TheChek News Flow

The NFL is asking for a 100% increase in TV rights payments, but Disney is pushing back

• The NFL wants a 100% price increase from its network league partners, sources say.
• Negotiations are actively underway with NBC, CBS, Fox and Disney -- which owns both ESPN and ABC.
• Disney has already rejected a 100% increase, citing the high price tag it already pays for Monday Night Football relative to other packages, sources say.

The NFL is in active discussions on renewal rates with all four of its existing network partners — NBC, CBS, Fox, and Disney-owned ESPN, according to people familiar with the matter. The NFL is hoping to get its primary package renewals completed by March 17, before the start of the new NFL league year, CNBC reported earlier this month.

NBC, CBS and Fox are likely to accept increases closer to 100% than Disney, which is currently paying much more than the three broadcast networks for its Monday Night Football package, said the people, who asked not to be named because the negotiations are private.

Disney agreed to pay $1.9 billion annually for Monday Night Football in 2011 — a deal that runs through 2021. That dwarfed the average $1.1 billion annual cost for Fox, $1 billion annual price tag for CBS and $960 million for NBC’s Sunday Night Football.

Disney has already rejected paying anywhere close to $3.8 billion per year for its new deal, said two of the people. Disney CEO Bob Chapek alluded to pushing back on the NFL’s asking price during his company’s earnings conference call last week.

“We’re looking at the long-term trends of sports viewership,” Chapek said on Feb. 11. “We’ve had a long relationship with the NFL. If there’s a deal that will be accretive to shareholder value, we will certainly entertain that and look at that. But our first filter will be to say whether it makes sense for shareholder value going forward.”

NFL games have been the most watched programming on television for many years. The top five broadcasts of 2020 were all NFL games. But there’s been a concerning decline among younger audiences, as evidenced by a decade-long decline in Super Bowl ratings among 18-to-49-year-olds.

Disney’s negotiation

Disney’s Monday Night Football deal is for more than just the games. Disney also gets highlight rights for ESPN, branding rights for shows, and — importantly — streaming rights.

The league has asked Disney to pay the same type of increase as its other partners because Disney is asking for more from the NFL this time around — including double-header Monday Night games, where one game airs on ABC, the Disney-owned broadcast network, the people said. Disney also wants ABC to become part of the Super Bowl rotation with NBC, CBS and Fox. ABC was the home of Monday Night Football until 2005.

Disney also wants flexibility in terms of streaming rights as the company considers selling ESPN as a direct-to-consumer product. The NFL plans to include streaming rights as part of each network package, the people said.

Further, the NFL wants to add an 18th week of regular-season play as soon as next season. That’s an extra game for Disney — and every other broadcast partner.

Spokespeople for the NFL and the networks declined to comment.

Valentino was sued on Friday for $207.1 million by the landlord of its former American flagship on Manhattan’s Fifth Avenue, which said the Italian fashion company had no right to break its lease and leave the store in disrepair.

The RealReal reports fourth-quarter results on Feb. 22; Farfetch and Mytheresa report on Feb. 25

Both companies say they are on track to become profitable, Farfetch as soon as this year

Several digital competitors have gone public or plan to this year, including Poshmark, Thredup and Mytheresa

The RealReal and Farfetch were at the vanguard of the last wave of fashion technology IPOs, selling investors on the idea that the luxury sector was ready to embrace resale and Amazon-style e-commerce. Both have largely succeeded in making their case, with shares of the two companies trading near record highs as sales soared during the pandemic. The final piece of the puzzle is turning a profit. Farfetch says it will be in the black by year’s end, while The RealReal has longer to go, potentially needing to double annual revenue to $2 billion first, according to Cowen.

The clock is ticking, as both companies have seen profitable rivals (Poshmark in resale, Mytheresa in e-commerce) stage IPOs this year. The RealReal is opening stores – a good way to secure access to the best secondhand inventory – and taking other steps to distinguish itself as rivals like Vestiaire Collective forge partnerships with luxury brands. Farfetch has its joint venture with Alibaba and Richemont, plus its brand factory, New Guards Group.

