something they cannot afford in the long run.

“The concept is clear,” says one senior club executive working on a major stadium project. “Convert a football stadium that gets used 25 days a year into a multipurpose entertainment venue that’s busy every day of the year.”

The Spurs model

For now, the gold standard in European football grounds is the Tottenham Hotspur stadium in north London, a £1bn construction project completed in 2019.

Its impact on the club’s finances has become increasingly clear as the effects of the pandemic have faded. Previously, the average fan would spend less than £2 inside the ground on a typical match day, but now that figure is about £16, thanks to new facilities including the longest bar in Europe and an on-site microbrewery. Capacity has gone up from 36,000 at the club’s previous home of White Hart Lane to 62,000. 

“We had been operating with one of the smallest stadia in the Premier League and, consequently, lower match day revenues — in what is a fiercely competitive environment,” says Daniel Levy, chair of Tottenham Hotspur, in an email to the Financial Times. “An increased capacity stadium was critical to meeting demand from fans unable to get access . . . and driving greater match day and non-match day revenues to reinvest in the football side.”

The new stadium — built on land adjacent to White Hart Lane — has opened the door to a broad range of other events that have helped to push commercial income up from €117mn in 2018 to €215mn in 2022. Last year, Tottenham hosted US singer Beyoncé for five nights on her global Renaissance tour, two NFL matches, as well as rugby games and heavyweight boxing bouts. 

Money brought in from football has gone up too. Match day income is up from €85mn in 2018 to €125mn last season, according to Deloitte, partially due to the addition of premium hospitality such as The H Club offering private members cuisine from celebrity chefs and The Vault, a place where they can store their whisky and fine wines.

An executive at a rival club described the stadium as a “work of art” that had inspired owners across Europe to reassess their own facilities, and focus much more on the fan experience.

“We can’t treat football fans as a captive audience. They do have choice. They will come to the game, but they will spend their money in a local pub and restaurant if you’re not providing good enough quality,” says Christopher Lee, managing director of the Europe, Middle East and Africa business at stadium designer Populous. 

Other clubs are following suit. In Barcelona, the club’s redevelopment project, which has been almost a decade in the making, is finally under way. Once finished, the total capacity at Camp Nou will only rise slightly to 105,000, but an extra ring of VIP seats will be added, as will a roof, a new third tier of general admission seats, and a 360-degree screen.

More work will take place outside the stadium, where a new building will house the museum and club shop, alongside a revamped Palau Blaugrana, a space that will hold 15,000 people for concerts and other sport, such as basketball.  

Spanish clubs will also need to invest heavily in preparation for the 2030 World Cup. La Liga’s investment deal with private equity firm CVC Capital Partners included carve-outs from the league’s spending rules to encourage clubs to put money into stadium infrastructure instead of blowing it all on players. La Liga expects the deal to help unlock as much as €1.8bn in investment.

Milos Nenadovic, club infrastructure consultant at La Liga, says the goal is to give fans a reason to arrive before the game and increase the amount of money they spend once there.

Work at the top Spanish clubs has left their Italian counterparts racing to catch up. The two Milan teams share the San Siro, which was completed in 1926 and then renovated ahead of the 1990 World Cup. The fierce rivals have explored building a new venue together, but recently announced separate plans to build their own stadiums each with capacity for about 70,000 fans. Both would be some way south of Milan city itself. 

In Italy, the problems with infrastructure are acute. Serie A was the top league in the world in the 1990s, but has since seen its position slip, in large part due to a lack of investment. It now generates less broadcast income than top leagues in England, Spain and Germany, and recently concluded a domestic TV deal at a lower price than its last contract. Club executives and owners, including a growing band of professional investors, see new stadiums as key to getting the league back on track. 

“Italy is super interesting because the infrastructure has held back huge clubs with massive fanbases and international appeal, which is why we’re seeing international capital move in,” says Lee, who helped design Tottenham’s stadium and is working on stadium projects at both Inter Milan and Roma. “They are ultimately very undervalued assets. The stadium is the one thing that flips that.”

