Hey everyone, and welcome back to Chain Reaction.
Last week, we discussed $4.5 billion in new crypto funds from a16z. This week, we’re talking about the arrest that has everyone in the NFT space sweating bullets.
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crimes of the future
The crypto space has been moving so quickly over the past couple years that builders have generally seemed to believe existing rules didn’t apply to them. Well, after years of snails’ pace legal action, it seems U.S. prosecutors are starting to feel it’s time to challenge that perception.
This week, the U.S. Attorney’s Office in the Southern District of New York arrested and filed charges against a former OpenSea executive who used his position to front-run NFT projects that were going to be listed on the home page of the marketplace. Members of the community discovered his actions by tracking his activity on public blockchains.
I would’ve loved to rant on this during the podcast, but news broke while we were recording, so I’ll leave you with some thoughts here.
The arrest was pretty much a massive shock to people in the NFT space who generally believed that Nate Chastain had acted unethically but that it couldn’t be “insider trading” because NFTs weren’t securities. This is a framing that was held by many, including Chastain’s boss at OpenSea who fired him.
“I do think there was a misframing of it as insider trading. We don’t view NFTs as financial assets, so that does not apply. That’s a very specific term for a very specific thing,” OpenSea Devin Finzer told Decrypt in September.
There are an awful lot of people taking a very close reading of the SDNY press release, which states it specifically charged Chastain “with wire fraud and money laundering in connection with a scheme to commit insider trading in Non-Fungible Tokens.” They notably describe NFTs as “digital assets” later in the release. Also, it’s worth reiterating that this is the DOJ — not the SEC — charging him, though it is the Office’s Securities and Commodities Fraud Task Force handling this case.
Now, why don’t crypto people want NFTs to be classified as securities? Well, there’s a lot of existing regulatory guidance there, and most feel it would basically upend the industry if NFTs were unilaterally subjected to securities law; it would certainly raise the barrier of entry for creation of NFTs and curtail a lot of the experimentation happening in the space right now.
Another big reason that it would be bad if NFTs are treated as securities is that it would mean an awful lot of people have been doing illegal things for an awfully long time.
The NFT space made it through this latest crypto bull run without any meaningful regulation coming down on it. As NFT volumes start to show signs of slowing, there’s a fear that more regulation could be just around the corner.
the latest pod
What’s up, it’s Anita here to give you a preview of the latest episode of our Chain Reaction podcast, where we unpack the latest web3 news, block-by-block for the crypto-curious.
This week, we talked about Coinbase’s new approach to what can be one of the most anxiety-inducing aspects of corporate life — the performance review. Our colleague, Amanda, wrote about how the crypto exchange is trying to emulate Ray Dalio’s hedge fund, Bridgewater Associates, by letting employees give each other real-time feedback and ratings. Is this part of tech’s descent into a Black Mirror-style reality? Tune in to hear our thoughts.
We also recapped two recent crypto comeback stories, one from the OnlyFans founder and CEO who left the company after trying to ban sexually explicit content from the platform and another from the architect of the highly unstable stablecoin, Terra.
Our guest this week was Outdoor Voices founder Ty Haney, who shared details about her pivot from athleisure to crypto with her new venture, Try Your Best. Haney broke the news on our podcast that the startup just landed its second round of institutional funding.
follow the money
Where startup money is moving in the crypto world:
- New York-based enterprise blockchain startup Digital Asset took in a strategic investment of undisclosed size from Japanese banking giant SBI Holdings.
- InfStones, a blockchain infrastructure provider, nabbed $66 million in a round led by SoftBank and GGV.
- Indian music NFT startup FanTiger bagged $5.5 million for its seed round led by Multicoin Capital.
- LivingCities, a metaverse-focused social startup co-founded by Foursquare founder Dennis Crowley, banked $4 million in early funding led by DCVC.
- Zimbabwe’s FlexID received an undisclosed amount of funding from Algorand for its blockchain-based identity system for the underbanked.
- Web3 augmented reality gaming company Jadu raised $36 million in funding for its Series A led by Bain Capital Crypto.
- VillageStudio raised $2.3 million in an Animoca Brands-led round for its NFT-based Playken avatars.
- Web3 payments API Merge got $9.5 million in seed funding led by Octopus Ventures.
- GoSats, an India-based bitcoin rewards platform, raised $4 million in a pre-Series A funding round from investors including Y Combinator, Accel and Gossamer Capital.
