WHARTON PRIVATE EQUITY & VENTURE CAPITAL Volume 1 / Issue 15
IN THIS ISSUE: 1. Uber: Exiting vs. Staying 2. Logistics Industry: M&A and Consolidation 3. Blackstone sells SeaWorld to Chinese investors 4. Hostess: Apollo’s Sweet Deal
Author WenTao Zhang Class of 2019 wentaozh@wharton.upenn.edu
EXITING UBER OR GOING THE EXTRA MILE? Benchmark Capital was one of the first investors in Uber, participating in the Series-A financing in 2011 and acquiring a 13% stake in the company for a $20 million investment. Now, after watching Uber suffer through 24 consecutive quarters of cash burn, managerial controversy, a power vacuum in the C-suite, and multiple lawsuits filed against Uber by the powerhouse venture capital fund, Benchmark Capital is considering exiting from Uber at more than 200 times its initial investment. It is no surprise that Benchmark Capital put the option of exiting Uber on the table. Managerially, Uber stands at the center of controversies surrounding labor regulation for its drivers, sexual harassment of app users, privacy concerns of riders, and dirty business tricks against its main competitor, Lyft. More recently, the company faced a PR crisis and a lawsuit from Alphabet claiming the ride-sharing app stole technology related to self-driving vehicles. All of this prompted ex-Uber CEO Travis Kalanick to resign in June 2017. Even though Uber replaced the CEO with ex-Expedia CEO Dara Khosrowshahi in late August 2017, most of its C-suite executive positions are still vacant. More concerning, Uber may be caught in the middle of a power struggle between Kalanick, Khosrowshahi, and outside investors. Travis Kalanick has the say on at least three of six new incoming directors coming on board, which brings his total influence on the board to at least six including himself. This means that while Khosrowshahi is commander-in-chief, the new CEO could face insubordination from his board. In response, Khosrowshahi has proposed slashing the number of board seats controlled by Kalanick and stripping supervoting rights - smells like a power struggle brewing. Financially, the company is bleeding cash, losing more than $700 million in its first quarter this year despite booking over $20 billion last year and owning around a fifth of the global taxi and limousine industry. Additionally, the company has recently raised capital from investors ranging from Saudi Arabia to Baidu to Softbank at valuations as high as $70 billion. This has led some investors to fear that Uber’s valuation is an over-inflating bubble and has stirred some doubt in the venture capital community. Even worse, the mismatch between investing and exit valuation caused by Softbank’s special investment valuation at $45 billion has put current Uber positions in difficult positions, as few investors are willing to invest at a $70 billion valuation and exit at a $45 billion valuation.
Evaluating Benchmark’s position from these two angles, it would seem like the venture capital fund is stuck between a rock and a hard place and would explain why Benchmark has been hesitant on staying on board or exiting. In my opinion, however, Benchmark should immediately liquidate its investment in Uber to protect itself from the potential downside of a significant drop in valuations. Currently, Benchmark stands to make at least
$5.8 billion from its exit (almost 200 times its initial investment) at the $45 billion valuation bid from Softbank. Sure, venture capitalists could claim that Uber will be worth more than $100 billion in a few years, but the potential upside does not justify the illiquidity and potential managerial and financial downsides and heated competition that Uber faces in the coming years.
LOGISTICS INDUSTRY: M&A ACTIVITY TODAY, CONSOLIDATION TOMORROW
Author Jose Roberto Delgado Class of 2018 delgj@wharton.upenn.edu
The logistics industry is significantly fragmented with a high percentage of family-owned firms, presenting numerous opportunities for acquisitions. The largest ten freight-forwarding firms account for 43.5% of the market’s $141 billion 2016 global revenues, suggesting there is plenty of room for more M&A activity. XPO Logistics has been the pioneer in this field, with eight major acquisitions in the last five years as well as ten smaller ones. XPO’s CEO Bradley Jacobs recently said that the company has about $8 billion ready to spend on takeovers after a two-year hiatus since buying France’s Norbert Dentressangle for $3.5 billion and Con-Way Inc for $3 billion. CEVA Logistics, owned by Apollo, has had a history of earnings trouble but has given stronger 2017 forecasts, making it a likely target. Geodis, a unit of France’s state-owned railway SNCF, acquired Tennessee-based OHL two years ago for $800 million, quadrupling its US revenues since. Kuehne + Nagel acquired US transportation broker Retrans in 2015 and is expected to accelerate its growing market shares in ocean and air cargo through acquisitions. Following acquisitions of Dutch trucker Fans Maa and Belgium’s ABX Logistics, Danish trucker and freight-forwarding firm DSV has been posting record results as it realizes the benefits of its $1.35 billion 2016 acquisition of California-based UTi Worldwide. Global Logistics Properties also agreed to acquire European logistics platform Gazely, along with 32 million