Monday, February 27, 2017

Softbank.....The Art of Self-Dealing......

As most of you, my loyal readers, have come to know, and hopefully love about this blog, I really enjoy getting into the nitty-gritty when it comes to analyzing what I deem to be "fake news" style financial press releases.

Given the above, today I'd like to train my sights on the fiscal third quarter 12/31/16 Softbank earnings announcement  recently released on February 8th, as well as related developments.  Here's the headline:

"SoftBank Group Corp. on Wednesday reported a 71% jump in operating profit for its fiscal third quarter as turnaround efforts at Sprint Corp. took hold.......The earnings report comes as Sprint's turnaround efforts appear to be gaining traction. The U.S. mobile carrier bought by SoftBank for $22 billion in 2013 narrowed its loss in its fiscal third quarter and continued to increase its customer base,"

Well, I guess that's one way to look at it.  On the other hand, "losing less" money is not nearly as profitable as "making more" money.

Many of you are familiar with my initial review of Softbank from September of 2015 entitled Anatomy of a Financial Contagion and Kayaking the Chicago Wilderness.  If you have a few minutes, I'd encourage you to reread the post to get a feel for what we're talking about today.  Of course, with a fast moving (some might say spasmodic) business like Softbank you have to expect some disruption.  In just a year and a half, the business units have changed dramatically.  Softbank "invests" in some 1,300 diverse tech companies, most of which nobody has ever heard of, but the financial/philosophical direction and accounting methodology, like an addicted junkie, secretly pawning his wife's jewelry to feed his habit, has remained frighteningly consistent.  Let's put aside the past for a moment, like Mr. Son's losing $70 billion of investor's money in one day during the bursting of the dot.com bubble, or threatening to set himself on fire in a regulatory meeting (luckily, he forgot to bring the gasoline....he's never been much for details).  Let's focus on how he has made an incredible career out of his "money is no object" motivated management style, jumping from one high priced "shiny ball" to the next. Softbank Investors, at their own peril, continue to hope that Mr. Son has grown and learned from his mistakes, and truly is capable of discerning real, visionary value where the rest of the world sees none (or at least much less).  As you might conclude after reading this post, no matter how you slice it, Masa Son is now and will always be the grand master of futuristic techno-hype, able to convince the world that the "happiness" he continues to spread can somehow go on forever.  I guess we'll see.....

Today, Softbank's Market Cap is about US$86 Billion with a P/E of 30 (Book value of US$37 Billion).  Its Balance Sheet is a home for US$229 Billion in assets (book value) of which US$133 Billion (58%) are, by my definition, "Questionable Assets" (Goodwill, Intangibles and Investments in "Investees").  The table below describes the change in these assets in the most recent quarter from prior and how theses increases were financed.  I've also included a thumbnail analysis of major components of Net Income for the Quarters Ending September 30th and December 31st, 2016.  Keep in mind that the US$17 Billion "Questionable Asset" increase for the 12/31/16 Quarter is on top of the US$32 Billion Goodwill increase from the ARM acquisition in the 9/30/16 Quarter.





































Obviously, this was a busy six months for the Softbank finance department.  A couple of things absolutely jump out at us.

1.) Segment income actually declined by US$ 400 million from the prior quarter. (pg 44 & pg. 52 of the respective reports.)

2.) The ARM acquisition, at least in the December quarter, is contributing about 10% of Segment Income.  When we apply financing costs to the US$ 32.7 Billion acquisition price, the business is barely covering the cost to finance the acquisition.  Even a small rise in interest rates would make the ARM acquisition a loser with negative cash flow.

3.) Net Income in the 12/31/16 quarter was comprised substantially of the US$ 1.2 Billion of "fake" Alibaba equity-method income.

4.) Net Income for the 9/30/16 quarter was comprised primarily of the US$800 Million of "fake" Alibaba equity-method income and the US $4.6 Billion gain  on the sale of Supercel and Alibaba stock.

5.) Oddly, nowhere in either the 3/31/16 Annual report or any of the quarterly reports, does Softbank disclose the Balance Sheet carrying value of the Alibaba shares they hold.  The only thing we know with certainty is that the Alibaba share value is a major component of the JPY 1.55 Trillion (US$14.4 Billion) "Investments - Equity Method" line item on the balance sheet.

6.) Other Financial Assets increased by US$5.3 Billion during the quarter.  The entire explanation for the increase is shown on page 20 of the Report "The Company made additional investments into existing investees and newly acquired investment securities."  That's it?....So a US$5.3 Billion long-term "Investment" over three (3) months doesn't even warrant a footnote describing what it is? Really?  After going into a painful, irrelevant three page discussion (Pg. 9) on Churn Rate, Subscriptions, Bundling, ARPU and phones sold....there wasn't any space left to tell us what boondoggles they've "Invested" $5.3 Billion in?  Could this be where they booked the already owned Alibaba Shares pledged as collateral and "transferred" to "West Raptor Holdings"?  If it is, why don't they just say so?  I'm aghast....

Let the Games Begin!

Just about everything the gang in the Softbank Finance Department does is geared to 1.) Goosing Earnings and 2.) Disguising Leverage and finding creative ways to finance this mess.  Here are a couple of examples that immediately come to mind

The ARM Purchase

The ARM business provides designs of microprocessor intellectual property and related technology, as well as the sale of software tools.

The details of Softbank's purchase of ARM is described on pg. 49-51 of the Financial Report for the   9/30/16 Quarter.  Softbank paid US$32.7 Billion for US$1.5 Billion of "hard assets" assets, properly booking the remainder of the purchase price as Goodwill.  Based on a simple extrapolation of the 12/31/16 Segment Income of US$266 Million (US$1.1 Billion/yr.) and applying a financing cost (US$980 Million - 3% of $32.7 Billion) we can estimate, the business earns US$ 120 Million/yr.  or a calculated (P/E ratio of 272).  In other words, it will take 272 years to generate earnings equivalent to the purchase price.  Softbank Investors can only hope that Masa Son's crystal ball continues its pin-point accuracy and ARM, despite intense competition and myriad unknown-unknowns, quickly becomes the master-super-engine of the Internet of Things.

Moreover, ARM's profitability might be difficult to compare to prior periods since, on completion of the acquisition, in an obvious effort to "goose" earnings, the first step the Softbank finance department took was to "improve" the accounting method, accelerating royalty income as described on page 17 of the QE 9/30/16 Report.

"Following the Company’s acquisition of ARM, ARM has changed its accounting policy for recognition of royalty revenues. Since the change, ARM accrues the royalty revenue in the same quarter the chips are shipped by ARM’s licensees, based on estimates."  

In case you were unaware, we accountants always enjoy having the latitude to base our revenue recognition on estimates.  It gives us more flexibility and we can't possibly be wrong....after all, it's an estimate.  To be sure, there's nothing improper about this accounting change, the only reason I mentioned it is that it's yet another example of a change buried in the financials intended to "improve" results when the economic situation of the underlying business remains the same. 

Sale & Lease-Back of Phone Equipment

The Sale & Lease-Back of phones with a joint venture is described on pg 45 of the QE 12/31/16 Financial Report.  This scheme is yet another device to raise cash and move liabilities and assets off the balance sheet.  Again, there's not enough disclosed, but you can bet that contractually Softbank remains responsible for the collect-ability of the leases and the disposition of obsolete phones.  Here's a diagram of the transaction:
























So why bother going through all of this "creation of phone-lease tranches"?  The report says (pg. 45  paraphrased) "after putting this whole mess together, they cancelled the 1st tranche with no material impact to the financials".  Why would they cancel the US$477 Million transaction shortly after assembling the first tranche?  Why would they incur the legal cost and complexity?  These transactions and structures are expensive.  Why wouldn't they simply borrow some money at a reasonable rate if they couldn't finance the phones internally?  Would that be too simple?  Again, by deduction, this modus operandi is a byproduct of Softbank's deeply ingrained, anaphylactic management style/psychosis.  To recall an old college metaphor, once we experience a little alcohol induced amour on our dorm room couch, it suddenly seems like a good idea to tear it apart in order to retrieve the spare change trapped in the cushions.  We continue our pathetic quest, buying more beer to keep the party going.


