Mall owners Simon, Brookfield close to buying J.C. Penney out of bankruptcy


A shopper heads into a J.C. Penney store in Seattle in 2017.


Associated Press

NEW YORK — Mall owners Simon Property Group and Brookfield Property Partners are close to a deal to buy department store chain J.C. Penney out of bankruptcy and keep the chain running.

Penney’s lawyer Josh Sussberg announced the tentative pact, which will save roughly 70,000 jobs and avoid liquidation, during a brief hearing in bankruptcy court Wednesday.

Sussberg said that the Penney
JCPNQ,
+108.25%

would have an enterprise value of $1.75 billion, including $300 million in cash from the two landlords and $500 million in new debt.

He noted that a letter of intent including more details of the pact will be filed with the bankruptcy court in the next day. Penney will be left with $1 billion in cash after the deal is completed, he said.

“We are all committed to moving this quickly and saving J.C. Penney,” Sussberg said during the court hearing.

The 118-year-old department store based in Plano, Texas, filed for Chapter 11 bankruptcy protection in mid-May, one of the biggest retailers to do so since the pandemic temporarily shut down non-essential stores around the country. As part of its bankruptcy reorganization, Penney said it planned to permanently close nearly a third of its 846 stores in the next two years. That would leave it with just over 600 locations.

More than 40 retailers have filed for Chapter 11 bankruptcy this year, including more than two dozen retailers since the coronavirus outbreak. Among the hardest hit have been department stores, which were already struggling to respond to shoppers’ shift to online shopping.

The tentative agreement between two big landlords and Penney is the latest example of mall owners’ increasing willingness to buy out their pandemic-hit tenants. Mall owners are facing big challenges as stores close or are unable to pay rent. The exit or closing of retailers also triggers a clause that would allow other tenants to break their leases or get a rent reduction without facing penalties.

In fact, a retail venture owned by licensing licensing company Authentic Brands Group and Simon agreed to purchase 200-year-old clothier Brooks Brothers for $325 million last month.

Neither Simon
SPG,
-1.69%

nor Brookfield
BPY,
+0.27%

responded to requests for comment regarding the tentative deal with Penney.



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2020 is the year of the SPAC — yet traditional IPOs offer better returns, report finds


After a record 82 initial public offerings of special purpose acquisition corporations — known by the acronym SPAC — 2020 seems to have upended the traditional IPO market, yet most offer lower returns on average than conventional deals, according to a report.

Of 223 SPAC IPOs conducted from the start of 2015 through July, 89 have completed mergers and taken a company public, offering the chance to examine their performance, according to the report from Renaissance Capital, a provider of IPO ETFs and institutional research. Of those 89, the common shares have delivered an average loss of 18.8% and a median return of minus 36.1%. That compares with the average after-market return from traditional IPOs of 37.2% since 2015.

As of July 24, only 26 of the SPACs in that group had positive returns, the study found.

SPACs, also known as blank-check companies, have been around since the 1980s, but have become a juggernaut this year amid high levels of liquidity and a strong appetite for new growth companies.

Don’t miss: The CEO who made one of Silicon Valley’s worst acquisitions wants a $400 million blank check

SPACs raise money in an IPO, and then place it in a trust while the sponsor searches for a business or businesses to acquire, usually within a two-year period. The companies then complete a merger and the target becomes a listed stock. Recent examples include sports-betting operator DraftKings Inc.
DKNG,
-3.31%
,
electric truck maker Nikola Corp.
NKLA,
-1.60%

and space travel company Virgin Galactic Holdings Inc.
SPCE,
-3.69%
.

“It’s a back door to going public and avoiding scrutiny,” said Kathleen Smith, Principal at Renaissance. “You hear about the moonshots, like DraftKings and Virgin Galactica, which have done well, but the average return is negative. You can’t just blindly go in and make money.”

