☀️☕ Skinny Mickey... Activist Investor wins at Disney

10 February 2023

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📝 Focus

• Skinny Mickey... Activist Investor wins at Disney

📊 In the Markets

• Affirm: Buy Now, Pay Never?

• Cracking Kraken: stopping staking

📝 Focus

Skinny Mickey... Activist Investor wins at Disney

Besides Disney's smaller-than-expected drop in streaming subscribers and better-than-expected earnings, Wall Street cheered the entertainment company’s announcement that it would be slashing 7,000 jobs as part of a broader cost-cutting and restructuring plan. This would save US$5.5 billion (of which $3bn would come from reduced content creation), allowing dividend payments to be restarted and increase from there.

This is seen as validation of famed activist investor 🎓 Nelson Peltz's view of the company, despite Disney's aggressive rejection only last month of his bid for a seat on the board and, through a potential "proxy fight", control of the company. ​“Peltz has no track record in large cap media or tech, no solutions to offer for the evolving media landscape.”

Peltz has now called off the proxy fight with the Disney board. Disney shares are up 18% since he announced his intention to join the board less than a month ago, saying that “Trian believes that Disney’s recent performance reflects the hard truth that it is a company in crisis with many challenges weighing on investor sentiment” and that Disney had a “balance sheet from hell.”

Trian, which owns less than a 5% stake in Disney, had taken a stake valued then at US$900 million and was especially critical of management overpaying in its 2018 acquisition of the assets of 21st Century Fox for US$71bn and hopeless succession planning.

Bob Iger's earlier stint at the company involved first scooping up mega-franchises Pixar in 2006 for $7bn, Marvel in 2009 for $4bn, and Lucasfilm in 2012 for $4bn and then kicking off the massive eight-way streaming wars, which lost every one of the players other than Netflix massive amounts of money on creating premium content (and which supporters say Disney had no choice in, given Netflix's increasing power in the industry.)

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📊 In the Markets

Typically, Wall Street cheers as normal people in the broader economy lose their jobs. But overnight, after a bright start to the day on some better-than-expected earnings from Siemens, AstraZeneca, Pepsico and Disney, even (very slightly) higher than expected new job losses couldn't stem a steady slide into the close as US government bond yields went up on weak demand for a US$21 billion sale of 30-year Treasurys. (Yields, which go up when bond prices go down, are the interest rate you get at a particular price.) For investors, higher yielding, zero-risk bonds, as US government bonds are seen to be (ignoring debt ceiling issues!), are viable alternatives to shares.

Affirm: Buy Now, Pay Never?

Affirm, the buy now pay later giant, dropped 17% after announcing an earnings and revenue miss and the immediate sacking of 500 people or 19% of its workforce (“the single most difficult one” of all the cuts the CEO chose to make.) Affirm Crypto was also shut down.

Company guidance was also below expectations, with founder and CEO Max Levchin saying that they'd been boosting staff numbers ahead of actually growing revenues, but were killed by climbing financing costs from the Fed's rate hikes all last year. For the 3 months ending March, revenue is projected to be $360M to $380M, while highly-paid Wall Street analysts had been expecting $418M.

Buy Now Pay Later (BNPL) - a mini-explainer

• BNPL schemes allow consumers to purchase goods and services at the point of sale and pay for them later, usually in 3-4 instalments, with no interest charges and a soft credit check.

• These schemes appeal to consumers with a limited credit history or lower credit scores and hence are at higher risk for late or missed payments. These lead to large late fees (but not interest charges) and can cause financial difficulties and a cycle of debt, leading to comparison with controversial payday loans.

• While not technically considered debt (for now), they can still impact credit scores as missed or late payments may be reported, and can count against your credit utilisation rate. Regulators are circling.

Cracking Kraken: stopping staking

Prominent crypto exchange Kraken has coughed up US$30 million in a settlement with the SEC and will shut down its on-chain staking service for US customers while keeping it going elsewhere. This is likely part of a broader crackdown on the practice by the SEC as crypto asset-lending schemes are seen as securities offerings, and therefore need to be registered as such.

Staking involves an owner transferring their crypto tokens to a wallet run by a staking service for a certain period of time in return for some outsize returns ranging from mid-single digits to well over 100% (!) on an annualised basis. (Kraken's offered up to 21%.) Conceptually, they are used to validate and secure a blockchain network, thereby helping to increase the number of tokens created, the "inflation rate", itself driven --in theory-- by the "real-time utility of a network", i.e. its actual use cases and the demand for its services.

SEC chief Gary Gensler said, “Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection... When a company or platform offers you these kinds of returns, whether they call their services 'lending,' 'earn,' 'rewards,' 'APY,' or 'staking' - that relationship should come with the protections of the federal securities laws."

The SEC - a mini-explainer

• The Securities and Exchange Commission (SEC) is the US government agency that regulates the securities markets to ensure that investors are protected from fraud, insider trading and other activities designed to rip them off, both by the companies they invest in as well as by other traders and investors.

• It regulates the key players in the securities industry, including exchanges, broker / dealers, advisers, funds, and rating agencies. Many of them may have a financial incentive to defraud or otherwise rip off their own and other investors, so as much oversight as possible is needed without preventing them from doing legitimate business.