The Alibaba "Sale"

As the media reported, in June of 2016 that Softbank was about to "sell" a good sized chunk of its Alibaba Stock to pay down debt and finance the newly announced ARM Acquisition.  Reports had the value of the share "sale" placed somewhere between US$7.7 and US8.1 Billion.  Reuters described the deal at $7.9 Billion.  This made perfect sense.  Softbank was about to spend US$32 Billion on the hastily negotiated (2 weeks), shiny-ball ARM acquisition and by all accounts, shareholders were growing increasingly restless over the company's leverage.  Selling some of the Alibaba shares was an obvious next step.

But wait!.....let's take a look at what actually happened.  The Alibaba shares were never sold.  Here's the "sale" diagram from page 47 of the 12/31/16 Quarter Ended:




















Here are some of the highlights of the transaction as described in the report.  I invite your to read it if you feel you have the stomach for it:

1.) The BABA shares are transferred to West Raptor Holdings, LLC (Softbank Subsidiary) and pledged as collateral for newly issued "Trust Securities" held by the newly formed Mandatory Exchangeable Trust.

2.) Investors pay US$6.6 Billion for the newly issued, created from thin-air "Trust Securities". (Author's note:  Hey....why did the press release say US$8.0 Billion?)

3.)Softbank receives US$5.4 Billion in exchange for an obligation under the "Forward Contract" to deliver BABA shares on the first trading date after June 1, 2019 (Three years later)

4.) The Report states:  "A cap and a floor are set for the number of shares settled and the variable prepaid forward contract is classified as a hybrid financial instrument with embedded derivatives of collar transaction." (Author's note: This really smart sounding text, though fragmented in a style typical of an un-proofed Sushi menu, was apparently written to make the reader feel uninformed or ignorant re: highly sophisticated financial transactions.)

Fear not.  There's no need to feel inadequate if you don't fully understand this deal.  It's not because you're not smart or because you don't have a Master's degree in finance from Wharton.  The reason you don't understand this is because the language is designed so you don't understand it.  The description of the transaction is insufficient for the reader to assess exactly what this mess really is. The lack of transparency is actually quite frightening.  Here are some of the missing particulars that could easily be disclosed.

1.) We have no idea what the parameters of the "collar" are so we can't assess the risk of (or the cost to) the parties involved.

2.) The number of shares involved are not disclosed.  Will Softbank be required to deliver the share equivalent of US$6.6 Billion as of June 1, 2019?  What happens if the share price is $30.00?  How about $200.00?

3.) In accounting parlance, cash is "debited" for $5.4 Billion from the deal.  Where is the offsetting $5.4 Billion credit?  Well, even though in all probability the risk of share price fluctuation hasn't been fully transferred, the offsetting credit is hiding in the oddly titled "Gain from Discontinued Operations"... of course. (Author's Note:  If I could generate a $5.4 billion gain from a hokey "Discontinuation" transaction....I'd be "discontinuing" everything I could get my hands on.)

4.)  Is it just me or does anyone else find it odd that the insiders (Yahoo!, Softbank!, etc.) have a really difficult time parting with Alibaba shares?  Could it be that those pesky 10b-5. Insider Trading Rules have something to do with their reluctance to actually sell?

5.) The fees involved to accomplish this hybrid, desperation financing would also be an interesting bit of information to disclose.

In any case, what we really have here is a thinly veiled attempt to disguise leverage and risk, while simultaneously booking tenuous gains that could all be clawed back if this scheme doesn't work out. We simply can't tell from the description of this deal what the real future value of the transaction is, yet it makes the present look pretty peachy.  My guess would be that, in order to get this deal done, Softbank will continue to retain significant downside risk while most of the upside potential has been transferred to the Investors.  The sofa cushions continue to be desecrated and the spare change is getting harder to find.  At some point Softbank is going to run out of beer.

The Fortress "Purchase"

Last week, Softbank announced that they were "buying" Fortress Investment Group, LLC. (FIG:NYSE)  for US$3.3 Billion.  So what is Fortress?  Simply put, Fortress is, for lack of a better description, a publicly traded hedge fund which IPO'd  at $30 a share in March of 2007.  The IPO netted the management team (Edens, Kauffman, Nardone, Briger & Novogratz) roughly $11 Billion.

Timing, as they say, is everything,

When we take a look at the Softbank press release we get a flavor for the particulars of the deal.  All the typical boilerplate, hype-filled representations are in place, management is fully on board, it's a great deal for everyone, synergies abound, the sky is the limit, etc.  Feel free to read it if you have the time.

Now let's delve into a little of the Fortress history per the filings.  As of the most recent 10-K (9/31/16) the company has assets under management of roughly US$70.1 Billion.  The stock has bounced around between $4.00 and $7.00 for years while generally under-performing the major indexes.  Money under management comes from 1,750 Institutional Clients and other private/sophisticated investors (pg. 43).   The filings describe roughly 1,650 clients  ($36.7 Billion or an average of $22.2 million invested) at Fortress and 100 clients at Logan Circle ($33.4 Billion or an average $334 million).  These Fortress Assets are invested in roughly seventy (70) Private Equity/Hedge Funds.  The Logan Circle Investment composition, even thought they represent about half of all Assets Under Management, are not disclosed and are reported in one lump sum in the Fortress filings.

Assets Under Management(AUM) have increased nearly 60% from $44.6 Billion in 2010 to $70.1 Billion today.  This increase in AUM certainly hasn't been reflected in the stocks performance.  On page 12 of the 2015 Annual Report they describe Fortress Shareholder investor returns when compared to various indexes over the last few years.



So what's going on?  AUM has increased dramatically.  Who's making all the money?  Let's take a look at some of the key metrics over the years.






As we can see from the above, Revenue (fees) have remained relatively constant even though AUM has skyrocketed.  Apparently, Fortress is providing their highly coveted services at a deep discount. Thankfully, they've also seemed to understand over the last few years that it's simply not sustainable to pay themselves more in compensation than the business generates in Revenue.  If we look at 2011, to the presumed chagrin of shareholders, compensation (as is described as contractually obligated) is roughly double the businesses revenue, actually causing a $1 Billion loss.  If I were a shareholder at the time, I might question the value added by Messrs. Edens, Kauffman, Nardone, Briger & Novogratz, but that's just me.   Thankfully, today compensation represents only 60% of revenue.  I'm sure that the shareholders are relieved that the management team has finally taken the steps necessary to get that expense under control.

So, back to the original question....who has been making all the money?  Although we can't determine the profitability of the seventy (+/-) individual funds under management or the Logan Circle AUM, my guess would be that the P/E investors (outside of the Fortress Umbrella and Logan Circle), because of presumably favorable terms, are doing just fine.  The Fortress management team also seems to be doing pretty well, even with their pay cut from $1,8 Billion/yr. down to only $700 Million/yr.  On the other hand, Shareholders who brought Fortress at $30... and have been collecting their 9 cent per share quarterly dividends......not so much.

When examining these events from a "how could this possibly happen?" perspective, although difficult, since hedge fund folks are notoriously secretive, it's important to understand the people involved and what makes them tick.  In the case of Fortress, there is a treasure trove of interesting, wonderfully entertaining information out there.  Let's start with an April, 2009 Article written by Bethany Mclean for Vanity Fair which describes the Hedge Fund industry melt down in the fall of 2008 with Fortress prominently featured.  Here are a couple of fascinating paragraphs which set the tone for what we're going to talk about.