- DAO management platform Utopia Labs closed a $23 million Series A led by Paradigm.
the week in web3
It was an uncharacteristically quiet week in web3, and our team members in the U.S. took some time to enjoy the rare, uneventful long weekend. Still, some big personalities made waves in the space, for better and for worse.
- OnlyFans founder Tim Stokely is pivoting to crypto after leaving the company last December following controversy over his push to ban sexually explicit content from the platform. Anita wrote about the new “family-friendly” NFT startup he’s launching alongside another former OnlyFans exec that will allow people to buy, sell and trade virtual cards featuring influencers and celebrities.
- NFT platform OpenSea had fired Nate Chastain, its head of product, back in September after he was accused of front-running trades on the platform. Now, he’s been arrested and charged with insider trading; Lucas has the details.
Here’s some of this week’s crypto analysis you can read on our subscription service TC+ (written by TC’s Jacquelyn Melinek):
VC funding for crypto projects fell in May, but many investors remain bullish
VC funding in crypto has fallen month-over-month from April to May, but many investors are not concerned. “For investors like us, it’s time to buy,” Stan Miroshnik, partner and co-founder of 10T Holdings, told TechCrunch. The pace of capital deployment might be more measured as investors and founders alike become more calculated, but VCs will still continue to have a robust amount of activity, Miroshnik said. Even though there might be a gloomy sentiment in digital asset markets, true crypto-native funds will continue to invest heavily, Saurabh Sharma, head of investments at Jump Crypto, said to TechCrunch.
As crypto becomes more mainstream, can it stay decentralized?
Whether it’s first-time buyers of cryptocurrency or people learning more about NFTs, Bitcoin and the general crypto ecosystem, there has been an uptick globally in awareness of crypto. But as it gains momentum, regulators worldwide will continue to monitor the space more closely, but the headline speaks for itself: what does this mean for the future of crypto? A number of founders and executives in the industry weighed in with their thoughts.
Longtime Bitcoiner Dan Held says this ‘crypto winter’ won’t be as harsh as others
As the cryptomarkets remain bearish, some longtime market participants, like Dan Held, director of growth marketing at crypto exchange Kraken, aren’t worried. Even though there is lots of talk of a crypto winter circulating through the community, Held said the sentiment for this current market cycle is different. While he — and many others — persisted through major market cycles over the years, the narratives have shifted a lot, thanks to more prominent institutional players and massive amounts of capital entering the space.
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How One Founder Is Helping DIY Investors Navigate Risk
August 14 is National Financial Awareness Day, and I had the opportunity to chat with John Duffy, founder of Trending Stocks, who went from personally absorbing the 2000 and 2008 market crashes to launching a risk-adverse stock market platform for DIY investors. Here, I chat with Duffy about trend following and investment risk management.
WHAT GAVE YOU THE IDEA FOR TRENDING STOCKS?
It took me 14 years to “get even” after two huge downturns in the stock market – first in 2000 (down 50%) and then in 2008 (down 56%). Losing 14 years of investing time and money was the impetus for me to research a better way in the market. I learned about the ancient trend following strategy – and while it worked well – there was no simple software or program to apply it. Spending hours upon hours charting and graphing doesn’t interest anyone, so I programmed and launched TrendingStocks.IO to automate the research time and hassle on the backend.
HOW DOES IT HELP INVESTORS AVOID RISK?
The trend following strategy inherently has a focus on risk management, so I applied that into the new platform. The risk management helps investor avoid riding the market down. You pre-set a fixed stop-loss amount based on your personal risk tolerance. As a stock goes up, which it should based on the trend following strategy’s identification, so does the stop-loss amount; it rides up. While the stop-loss amount fluctuates up and down causally with the stock, if it gets down far enough to cross below a bottom threshold – we flag you to sell and get out.
WHAT’S YOUR BACKGROUND?
Aside from studying finance, economics and business, I’m a Vietnam Navy Veteran. Oddly enough, this was my foray into programming and coding. I bunked with the first IBM IBM programmers in the world. Their expertise interested me, so I asked a bunch of questions and they taught me the science.
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Not to date myself, but this was before when computers could be owned, only leased. IBM recruited me to program after the war, so I entered as one of few who had learned how to program back then.
IS THIS FOR DAY TRADERS OR DIY INVESTORS?
