Rumors can be difficult to manage when they surface and center on an investment vehicle in your portfolio. As an investor with nearly 20 years of managing investable capital, I’ve seen my fair share of rumors over the years. In this article, I aim to offer a few of these rumors I’ve run into and why I was able to decipher or uncover the reality behind these rumors. 

SodaStream (SODA) was a company that I participated in as an investor when it IPO in 2011 at $20 a share. I participated up until 2014 and sold my position at $47 a share on a rumored PepsiCo (PEP) partnership. Leading up to this rumored partnership, which I actually did believe would happen at some point, there were several more rumors that surfaced in 2013 and 2014. One such rumor was that SodaStream had been approached by private equity firms concerning a sale of the company. 

What was telling about the rumor of a private equity takeover was that at that time SodaStream was unable to generate free cash flow (FCF). In fact, the company had never generated FCF as a public or private company. That is one of the key differentiators and identifying metrics of a sound private equity takeover candidate. As such, the rumors made no sense. Additionally, SodaStream is a hardware-centric business that is headquartered in Israel, a strong impediment to private equity takeover considerations. The articles outlined go into great detail as to why rumors that surrounded SodaStream’s likely takeover potential were anything but rooted in logic. But the following one reported by the New York Post may be of relevance due to the nature of the New York Post’s most recent reporting on Macy’s (M), which I will get into a bit later in this narrative.

In July of 2013, New York Post’s Josh Kosman wrote an article titled SodaStream’s sale hopes going pffffffft. In the article the very first sentence reads as follows:

SodaStream’s efforts to sell itself are fast losing their fizz, The Post has learned.

The news or rumor that SodaStream was trying to sell itself came as a great surprise to the market and investors. I was one of the leading analysts covering the SodaStream story back then and had no indication from management it believed it needed to sell itself. I spent a great deal of time with SodaStream’s management team back then, even traveling to their headquarters in Israel. At that time, SodaStream’s core business was growing at a double-digit clip, even if they were nearing a saturation point. Moreover, the company had invested nearly $100mm in a new manufacturing facility aimed for completion by 2015.  The article goes on to say the following:

The Israel-based company is working with Rothschild as its informal adviser. Birnbaum declined to comment.

And that is where the journalist from the Post used a bit of bait and switch, as Rothschild was an advisor to SodaStream, but in completely unrelated matters. During SodaStream’s expansion phase, it required additional capital and lines of credit and Rothschild help facilitate these requirements, not a sale of the company. 

PepsiCo was only interested in part of SodaStream’s business — refilling carbon dioxide containers — and not the actual consumer appliance, one source said.

This statement by the author was a complete fabrication, as PepsiCo hasn’t even their own CO2 refilling business for what is their largest and longest standing business of selling carbonated soft drinks. Furthermore, anybody who understands the beverage industry would understand that SodaStream’s business doesn’t exist without the joint operation of selling CO2 refills and the appliance that operates that CO2 refill cylinder. There is no business to be done in separating the two product lines. The ignorance on the part of the New York Post reporter would be known by those who understand the SodaStream business model, but unfortunately, that knowledge base is not widespread and as such, the reporter preyed on the ignorance of many.

Birnbaum declined to comment.

Shortly after this rumor was offered to the public I contacted SodaStream’s CEO Daniel Birnbaum and he offered that the Post had never even contacted any member of SodaStream. The many rumors that had besieged SodaStream from 2013-2014 were found to be baseless over time. Having said that many unwitting investors were found at a loss, in part, due to these rumors. 

Moreover, this brings us right back to center and with regards to the New York Post.  The firm makes a habit of rumor mongering and erroneous reporting that preys on investors, for better or for worse. The most recent and/or relevant rumor the agency offered was with regards to Macy’s (M).  On February 1, 2017 the New York Post offered an article titled Macy’s sale rumored as long-time CEO steps down. After reading the article I understood the rumor that the Post was offering was nonsensical and erroneous in nature, akin to their offering with regards to SodaStream in years past. 

A partner at a private equity firm told The Post that he’d been contacted about a Macy’s sale by a real estate investor — while other industry sources close to the situation say they, too, have had similar discussions.

The statement by the Post above reads very much like, “A friend of a friend told me that…”.  It’s pretty juvenile on the surface and of course, they follow it up with the standard, “We do not comment on rumors and speculation,” a Macy’s spokesperson told The Post. Nobody from Macy’s told the Post anything because the Post never contacted Macy’s I'm sure. 

