Coming down to earth
Virgin Galactic announced today that Chamath Palihapitiya, whose SPAC took the space tourism company public three years ago, has stepped down as its chairman. It’s a low-key and sudden departure for the outspoken financier, and another sign of the bad times that have hit the market for blank-check funds.
It’s unclear why Palihapitiya is leaving Virgin Galactic, apart from the company saying he will “focus on other public company board commitments.” But it’s worth noting that Virgin Galactic’s shares fell to $9 yesterday, down 81 percent from their 2019 debut. (The move also comes a month after Palihapitiya was widely criticized for saying “nobody cares” about China’s repression of the Uyghur ethnic minority.) Palihapitiya sold his entire personal stake in Virgin Galactic last March, netting him $200 million that he promised to reinvest toward fighting climate change.
Palihapitiya has other challenges to deal with. He gained prominence as the “SPAC king” for being an early and successful sponsor of blank-check funds that raise money in the public markets to buy private companies. But shares in four companies that his SPACs have taken public fell sharply last year. He is one of several SPAC sponsors who was asked last year by Senator Elizabeth Warren, Democrat of Massachusetts, about potential “misaligned incentives” in SPAC deals.
The overall SPAC market faces growing disenchantment. At least 22 blank-check mergers have been called off since the middle of 2021, according to new research. That leaves those funds hunting for new deals while scores of other SPACs are doing so, feeding into concerns that many of these vehicles will be forced to fold and return money to investors. SPACs are also facing greater scrutiny from regulators, which threaten to make what was once considered easy money a far less sure bet.
HERE’S WHAT’S HAPPENING
Markets are set to bounce back despite Ukraine fears. Stock futures are up, after investors sold off in droves yesterday amid concern about the continued standoff over Ukraine. Tensions remain high, as U.S. officials warned that artillery exchanges could provide a pretext for Russia to invade.
Joe Rogan’s Spotify deal is worth at least $200 million. The Times reports that the exclusive contract for his podcast was worth double what has been widely reported. That’s how much Spotify paid for entire companies — and it helps explain why the company stood by Rogan amid controversy over coronavirus misinformation on his show.
Tesla accuses the S.E.C. of harassing Elon Musk. The electric carmaker, in a letter to the federal judge overseeing its 2018 regulatory settlement, said that the agency was conducting “unrelenting” investigations of the company and its C.E.O. because of Musk’s criticisms of the government.
Donald Trump and two of his children can be questioned under oath. A judge ruled that New York’s attorney general, Letitia James, can examine the former president, Donald Trump Jr. and Ivanka Trump as part of a civil inquiry into the family’s business practices. It’s the latest legal defeat for Trump as he faces inquiries into possible financial fraud.
Regulators are said to be expanding their inquiries into Activision Blizzard. California officials have subpoenaed members of the video game company’s board as they investigate accusations of widespread workplace misconduct, The Wall Street Journal reports. The S.E.C. also subpoenaed additional records from the company.
A nonprofit representing the Facebook whistle-blower files new complaints with the S.E.C. The complaints accuse Facebook of misleading investors about its efforts to fight misinformation on climate change and Covid-19, according to The Washington Post. They build on Frances Haugen’s previous congressional testimony and follow complaints that had been submitted to the S.E.C. last fall.
Fanatics teams up with Jay-Z for a jersey deal
The sports merchandise retailer Fanatics has joined with celebrities like Jay-Z and Meek Mill to buy the brand merchandising company Mitchell & Ness. The deal, which people familiar with the matter tell DealBook values Mitchell & Ness at about $250 million, further cements Fanatics’ dominance in the field of sports.
The deal adds to Fanatics’ apparel business, which already includes Majestic jerseys and Top of the World hats. The 104-year-old Mitchell & Ness, which collected $350 million in sales and $70 million in profit last year, is best-known for selling throwback jerseys that go for as much as $400 each.
Fanatics will own 75 percent of Mitchell & Ness, while a cohort of celebrities — including the rappers Jay-Z and Meek Mill, LeBron James’s business partner Maverick Carter and the D’Amelio family of influencers — will own the remainder. It’s the latest collaboration between Fanatics and Jay Z, who is also working with the company on a forthcoming sports betting division.
Bringing in high-profile backers has a business purpose. Fanatics plans to use its network of celebrities to help its new acquisition grow. Jay-Z, a self-described “early adopter” of Mitchell & Ness, said he was “proud to play a small role in bringing it back and, in some cases, introducing the authenticity and quality of the Mitchell & Ness brand to a new generation.”
The markets fall out of love with online sports betting
It was impossible to watch this year’s Super Bowl without being bombarded with ads for online sports betting services, as the industry seized upon a wave of states legalizing their business to capture new customers. But as DraftKings, one of the giants of the field, reports quarterly results today, Wall Street has lost faith that the company will turn a profit anytime soon.
DraftKings lost $326 million in the fourth quarter, and had fewer users than expected. The loss came despite healthy growth in the top line in the last three months of 2021, with sales rising 47 percent to $473 million. The Super Bowl ad blitz is expected to provide a further boost to legalized sports betting. Nonetheless, the company told investors to expect nearly $1 billion in additional losses from operations this year.