In 2002, Edens, Nardone, and Kauffman were joined by Peter Briger Jr., 44, and Michael “Novo” Novogratz, 43. Both are Princetonians who became Goldman Sachs partners. Of Briger, someone who knows him says, “He could take a pile of napkins and figure out how to make money.” He is seen as a scrappy, tough trader type who knows how to play hardball in the often brutal world of distressed debt. His high-profile deals have included loans to both fallen New York real-estate mogul Harry Macklowe and Donald Trump’s struggling Chicago hotel project. As for Novogratz, a former college wrestler and army helicopter pilot, he’s the kind of guy who makes other guys “starry-eyed,” as a friend puts it. This is due to his great charm and his embrace of a lifestyle that more than one person calls “lunatic”—they mean it as a compliment—due to his love of partying. Indeed, sources say that, while Goldman Sachs wanted Novo’s considerable skills, the firm was nervous about his lifestyle issues, and the two parted ways.

Making money seemed to be simple for Fortress. And no wonder. While the five principals are seen by their colleagues as extremely smart—“these are not B-team guys,” says one—in recent years it was hard to lose, and Fortress, like its peers, charged rich fees. For instance, its hedge funds, which were run by Novogratz and Briger, cost investors a management fee of between 1 and 3 percent of the total assets under management, as well as “incentive fees”—20 to 25 percent of any profits. At Fortress, such fees for all of its businesses totaled over $1 billion in 2007, more than double than in 2005.

In June of 2010 Mike "Novo" Novogratz did an odd Youtube Interview for OpalesqueTV which could have been titled "things I'd never want to hear my investment adviser say"....Here are a few of "Novo's" quotes:

(Minute 2:20) John Corzine refers to "Novo" as "Mr. Bitch about your salary"

(Minute 3:15) "You need all the weapons of liquidity, stocks, bonds, currencies and credits to really make your bets"

(Minute 4:26) "I rely on instinct, luck and learning to trust my intuition....that's real intelligence."

(Minute 4:45) "I was such a good bullshitter as a sales guy that John Corzine called my bluff and put me in a job where I couldn't bullshit."

(Minute 5:25) "I hired Ehud Barak, the former Prime Minister of Israel as a consultant....he said 'Novo, I've figured you out....you are not so smart.....you are just lucky'....then he gave me a quote from Napoleon, which I didn't understand because I don't speak French...."   

(Minute 7:15) "I tell my investors that we're in the guessing business....it makes them a little bit nervous."  (Author's Note: I'd prefer not to pay 2/20 for "guesses".  I can lever up and make my own uninformed, bad guesses for free.) 

(Minute 7:45) "We just think, but we don't know....and we're scared shit-less.  There's a tremendous amount of anxiety in this business....so the genius and the discipline that separates the really good traders, is creating a set of rules that you live by, that you run your portfolio by and actually manage your life by, that gives you the best chance of managing the guesses and bets you've made."

Throughout the 9 minute interview "Novo" name dropped personal relationships with John Corzine, Jimmy Leitner, Lee Cooperman, Paul Jones, George Soros, Stan Druckenmiller, Bruce Kovner, Ehud Barak, Louis Bacon, Dan Mudd and Adam Levinson.

Mr. Novogratz also referred to the Logan Circle acquisition as a "small bite, learning to walk before we run".  Since Logan Circle currently represents roughly half of the AUM ($33.4 Billion) on the Fortress books, and is discussed as one big lump sum, let's take a quick look at the history of Logan Circle.

Logan Circle, was founded by Jude Driscoll in 2007 right before the financial crisis (timing, again, is everything).  In 2009 Logan Circle purchased roughly $1 Billion of Client Asset Relationships along with a former Bear Stearns Asset Management Team from J.P Morgan.  The team, lead by Scott Pavlak and David Wheeler, former Bear Stearns managing directors, along with six other Investment Professionals were acquired by Logan Circle from J.P Morgan as a result of the Bear Stearns collapse.  At the time, the acquisition by Logan Circle was reported to be "amicable".  

As history has taught us, Bear Stearns executives are widely known to be experts at quickly identifying undervalued, complex assets, convincing other investors of their un-locked value, raising money and snapping up these bargains as quickly as possible.  This "small bite" of a business has gone from literally nonexistent to $33.4 Billion under management in just a few years using the team's skills presumably forged from their experience at Bear Stearns.  

Since Logan Circle is a privately held investment company, we really can't tell what the investment returns look like, but based solely on the AUM growth, one thing we can be sure of, is that the "team" continues to be expertly adroit at attracting client money.  A key question might be:  Why would state, municipal and public entity pension plan managers; corporate plan managers, corporate treasurers, endowment funds, foundations, health care and insurance companies choose Logan Circle over say a Black Rock, J,P Morgan or Fidelity?  What sets them apart?  Again their performance or fee structure doesn't seem to be an attraction.   The Logan Circle team must have a heck of a sales pitch.

I for one, think it's wonderful that Wall Street continues to recycle and forgive failed executives, allowing them to make amends for their mistakes, perennially giving them second, third and virtually unlimited chances to continue their careers.  Interestingly, in some cases they are given even more responsibility and less oversight than they had when they failed the first time(s).  With Hedge fund managers and traders, as opposed to say, helicopter pilots, there's no Darwinian form of self selection.  Because of the "heads I win, tails you lose" fee structure, even whey they make horrible bets and "guesses", financial professionals usually live to fight another day.

Keeping in mind that we also have no idea who the 100 Logan Circle Clients are, we can only hope that they know exactly what they are doing.  Who might these clients be?  Well, they could be sophisticated Institutional Investors or money managers, perhaps like the reincarnation of Scott Sullivan, Andy Fastow, Dick Fuld, Jimmy Cayne, John Corzine, Bernie Ebbers, Angelo Mozilo, Bernie Madoff, John Merriweather, Bruno Iksil, Frank Gruttadauria, Steve Cohen, etc. all extremely talented, smart, respected financial executives, at least at one time in their respective careers.  (Note: The list is nearly limitless....these are just the first few names that come to mind.)  Or they could just be political appointments or inexperienced hacks in charge of State/Government/University Funds, pensions and the like, with little regard for their fiduciary responsibility or understanding of accounting rules and investing, as long as they get to attend those awesome island conferences on the Management Company's dime.  Again, we have no idea what the mechanics of these relationships are, or who the clients are, but we can be relatively sure it's not based on the Fortress financial performance.

Unfortunately for "Novo", in the fall of 2015, it became apparent that for the last two years his intuition and "real intelligence" had abandoned him and his luck had run out.   His macro business had been losing boatloads of money, was closed down and he was given the boot (i.e. offered a handsome buyout) from Fortress.  Mike, like so many other highly compensated lost prophets, will probably show up on the "where did I go wrong and why it wasn't really my fault" rubber chicken speakers circuit, giving his take on all things macro/global for a modest fee.  Be that as it may, I'm sure his spirit and legacy lives on at Fortress.


So Why is Softbank Doing This Deal?

The answer is simple. Softbank, one of the world's preeminent purveyors of accounting gamesmanship needs cash.  They look at the Fortress "purchase" as an easy way to gain access to a pool of investment capital that can easily be mis-directed into Sortbank influenced or sponsored joint ventures, funds, or projects that could easily fly under the radar of both regulators and Fortress Investors.

If we examine the filing, the deal isn't really a "purchase" at all.  The structure of the deal is actually a Merger of Fortress (FIG) with a Delaware "Merger" Corp. (Foundation Acquisitions LLC), simultaneously merged into a surviving Cayman Islands Limited Partnership. (SB Foundation Holdings, LP).  The deal accomplishes a number of things.

1.) As a Cayman Islands Limited Partnership. it relieves the surviving entity, SB Foundation Holdings LP , of tedious SEC reporting and regulation.

2,) SB Foundation Holdings LP would also most likely not be subject to Japanese reporting requirements or financial statement disclosure depending on ownership.