Despite the advantage that comes with lucrative Premier League TV rights, English clubs are not immune from the need to update facilities. Manchester City, ranked by Deloitte as the club with the highest revenue in football, is feeling the pressure to keep up with Europe’s top clubs. It is planning to add about 7,000 seats to the Etihad, its home ground, but is also building a hotel, a museum and a new 23,500-capacity music space — the Co-op Live arena — on its campus in east Manchester that will host the likes of Nicki Minaj, Eric Clapton and Barry Manilow when it opens in April.

Roel De Vries, chief operating officer of the group that owns Manchester City, says the club needs to increase stadium revenue “if we want to stay competitive in the world of football and be in the top group when it comes to performance”.

“We cannot easily expand the stadium beyond 60,000,” he says. “So then we have to figure out, ‘How can we squeeze a lot more out of the stadium?’”

Lure of long-term financing

Much inspiration for the current trend of investment has come from the US, where sports stadiums are often part of a much bigger entertainment complex designed to generate returns seven days a week. 

Owners have spent billions of dollars on new facilities for their baseball, basketball and NFL teams, although the model in the US is distinct because franchises can uproot themselves and find new homes. Cities and states then compete to attract teams by offering to finance or underwrite the costs of new stadiums, with taxpayers often footing the bill. 

Although the American funding set-up is hard to replicate, the broader idea of creating diversified real estate businesses with a sports team at the centre is increasingly taking hold.

“There’s the building and how that building generates revenue,” says Irwin Raij, co-chair of law firm Sidley Austin’s sports and entertainment division. “Then there’s the other part, which has become very fashionable in the US, of owners saying: ‘I want to control the real estate around the building.’” 

It is no coincidence that many of the big projects under way are happening in tourist centres. London, Paris, Rome, Milan and Barcelona are all in the top 10 most visited cities in Europe, with Madrid also in the top 15.

Owners see the opportunity to turn football stadiums into attractions in their own right — with stadium tours for football fans and other activities for those who are not. Tottenham will add a Formula One-branded electric karting track this year, part of a 15-year contract with the motorsport operator. 

While football teams are seen as relatively risky borrowers — clubs often pay specialist lenders interest rates of well over 10 per cent — stadiums are seen through a different lens. Owners will often split the business into a company that owns the club and another that owns the stadium, or a “stadco”.

Stadcos have a far lower risk profile, similar to a power station or wind farm, according to bankers, because they generate long-term, predictable returns that are not so beholden to the team’s performance on the pitch. While relegation from a top league would push a club’s broadcast income down dramatically, ticket sales and corporate hospitality tend to be sticky in comparison. Despite enduring its worst ever start to the season, French club Olympique Lyonnais was recently able to complete a €320mn refinancing of its stadium at a fixed interest rate of 5.8 per cent.

The design of a new stadium can have a significant impact on how it is financed. Anything that brings in visible and reliable future income — such as hospitality boxes — can be borrowed against, often at relatively low rates.

Much of the cost of rebuilding Wembley Stadium in London was paid for through a long-term hospitality contract with sports agency IMG. At Tottenham, hospitality guests now account for about 13 per cent of those attending matches, partly due to rising demand from wealthy people keen to enjoy a premium match experience rather than corporate clients. 

Other clubs have turned to the handful of big investment banks that work on stadium project finance, such as JPMorgan and Japan’s MUFG, or have brought in new shareholders. Sir Jim Ratcliffe’s deal to buy 25 per cent of Manchester United included a further $300mn investment dedicated to the stadium.

Bankers say some clubs are still able to get long-term financing for as little as 2 percentage points above the base rate, thanks to multiyear contracts such as stadium naming rights or advertising. Another boost could come if the US Federal Reserve follows through on signals that it will begin cutting rates this year.

“In 2024, the wind is behind our sails. Everyone believes interest rates will go down,” says Greg Carey, global co-head of sports franchise at Goldman Sachs. “People are getting more comfortable that inflation is under control, and we’re feeling very good about the projects coming on board.”