The catalyst, it seems, is Jeffrey Smith’s Starboard Value, the activist New York hedge fund.

With shares of M hovering just below $30 a share at the time of this rumor mongering from the New York Post and with Starboard’s initial M position valued in the upper $50s, fighting for a sale that could only hope to achieve low $40s made absolutely no sense whatsoever. I offered this analysis in my report article titled Macy's May Be Acquired, But It Begs For Greater Logic. In my article, I not only analyze the probability of a Macy’s takeover/acquisition but the likelihood of Starboard being the catalyst of talks. 

The current market cap of Macy’s rests at $9.4bn, which couldn’t be the acquisition price. Investors of scale would demand a premium, possibly pushing the market cap up to $12-$13bn or above $40 per share. The company’s debt stands at 7.5bn that would have to be assumed by an acquirer. Now I get that a potential acquirer would look at free cash flow and let’s face it, most mass market, big-box retailers have strong free cash flow. But in the case of Macy’s, they’ve leveraged nearly half of their free cash flow and as such greatly void the benefit of that free cash flow. That’s not something that can be easily remedied either, especially as Macy’s is experiencing cash flow drains. Now if we circle back to Starboard’s valuing of Macy’s real estate at roughly $21bn and account for a premium to the market cap and assumed corporate debt, what is there really to profit from if you are Starboard forcing or stimulating a sale at this time? They may only be able to squeeze a couple of billion in profits and assuming they get the full $21bn out of a total re-sale. It’s the only way they can make a reasonable profit, shy of allowing a sale to go through with a side agreement that allows Starboard to carry warrants tied to the real estate. Good luck getting the rest of the shareholder base to go along with that agreement though.

$13bn + $7bn = $20bn worth of investments from any would-be acquirer, at least. Because remember, post the retail sales the acquirer is still left running whatever is left with regards to Macy’s retail outlets. How much further will that core business decline and possibly exhibit losses in the future? For a shrinking core business and across all metrics and the hopefulness of activating and executing on all real estate assets to their assumed valuation…that’s a risk profile not usually found in great demand. The worst part of a $20bn buyout is that it assumes a premium to Wal-Mart’s price to sales. The logic just isn’t there and as such it is hard to rationalize why Starboard would be pushing for a sale or even a member of Macy’s itself. Also, I’m using a baseline for the acquisition price, as it would likely be forcibly higher.

Based on the analysis offered, the likelihood that Starboard would push for a sale of Macy’s knowing it would take a significant loss even if the retailer were acquired was illogical.  It made no sense whatsoever. Again, the New York Post used a good deal of preying on the situation surrounding Macy’s 2-year declining results and restructuring of the business to float a nonsensical acquisition thesis. And remember, if a public company were dedicated to selling itself, it would be required by SEC rules and regulations to notify the public and shareholders. Of course, no notification was ever offered and again the New York Post’s own lack of knowledge regarding SEC rules and regulations was an identifying element of rumormongering. But the nail in the coffin that more clearly and simply validates New York Post’s was participating in rumor mongering came overnight and reported by a more reliable source that is Reuters. 

Reuters has reported that Starboard had offloaded their investment in Macy’s shares this year. It’s very likely that in February when the New York Post offered that Starboard was the catalyst for a Macy’s sale, Starboard didn’t even own shares in M at the time.  Furthermore, the New York Post probably understood more recently that this new Starboard information would come to light for which the Post began to walk back their initial Macy’s sale rumor in a follow-up titled Macy’s asking price may be too steep for bidders. That article was offered to readers on March 3, 2017, ahead of the Reuters reporting on Starboard’s disposition of M shares. What is also funny is that the Post decisively realized that my previously offered cost/benefits analysis concerning a Macy’s sale/acquisition invalidated their assertion… so they used it to walk back their rumor as indicated in the very title of their follow-up piece. 

In short, what sounds improbable usually is improbable. But investors should perform exercises of due diligence when these rumors are put forth in the media. Most of the time, unfortunately, the rumors are found to be just that, rumors and baseless rumors at that. It’s disheartening to realize these types of media outlets are permitted to proliferate such rumors or thoughts, but that is the era we live in. As such, investors beware and be aware.