3.) SB Foundation Holdings LP provides an easily accessible "piggy bank" which could be secretly raided, without disclosure, to fund the Softbank (alleged) Ponzi scheme.

The Fortress deal is in addition to a similar vehicle, the establishment of the $100 Billion "Vision" Tech Investment fund which is also an integral part of Masa Son's "300 year plan for spreading happiness". The fund will be run by Rajeev Misra, who joined Softbank a little over two years ago, after leaving Fortress Investments Group LLC, where he had coincidentally worked for less than a year.  The apple never seems to fall too far from the tree.

The Vision Fund, to be managed by Mr. Mirsa in Great Britain, will be roughly ten (10)  times the size of any such similar fund currently in existence.  The Saudi Arabia Public Investment Fund (PIF), along with Softbank, will be the primary initial investors.

Actually, Masayoshi Son and Deputy Crowned Prince Mohammad bin Salman (2nd in line to the throne), might just be the most interesting investment duo in history.  Prince bin Salman has committed to invest $45 Billion into the Vision Fund, nearly doubling Mr. Son's commitment.  Both men have equally volatile, impulsive styles, with absolutely no fear of making seismic decisions with little (or no) experience or knowledge of the issues at hand.  ("Novo's" legacy lives on!)

Last year, the 31 year old Prince bin Salman noticed a $550 million yacht anchored in Saudi waters and was so smitten with it, he bought it from a Russian Vodka tycoon after an hour of negotiation, summarily "evicting" the occupants once the deal closed.   In his new role as defense minister, the young Prince decided to invade Yemen, unfortunately, without keeping members of the Royal Family or the National Guard in the loop.  Once the attack was underway, he took off on a well deserved vacation in the Maldives.  As the battle(s) raged on, he was apparently unreachable while Saudi troops were committing all sorts of alleged atrocities, bombing and killing hundreds of women and children.  It was also reported that Defense Secretary Ash Carter couldn't reach the Prince for days when he was trying to figure out "what the hell is going on in Yemen?"


Even though they are, perhaps, in this author's humble opinion, a bit disconnected from financial reality, both men, Son and bin Salman, for better or worse, are soon to be joined at the hip.

Given the Saudi Royal family's captivation with public executions (beheadings, hangings, floggings and the like) as a way to keep the rabble in line, when coupled with Prince bin Salman's meteoric rise to power, no nonsense attitude toward discipline and his progressive vision for the economic development of a truly state of the art Saudi Arabia, we can only hope, for Mr. Son's and Mr. Misra's sake, that they don't mess this up. (Author's Note: I, for one, wouldn't want to meet my maker by having my head chopped off on Youtube by a bearded, fat guy in a dress, but our State Department and Investment Bankers insist that if we are to do business in the Middle East, we must put up with these cultural idiosyncracies.)

That said. I doubt that Prince bin Salman will be all that compassionate if Messrs. Son and Misra somehow manage to piss through $45 Billion of Saudi Royal Family money.  On the other hand, we hope for their sake, that it won't be anything to lose your head over.

So Let's Sum It All Up....

What we have here is, Masayoshi Son, a possibly delusional "money is no object visionary" who doesn't understand the difference between earning money and raising money.  He's willing to deploy all sorts of convoluted accounting devices to mask what's really going on in his businesses, surrounding himself with like minded individuals who, for the right compensation, are more than willing to tow the company line and come up with even more creative ways to defy economic gravity.

Unfortunately for Softbank, in order to create sustainable economic value, a business must be able to deliver a product or a service at a price substantially above the cost to the business.  When we examine Softbank's portfolio, after removing all of the accounting shenanigans, we can conclude that there are very few operating segments (if any) that actually meet this criteria.  The need for funding will only accelerate.

Now, with the establishment of the Vision Fund, the Saudi relationship and the acquisition of Fortress (providing that it passes CFIUS muster) Softbank has secured a potentially limitless (short term) flow of capital to fund this money sucking Ponzi scheme that somehow, global financial markets have come to know and love.

Perhaps this $170 Billion of new newly deploy-able capital will all be invested in brand new blue chip ventures like "West Raptor Holdings LLC", "Mandatory Exchange Trust", "SBLS", "JPLS", "MLS", "SB Foundation Holdings LP - Phase II", etc., etc., etc. or myriad other shell companies, creating all sorts of new securities out of thin air, all designed to do whatever it is they were designed to do......

God help us all.....



Additional Reading

Fortress - Performance 12/31/15 10-K p 12 - worse than S&P/etc.
https://www.sec.gov/Archives/edgar/data/1380393/000138039316000027/fig-20151231x10k.htm

Fortress - 12/31/2010 10-K
https://www.sec.gov/Archives/edgar/data/1380393/000119312511051919/d10k.htm


Softbank buys Fortress
http://www.reuters.com/article/us-fortress-inv-glo-m-a-softbank-group-idUSKBN15T333

Fortress - 13F -QE - 12/31/16
https://www.sec.gov/Archives/edgar/data/1380393/000108514617000601/xslForm13F_X01/form13fInfoTable.xml

Fortress 10-Q - 9/30/16
https://www.sec.gov/Archives/edgar/data/1380393/000138039316000036/q3fig-2016930x10q.htm#sD540C857A98FD2FE1089370666584F6F

Logan Square - Business Overview - $33B - 100 Institutional Clients
http://www.logancirclepartners.com/about/business-overview

Softbank's Earnings Article
http://www.marketwatch.com/story/softbank-profit-soars-71-amid-sprint-turnaround-2017-02-08


SoftBank Tech Fund
https://www.gulf-times.com/story/532383/SoftBank-aiming-to-close-first-round-of-investment-in-100bn-tech-fund-in-Feb

Softbank - SnapDeal & Ola
http://tech.economictimes.indiatimes.com/news/startups/softbank-writes-off-350-million-on-investments-in-snapdeal-and-ola/57065852

Softbank Earnings - QE 12/31/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2017/softbank_results_2017q3_001.pdf

Softbank Earnings - QE - 9/30/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2017/softbank_results_2017q2_001.pdf

Softbank Earnings Year End 3/31/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2016/softbank_results_2016q4_001.pdf

Fortress Hire's Bear Stearns Asset Management Team from JPM - 2008
http://www.pionline.com/article/20081110/ONLINE/811079972/people-logan-circle-snares-ex-bear-stearns-team

David Wheeler - Logan Circle - Former Managing Director at Bear Stearns
http://www.logancirclepartners.com/about/people/bios/david-wheeler

Scott Pavlak - Logan Circle - Senior Managing director and head of fixed income at Bear Stearns Asset Management
http://www.logancirclepartners.com/about/people/bios/scott-pavlak

Fortress - flat between $4 and $6 since mid 2015 - Currently a P/E of 38 at $8/share.
https://www.google.com/finance?q=NYSE%3AFIG&hl=en&ei=dYuoWOjTOsHu2Abdk52wDw

Softbank Purchase of Fortress Press Release Filed with the SEC
https://www.sec.gov/Archives/edgar/data/1380393/000119312517044130/d337035dex991.htm


Mike Novogratz - Closes macro Fund and Leaves Fortress October, 2015
https://www.bloomberg.com/news/articles/2015-10-13/fortress-s-novogratz-said-to-plan-exit-after-two-years-of-losses

Wes Edens - Fortress Director Video
https://www.youtube.com/watch?v=g0b2l7FEfyU

Mike Novagratz - Video 1
https://www.youtube.com/watch?v=3JGpu_grsHk

Mike Novogratz - Video 2
https://www.youtube.com/watch?v=UhETNy6n7UI&t=4s

Mike Novogratz - Video 3
https://www.youtube.com/watch?v=29EdY36IRS4&t=8s

Mike Novogratz - New Yorker - Vision of the Future - May 2009
https://www.youtube.com/watch?v=BB8eJ8NC6o0