The less predictable income — a Taylor Swift concert, for example — then becomes an upside for the club. Hosting a single night of live music from premium artists such as Rihanna or Lady Gaga can bring in as much as €4mn, according to industry executives.

Barcelona was able to borrow the €1.5bn it needs for its project from the bond market in April, even as the club grappled with overstretched finances and high levels of debt.

Real Madrid tapped US investors through private placement, securing long-term financing when interest rates were still close to zero. Then last year it agreed a deal with US investment fund Sixth Street, which paid €360mn in return for the rights to host music and other live events inside the Bernabéu through Legends, the firm’s events business.

But getting projects over the line is easier said than done — and is not without financial risk. Building in European city centres is expensive and slow, while planning permissions are often hard, sometimes near impossible, to come by. Italy has had to change planning laws to make stadium investment easier. 

More than a year after their £2.5bn takeover, Chelsea’s US owners are still grappling with whether to attempt a big renovation of Stamford Bridge to increase the 40,000 capacity stadium, or explore an alternative site elsewhere in west London — one of the world’s most expensive real estate markets. The current stadium is hemmed in by train lines, tightly restricting what can be done.

Although clubs have a range of financing options once a stadium is finished, most must bear the burden of construction directly — typically through standard commercial lending. That leaves the club exposed to rising building costs, delays and, potentially, higher borrowing costs.

“Until that stadium opens you need to make sure you build it on time and at cost,” Carey says. “Mitigating construction and completion risk is the biggest risk these clubs face.”

The price of construction has soared since the pandemic as the economic rebound pinched global supply chains. The headline price of Everton’s new stadium, for example, has jumped to at least £760mn, adding to the club’s serious and mounting financial problems.

While some clubs may try to lock in a fixed-price contract for building work, construction companies are increasingly wary of committing to anything when prices for all things — from labour to materials to energy — are so unpredictable.

For those yet to break ground, the halcyon days of locking in cheap, long-term financing may have passed. “Timing is everything,” says Levy, the Spurs chair. “We simply wouldn’t be able to do what we did if we were doing it today.”

U.S. puts diplomatic clout behind sales of cutting-edge reactors that have yet to show commercial success

WASHINGTON—To compete with its biggest geopolitical rivals, the U.S. government is looking toward small nuclear reactors.

Not a single so-called small modular reactor has been sold or even built in the U.S., but American officials are trying to persuade partner countries to acquire the cutting-edge nuclear reactors still under development by U.S. firms. The goal: to wrest nuclear market share from Russia—the global industry giant—and defend against China’s fast-growing nuclear-technology industry.

The U.S. hopes that putting its clout behind a new technology can cement future commercial and diplomatic relationships and chip away at China’s and Russia’s ability to dominate their neighbors’ energy supply.

The Biden administration also sees nuclear energy as a way to export reliable green energy, since nuclear-power plants split atoms and don’t burn carbon-based fuels that contribute most to climate change. With Russia’s broad 2022 invasion of Ukraine sending Poland and other European countries looking for new energy partners, U.S. officials and industry leaders see a potential opening in the market for U.S. exports to compete with China’s growing nuclear ambitions.

At the United Nations climate-control conference in Dubai, officials from 20 countries last month agreed to a pact led by the U.S. that would triple global nuclear-energy output over three decades. Meanwhile, the Republican-controlled House of Representatives and Democratic-led U.S. Senate passed legislation aimed at weaning the U.S. off Russia’s nuclear fuel over time and helping to build capacity to enrich uranium domestically. In November, the U.S. signed an agreement to facilitate the sale of nuclear-energy technology and material to the Philippines, just one southeast Asian country that is re-examining nuclear energy a dozen years after the Fukushima disaster in Japan.

While China dominates the wind- and solar-power sectors, nuclear energy is one area where officials believe the U.S. could compete with its long menu of newer reactor types and fuels. The U.S. aims to sign agreements for partnerships lasting 50 years or longer to provide U.S. technology to Moscow’s former energy partners and to fast-growing countries in Southeast Asia worried about overreliance on Chinese and Russian energy.