The Bottom Line: Both companies need to keep an eye on the competition, even with their commanding head starts in their respective markets. Consumers have more choices for fashion marketplaces and resale sites than ever, even if few are as big or well-funded.

... AND ITS BRICK-AND-MORTAR PAST

Macy’s reports fourth-quarter results on Feb. 23; Victoria’s Secret owner L Brands on Feb. 24

L Brands is expected to split Victoria’s Secret from Bath & Body Works later this year

Macy’s is closing stores and testing smaller locations outside malls

For this pair of ailing mall fixtures, it’s all about changing the narrative. L Brands is further along in that respect. Victoria’s Secret has new leadership, new marketing and, soon, a new swimwear collection. Sales were better than expected last quarter, and newfound price discipline boosted profits. This strategy is geared toward getting the brand in good shape financially ahead of a potential spinoff later this year. Meanwhile, Macy’s is attempting to shed its image as an anchor to dying malls, testing small store concepts with “Market by Macy’s” and “Bloomie’s,” and closing dozens of underperforming locations. For now, though, the chain’s fate remains tied to shopping centres, and therefore to a speedy vaccine rollout.

The Bottom Line: The focus at both brands has been to update outdated and bloated store networks. But their success likely hinges on pairing healthier brick and mortar with a robust online presence. Look for more details on that front this week.

This week, everyone will be talking about who is, and isn’t, showing at Milan Fashion Week, plus financial results from some of the biggest new and old retail names.

Milan Fashion Week runs Feb. 23 through March 1 with mostly digital shows

Kering’s Gucci and Bottega Veneta are not on the schedule

Versace will show its fall collection digitally on March 5

It was at Milan Fashion Week one year ago that the coronavirus burst onto Europe’s fashion scene. Giorgio Armani’s decision not to hold his scheduled runway show was the first in what would quickly become many cancellations and closures. Two seasons later, nobody blinks an eye at Milan’s schedule of mostly digital shows. One can even begin to detect some patterns: namely that Gucci and Bottega Veneta once again are not on the calendar. The brands have given their own reasons, but the fact that they are both in the Kering portfolio, as are Paris dropouts Balenciaga, Saint Laurent and Alexander Mcqueen, raises the likelihood this is part of a broader corporate strategy.

Is skipping fashion week the right call for Kering? Gucci’s declining sales indicate the label is still struggling to convey to consumers what will succeed the maximalism of the last few years. The tourists whose spending supported the brand in the past are also sorely missed. Meanwhile, Bottega continues to grow, if not at quite the hectic pace of previous quarters.

The Bottom Line: In the past, designers (including Gucci’s Alessandro Michele and Bottega Veneta’s Daniel Lee) have used fashion week to make exactly the sort of radical statement needed to jolt their brand out of a funk. It remains to be seen whether film festivals or social media stunts will have the same effect.

Tycoons in the region put money into U.S. blank-check companies as major local stock exchanges haven’t allowed such listings

Thousands of miles from Wall Street, the boom in blank-check companies is taking hold in a region where major stock exchanges don’t let firms raise money for unspecified uses.

In mainland China, Hong Kong and Singapore, investment firms controlled by tycoons and money managers have collectively raised billions of dollars on the New York Stock Exchange and Nasdaq Stock Market over the past year via special-purpose acquisition vehicles, showing how far-reaching the SPAC boom has been.

The vehicles are publicly listed shell companies with ready pools of cash to invest in—and merge with—private businesses. They have been touted by investment bankers as an easier way for startups to go public. If a SPAC fails to find a merger target by a deadline, typically two years, investors could take their money back.

As of Feb. 18, eight SPACs sponsored by companies in Asia raised a total of $2.3 billion this year, according to Dealogic data. The sum is small relative to what has been raised by American companies, but it already surpassed the total raised from SPACs in the region for all of 2020. Bankers say more issuances are likely, including from private-equity groups.