Vanity Fair - FIG Management profile
http://www.vanityfair.com/news/2009/04/fortress-group200904-2 

Mike Novogratz - Don't get an Internship at GS
http://money.cnn.com/2015/05/18/investing/internship-advice-travel-to-india/index.html

SoftBank Tech Fund
https://www.gulf-times.com/story/532383/SoftBank-aiming-to-close-first-round-of-investment-in-100bn-tech-fund-in-Feb

Softbank - SnapDeal & Ola
http://tech.economictimes.indiatimes.com/news/startups/softbank-writes-off-350-million-on-investments-in-snapdeal-and-ola/57065852

Softbank Earnings - QE 12/31/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2017/softbank_results_2017q3_001.pdf

Softbank Earnings - QE - 9/30/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2017/softbank_results_2017q2_001.pdf

Softbank Selling Alibaba Shares for $7.9 Billion
http://www.reuters.com/article/us-alibaba-stocks-softbank-group-idUSKCN0YM2MA

Softbank $100 Billion Tech Fund
https://www.gulf-times.com/story/532383/SoftBank-aiming-to-close-first-round-of-investment-in-100bn-tech-fund-in-Feb

Softbank - Sprint up for Sale?
http://www.reuters.com/article/us-sprint-corp-softbank-group-stocks-idUSKBN15Z014

Softbank Acquisition of Fortress - SEC Filing - Transaction Structure
https://www.sec.gov/Archives/edgar/data/1380393/000119312517045384/d327463dex21.htm

Softbank Vision Fund - Rajeev Misra
http://www.vccircle.com/news/alternative-investment/2016/10/14/meet-iitian-rajeev-misra-who-would-head-softbank-led-100-bn

Softbank Hires Rajeev Misra from Fortress - Oct. 2014
https://www.bloomberg.com/news/articles/2014-10-14/japan-s-softbank-said-to-hire-rajeev-misra-from-fortress

Softbank Vision Fund - WSJ
https://www.wsj.com/articles/softbank-group-launches-investment-fund-1476398189

Softbank Vision Fund - Press Release
http://www.softbank.jp/en/corp/news/press/sb/2016/20161014_01/

Saudi Arabia - Public Executions
https://www.theguardian.com/world/2016/jan/02/saudi-arabia-beheadings-reach-highest-level-in-two-decades

Prince bin Salman - NYT
https://www.nytimes.com/2016/10/16/world/rise-of-saudi-prince-shatters-decades-of-royal-tradition.html?_r=0

Prince bin Salman - Economist Interview
http://www.economist.com/saudi_interview 

Sunday, January 29, 2017

Ant Financial buying MoneyGram??......now I'm really getting irritated.....

The financial press has been abuzz with the recently announced "breaking news" and analysis of the proposed Alipay acquisition of MoneyGram.  Generally speaking, reporters have been euphoric about the deal, robotically repeating the press release talking points that Alipay and MoneyGram management have jointly provided.

As you might suspect, I have a markedly different take.  To me, the deal looks like the acquisition of one (allegedly) criminal, money laundering enterprise by an (alleged) Ponzi scheme.

As always, when reviewing any of these deals, the first place I go is the SEC repository to review the filings so I can get a feel for what might actually be going on.  (Remember: "Nobody tells a fib in a filing!")  Links to the deal and the most recent (2015) 10-K are posted below.  The 2016 10-K will be released on Valentines Day.....love is in the air!

Please take a few minutes and scan through these documents for background on what we're going to talk about today.

MoneyGram 10-K
Alipay/MoneyGram Merger

Finished?  Great! let's continue.

A Little History.....

As you now know by reading the 10-K, MoneyGram is a major player in the US$550 Billion global "money transfer" business.  Results have been oddly flat over the last few years. Annual revenues have been consistent at about $1.4 Billion since 2013 and they have been operating at break-even, showing little or no net income over the same period.  I say "oddly flat" because the percent of "unbanked or unbankable" folks in this country, the very sandbox that MoneyGram plays in, has been steadily increasing over the years, to roughly 40% of the US population in 2015.

Twenty years ago, if you wanted to get a bank account, you just showed up at a local branch, told the bank manager who you were, signed a form, ordered some checks and that was it.....you were "bankable".  Anybody who wanted a bank account had one.  But over the years, like much of what we do in this country, we've made things (some would argue justifiably) more difficult for our less prosperous residents. Today, if you try to open a bank account you have to provide multiple forms of identification, background checks are done, ChexSystems reports (to see how you've handled prior bank accounts and financial relationships) are requested and if the banker is unable to connect all of the dots re: your financial history.....NO BANK ACCOUNT FOR YOU!

So who are the unbankable?  When you visit a MoneyGram "store", generally, you see people who are just trying to get by.  Of course, there are lots of understandable reasons for good folks to lose banking privileges in America.  Job loss, medical bills, disability, etc. just to name a few.  There are also lots of "not so good" reasons (i.e. criminal activity, evasion of court ordered judgments, garnishments and seizures, citizenship issues, a potentially nefarious desire just to stay "off the grid", etc.)  In any case, all of the aforementioned comprise MoneyGram's target market.

Given the above, with the expansion of this market over the last decade, you'd think that MoneyGram's revenue and profits would be skyrocketing.  Interestingly, from what I can see, the only part of the business that's really taking off, as described on page 32 & 33 of the 10-K, is the foreign component of the Global Money Transfer segment of the business.

In 2015 the Global Money Transfer business comprised 88.9% of MoneyGram's total revenue ($1.262 Billion). While total revenue remained relatively constant, transfer volume within the US had decreased from 30% of total to just 13% in two years since 2013, despite the dramatic increase in eligible/potential "unbankable" domestic customers.  Combined US outbound (US to foreign) and foreign transfers (non-US to non-US) have increased from 70% to 83% of total transaction volume during the same period.  Per the 10-K (Pg. 33):

"The growth was primarily driven by the Middle East, Western Europe and Latin America regions.......the U.S. Outbound corridor was primarily driven by sends to Latin America and to Africa."    

I wasn't aware that these regions were experiencing an economic boom or a seismic acceleration of financial activity.  I must have missed it.

The Gory Details....

Hypothetically speaking of course, let's say I was an unbankable individual who wanted to get money into or out of the US for potential unsavory purposes. How might I do it?  I'd send a MoneyGram!

The first thing I'd do is to go to MoneyGram.com and find a convenient location.  I'd figure out who I wanted to send my money to and let them know it's coming.  I'd take my fake ID and off I'd go.  Let's say, for example, I wanted to send $500 to a fellow unsavory friend in Kabul Afghanistan (or perhaps the unsavory friend wants to send money to me).  According to MoneyGram.com the transaction would cost me $11.00.  Presumably, MoneyGram would also take a cut on the currency conversion.


Luckily, for me and my hypothetical unsavory friends, there are fifty-six (56) convenient Kabul locations, where my unsavory, unbankable friends, with their fake forms of identification, can pick up the money.  MoneyGram "agents" are generally, banks, "Monitoring and Support Project" financial advisors (like Gulam Mustafa MSP or Sadat Hufyani MSP), small merchants, drug stores, bodegas, check-cashers, payday loan shops, etc.  I'm just guessing of course, that the employees and operators of the Kabul locations might not be all that well versed in identity fraud/verification and might even consider this process an alternative revenue stream, charging a small fee to look the other way rather than to closely examine the recipient's/sender's ID. Moreover, with the abundance of locations, my fellow unsavory friends could move from location to location, using trial and error until they find a location that will accept their fake identification documents.  MoneyGram is all about customer service!






















As luck would further have it, if I happen to have unsavory friends scattered all over the globe, MoneyGram actually operates in two-hundred-an-one (201) countries with more than 350,000 secure locations!  You can check out the countries listed on the drop down list on the website.....some of the more interesting vacation spots, besides Afghanistan, are Angola, the Congo, Belarus, Ukraine, Uganda, Russia, South Sudan and Sierra Leone.