“If we’re the supplier, we support the energy security of our allies and partners,” said Ted Jones, head of national security and international programs at the Nuclear Energy Institute, a U.S. industry group. “We help prevent them from finding themselves in the situation of Europe with respect to Russian gas and nuclear.”

At the core of the U.S. campaign is a technology, yet-unproven in the U.S., called a small modular reactor, or SMR. SMRs generate about one-third the energy of a conventional nuclear reactor and can be prefabricated and shipped to the site. Among other potential advantages, they are intended to be cheaper than larger reactors, which often have to be custom designed, and they can be installed to meet growing demand for energy, according to the International Atomic Energy Agency.

‘Very, very long-term strategic partnership’

U.S. officials say they are working with developers of SMRs, and the government-run Export-Import Bank and the U.S. International Development Finance Corp., to win overseas orders that will bring down costs and build an order book for the new technology, all while linking the countries’ energy systems to the U.S. and its allies. By 2035, the U.S. Nuclear Energy Agency estimates that the global SMR market could reach 21 gigawatts of power, enough to power two billion LED lightbulbs.

“It’s important that the United States maintains that leadership in the transition from the laboratory to the grid and deployment and commerciality,” said Geoffrey Pyatt, the State Department’s assistant secretary of energy resources. “It’s about building a very, very long term strategic partnership.”

To make nuclear-energy exports a viable tool of foreign policy, U.S. companies will have to prove they can deliver smaller reactors for export on time and budget, a goal that has eluded larger nuclear-power plants in the West.

The U.S. has yet to build an SMR, and none is yet under construction in the U.S. The concept’s economics remain unproven, as does the timeline for building such a reactor. One company, Kairos Power, recently received construction approval for a demonstration project in Tennessee. It plans to focus on the domestic market. NuScale Power, one of the major U.S. players, recently canceled an SMR project in Idaho when a group of utilities in the Mountain West couldn’t get enough members to commit.

To make the concept work, most SMRs’ developers would need a pipeline of orders so they could move into factory-style production, lowering unit costs.

Among the potential customers U.S. industry and government officials are looking at are Polish energy company Orlen, which wants to build SMRs designed by GE Hitachi Nuclear Energy.

The U.S. Export-Import Bank and U.S. International Development Finance Corp. have offered to arrange up to $4 billion in financing for a plant planned by NuScale in Romania, with an aim of going online in 2029 or 2030. U.S. officials also say they are in discussions with Bulgaria, Ghana, Indonesia, Kazakhstan and the Philippines on new nuclear projects.

China is leading the world in reactor construction and recently started commercial operations of a plant with two SMRs. The country is now building 22 of the 58 reactors under construction around the world, according to the International Atomic Energy Agency. China has built reactors in Pakistan and aims to join Russia as a major exporter of nuclear technology.

Last year, China and the U.S. were jockeying to provide civilian nuclear technology to Saudi Arabia. Washington appeared close to a deal, part of a regional pact with Israel, but it was derailed by Hamas’s attack on Israelis in October and the subsequent war in Gaza.

U.S. sales pitch: We’re less risky than Russia and China

Russia’s state-owned Rosatom, meanwhile, is a major exporter of both reactors and nuclear fuel.

According to the latest World Nuclear Industry Status Report, it was building 24 reactors: 19 large reactors in countries from Turkey to Bangladesh, a barge to be equipped with two small reactors under construction in China but intended for use in Russia, and three reactors at home. Of the reactors under construction in Russia, two are large; the third is an SMR that would use liquid metal for cooling. Rosatom started commercial operations of two SMRs on a floating barge in 2020, though that project took longer and cost more than expected.

Washington is counting on partner countries’ interest in working with U.S. firms and what officials are selling as a less risky tie-up than working with Moscow and Beijing on projects that have a lifespan of 50 years or more.

“It’s never good if our allies are dependent on a potential adversarial country for energy,” said Bret Kugelmass, chief executive of nuclear-power startup Last Energy, which plans to build microreactors that would generate 20 megawatts of electricity and be sited near factories.