square feet of gross leasable area in properties across four countries, for $2.8 billion as it continues to expand into Europe. Asian markets are also very attractive to logistics investors. Last year, four logistics operators went public and raised $1.4 billion with ZTO Express. Now, Best Inc, a Chinese logistics company backed by Alibaba Group, prepares to make its debut on the New York Stock Exchange as China’s e-commerce market is poised to grow at a CAGR of over 15% from 2016 to 2021. Similarly, Mapletree Logistics Trust raised $640 million through a private placement and preferential offering to its portfolio of over 100 logistics assets across Singapore, Japan, and Australia among other countries. India, in particular, is poised to benefit from trends related to logistics as well. Its manufacturing industry, as a percentage of GDP, is expected to grow to 25% in 2020 from 16.7% today, while the digitization of this market’s B2B trade is increasing rapidly. Logistics in India generally make up 12.5% of total supply chain costs, over 1.5x comparable developed economies despite its lower labor costs; this suggests its market is underserved by capacity and presents opportunities for companies to optimize systems. Moglix, for example, is a startup automating the supply chain of 200 large manufacturers and about 100 thousand SME’s in India. The logistics space is also expected to get a boost from the goods and service tax (GST) regime that will remove intercity checkpoints as well as from a 20 to 25% annual growth in the temperaturecontrolled logistics industry. This sector has attracted plenty of attention from private equity firms as well as real estate investors looking for opportunity in warehousing. For instance, Warbus Pincus invested $75 million in logistics services provider Rivigo and Stellar Value Chain last year, and $29 million in
Figure 1: India’s current and projected warehousing space
Ecom Express this year. Additionally, Carlyle Asia Partners IV led a $100 million funding round in ecommerce logistics company Delhivery for a minority stake. I believe that, in addition to M&A activity, technological innovations will disrupt the warehousing industry, and in turn, reshape the future of logistics. Additive manufacturing, or 3D printing, may begin to be adopted in this space and can result in major reductions to inventory sizes and streamlined inventory flow. Since Amazon bought robotics manufacturer KIVA in 2012, other warehouse-heavy companies have followed suit.
Given today’s driver shortage, several companies have also invested heavily in researching self-driving vehicles. For instance, truck manufacturer Freightliner has been developing self-driving trucks that are legal to deploy in Nevada and use a “platooning” system that allows driverless trucks to follow a human-driven lead semi. By acquiring smaller companies, larger players are able to benefit from economies of scale and vertical integration; add disruptive innovations to management's’ strategies and you find a powerful combination for growth. I look forward to seeing how consolidation in this sector plays out the next few years.
BLACKSTONE SELLS REMAINING STAKE IN SEAWORLD TO CHINESE INVESTMENT FIRMS
Author Suyash Hodawadekar Class of 2018 suyh@wharton.upenn.edu
On March 24th, Blackstone sold its stake in SeaWorld Entertainment Inc. for $448.5 million to Zhonghong Group, a Chinese holding company that focuses on opportunities in the leisure and tourism space. Prior to the sale, Blackstone was SeaWorld’s largest shareholders with 19.5 million shares. Zhonghong Group agreed to purchase Blackstone’s stake in the theme park for $23 per share, which represents a 33% premium from the previous day’s closing price of $17.31. SeaWorld Entertainment Inc. headquartered in Orlando, Florida, first opened its doors in 1964 and was owned by Anheuser-Busch prior to Blackstone’s acquisition of the theme park in 2009. The company was originally planned as an underwater restaurant, but the initial idea eventually grew into a marine zoological park. The first park was located on 21 acres along the shore of Mission Bay in San Diego and drew more than 400,000 visitors in its first year of operations. Since then, SeaWorld opened two more parks in Orlando and San Antonio. On December 1st, 2009, Blackstone acquired a 100% equity interest in SeaWorld Parks and Entertainment as well as SeaWorld LLC from Anheuser-Busch Companies for $2.7 billion. In 2011 and 2012, Blackstone performed a dividend recapitalization and received a total of $610 million in dividends from the theme park. In 2013, Blackstone was considering potential exit strategies. The private equity giant received offers from Apollo Global Management, Onex Corp., and Six Flags, but Blackstone ultimately decided to pursue an IPO exit strategy. In April 2013, SeaWorld sold 26 million shares at $27 per share. The main reason Blackstone chose not to sell its entire stake was that the firm expected the IPO to yield better returns than a sale at the time. Shortly after SeaWorld’s IPO, the infamous documentary Blackfish was released, which highlighted the inhumane treatment of the park’s killer whales and flawed safety protocols of the theme park. As a result of the negative publicity, the stock dropped from a high of $38.88 shortly after