This is definitely not a day-trading solution. Trending Stocks provides analysis at the end of every business day and therefore, it’s not suitable for day trading. It’s after-hours based.
The tech is suited for a long-term, DIY investor and anyone who’s a newbie or wants to get involved in the market. Aside from managing risk, being a diligent trend follower helps with wealth growth over time.
Once an individual has confidence they’re working with good investable trends and a solid risk management process, it’s an easy plan to follow and platform to supplement that plan.
Difference Between CFD and Shares
Contracts for Difference (CFD) trading and share trading vary primarily in that when you trade a CFD, you speculate on a market’s price without acquiring ownership of the underlying asset, but when you trade shares, you must do so.
The main distinctions between a share and a CFD are ownership and leverage. You become the owner of the shares when you purchase shares. Investing in shares is equivalent to acquiring a modest ownership share in a business you support. You must pay the whole share price when purchasing stock shares.
Contract for Difference is referred to as CFD. Without holding the underlying asset, you can speculate on the price of a security by engaging in online CFD trading. A stock, stock index, currency, commodity, or cryptocurrency might all be the underlying security for a CFD. With CFDs, you may join a trade with a lower initial investment because they trade on leverage.
Trading CFDs involves taking into consideration leverage and margin, fees and charges, instrument categories, going short, and asset ownership, which is one of the primary difference between CFD and share trading. Let me elaborate more.
What are Leverage and Margin?
Leverage and margin go hand in hand when trading CFDs. By using leverage, you may acquire exposure to an underlying asset without having to put down the whole amount of money needed to purchase and hold the real asset; instead, you just have to contribute a portion of the position’s overall worth.
The amount you must initially have available to begin a position, known as margin, fluctuates based on the contract size and the underlying asset you want to trade. Margin is not a cost. Based on the pre-determined leverage for the asset class, the first margin need is expressed as a percentage of the contract value. Risk is increased while trading on margin.
When you trade on the Invest trading platform, you must have the full asset value accessible, and you buy shares without applying leverage to your available funds.
Variety of Assets
You may trade on more than 2500 different assets on the Traders Union CFD platform, including shares, forex, commodities, indices, cryptocurrencies, ETFs, and options. You may do this to diversify your portfolio and get exposure to major exchanges across the world.
The Invest trading platform is a marketplace where you may buy and sell stocks and ETFs (ETFs). You may purchase and hold shares of your favorite businesses or any listed ETF on the platform, as well as benefit from the newest IPOs when firms go public, thanks to your access to over 1200 equities and 90 ETFs.
You may acquire exposure to an underlying asset, such as Gold (XAU), Apple (AAPL), or EUR/USD, without really holding it by using a CFD. Due to changes in the underlying asset’s price, you will either gain or lose money. The goal of CFD trading is to bet on changes in an underlying asset’s price. The size of the stake and price changes determine any profit or loss.
In contrast, when you purchase a stock on the Invest trading platform, you become the owner of the physical asset and look for a potential longer-term rise in the asset’s value before selling it.
A Little More About How CFDs Can Differ From Investing
If your position remains open overnight while trading CFDs, you will be charged an overnight fee. While CFD trading is frequently utilized to speculate on near-term events like earnings announcements or the release of U.S. data reports, stock trading is typically favored for constructing portfolios.
In summary, both CFD and share stock trading offer benefits and drawbacks, and both let you profit from price changes that might result in either a gain or a loss. You should be able to choose which Traders Union platform best matches your trading preferences after you have an understanding of your trading goals. Which trading platform—CFD or Invest—does best for you?
Hillenbrand Should Spinoff Their Casket Business. It Would Mean 50% Upside For Shareholders.
As humans, we find death a difficult topic as it brings up a lot of feelings of anxiety, fear and awkwardness. As well as sadness. It’s extremely unsettling to think of our mortality. We tend to put it out of our minds, but as with taxes, death is an absolute certainty, as Mr. Benjamin Franklin so succinctly put it.
Here at The Edge, we to seek out untapped shareholder value as well as underperforming companies for Activist investors. Furthermore, when we find them, we also need to explain exactly how that can be achieved. Sometimes companies are sitting on hidden value and at other times, they just need to be given a push to consider looking more closely at finding and ultimately realizing that value for shareholders.