“This is a compelling pocket of capital that all the large private-equity and venture firms in Asia will be considering,” said Udhay Furtado, co-head of Asia equity capital markets at Citigroup Inc.

Recent deals have included the $360 million NYSE listing of Primavera Capital Acquisition Corp. , backed by a private-equity firm founded by Fred Hu, a former chairman of Goldman Sachs Group Inc.’s Greater China business. Other backers of blank-check vehicles include Hong Kong billionaire Richard Li, who is a son of tycoon Li Ka-shing, and Chinese rainmaker Fang Fenglei.

They have all flocked to the U.S.—where investors are plowing money into blank-check firms—because larger exchanges in Asia haven’t allowed such companies to list. The Singapore Exchange is considering a public consultation to allow SPAC listings after previously examining the issue in 2010.

The exuberance has sparked debates among private-equity investors and investment bankers about whether the trend will continue and whether there will be enough suitable targets to be merged with if the pace of fundraising continues. Most Asia-sponsored SPACs are aiming to merge with regional businesses or multinationals that plan to grow in the region.

“People are noticing and watching,” said Raghav Maliah, co-head of M&A in Asia, excluding Japan, at Goldman Sachs. He said the test will be whether the companies can successfully “de-SPAC,” a term used to describe their eventual acquisitions of operating businesses.

“If so, then as with everything, success begets success. If not, that could be a setback for the overall asset class,” Mr. Maliah added.

So far, Asian companies that went public via SPACs in the U.S. have largely underwhelmed investors. One of the largest such mergers was the $1.4 billion listing of United Family Healthcare. A high-end private hospital chain in China, the company went public on the NYSE in December 2019 via a SPAC issued by New Frontier Group, an investment firm led by former Hong Kong financial secretary Antony Leung.

For more than a year, shares of New Frontier Health, the merged entity, traded below the $10-per-share price that they were originally sold at, a sign the deal hadn’t been well received by investors. Last week, the company said a consortium led by Mr. Leung planned to take it private, sending the stock price above $11.

David Zeng, managing director of New Frontier Group, said that the firm “strives to create value [for] the investors/shareholders” and the proposed buyout would provide a 32.5% return for those who invested in the original blank-check IPO.

When targeting Asia-based companies, SPACs face additional challenges. “One of the biggest obstacles is overcoming U.S. investors’ concerns about the impact of geopolitical tensions on issues such as trade and technology transfer,” said David Shen, managing director of Olympus Capital Asia, which in January raised $130 million to invest in American companies that intend to expand in the region.

The rapid growth of SPACs has also raised concerns, among even those who believe in the value of these vehicles as a source of capital and investment, about overpriced deals or a lack of suitable targets.

“There’s a little bit of fear [about SPACs] because this is too new for some people and has grown too fast,” said Joaquin Rodriguez Torres, Hong Kong-based managing partner at private-equity firm Princeville Capital, which raised $300 million last month on the Nasdaq and is targeting technology businesses in Europe and Asia.

Benjamin Kwasnick, founder of SPAC Research, said there were 335 SPACs listed in the US. He said they had collectively raised more than $100 billion, which was parked in so-called trust accounts.

“SPACs typically look for companies at least three to five times the amount of cash in their trust account, so that could mean at least $300 billion-$500 billion worth of enterprise value taken public from the current crop of SPACs,” he said.

In Asia, Goldman’s Mr. Maliah estimates roughly 400 to 500 companies are looking to list in the next two to three years. Some startups could opt for a SPAC merger as a way to go public more quickly.

China tightens online lending rules in fresh blow to Jack Ma’s Ant Group

Tech platforms will be forced to provide capital for 30% of the loans they offer in partnership with banks

China’s banking regulator has tightened rules governing how online lending platforms fund their loans, a move that analysts say could hit the valuation of Jack Ma’s Ant Group.

Under the rule changes announced over the weekend by the China Banking and Insurance Regulatory Commission, online lending platforms will have to contribute 30 per cent of the funding for loans they offer in partnership with banks.