the company’s IPO to an all-time low of $12.15 in September 2016. In addition to negative publicity reducing foot traffic in its theme parks, SeaWorld also faced legislative pressures. In May 2016, SeaWorld announced that it would no longer breed killer whales as a result of California legislation that banned captive breeding. After further pressure from animal advocates, SeaWorld announced that it would end its orca shows in San Diego. In addition, the company would end the orca shows at its Florida and Texas theme parks in 2019. Moving forward, SeaWorld plans to pivot from orca shows to natural orca encounters. While the remaining orcas stay in captivity, SeaWorld plans to focus on orca enrichment and overall health to maintain a positive public image. Nevertheless, Blackstone’s investment in SeaWorld has been profitable overall with the private equity giant nearly tripling its original investment. On March 24th, Zhonghong Group acquired a 21% stake in SeaWorld from Blackstone. The sale is one of the many Chinese acquisitions in the western entertainment
space. For example, Dalian Wanda Group, China’s largest commercial property owner and the world’s largest cinema chain operator, acquired AMC Entertainment and Legendary Entertainment Group in 2012 and 2016, respectively. Zhonghong Group has plans to partner with SeaWorld to develop and design theme parks in China, Hong Kong, Taiwan, and Macau. An Asian expansion would be ideal for the SeaWorld, and Zhonghong Group has a strong management team with experience in theme
parks, family entertainment, and real estate development in Asia. SeaWorld will add two extra seats to its existing Board consisting of 9 members to accommodate for two Zhonghong executives. A provision of the agreement was that the Chinese investment firm cannot own more than a 24.9% equity interest in SeaWorld without the approval of independent directors. Moving forward, the sale could be the pivotal catalyst that enhances SeaWorld’s financial performance.
HOSTESS: APOLLO’S SWEET DEAL
Author Armghan Ahmad Class of 2019 armghana@wharton.upenn.edu
$59.99. That’s how much a box of Twinkies sold for in November of 2012, when the fate of Hostess Brands, the maker of the iconic snack food, seemed to be hurtling towards extinction. In 2013, along with Dean Metropoulos—a Greek businessman and investor with a track record in the food industry— Apollo bought the Hostess brand for $410 million, of which the two parties invested approximately $200 million of equity and raised debt for the remaining $210 million. Today, the company has a market value of $2.1 billion and is projected to have earnings of $235 million in 2017—up from a loss of $5 million in 2013. Apollo and co-investors Metropoulos & Co and Gores Group (which brought Hostess to IPO late last year) recently announced that they would be cutting their stake in the business through a public offering. Apollo will cut its ownership to 2.6 percent, Metropoulos to 24.9 percent, and Gores will reduce its holdings to 12.8 percent. At $15.25 a share, the offering represents a 7.5% discount from the Hostess all-time high set in March of this year, and stays level with Apollo and Metropoulos’ return of 13x their cash investment. The business turnaround of Hostess rested upon several factors; upon acquisition, Apollo and Metropoulos leveraged the classic Hostess brand, doubled product shelf life, and overhauled its expensive direct-to-store delivery system to return the company to profitability. Most importantly though, the owners renegotiated labor contracts and trimmed operations— reducing the workforce by nearly 85%—to cut costs and increase efficiencies. Consider the fact that an automated production line staffed by 10 workers in Emporia, Kansas, produces 95 percent of America’s Twinkies. The initial rumors are true; it is not illegal workers, or China, or regulatory law that is keeping jobs out of the hands of US workers. It is automation, which makes it even more difficult to buy into the President’s promise to ‘create a manufacturing boom’ in this country. Bluster can win elections, we have seen, but it certainly cannot create jobs.
Figure 2: Retail sales of natural and organic foods
What is also interesting to consider is the changing tastes of the American consumer and the food landscape; healthier foods are more popular than ever and the shunning of salty, sweet, and fatty foods has never been more vocal or prominent. And yet—sales of Twinkies and other Hostess snacks are up 13% in the past year. For Apollo, the Twinkie craze has certainly proved to be a profitable one. But in the greater picture, how much longer will Hostess be able to sustain its growth? The healthy-foods market, for lack of a better term, has been
growing at an annual rate of nearly 6% in the US— outpacing the entire food and beverage market and is globally expected to cross the $1 trillion mark this year. Coupled with growing consumer disenchantment with fast food and traditional snack foods, the viability of a brand like Hostess—that relies entirely on fattening, sugary sweets for its business, is questionable. Time will tell whether Hostess can continue to prevail in a changing market or will wind up back where it was when Apollo picked it up.
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