A Guide to Cryptocurrency
The problem is the cost of gaining new customers. Investors aren’t worried about the potential size of the market; analysts at MoffettNathanson predict online sports betting will reach nearly $11 billion in sales by 2025, up from $3.6 billion. But consider this:
DraftKings enticed new customers by putting $140 million into their accounts, and spent nearly $300 million on sales and marketing (including its $6.5 million 30-second Super Bowl ad), according to MoffettNathanson’s estimates. Some analysts worry that those promotional costs may not pay off if customers don’t prove to be loyal.
Companies must also contend with high taxes that states have imposed on online betting sites; New York State, for example, has a 51 percent levy. That makes it even harder for betting businesses to turn a profit.
“Investors are really questioning long-term gaming profitability” of these companies, said Barry Jonas, an analyst at Truist. Robert Fishman of MoffettNathanson reckons that DraftKings won’t turn cash-flow positive until 2025 and actually profitable until 2028.
That could mean gaming companies will be forced to focus on retaining customers instead of adding new ones — and potentially see their valuations fall even further as their growth slows. “Unquestionably, industry stakeholders will need to shift focus,” Lloyd Danzing, the founder of the gaming investing and advisory firm Sharp Alpha Advisors, told DealBook.
“This is what Xi Jinping has called ‘telling China’s story well.’”
— David Bandurski, director of the monitoring organization China Media Project, on how Beijing has used bots, influencers and other means to make the Winter Olympics a potent vehicle for Chinese propaganda.
The feds bulk up their crypto team
Announcements by the Justice Department yesterday, including the naming of a chief for its recently created National Cryptocurrency Enforcement Team and the formation of a new F.B.I. unit focused on blockchain analysis, show how U.S. authorities plan to make virtual currencies a top focus for years to come.
Among the department’s moves:
The naming of Eun Young Choi, a veteran federal prosecutor who focused on cybercrime cases for the Southern District of New York, to lead its crypto enforcement team. The group will help coordinate the department’s efforts to crack down on crypto crime.
The creation of a “virtual asset exploitation” unit at the F.B.I., tasked with tracking blockchain data and seizing illicitly gained crypto. It will also provide training to others at the bureau.
The formation of an international virtual currency initiative, which will help train and support law enforcement agencies in other countries.
“We are issuing a clear warning to criminals who use cryptocurrency to fuel their schemes,” Lisa Monaco, the deputy attorney general, told a cybersecurity conference in Munich yesterday. She compared the current push to previous efforts to crack down on Al Capone, the Mafia and terrorist networks by following money trails. It also comes after the feds charged a married couple with trying to launder billions of dollars worth of Bitcoin stolen in a 2016 hack.
Industry experts said they welcomed the moves. “It reinforces the narrative that law enforcement has a good toolbox and capable teams that are equipped to detect and mitigate bad behavior in the space,” Tomicah Tillemann, policy chief at the crypto-focused investment fund KRH, told DealBook. More robust enforcement could increase public trust in the crypto industry, he added.
THE SPEED READ
Berkshire Hathaway didn’t have advance knowledge of Activision Blizzard’s talks to sell itself to Microsoft before investing in the video game company last fall, Warren Buffett said. (Bloomberg)
DuPont will sell its materials and mobility division to Celanese for $11 billion as it continues to shrink its operations. (Reuters)
JBS, the Brazilian meat processor, ended efforts to buy full control of Pilgrim’s Pride, as Biden antitrust officials have taken a closer look at competition in their industry. (WSJ)
Sequoia, the venture capital giant, said it’s setting aside at least $500 million to invest in crypto. (FT)
The Senate passed a three-week government spending bill to give lawmakers more time to finalize a funding deal and avert a shutdown. (NYT)
Some White House economists have reportedly resisted efforts to blame corporate consolidation for inflation. (WaPo)
“The $1.7 Billion Student Loan Deal That Was Too Good to Be True” (NYT)
Oregon’s Supreme Court definitively ruled that Nick Kristof, the former Times columnist, can’t run for governor of the state. (Oregon Live)
Best of the rest
Oprah Winfrey held talks with the likes of Bob Iger and the Hollywood producer David Ellison about creating a nonpartisan news start-up, though that effort now appears to have ended. (Politico)
The National Highway Safety Administration said it’s investigating Tesla over reports of cars unexpectedly braking. (NYT)
How “the Black version of Gordon Gekko” got ensnared in a federal arms-dealing sting, and has since tried to bounce back. (New York)
Will de-emphasizing traditional investment-banking titles like “managing director” help UBS improve its work-force culture? (Bloomberg)
Good luck finding guacamole at an American restaurant that isn’t Chipotle soon. (Bloomberg)
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https://www.nytimes.com/2022/02/18/business/dealbook/chamath-virgin-galactic.html Chamath Palihapitiya Steps Down as Virgin Galactic’s Chairman