See also: A new breed of tech IPOs may give the stock market reason to party like it’s 1999

DraftKings went public via a merger with SPAC Diamond Eagle Acquisition Corp. and a gambling tech business, SBTech Global Ltd., earlier this year. The renamed DraftKings has been on a tear, gaining 258% in the year to date, even as major sports events were canceled during the pandemic.

Nikola merged with VectolQ Acquisition in June and immediately benefited from the cult status enjoyed by fellow electric vehicle maker Tesla Inc.
TSLA,
+2.78%

, which has propelled that stock to record levels this year. Nikola has gained 232% in the year to date.

See:Former House Speaker Paul Ryan to chair $300 million blank-check company: report

Virgin Galactic’s route to public markets came through a merger with Social Capital Hedosophia last October. The stock is up 35% in 2020, outperforming the S&P 500 ‘s
SPX,
-0.81%

5% gain and the Dow Jones Industrial Average’s
DJIA,
-0.56%

2% loss.

The recent crop of SPAC mergers have performed better than the broader group, the report found. The common shares of the 21 SPAC mergers completed in the period from Jan. 1 to July are averaging a return of 13.1% from their offer price, but that’s mostly due to the two highest performers — DraftKings and Nikola. Without those two, the SPACs produced better returns than in the period going back to 2015, but are still a negative 10.5%. That compares with the 2020 IPO market’s average aftermarket positive return of 6.5%.

The trend isn’t expected to end anytime soon. SPACs have raised a record $31 billion in 2020 to date, and new announcements are coming every day as investors seem to be racing to join the club. The year also brought the biggest-ever SPAC, when billionaire hedge-fund manager Bill Ackman took one public in July with more than $4 billion in its kitty to spend.

At the time, Ackman said he was “long-term bullish” on America and the stock market, although he was bearish on highly indebted companies.

James Gellert, chief executive of Rapid Ratings, a data and analytics company that assesses the financial health of private and public companies, said SPACs are a bull market phenomenon that gain in popularity when markets are doing well, as the stock market was until the recent selloff.

See: The ‘death of valuation’ and what it could mean for investors going forward

“There’s a lot of liquidity looking for nuanced asset classes and SPACs as a sub-category of equity is an interesting one to take a flier on,” he said. “If you have a diverse portfolio, a SPAC that is executed well is like a liquid private-equity investment.”

Many of the companies that are merged into SPACs come from private-equity portfolios, which usually means they are more mature businesses and in better financial health. For investors, they are really betting on the management team of the SPAC finding a good target business.

The broader initial public offering market is expected to be busy through the end of the year, with 45 companies in the current pipeline aiming to raise about $8 billion, according to Smith from Renaissance Capital.

See:Fisker is going public: Five things to know about the electric-car maker ahead of its IPO

Another 65 companies have filed confidentially with the aim of raising $28 billion, boosting the total to a potential 110 deals raising $36 billion.

So far this year, there have been 111 U.S. IPOs, raising $37 billion. The last year to see proceeds of more than that was 2014, when there were 275 deals that raised $85 billion.

“Even if we don’t get to that backlog of confidential filers, we’ll still probably exceed any year going back to 2014,” she said.

That was the year Alibaba Group Holding Ltd.
BABA,
-0.39%

went public, raising $25 billion in the biggest deal ever. That deal is expected to be eclipsed by the flotation of Ant Group, the payments company that was set up to serve Alibaba in 2004 and was spun off in 2011. Ant is expected to list on the Hong Kong and Shanghai exchanges later this year in a deal expected to raise up to $30 billion.

Smith said the pullback in stocks at the end of this week was a positive for the IPO market, “as it puts a bit more fear in the market. Fear gets better pricing, because multiples drop as peers drop and pricing falls,” she said.

Among the deals on tap are Palantir Technologies, the data-mining company backed by tech billionaire Peter Thiel; cloud data-warehouse company Snowflake Computing; videogame technology company Unity Software; Asana, a software provider started by Facebook; construction software company Bentley Systems; telehealth companies Amwell and GoodRx; packaging company Pactiv Evergreen Inc.; and Chinese online internet finance marketplace Lufax, among others.