Just to pick a few of the above, using the MoneyGram.com "location finder" we note that Luanda Angola has 70 pickup/send locations, Juba, South Sudan has 26 Locations, Freetown, Sierra Leone has 63 locations and Minsk, Belarus has 72 locations.....I'm no detective, but I think there's at least a good possibility that some of the money sent to/from these convenient locations isn't going to kids away at school, family members for financial help or other humanitarian purposes.

If you want to move a lot of money under the radar, the key is to spread it out into lots of small seemingly unrelated transactions. The Chinese, in their effort to get money off shore and get around their government's FOREX conversion restrictions, have coined the phrase "Ants moving house" which refers to the practice of having trusted friends, relatives or employees carry smaller amounts of money off shore for conversion and eventual re-consolidation into accounts owned by the original perpetrator of the scheme.  Legions of Chinese citizens getting on planes, boats and trains traveling on vacation with the hidden purpose of laundering the money of the Chinese elite.  It wouldn't be difficult to imagine that the MoneyGram model could simply become a slick way to automate the "Ants moving house model".  All of this potential transaction volume could really provide a boost to Alipay transaction revenue once they expand the list of convenient locations in China.

Moreover, there's a good chance, based on the rapid increase in MoneyGrams international transaction volume over the last few years, the model could already be working for drug dealers, gun runners and terrorists.  A $100,000 transaction stands out.....hundreds of $1,000 dollar transactions in multiple names to/from multiple locations fly right through.  If it works for terrorists and drug dealers it should also work pretty well for the Chinese elite trying to convert rapidly devaluing RMB into US dollars.

On pages 8 through 10 of the 10-K the company describes the onerous, complex regulations it is forced to comply with (OFAC, Bank Secrecy Act, Patriot Act, Dodd-Frank, etc.) and the risks associated with the complexity of its business.  It's the typical boilerplate "see ....we told you this could happen!" language intended to insulate the company from shareholder legal action.  There are lots of buzzwords in the disclosures, but as far as I can tell, the sophisticated compliance techniques used to prevent and catch illegal transactions consist of some computer software designed to analyze the "big-data" for repetitive, larger transactions and more importantly, handing the 350,000 authorized agents in 201 countries a probably unreadable manual describing the required anti-money laundering controls and compliance process. If I were to venture a guess, I'd think that one of the possible systemic, internal control weaknesses might be that the less-than-minimum-wage operators in Kabul, Luanda, etc. might be a bit more concerned about survival, food and just getting through their day than they might be about MoneyGram management's Dodd Frank compliance program.

I'm just sayin'......

So if we try to back into the US dollar value of this transaction volume, which interestingly isn't disclosed in the 10-K.  Using our ratio of $11/$500 (2.2%) of the transaction cost, we can make an inexact "guess" that the dollar value of Foreign Transactions processed by MoneyGram is about $47 Billion (($1.262B x 86%)/ 2.2%) Note: I say this is just a "guess" because the figures required to accurately calculate/estimate the exact amount of money transferred (% Revenue by Region/Country) are not disclosed. Moreover, you'd think they would simply disclose the annual "Gross Money Transfer Value" by country, since it would be an important operating metric, telling investors exactly where the business is growing and where it's profitable, but alas, it's not disclosed.  We know the figures are readily available since in response to a 2013 SEC inquiry regarding illegal transfers to Cuba they responded, generally, that the transactions were accidental and immaterial, amounting to only $4,503.

 "During the past three fiscal years, the Company conducted transactions totaling $4,503 with Cuba"

Of course, I'm not a sophisticated international money manager, but I'm not sure how anyone would accidentally send money to Cuba given the regulatory environment at the time.  Thank goodness MoneyGram tracks these things and is able to calculate exactly how many accidental mistakes they make upon a regulatory inquiry.

In any case, I think anyone reviewing the MoneyGram revenue figures would agree, the amount of money transferred by the company to/from outside the US is a huge number even though they fail to disclose it (at least that I can see) in any of their filings.


The SEC is onto them!

After their routine review of MoneyGram's 2012 10-K, the SEC fired off a "nasty-gram" dated 5/9/2013, as Mary Jo's SEC had been known to do.  MoneyGram counsel responded, as documented in the MoneyGram response letter dated 6/13/2013, the SEC noticed that MoneyGram had mentioned in their annual report that they were growing like gangbusters in Africa and the Middle East.  The SEC also noticed that one of their subsidiaries, MoneyGram Payment Systems, Inc. "continues to be identified on the OFAC (Office of Foreign Asset Control) website as an authorized remittance forwarder to Cuba. 

To paraphrase, the MoneyGram response letter generally states that "we're doing all kinds of things that look to you like they are illegal but we aren't doing anything wrong.... but if you somehow catch us and prove that we are doing something wrong, it's probably immaterial and insignificant.  If you find that it's not immaterial, and is indeed significant, we either didn't know it was going on or had adequate controls in place to stop it, but the controls didn't work."  Here's a quote from the Moneygram response.

"From a quantitative and qualitative perspective, the Company determined that the limited business conducted and the limited contacts made were not material and did not raise material investment risks for investors. Any operations or relationships that are consummated by the Company, either directly or indirectly, with any of these countries will be conducted in a manner consistent with the Company’s compliance program and applicable laws and legal requirements, and will be disclosed in the Company’s filings with the Commission as appropriate and required under the legal and regulatory requirements of the Commission." 

Isn't that AWESOME!

In the super-sleuth tradition of the SEC they continued to review the financial statements, for years, sending the obligatory, occasional, cover-my-ass, nasty-grams/exonerations on the same topics. letters dated, 4/17/2015, 7/8/2015, 10/27/2016, 11/30/2016 , taking no action other than to continue to urge MoneyGram management to provide accurate information, threatening penalties under the Securities Act of 1934.

As always, with Mary Jo's SEC, suspicion is one thing, having the fortitude to lawyer up and prove your suspicion is quite another.  It's also a lot of work.  Better to just let it go.....


The "Deal"....

It's been reported that Ant Financial is "buying" MoneyGram.  This is simply not completely accurate.  The transaction consists of the creation of a newly formed, Delaware Holding Company (Matrix Acquisition Corp.) which will be the surviving corporation in a merger between same and MoneyGram International, Inc.  Matrix Acquisition Corp. will be a wholly owned sub of a newly formed, privately held , British Corp. (Alipay (UK) Limited).  Ownership of the Alipay (UK) Company was not disclosed.  The transaction will be "guaranteed" by a wholly owned, newly formed (2014) Hong Kong Corporation (Alipay (HK) Ltd.), again, the ownership and capitalization of same is undetermined. The deal will be funded/guaranteed by CitiBank (Hong Kong Branch) through Alipay (HK) Ltd, pursuant to the funding agreement as described in Sec. 4.9 of the Agreement and Plan of Merger (Pg. 31)    

There is no corporate history or disclosed governance or ownership of any of these newly formed Corporations.  I've found nothing on Bloomberg re: their activities or ownership.  Leiming Chen, a partner at the Hong Kong office of Simpson Thacher & Bartlett LLP, Alipay's advisor on the deal, was the authorized signor for Matrix, Alipay (UK) and Alipay (HK) on the filing.  There could be many reasons for this legal structure, but I'd suggest that none of them are intended increase transparency to US Regulators.

So what do we have?  We have an (alleged) money laundering business, being dumped into a "new" Delaware Corp. (Matrix), which will be owned by a brand new British Corp. (Alipay UK) which is owned by, God knows who?  Funded with debt financing (the "guarantee") provided by Alipay (HK) a new Hong Kong Corp. and Citibank (HK).  Ostensibly all owned or related to Ant Financial, of which, the only financial information publicly available in any filing I'm aware of, is a $60 Billion Market Cap estimate provided as a footnote in the BABA Earnings Call PowerPoint Presentation (Page 23), absurdly citing the "Media" as the source of this valuation.  (Authors Note: On its face you'd think that reporting an asset value in a financial statement based solely on a "Media" valuation would be a prima facie 10b-5 violation...but that's just me).