One company that came across our radar two years ago was Hilllenbrand (HI), currently trading at $45 a share. This Indiana based company is listed on the NYSE and has a market capitalization of just over $3 billion. It has many businesses in the industrial sector that complement quite nicely together. The business it has that sticks out like a sore thumb and that doesn’t fit with the rest of the company is its “Batesville” business, which is involved in the manufacturing and sale of funeral service products, including burial and cremation caskets, cremation containers and urns, other personalization and memorialization products and technology applications for funeral homes. The following is all from our March 31, 2022, report with some recent updates and is available on request.
Timing is Everything. Why Now?
Over the last two years, the management at Hillenbrand HI have continued to progress with the transition away from just selling caskets in the death care business to becoming a large diversified industrial company. At the time, we acknowledged that with the help of an activist investor, the company can come off its 2008 lows and create value for shareholders. However, a lot has happened between then and now that has made a Spinoff of the casket segment even more compelling.
If HI’s stock price hadn’t doubled, there would have been a risk that the market cap size for Batesville would have been too small and been kicked out of the SmallCap 600 Index, and shareholders would have incurred index selling pressure. Likewise, HI’s debt at the time was around 4x and would have presented a challenging split. Now, using the stable and predictable cashflow from BATES, the debt has been brought down to about 1.5x as of Q1 2022. And finally, with someone new at the helm who has seen first-hand what kind of value a Spinoff can create, there is a greater opportunity for a Spin today. This doubling of the stock actually puts Batesville at the right size (larger market cap) and the right leverage point for a smooth break-up;
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HI has increased its industrial focus from a 70/30 revenue split to an 80/20 split. Over the last two years, the management at Hillenbrand, Inc. have continued to progress with the transition away from just selling caskets in the death care business to becoming a large diversified industrial company. The move away from HI’s 100+ year old legacy death/burial business first began after a string of acquisitions starting in 2010. Initially, the Batesville Casket business was the only segment, contributing to 100% of the business. Now, after recently acquiring its Molding Technology Solutions business (Milacron Holdings Corp. (MCRN) for $1.9 billion) which closed on March 30, 2020, this has increased the percentage of the industrial side of the business from 70% of the revs to just over 80% (or on the flipside, Batesville previously contributing to 30% of revs to only around 22% by FY21 and 9M2022).
Revenue Break-Up: Latest Fiscal Year End
Batesville in 2022 is the Right Size for a Spinoff
In March 2020, HI was a $1.4 billion Market Cap ($3.1 billion EV) company. Today, HI is a $3.3 billion Market Cap company, with a $4.1 billion EV. Back in 2020, while the minimum market capitalization restrictions would have been lower than what it is today in order for both the RemainCo and the SpinCo to remain in the S&P SmallCap 600 Index to prevent any near-term index selling pressure, other complications surrounding its debt would have arisen. Therefore, the SpinCo (suggested ticker BATES) is in a much better state to be listed today, creating a pure-play, high free cashflow generating business. See below for our different market cap scenarios.
A separation in March 2020, based on the revenue distribution, would have resulted in a higher leverage for Batesville (BATES) on a standalone basis (4.3x). Furthermore, the split would have led to Batesville leaving the S&P SmallCap 600 in March 2020 as the criteria for inclusion required a minimum market cap of $600 million to remain in the SmallCap Index.
If the management wanted to shift debt in such a proportion to allow Batesville to remain a part of the SmallCap Index, it would have required a 42% distribution of debt, which would have led to a higher leverage of 6.2x for Batesville, making it even less appealing for investors as a standalone company
If HI plans to split the company based on the revenue contribution in today’s terms (as of February 2022), even though the leverage seems more appreciable than in March 2020, the market cap would still lead to Batesville being kicked out of S&P SmallCap 600 Index, as the most recently updated criteria requires the minimum market cap to be around $850 million, which is higher than our scenario putting Batesville’s market cap at around $619 million. However, if we adjust the debt distribution to allow BATES to remain in the S&P SmallCap 600, the below table is the ideal debt distribution scenario:
Based on the above scenario, a 73%-27% split would lead above the minimum $850 million market cap needed for BATES to stay in the S&P SmallCap 600 Index and will also give a leverage of 2x, which is less than the combined Parent’s 2.3x. At a leverage of 2.3x (Scenario 3) or 1.4x (Scenario 2), the leverage is way lower than the peer average of 3.7x (CSV: 5.4x, MATW: 3.8x and SCI: 3.6x). Therefore, this gives HI’s management even more room to manage and distribute debt among the RemainCo and the SpinCo.