The Renaissance IPO ETF
IPO,
-1.60%

has gained 49% in 2020 to date.



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Weekend reads: An early warning sign for Tesla’s stock


The tech-heavy Nasdaq Composite Index, after a long and steady rally this year, suffered its biggest two-day loss since mid-March to close out the week.

Before those declines, there were warning signs from Wall Street analysts who ordinarily shy away from rating any stock a “sell.” Shares of Tesla
TSLA,
+2.78%

had more “sell” ratings than “buy” ratings, and so did 62 other stocks in the Russell 1000 Index
RUI,
-0.85%
.

William Watts explains why it’s too early to call the tech-stock decline a correction.

Related Tesla and tech stories:

• Tesla’s stock story is one of newbs and rubes — but not quite the way you think it is

• Tesla’s stock sinks again to kick off a correction after disclosure of another large seller

• After Apple and Tesla stock splits, read this before jumping in

What the eviction moratoriums really mean

The U.S. Centers for Disease Control has ordered a moratorium on evictions through the end of the year to keep people from being displaced during the COVID-19 crisis. Treasury Secretary Steven Mnuchin expects the moratorium to protect about 40 million renters. But if you rent your home, you need to understand important details of the order to make sure you are eligible, as Jacob Passy explains.

Related:California eviction moratorium is ‘a real nightmare’ for renters to understand — here’s what you need to know


Getty Images/iStockphoto

The desire to retire — when expenses are high

Alessandra Malito helps a man 15 years older than his wife who wishes to stop working. They are both high earners, but they have a problem with expenses.

Worried about voting by mail?

Look to Oregon.

Debt and inheritance

Quentin Fottrell — MarketWatch’s Moneyist — helps a woman who is concerned about how much of her husband’s debts she might be liable for if he dies. These affairs may not be so simple, depending on which state you live in.


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Don’t Social Security benefits keep increasing over time?

Maybe not.

What to do when your online trading service is down

Several online brokerage services, including Robinhood, Charles Schwab
SCHW,
+2.28%
,
TD Ameritrade
AMTD,
+2.14%

and E-Trade
ETFC,
-0.12%

went down or slowed Aug. 31. Michael Brush has tips on how to lower your risk before these events and what to do when they occur.

Estate tax planning

Inheritance planning isn’t only for the wealthy. The tax implications for your inheritors can be difficult for them. Bill Bischoff — MarketWatch’s Tax Guy — shares four ways to ease the burden on those you love.

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Vanguard founder John Bogle supported a small tax on financial transactions, but Vanguard itself argued against it in January. But now the mutual fund giant has revised its estimates of how much investors and traders would actually pay, by quite a bit. Michael Edesess explains the math and why Vanguard is still against a transaction tax.


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Want more from MarketWatch? Sign up for this and other newsletters, and get the latest news, personal finance and investing advice.



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Only 19% of Tesla analysts say buy the stock while investors remain ‘insatiable’


There is an old Wall Street saying that investing isn’t about being right or wrong, it’s about making money. No one understands that better than an investor in Tesla Inc.’s stock.

The financial fundamentals and the historical valuations of earnings suggest the market is wrong about the electric vehicle (EV) maker’s stock price, according to the overwhelming majority of Tesla analysts. But the stock keeps rising and Tesla investors keep making money.

No one is making more money than Elon Musk, Tesla’s chief executive officer, largest shareholder and arguably its most important cheerleader, who just became the third-richest person in the world, according to the Bloomberg Billionaires Index.

RBC Capital Markets analyst Joseph Spak, who has been bearish on Tesla since Jan. 23 2019, when the stock closed at $57.52, put it this way in a note to clients:


“We recognize we underestimated a critical valuation point: seemingly insatiable investor demand for alternative/clean vehicles.”


— RBC’s Joseph Spak

Spak raised his price target to $290 from $170, but his target was still 42% below Monday’s closing price.

See related: His short position just got ‘obliterated,’ but this Tesla bear isn’t giving up.