The process for hammering out a network of government and commercial deals can take years, with U.S. officials working alongside foreign counterparts, export credit agencies, nuclear-energy firms and utilities, not to mention the U.S. Congress. Russia and China have the advantage of state-led financial sectors to fund projects that can span a decade until power flows.

U.S. industry executives and government officials say they are now working on shortcuts to marketing reactors, including setting up a single government-to-government deal that includes corporate contracts and public and private financing assistance.

The new deals are designed to appeal to partner countries that want a simpler path to getting a reactor, without the heavy dose of Chinese financing that U.S. officials say might have strings attached.

The Ladbrokes owner cited its withdrawal from 140 territories as part of efforts to clean up

Antarctica and Vatican City are among the list of more than 140 unregulated gambling territories that Entain said it had exited in a frequently cited statistic to show how the Ladbrokes owner had cleaned up its business, according to an internal document.

The London-listed bookmaker was not generating any revenues in these two territories in the run-up to closure, according to internal estimates, but they were nevertheless included in a list of areas from which Entain committed to withdraw as there was no path to domestic gambling regulation.

The worldwide exits were held up as part of efforts by Entain to overhaul its compliance, especially in light of a criminal bribery probe by British authorities that concluded last month with Entain agreeing to pay a £615mn penalty.

The deferred prosecution agreement Entain signed with UK prosecutors over historic wrongdoing at its Turkish subsidiary obliged the bookmaker to withdraw from unregulated markets. Entain pointed to how it had “exited approximately 140 markets where there was no clear path to regulation” in line with the DPA’s conditions.

Entain’s chair Barry Gibson also emphasised its success in withdrawing from more than 140 unregulated markets at its most recent trading update in November, saying it was “the right thing for the business”.

An internal tracking document maintained by Entain’s compliance team, seen by the Financial Times, shows that along with Antarctica and Vatican City, other territories with a permanent human population of less than 1,000 people helped make up the total of 140-plus unregulated gambling markets that the bookmaker exited.

These included the Pitcairn Islands, the French Southern and Antarctic Lands, and the United States Minor Outlying Islands.

Greg Johnson, an analyst at Shore Capital, said: “I struggle to see why it’s a great achievement to move out of markets you either weren’t ever really in or shouldn’t have been in the first place”.

Entain’s plan to close unregulated markets, which was first announced in November 2020 and completed at the end of last year, was known internally as “Project Sunrise”. According to the internal spreadsheet, Entain officially exited more than 100 other markets on December 17 2020. Subsequent rounds of market exits occurred between 2021 and 2023.

Bigger unregulated markets, such as Argentina, Russia and Ukraine, were also closed, according to the internal spreadsheet.

Entain’s board is wrestling with major shareholder unrest over the company’s poor performance and languishing share price, which resulted in its chief executive leaving last month. The company counts four US activist hedge funds among its top-20 shareholders, including Corvex Management and Eminence Capital, and last week granted Eminence’s founder Ricky Sandler a board seat.

Entain is the only major gambling group that has fully withdrawn from unregulated markets. But much of the industry is heading in a similar direction: industry rival Flutter, which owns Paddy Power and Sky Bet, derived 97 per cent of its revenues from regulated markets in 2022.

Shore Capital’s Johnson said withdrawing from unregulated markets had been “an easy win” for Entain, adding that it was a move aimed at “simplifying the business and having that nice round figure that you’re 100 per cent regulated”.

Entain said the company had foregone about £100mn in earnings before interest, taxes, depreciation and amortisation as a result of these market exits “to create a more sustainable, higher-quality revenue base”.

“We closed 140 markets where revenues ranged from significant to de-minimis at the time of exit, but where customers could bet with us,” the gambling group added.

Under the terms of the DPA agreed last month, Entain has a 12-month deadline to exit four further markets — Brazil, Chile, Peru and Mexico — if regulation is not achieved. However, Entain obtained a Mexican licence late last year and Brazil is expected to pass betting legislation early this year, so the company could remain in those markets.