The CBIRC will also cap how much capital commercial banks can commit to online lending in co-operation with tech platforms. The new rules will come into force next year.

The draft of the new regulations released late last year caused Chinese tech stocks to tumble, and was one of the catalysts for the abrupt cancellation of the proposed $37bn listing of Alibaba’s online payments and lending arm, Ant Group, in Hong Kong and Shanghai.

Ant, which uses algorithms to determine the loans individuals are eligible for, is set to come under even more valuation pressure due to the new rules, experts said.

Wong Kok Hoi, the founder of APS Asset Management, said the rules were likely to force the current scale of fintech loans to "contract significantly" in China and the changes could force the companies to operate more like commercial banks. "Ant’s business model will need to be drastically revamped," he said.

“This will raise financing costs for consumers and will cripple one of the fastest-growing business segments for Ant, almost certainly forcing a steep drop in its eventual valuation,” said Michael Pettis, finance professor at Peking University.

Bruce Pang, head of macro and strategy research at China Renaissance Securities, said the new rules meant banks would be required to cap the joint lending business they carry out with these fintech companies. Some of the fintechs would also need to seek new licenses.

“Online lending platforms could face more valuation pressure with dampened growth prospects, considering that they would have to raise more capital to fund [themselves] in joint loans with banks,” Pang said.

Before these new regulations on capital contributions, Ant had been funding only 2 per cent of its hundred of billions of dollars in consumer loans with most of the remainder coming from partner banks.

Ant’s listing would have been the world’s largest and was suspended just days before it was due to start trading.

The company’s Alipay app, which is used for payments, loans, and insurance, has more than 700m monthly users.

The cancellation was also seen as political, and came after Ma, Ant’s founder, had publicly criticised Chinese regulators.

Since then, the company has reached a deal with Chinese regulators to restructure its business, which would involve Ant placing all of its major businesses, including its technology units, inside a financial holding company.

The squeeze on Ant has pushed Chinese borrowers towards alternative lending platforms, many of which charge higher interest rates because they lack Ant’s economies of scale and have less sophisticated systems to identify and manage risk.

Regulators have in recent months taken a harsher stance against the nation’s burgeoning private fintech companies in official statements.

Ant Group declined to comment.

Companies may no longer be able to profit from grey areas in employment law

Move fast and break things, runs a Silicon Valley aphorism. In Uber’s case, one of those things turned out to be British employment law. The UK Supreme Court on Friday dismissed an appeal by the taxi booking app against a lower court’s judgment that its drivers should be classified as “workers” rather than self-employed. That grants them the entitlement to holiday pay, sick pay and the minimum wage. The decision strikes not only at the heart of the company’s business model but the gig economy generally.

This is by no means the first case that Uber has lost. In California, courts similarly backed the idea that drivers using the service ought to be classed as employed by the company rather than independent contractors — though this was weakened by a referendum. In the UK, the question rested on the degree of control the company enjoys over drivers. Lord George Legatt, who wrote the Supreme Court’s unanimous ruling, said “the question . . . is not whether the system of control operated by Uber is in its commercial interests, but whether it places drivers in a position of subordination to Uber. It plainly does.”

The judgment, however, rests on specific facts about the relationship between Uber and its employees. The court asserted that Uber set maximum fares, drivers had no say in their contracts and the application imposed penalties if drivers cancelled too many requests. This level of control meant drivers could not increase their income using “professional or entrepreneurial skill”, the court concluded, meaning they worked for Uber and not themselves.

It remains to be seen how Uber will react and whether it can tweak the platform so that it reduces this control, allowing drivers to be genuinely self-employed. If it does so, however, it will mean the taxi booking app will be less able to guarantee a uniform service. The alternative would mean raising prices to cover the additional costs associated with conforming to the law. Either way, the company's business model in the UK — London is one of its few profitable markets worldwide — will have to change.