If we assume management decides to assign enough debt on BATES that the leverage trades in-line with peers (around 3.7x), this requires a debt distribution in the ratio of 51%-49% for Advanced Process Solutions & Molding Tech Solutions and BATES, respectively. This would lead to a market cap of around $1.6 billion for BATES and a $1.7 billion Market Cap for the RemainCo (with a favorable leverage of 1.4x).
Enticing Proposition of BATES Expanding Its Business as a Standalone Entity
After HI’s biggest acquisition of Milacron in March 2020, the company’s debt was around 4x and therefore why we mentioned this higher leverage would have presented a challenge for a break-up at the time. However, over the last two years, the management have used the stable and predictable cashflow that Batesville (BATES) generates to bring that debt down significantly to about 1.5x as of Q1 2022. This was made clear in HI’s most recent transcript (Feb 3, 2022), where the management said that “our next strategic pillar is to manage Batesville for cash.”
However, when asked about the long-term shift towards cremation (as peers have been), this topic is never fully explored, and the management highlighted a slight decrease in the revenues was due to an increase in families opting for cremation. In fact, close to 55% of all funerals in the US currently are cremations. The real question is whether BATES becomes an independently listed company and uses this predictable cash to expand and improve their FY22E margins (20% compared to over 30% like its peers SCI and CSV), especially to pivot from the relatively high mortality rate seen in 2020 and 2021.
The table above highlights the high conversion rate of FCF HI has achieved, which proves their superior debt-paying capabilities and ability to manage higher operational scaling (if required) based on its own funds. Furthermore, the management has proudly highlighted they have been able to achieve a 100% FCF conversion rate over the past decade, which shows both BATES and the remaining HI business (Advance Process & Molding Technology Solutions) are high free cash flow generating divisions.
Batesville (BATES) derives 89% of its business from the sale of caskets, whereas its peers have a mixture of casket sales and funeral services, and we believe the services business is helping these peers achieve better operating margins compared to BATES. Currently, BATES is expected to report a margin of around 20%-21% for FY22E, primarily through selling caskets. Peers SCI and CSV are expected to make around 30% and 33%, respectively, owing to their revenue mix. We believe a separation into an independent company will allow BATES to leverage on its operational performance and potentially venture into the higher margin Funeral business and Services as well as the cremation space, thereby improving its operating margins and increasing investor wealth.
HI has Underperformed Its Peers and the Broader Market
From 2020 to 2021, HI’s stock price went from as low as $14.29 (March 18, 2020) to over $45 by the end of February 2021. This was reflected in its 2-year TSR annualized (shown below), but historically HI has always been on the lower-end of the TSR chart versus its peers and Index with respectfully a better performance recently.
Total Shareholder Return: HI Vs. Peers & Index
Finally, the management are no strangers to value creation from Spinoffs. There is a new CEO on board after the previous CEO of HI was there for the last eight years and with the company for 27 years. Joe A. Raver retired at the end of 2021. HI’s new and current CEO (as of January 1, 2022) is Kimberly K. Ryan. Ms. Ryan has been on the board of a company that previously performed a Spinoff. She was a board member of Kimball International KBAL (KBAL) since January 2014, which performed a Spin of its Electronic Manufacturing Services business called Kimball Electronics, Inc. (KE) on November 3, 2014. KE jumped +128% in its first year from the Spinoff, so Ms. Ryan has seen first-hand and can appreciate the value creation potential following a break-up.
With a stock market that has taken a bashing, companies need to think of their shareholders as the economy tightens its belt and further consider how they are going to offer value for the holders of their stock. Hillenbrand seems an obvious candidate for hidden value release.
Our one-year Base case target price is $67.36 for HI, implying a potential upside of +45% from the current share price of $46.57. However, our Sum-of-the-parts target price comes to around $78.99, which implies a potential upside of +70%.
Peer Comparison Matrix for the Advance Process & Molding Technology Solutions
Peer Comparison Matrix for the Batesville Segment
Finally on July 20, the company have announced a strategic review of their Batesville business. We believe the correct route for them is to Spinoff the business to existing shareholders to maximize value.
If you are an Activist investor looking for companies like this or you are a regular investor looking to take advantage of price moves due to corporate change, please contact me and experience our service.
The author owns shares of Hillenbrand Inc.
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