Sellers are cutting prices for big-ticket products once seen as a financial refuge from high inflation

Nezih Allıoğlu is deploying a strategy to sell cars at his Peugeot showroom in Ankara that would have been extraordinary only a few months ago: big discounts.

Allıoğlu, chair of Göral Otomotiv, said his dealership off a motorway in the Turkish capital was doling out discounts of 10 to 15 per cent on new cars — the biggest incentives his group has offered in five years and the first price cuts since 2020.  

The second-hand car market has taken an even bigger hit, with used vehicle marketplace Otomerkezi.net seeing prices cut by up to 20 per cent in the three months to the end of November.

This slowdown in Turkey’s car industry is one of the clearest signs of how an economic overhaul after President Recep Tayyip Erdoğan’s re-election in May is cooling the $900bn economy. Car sales had surged in recent years as scorching inflation and low interest rates sent Turks rushing to find assets that would hold their value.

“Before [the election] you were waiting in line for three months [to purchase a new car],” said Allıoğlu. “Now you get your car in a week or 10 days.”

A top executive at a major Turkish car distributor, who asked not to be named, added: “The last two years were extraordinarily good, now it is returning to normal.”

Turks have in recent years turned to purchasing cars, home appliances and gold as stores of value because inflation, which peaked at over 85 per cent in 2022 and remains above 60 per cent, and a falling lira have seriously eroded the value of their savings.

Erdoğan’s insistence on holding interest rates at ultra-low levels turbocharged the idea of cars as investments because interest rates on bank deposits were far below the rate of inflation. By the same token, borrowing costs for car loans were very low when compared with inflation.

The rush among local savers to buy cars as investments, combined with the lingering effects of supply-chain disruptions related to the pandemic, led to a big imbalance between the roaring demand for vehicles and the limited supply available, said industry executives.

Retail car sales jumped to 841,000 in the first 11 months of 2023, compared with 593,000 over the whole of 2022, according to Turkey’s Automotive Distributors’ and Mobility Association, a trade body. Sales for 2023 were the highest in at least a decade.

Prices for vehicles in Turkey have surged 214 per cent in the past two years as Turks clamoured to buy cars, data from the country’s statistical agency showed. The rate of price increases was particularly vigorous around the May election when Erdogan’s government launched a wave of stimulus measures to prop up the economy before voting day. In July alone, prices rose 16 per cent from the previous month.

“When there was 80 per cent inflation and 25 per cent deposit interest, everyone wanted to buy goods. That’s why they came to us to buy three to five cars and keep them in their garage,” said Allıoğlu.

Turkey’s new economic management team, which was appointed in June, has launched a sweeping overhaul in policy to cool consumer demand for goods such as cars and tame inflation.

The central bank, led by former Goldman Sachs banker Hafize Gaye Erkan, has raised the benchmark interest rate from 8.5 per cent in June to 42.5 per cent, as Erdoğan has at least temporarily abandoned his long-held objection to high borrowing costs.

Other policy changes were also made, including a tripling of taxes on petrol and curbs designed to slow the rate of growth in car loans.

Interest rates on consumer vehicle loans have shot up from 25 per cent before May’s election to 37 per cent, central bank data showed. Although that is still below the current inflation rate, growth in vehicle loans, which had reached an inflation-adjusted annual rate of nearly 300 per cent in February, has cooled to just 61 per cent, according to Turkey’s banking regulator.

At the same time, the returns Turks can earn simply by leaving their liras in the bank has more than tripled from April’s level to reach 38 per cent, significantly reducing the appeal of purchasing cars and other goods as investments.

Erkan noted in a recent interview with Turkish newspaper Hurriyet that as a result of the new economic policies, “we see a decline in [markets for] products such as automobiles, white goods and furniture, which are most affected by monetary policy”.

The car executive said: “When [consumers] think inflation is going lower, then demand [for cars] goes lower.” He added that with higher deposit rates “it makes more sense to leave money in the bank rather than buying things like cars”.