The principles behind the judgment should also worry other gig economy businesses and their investors. Start-ups that want to control their workers and guarantee a particular kind of service will in exchange have to provide them with sick pay, holiday pay and the minimum wage. That will raise costs and reduce returns. The days of profiting from ambiguity in UK employment law could come to an end. 

Ultimately, however, the judgment is an indictment not of UK employment law but its enforcement. It took five years for the drivers to get justice. In addition to the harm done to workers, potential competitors to Uber who played by the rules may have struggled in the interim — penalised by the unfair competition. The impact of the decision may be piecemeal too: workers at other companies will have to bring their own cases and cite the decision as precedent. In the short term, many will not enjoy all their legal rights.

Britain needs to take a wider look at how it regulates the labour market as novel forms of work proliferate — delivery drivers have been one of the few professions to see their ranks swell during the pandemic. It also needs to take a more proactive approach to enforcing the laws that exist; every court has agreed with the Supreme Court’s interpretation but no agency proactively sought to enforce it. The government’s recently created position of director of labour market enforcement is soon to be vacant. The government must move fast to fill it.

Day trading has exploded among a new generation of retail investors —and U.K.-based online platform IG Group Holdings (ticker: IGG.UK) is hoping to catch the wave.

In its biggest acquisition ever, IG is spending $1 billion to buy Chicago-based Tastytrade. The financial network offers online streaming of market commentary and trading strategies on its own website and other platforms, while its Tastyworks brokerage arm gives clients the ability to trade stocks, options, futures, and cryptocurrencies.

The deal is the first big strategic move by June Felix, who took over from Peter Hetherington as chief executive officer of FTSE 250–listed IG Group in 2018. The question for investors is whether the acquisition comes near the top of a short-lived Covid-inspired boom in trading at home, or hitches IG to a long-term shift in how retail investors engage as traders.

“We are confident that there is a long-term shift in self-directed investing and trading. The U.S. is a critical market with big promise, and Tastytrade is a high-margin, high-growth business established by trading veterans with a record,” Felix tells Barron’s.

The market is certainly hot: Amateur traders stuck at home for months have embraced not only stock trading but also plunged into riskier options bets, helping to drive volume to record levels in 2020 while inflicting losses on a string of sophisticated hedge funds.

U.S. options trading hit its highest volume month ever in December, according to Jefferies, and that pace has continued in January. The market has expanded at a 24% compound annual growth rate since 2017, with Tastytrade increasing at three times the market over the same period.

The U.S. currently makes up about 4% of IG’s sales, but Tastytrade is expected to make it the group’s second-largest market. It will also add listed futures and options to IG, and has already added foreign-exchange trading.

IG was founded in 1974 by Stuart Wheeler, who died last year at age 85. The company allowed small investors to bet on commodities, currencies, stock indexes, and sports. It listed on the London Stock Exchange in 2000 and now has a market value of almost 2.9 billion pounds sterling ($4 billion).

Analysts have concerns about the price IG paid for Tastytrade, and investors also seem unconvinced about the deal: IG shares dropped as much as 9% on the day the deal was announced, though the stock is still up more than 12% over the past year. Tastytrade’s valuation looks full, at 18 times historic earnings before interest, tax, depreciation, and amortization, or Ebitda, “in what is likely to have been a year of supernormal earnings,” Shore Capital analyst Vivek Raja wrote in a recent research note.

IG trades at about 8.5 times historic earnings per share, and its U.K. rival CMC Markets (CMCX.UK) at less than seven times historic earnings.

There are other risks: Tastytrade will diversify IG’s business, but will subject the company to additional U.S. regulatory supervision, said analysts at credit-ratings firm Fitch Group.

“We are comfortable with the valuation. If you look at the intrinsic growth of Tastytrade, it has excellent potential and there are clear synergies which we have not yet outlined,” Felix says.

Market volatility helped drive up IG’s trading volumes and client base. The number of IG’s active clients rose 55% to 238,600 in the six months to Nov. 30.

“We can’t control the market and we can’t control volatility. But we can attract the right clients,” Felix notes.