The stock
TSLA,
-4.67%

soared 13% on Monday, and rocketed 74% in August, the best monthly performance in more than seven years, after a 5-for-1 stock split took effect. On Tuesday, the stock pulled back 4.7% to close at $475.05, after Tesla took advantage of the recent rally to announce a $5 billion share offering.

Also read: Tesla takes advantage of stock’s best month in 7 years with $5 billion offering.

There are some fundamental reasons for investors being right to buy, as Tesla has been profitable for four straight quarters, while Wall Street was wrong to expect losses in three of the past four quarters. And despite concerns about the negative impacts of the COVID-19 pandemic, Tesla delivered way more EVs than expected during the second quarter.

While the 5-for-1 stock split Tesla announced on Aug. 11 didn’t improve the company’s fundamentals in any way, investors were right to buy or hold on to their shares, for now, as the price has charged up more than 80% since the announcement through Monday.

Read more: Tesla stock rally accelerates further into record territory after split takes effect.

Despite such strong investor conviction, 81% of analysts don’t recommend buying.

Of the 36 analysts surveyed by FactSet, only seven, or 19%, have the equivalent of buy ratings on Tesla’s stock. And only one of those analysts, Jefferies’s Philippe Houchois, had a price target — $500 — that was above Monday’s closing price.

Meanwhile, half the analysts had the equivalent of hold ratings and 11 analysts, or 31%, had the equivalent of sell ratings. The average price target of all the analysts was $261.85, according to FactSet, which implied a 47% drop from Monday’s closing price.


FactSet

Most of what analysts have been wrong about Tesla has taken place over roughly the past five months. At the end of March, when the COVID-19 crisis was full blown, there were the same number of bearish analysts as there are now and the average stock price target was $101.86, just 2.8% below the March 31 closing price of $104.80.

With the stock’s gain since then, Tesla’s market capitalization increased to $464.3 billion as of Monday’s close, which was the seventh highest among U.S. companies.

RBC’s Spak suggested that what may also keep supporting the stock is that given the sheer market valuation of Tesla, many portfolio managers have to add to positions “just to keep pace.” He also believes investors have been willing to show more patience and look further into the future to value the stock.

“We still view Tesla as fundamentally overvalued and having to grow into its valuation,” Spak wrote.

Spak recognizes that Tesla is clearly ahead of its competition, has relatively inexpensive access to capital, the ability to attract talent, an “incredible” brand, and understands that “narrative, momentum and other factors” can impact the stock price. But he still believes that ultimately, a company’s value is related to fundamental factors.

Basically, he’s suggesting that one of the biggest risk factors to Tesla’s stock isn’t good or bad fundamental news, but how investors value that news.

Here’s how Tesla’s earnings are currently being valued by investors, through a common metric known as the price-to-earnings (P/E) ratio, and how that compares to the companies that had larger market caps at Monday’s closing prices:

The next major potential news catalyst is Tesla’s “battery day” scheduled for Sept. 22, of which Wedbush analyst Dan Ives said recently he’s expecting a number of potential “game changing” developments. One of those developments is the “million mile” battery, which in theory will support an EV for 1 million miles, which could put Tesla miles ahead of its traditional gasoline-powered automotive competitors.

That said, Ives is one of the analysts that doesn’t recommend buying — he’s at hold — while his price target of $380 suggests the stock could fall 24%.

Year to date, Tesla’s stock has rocketed nearly fivefold (up 468%). In comparison with other EV makers, shares of China-based Nio Inc.
NIO,
+5.72%

ran up 401% this year, Workhorse Group Inc.
WKHS,
+11.26%

soared 563% and Nikola Corp.
NKLA,
+0.46%

climbed 297%. The S&P 500 index
SPX,
+0.75%

has gained 9.2% year to date.

Tesla sees a lot of potential fundamental risks other than valuation

For those looking for actual fundamental risks, the following are just some of those included in the more than 20 pages of “risk factors” Tesla lists in its latest quarterly report filed on July 28. So far, those risks haven’t mattered to Tesla investors.