The sportswear brand surpassed $1 billion in revenue in 2022, buoyed by soaring demand for its fashion-forward performance products, parent-company Amer Sports’ IPO filing revealed.

Salomon Sportstyle — the division responsible for the outdoor brand’s fashion-forward adaptations of its trail running footwear and apparel — generated over $165 million in sales for the nine months ended September 30, 2023, up from $80 million in 2022, according to parent-company Amer Sports’ US IPO registration published Thursday.

The Sportstyle division is now the fastest growing segment of the Salomon businesses, which began in 1947 as a family-owned manufacturer of ski equipment in the French Alps, the filing said.

Overall, Salomon posted revenue of over $1 billion in 2022, up from $961.2 million the previous year.

Salomon’s booming Sportstyle sales are predicated on the soaring popularity of its XT-6 sneaker line, originally built for trail and ultra-marathon running. Over the last two years, XT-6 sneakers — which carry the same technology as the original trail running shoes, and are enhanced in fashion-forward colourways — have become a hit among the streetwear community and mainstream consumers, whilst also driving sales on the secondary market and landing several celebrity placements. In 2023, Salomon was the second-fastest growing brand on resale platform StockX, with trades up 202 percent year-on-year.

The Sportstyle division has also become one of the fashion industry’s most prolific collaborators in recent years, releasing co-designed products with brands such as Maison Margiela, Sandy Liang and Palace. The company’s evolution from a niche outdoor equipment manufacturer into a fully-fledged fashion brand was crowned when Rihanna wore MM6 Maison Margiela X Salomon Cross Low sneakers during her Super Bowl halftime show performance in February 2022.

In addition to Salomon, Amer Sports holds a roster of sports and outdoor brands, including Arc’teryx and tennis and basketball equipment company Wilson. A successful debut will propel ambitions to increase revenue at each of these three businesses to over €1 billion ($1.1 billion) annually — Arc’teryx recorded sales of $952.6 million in 2022, according to Amer Sports’ IPO registration. The company did not break out annual results for Wilson, but the company saw sales of $866.3 million in the first nine months of 2023, according to the filing. Amer Sports is aiming to grow its total annual revenue to €5 billion. The company generated $3.5 billion in 2022.

The Finnish holding company was acquired in late 2018 for $5.2 billion by a consortium of buyers led by Anta Sports, China’s largest sportswear company. Its owners also include Tencent, private equity firm Fountain Vest Partners and Lululemon founder Chip Wilson. Wilson has been nominated to sit on the company’s board following the IPO, the filing showed.

While Amer Sports’ filing did not disclose the price and size of its upcoming initial public offering, Bloomberg reported in September the group aims to raise up to $3 billion at a $10 billion valuation.

There is still value in viral moments and events, but the social media economy is not going to sustain a top-down industry that is still shedding journalists and influence.

In November, Popular Science revealed that it would stop publishing its digital magazine. The news came three years after the 151-year-old magazine discontinued its print issue in what turned out to be a futile stab at “sustainability,” a euphemism for our grim era of legacy media bloodletting.

The demise of the PopSci, which debuted in 1872 and included articles written by Charles Darwin and Louis Pasteur, made but a ripple in the vast ocean of media evaporation. The year started with pink slips at Vox Media, publisher of New York Magazine. (Penske Media, owner of WWD, is the largest single shareholder at Vox.) BuzzFeed News, once viewed as the prototype for digital native news, was shuttered. Vice Media, an erstwhile Wall Street darling with a bloated evaluation, filed for bankruptcy. The New York Times last summer eliminated its once-storied sports section, bouncing dozens of writers and editors out of their jobs and announcing that it would instead rely on sports coverage from the writers at The Athletic, the digital vertical the Times acquired in 2022 for $550 million. Weeks later, Hearst Magazines rolled out its latest restructuring, which resulted in pink slips for more than 40 journalists, including at Elle and Seventeen.