Guesses at Ant Financial gross assets (i.e. customer deposits, money market funds, WMP's, loans, etc.) have ranged anywhere from US$100 Billion to US$150 Billion or more.  There's no question that the amount of money the hard working people of China have entrusted with Jack and the gang is absolutely huge.  But again....nobody knows for sure how much it is and what it might be "invested" in.

It's important to understand exactly what this convoluted mess really is.  Alibaba (BABA) is a mish-mash of 300 or so related companies all dumped into a Cayman Shell Corp. to facilitate its listing on the NYSE.  Ant Financial is a "related", probably just as convoluted (maybe more so) mess of Fintech, Money Management and Investment Companies, (aka Ponzi Scheme) consistently offering above market rate "risk free" returns which consistently beat rates offered by SOE and Regional Banks.  Like any Ponzi Scheme, this can go on for a long time, until the hard working people of China decide that they no longer want to keep putting their hard earned money into Ant Financial Investment Products, or worse for Ant, they want their money back immediately.  This huge amount of money has continually been hijacked by Jack Ma and company to fund a series of boondoggle investments.  The purpose of these investments is (allegedly) two fold: 1.) Facilitate an accounting fraud, "buying" revenue and inflating asset values ; 2.) Convert overvalued RMB, "Monopoly Money" to hard assets valued in US dollars or Euros for the benefit of insiders.  The MoneyGram acquisition meets both of these dubious purposes.

Last Friday, the "Media" also reported on, what I'd suggest is the first trickle of what, over time, will be a steady flow of defaults of Ant Financial backed investment products, even though an Ant spokeswoman commented that this was a "one in billions incident".   As described in recent articles by Jim Areddy at the Wall Street Journal and Reuters, investments (loans) sold on one of Ant's websites (Zhao Cai Bao) were collateralize by the defaulted bonds of Chinese phone maker, Cosun Group. There are assertions of fraud and questions whether the bond underwriter, bank, or bond insurer will eventually be on the hook for the default. In any case, it's safe to say that these things rarely go smoothly.

My final thoughts are, that if the Alipay/MoneyGram merger is actually consummated, it will tell us a lot. It will tell us that CFIUS (Comittee on Foreign Investment in the United States) is about as effective at protecting US Interests as the SEC has been in detecting and preventing securities fraud over the years.  Yeeeeshhhhh......



Fortune - Ant Acquiring MoneyGram - $550 Billion Industry - Global Money Transfers Annually
http://fortune.com/2017/01/26/alibaba-moneygram/

SEC - Alipay/MoneyGram Merger Filing
https://www.sec.gov/Archives/edgar/data/1273931/000119312517019756/d338195dex21.htm

MoneyGram Response 11/23/16 Letter - Re: 6/5/13 SEC Letter "Relationships with countries re: State Sponsored Terrorism"
https://www.sec.gov/Archives/edgar/data/1273931/000119312516775887/filename1.htm

SEC 10/27/16 Letter To MoneyGram - Re: "State Sponsorship of Terror"
https://www.sec.gov/Archives/edgar/data/1273931/000000000016098723/filename1.pdf

SEC 6/5/2013 Letter to MoneyGram -  Re: "State Sponsoship of Terror"
https://www.sec.gov/Archives/edgar/data/1273931/000119312513248457/filename1.htm

SEC - most recent 10k - filed - pg 33
https://www.sec.gov/Archives/edgar/data/1273931/000127393116000064/mgi2015123110-k.htm

Ants Moving House
http://www.latimes.com/world/asia/la-fg-currency-global-china-20151201-story.html

Unbankable
http://www.reportlinker.com/p03631609-summary/Unbanked-and-Underbanked-Consumers-in-the-U-S-Edition.html

Unbankable & Mobile Payments
http://www.pewtrusts.org/~/media/assets/2016/06/fsp_what_do_consumers_without_bank_accounts_think_about_mobile_payments.pdf

SEC Nasty-Gram - 11/30/16
https://www.sec.gov/Archives/edgar/data/1273931/000000000016103098/filename1.pdf

SEC Nasty-Gram - 10/27/16
https://www.sec.gov/Archives/edgar/data/1273931/000000000016098723/filename1.pdf

SEC Nasty-Gram - 7/8/15
https://www.sec.gov/Archives/edgar/data/1273931/000000000015035822/filename1.pdf

Cosun Default
http://www.wsj.com/articles/a-default-in-china-spreads-anxiety-among-investors-1485513181

Cosun Default
http://www.reuters.com/article/us-china-bond-fraud-idUSKBN14F0FG


Checksystems
https://www.chexsystems.com/web/chexsystems/consumerdebit/page/home/!ut/p/z1/hY9PC4JAEMU_Swev7vgHk24LmVGWhkW2l1hlcwV1ZXcL-vYZ4kWS5jbzfu89BhGUIdLSV1VSXYmW1v1-I94d8BpbbgpRmMQbwMHh6KeXyIbQQ9d_APnKM4Oh95MBGRPi7dnuE4IodOy9FZ7cKTCpgOUIzJfsEClrkQ__4DZ3_BIRyR5MMmk-ZX_mWndqZYABilFZcPNNuRBmIRoDfpm4UBplUxZ1TQZV0lx9hRcfeDhj2A!!/dz/d5/L2dBISEvZ0FBIS9nQSEh/

MoneyGram - Kabul Locations - 56 Agents
https://hosted.where2getit.com/moneygram/printlocator_secure2.html?form=locator_search&name=&phone=&mon_hours=&tue_hours=&wed_hours=&thu_hours=&kiosk_id=&legacy_agent_number=&retailer_id=&money_order=&billpayment=&form_free=&paypal=&country=AF&addressline=Kabul+River+Kabul&sendcurrency=&receivecurrency=&like=0.45987065804083893




Wednesday, January 25, 2017

Alibaba - 1/24/17 Q3 Earnings Call....20 seconds of magic...

Rather than do an in-depth analysis of the earnings call, I'l just refer you to my analysis of the Q2 call "Just when I think....".  The numbers are a bit different but the content and direction is essentially the same.

Here are today's links:

Call

Presentation
Press Release
SEC 6-K Filing

The company continued to show enormous fake, organic revenue growth (54% YOY).  The market has responded accordingly, up $2.00 yesterday on the whisper numbers and $3.00 on the actual....the Analysts were salivating, using adjectives like "Tremendous", "Great", "Very Strong!"

....I'd actually like to add "unbelievable!" to the list.

I also won't take the time to ask how a "law of large numbers business" like Alibaba could:

1.) Increase Revenue by 45% year over year with only a 9% increase in Annual Active Buyers.
2.) Increase Cost of Sales (Excluding SBC) by 6.6% over the September quarter.  
3.) Continue to pay $500 Million +/- in dillutive Share Based Compensation (SBC) every quarter, including that which goes to employees of other "ecosystem" businesses.
4.) Continue to "buy" revenue indefinitely, consolidating the likes of Youku Tudou, Lazada and other money-sucking businesses into the pool of sludge.  InTime, another "strategic" acquisition, will most likely be consolidated next quarter.
5.) Increase PP&E US$407 Million in the quarter with no explanation.
6.) Increase Revenue guidance from 48% to 53%, implying continued, gigantic, organic growth.

Even though a discussion of the above would be entertaining.  I'd rather go a different direction today. 