“We are highly dependent on the services of Elon Musk, our Chief Executive Officer.”

“We have been, and may in the future be, adversely affected by the global COVID-19 pandemic, the duration and economic, governmental and social impact of which is difficult to predict, which may significantly harm our business, prospects, financial condition and operating results.”

“We have experienced in the past, and may experience in the future, delays or other complications in the design, manufacture, launch, and production ramp of our vehicles, energy products, and product features, or may not realize our manufacturing cost targets, which could harm our brand, business, prospects, financial condition and operating results.”

“Our future growth and success is dependent upon consumers’ willingness to adopt electric vehicles and specifically our vehicles. We operate in the automotive industry, which is generally susceptible to cyclicality and volatility.”

“Any issues or delays in meeting our projected timelines, costs and production at or funding the ramp of Gigafactory Shanghai, or any difficulties in generating and maintaining local demand for vehicles manufactured there, could adversely impact our business, prospects, operating results and financial condition.”

“If our vehicles or other products that we sell or install fail to perform as expected, our ability to develop, market and sell our products and services could be harmed.”

“The markets in which we operate are highly competitive, and we may not be successful in competing in these industries. We currently face competition from new and established domestic and international competitors and expect to face competition from others in the future, including competition from companies with new technology.”



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Saga has missed a trick by spurning private equity. It should have followed AA’s route


Saga rejected a takeover offer in favor of raising fresh equity and bringing back former boss Roger De Haan


Hauke-Christian Dittrich/Zuma Press

Don’t lock them out: lock them in until you have a deal.

Shutting out private equity bidders was a favored tactic during the heady days of the debt-fueled buyout boom in 2003. So it’s a strange one to resort to when times are tough and private capital should be welcome.

Yet that’s what Saga
SAGA,
+31.96%

has decided to do.

The troubled provider of insurance and cruises to the over-50s rejected a recent 33 pence-a-share takeover offer from a consortium of two unnamed U.S. private equity groups, which it said was“unsolicited and highly conditional.”

Instead, Saga has chosen to tap its shareholders – which includes dozens of retail investors – for £150 million ($201 million) in an equity raise to cope with its spiralling debts. As part of the plan, Sir Roger De Haan, the son of Saga’s founder Sidney, will return to the company’s board as chairman, replacing incumbent Patrick O’Sullivan.

Saga prides itself on looking after its loyal customer base. However, many of those loyal customers are retail shareholders who ironically, as a result of Saga’s proposal, will be diluted by more than 40% compared with the 140% premium they would have been received from the spurned private equity bidders’ offer.

Saga’s convoluted proposal has De Haan, who sold Saga for £1.35 billion in 2004,  investing £75.5 million to buy 324 million shares, or an average entry price of 23 pence a share, to give him a 17% stake. In addition, by underwriting a third of the £75 million placing he could invest a further £25 million at 15 pence, lowering his average entry price to 20 pence and increasing his stake to 25%.

That could be enough to block any future bids for the company, which may be in need of further investment in the future. The cruise industry – among those hit hardest by the pandemic – doesn’t look like it will recover anytime soon.

Private equity has abundant supplies of dry powder to inject into troubled companies. The same can’t be said for shareholders who will be expected to stump up more cash in coming months as many companies look to raise equity to cope with the impact of the coronavirus pandemic on their operations, which has left many of them reliant on borrowing to meet expenses.

That may be why AA
AA,
-5.76%

believes entertaining buyout offers might be a better route to take. The roadside recovery group, which was once Saga’s sister as part of Acromas, has £2.65 billion of net debt with £913m due to be repaid over the next two years. The company is pursuing a dual-track process – considering both offers from buyout groups while simultaneously looking at raising new equity.

On Tuesday, AA granted its potential bidders – which include a joint offer from Centerbridge Partners Europe and TowerBrook Capital, as well as separate cash bids from Platinum Equity Advisors and Warburg Pincus International – an extra four weeks to make an offer for the company.

Now is the right time for Saga to learn from its ex-sibling.



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