Even NPR — a comparatively lean nonprofit — laid off more than 100 staffers and canceled a slew of programs and initiatives amid a budget shortfall of more than $30 million. And Condé Nast — the once-poster child for high-spending media conglomerates where staff at titles like Vogue, GQ and The New Yorker, among others, seemed to have endless expense accounts — in October revealed its latest workforce reduction of 5 percent (or about 300 employees), including at The New Yorker, which had heretofore escaped the downsizing that has plagued its sister magazines.

The current shake-up also resulted in the restructuring of Condé Nast Entertainment — the film and production studio created in 2011 to convert its journalism into entertainment projects. Its five branded studios — for The New Yorker, Vogue, Vanity Fair, Wired and GQ — remain, but the anticipated windfall from Hollywood mostly never materialized. Agnes Chu, the well-regarded Disney executive who was hired in 2020 to run Condé Nast Entertainment, exited the company amid the reorganization.

Meanwhile, newspapers, especially local papers, are on life support. About 2.5 a week closed last year and since 2005, nearly 2,900 of them have folded, according to the Medill School of Journalism, Media, Integrated Marketing Communications at Northwestern University. Their demise continues apace as the U.S. barrels toward a presidential election that could return Donald Trump, whose untruths were exhaustively documented by the media during his first volatile term, to the White House. During his presidency, Trump’s near-daily norm-busting was a boon for national news organizations. The Washington Post doubled the size of its newsroom in the years after Jeff Bezos bought the paper in 2013, and digital subscriptions tripled at the Post and The New York Times during Trump’s presidency. CNN, which breathlessly covered Trump’s 2016 campaign, saw record revenue during his term in office.

But so far, Trump’s current run for the top office in the land has not produced another so-called Trump bump. While the Times, which has invested heavily in apps and games, has added subscribers since Trump left office, the Post has weathered a subscriber exodus and, last December, it shuttered its Sunday style magazine after 30 years. CNN, which also weathered a rocky transition during parent Warner Bros.’ acquisition by Discovery, has seen its ratings and profits dip.

But legacy media has been in the throes of a contraction, and attempted reinvention, well before the current digital advertising downturn sent so much red ink spilling across balance sheets. The aspirations of Condé Nast Entertainment were in part a hedge against old revenue models. The Times has attempted to meet the moment by diversifying — snapping up Wirecutter and Wordle and investing in its Cooking app. The Wall Street Journal, which has maintained a paid-subscription model for its digital content from the outset, saw its digital-only subscribers grow by 10 percent in 2023 to 3.4 million.

There is still value in content and events that drive outsize interest; Barbie ($1.44 billion box office gross), the tours and subsequent concert films of Beyoncé and Taylor Swift, the spectacle of the Met Gala. It’s why Vogue’s Anna Wintour has poured resources into minting Vogue World as a new signature event that potentially can drive engagement and sponsor dollars. (This year’s Vogue World event will take place June 23 at Place Vendôme in Paris, a month ahead of the city’s hosting of the 2024 Summer Olympics.) In a year-end note, Journal parent Dow Jones claimed that WSJ Magazine cover stories on Travis Kelce, Angelina Jolie and Dave Hollis “drove a surge in digital subscriptions.” These big, zeitgeist-y moments are the antithesis of the current Substack model, where journalists can turn a profit by speaking to a small clutch of like-minded, paying subscribers because they have virtually no overhead.

But new media economics — e-commerce, affiliate revenue, viral social content, cutting costs to the bone — are not going to save legacy media.

Because the current scenario – thousands of employees, a top-down corporate infrastructure, hundreds of thousands of square feet of physical office space, an aging paying subscriber base supporting a product for which there is not enough demand — is probably not sustainable without even more retrenchment. The question for legacy media is how to consistently mint quality content that can be scaled into a profit-generating business that will thrive in a future that is sure to generate even more competition for consumer attention and dollars.

Unfortunately, all signs point to 2024 as another year of downsizing as legacy media attempts to find a manageable cost-benefit ratio. But perhaps 2024 will also be the year the industry begins to collectively emerge from its natural selection hangover. To paraphrase Charles Darwin, that onetime contributor to a magazine that last year became all but extinct, the world is a dangerous place and only those best adapted to their environment will survive.