Let's discuss the "20 seconds of real magic" in the investor call that merits dissection.....When Eddie Leung of Merrill Lynch finally asked a question I had always hoped someone would ask.  He wanted to know if Alibaba's merchant product mix had changed over time (Minute 29:40 of the call).  For his effort he received a rambling, confusing (at least to me) discussion from Daniel and Maggie about business segments.  Maggie also reminded Eddie and re-emphasized that they still disclose GMV, but will only disclose annually (and apparently also on "Global Shopping Day" with great fan-fare as described in the filing.) To his credit, Joe Tsai recognized the disconnect and stepped in (Minute 33:20 thru 33:40) :

"With regard to the eCommerce segment product mix, the big categories, soft goods, apparel, electronics, FMCG...those categories, the mix has not changed over time."

That's AWESOME!  He didn't mention any of the Wealth Management Products, Bad Debts/Loans, Industrial Products (Pipe/Steel/Fuel Oil, etc.), planes, Yachts, counterfeit liquor or any other of the weird things anyone can find by doing a quick search on any of the Alibaba sites. 

Since the IPO, Alibaba has never disclosed product mix.  Other than Daniel's occasional, odd, rambling discussions of "winter coats and cold/warm weather", investors have no idea which product categories and quantities are sold by Alibaba/TaoBao/TMall merchants.  They never have.  Like presidential tax returns, this information is apparently a closely guarded state secret.

Now, per Joe Tsai, we do know with certainty, that the mix has stayed the same, yet, the actual GMV breakdown has never been disclosed.  You'd think, since Alibaba is a super-duper-high-tech-big-data-cloud-computing-giant, they could just push a button and generate detailed and summary GMV data by SKU, vendor, region, product class/category, etc.  Yet, to date, they've not done so.  The only discussion of product mix I know of appears in the initial IPO filing:

Product Mix 424(b)4 IPO - pg 167
https://www.sec.gov/Archives/edgar/data/1577552/000119312514347620/d709111d424b4.htm

Pg. 164 of the filing states that China's 2013 Consumption as 35.8% of GDP.
Pg. 165 of The filing states that China's 2013 GDP was US$9.5 Trillion.
Therefore Total Consumption in 2013 was US$3.4 Trillion, per the filing.

Pg. 1 of the filing states Alibaba's 2013 GMV was US$296 Billion.

Here's the silly little chart describing what Alibaba sells compared to China's consumption (Pg. 167)





So we can see that the sandbox  ("Orange slices" above) that Alibaba played in back in 2013 (just prior top the IPO) amounts to roughly 16.6% of China's consumption or US$566 Billion (16.6% x US$3.4 Trillion).   Alibaba's 2013 GMV was  a remarkable US$296 Billion or 52.3% of total China Consumption for the "Orange slices" at the time.  Makes sense?

Per Joe, there has been no change in product mix.  Therefore, almost all of Alibaba's GMV is still comprised of Clothing, Footwear, Electronics, Home Appliances, Household Goods and Services.

The NBS, another repository for amazing fake data, describes that total Online Sales of Physical Goods in 2016 (Bullet #4) amounted to 4.194 Billion Yuan or US$612 Billion (CNY6.83/$1.00).


In 2016, the online retail sales reached 5,155.6 billion yuan, an increase of 26.2 percent compared with last year, among which the retail sales of physical goods was 4,194.4 billion yuan, up by 25.6 percent, accounting for 12.6 percent of the total retail sales of consumer goods, or 1.8 percentage points higher than that in last year.

So presumably, based on a simple extrapolation, in a few months Maggie, Daniel and Joe will report a GMV number somewhere north of US$650 Billion.  Alibaba's GMV will have grown from a gigantic figure, $296 Billion (52.3% of all Clothing, Footwear, Electronics, Home Appliances, Household Goods and Services), just three years ago, to significantly more than all of the on-line sales in China as reported by the NBS. 

Clearly something is amiss.  The above, of course, isn't possible.

I'm beginning to believe that Joe, Maggie and Daniel are, as we say in finance, "just making this shit up".  It's as though a few weeks before the quarterly call, they sit down with an Excel spreadsheet, plug in the last quarters numbers and do some "what-ifs" as to what they think the investors might like to hear.  They come up with a script, muted only by what they think they can get away with, and put on their quarterly show.   

Obviously, if they disclosed detailed category mix data, it would be a relatively simple exercise to survey a statistically appropriate number of merchants and consumers, determine exactly what they are selling/buying, compare it to management's published figures/ratios and calculate, with great accuracy, the precise level of bull-shit being pedaled by these folks.


The SEC to the Rescue

As I mentioned a month ago in my post "Holiday wishes from a born again Investment Banker...." our new administration was about to appoint "the worst SEC Chairman in history", without my knowing anything about who was destined to be appointed.  It's not that I had anything against the unknown appointee at the time, my point was that the new chair, by default, would be the equivalent of a "goat trotting clueless into a mine field".  I have to say, now that the goat has been selected and the appointment has been made public, my expectations have been exceeded by a country mile.  The only thing you need to know about Jay Clayton, the new SEC Chair, is that he was one of the architects involved in the Alibaba IPO.  Moreover, not only has he never been a regulator, but he's spent his entire career representing the folks that he will now be regulating.  As I mentioned in my post (before I knew who the new Chair would be), Mr. Clayton will be the perfect "laissez-faire, less-government, figurehead who will spend his/her tenure making a few speeches, hobnobbing with corporate royalty and playing golf."  Yup....we picked the right guy. 

That said, I'd guess that the Alibaba and Yahoo! SEC investigations will be quietly closed without fanfare in the relatively near future.

Finally, I for one have to say that I'm absolutely thrilled that the SEC is finally going to stop bothering executives and management with these pesky investigations and let businesses finally get back to the task at hand.  Business people need to concentrate on the big, important things, like generating jobs for the "little people", creating shareholder value and of course, enormous insider wealth. The type of wasteful, time consuming administrative folly that the SEC has been engaged in must come to an end.  It stops here and it stops today.  

Like, for example a few years back, I recall how a now bankrupt, goofy Hotel & Casino group had tried to goose earnings by writing up the leasehold improvements of a failed coffee shop....could you imagine!.....and the SEC was all over them!....what a pain.  How's a guy supposed to make a buck? Here's the link to the hilarious, time-wasting investigation and "cease & desist" order.  I'm glad to know that, for the sake of the American people, that we can finally put this type of government harassment and injustice behind us.

With Mr. Clayton's appointment, Management will finally be able to put whatever numbers they'd like on filings without repercussion.  Executives can focus on improving their financial statements, making unverifiable claims and working naive shareholders into a frenzy with their impossible business models that have virtually no chance to succeed.  They'll be free to discover new fake revenue sources, nonsensical metrics-du jour and sprinkle misrepresentations anywhere they choose, like seeds upon the fruited plains.   To paraphrase Masa Son....the SEC will be "spreading happiness" all over the globe. 

Eventually, it will be impossible to tell whether Joe, Maggie and Daniel are committing Securities Fraud or just presenting "Alternative Facts" to keep their investors enthusiastic about the business.  

.....and apparently, nobody will care.


Additional Reading

NBS - 2016 Data 
http://www.stats.gov.cn/english/PressRelease/201701/t20170120_1455922.html

THRC  - SEC Cease and Desist
https://www.sec.gov/litigation/admin/34-45287.htm

Jay Clayton - Washington Post
https://www.washingtonpost.com/news/wonk/wp/2017/01/04/trump-to-tap-wall-street-lawyer-jay-clayton-to-head-sec/?utm_term=.8daf155b9e4a

BABA - Investor Call
http://edge.media-server.com/m/p/25qobdq7

BABA - Presentation
http://www.alibabagroup.com/en/ir/presentations/pre170124.pdf

BABA - Press Release
http://www.alibabagroup.com/en/news/press_pdf/p170124.pdf

BABA - 6-K
https://www.sec.gov/Archives/edgar/data/1577552/000110465917003802/a17-3083_1ex99d1.htm