💰Quantifying “The Amazon Effect”💰
|Jan 15|| 27|
In Sunday’s Members’-only edition we noted how, unlike certain other retailers that have found themselves in bankruptcy of late, Pier 1 Imports Inc. ($PIR) is almost certainly a victim of Amazon Inc. ($AMZN). Given the relative lack of debt and no private equity overlord, it seems that pundits have as clear-cut an example of “The Amazon Effect” as you can get.
This — coupled with the last few year’s of retail carnage — naturally begs a question about Amazon’s reach and market share.
Luckily, shortly before Christmas, Benedict Evans did a deep dive into Amazon’s business (using 2018 numbers). We’ll summarize it here but it’s worth a read in its entirety.
Discussing sales, Evans writes that in the US:
Amazon sold $77.5bn of products itself,
And also sold another $106bn for third parties,
Giving a total US [Gross Market Value] in round numbers of roughly $184bn.
…$184bn sounds like a big number, but how does that compare to the competition? What market share would that give Amazon?
The simple answer is that the US government gives a number for total ecommerce sales as an economic statistic: in 2018 the number was $522bn. Hence:
Amazon’s first party business had about 15% market share of US ecommerce
The third party business had about 20%
And the total GMV had a 35% share.
Note the distinction he’s making between direct online sales and “third-party seller services.” The latter is Amazon’s “Marketplace,” where Amazon simply serves as an agent handling the logistics for third-party sellers.
Splitting out GMV is important because Amazon isn’t setting the price or choosing the selection for the third party Marketplace. This is especially relevant for any conversation about predatory pricing: Amazon is setting the price directly for 15% of US ecommerce, not 35%. On the other hand, some of those third party products will be competing with products that are sold and priced by Amazon, and setting their own prices accordingly. Life is complicated.
But Amazon doesn’t merely compete with online businesses and so the share numbers above aren’t entirely accurate — particularly in the context of discussions about monopolies and regulation. Amazon does compete, for instance, against physical retailers like Walmart Inc. ($WMT), Target Inc ($TGT) and Barnes & Noble Inc. ($BKS), as just some examples (and increasingly so, it seems, given the improving performance by the former two, especially). For this, you need to add in the effect of Amazon’s limited physical consumer goods stores, i.e., AmazonGo (11 stores), Amazon Books (18 stores), Amazon 4-Star (3 stores), and most importantly, WholeFoods (~470 stores). In 2018, physical stores accounted for $17.2b of net sales (for the sake of comparison, Amazon’s cloud offering, AWS, was $25.6b). And then, he notes, we need to compare the figure against total US retail (excluding auto, gasoline stations, restaurants, bars).
That leaves ‘addressable retail’ (i.e. excluding cars, car parts, gasoline stations, restaurants and bars) of $3.6tr in 2018.
Hence, Amazon US retail revenue of $200bn was about 6% of US addressable retail.
(Incidentally, this means that $522bn total US ecommerce is about 15% of US addressable retail.) (emphasis added)
These are interesting numbers and support, in many respects, PETITION’s long-held position refuting the simplistic view that the proliferation of bankrupted retailers is the result of “The Amazon Effect.” Said another way, The Amazon Effect likely gets way more air time than it deserves. Right now anyway. Indeed, “in the USA in 2018, Amazon was a little less than two thirds of the size of Walmart.”
…of course, Amazon is growing. Its US ecommerce business probably grew 20% in the last year, and so its market share of total and of addressable retail is going up. Hence, you could argue that since ecommerce is clearly going to take over a much larger share of retail, and since Amazon has a large (35-40%) share of ecommerce, Amazon’s strength in ecommerce means it will swallow everything else, even if it’s only at 5-6% today.
And this is to say nothing about how it has used data to sideswipe third-party sellers and promote its own private label brands at their expense — among other shady behavior.
I don’t think one can just assume that Amazon’s market share of online sales will be maintained indefinitely in a straight line into the future. The more that ecommerce expands beyond the original commodity categories, the more that we see new and different models and experiences proliferating. Shopify, another platform for online retail, is now at an annual run-rate of $60bn of GMV, up from nothing five years ago.
Of course, people have bet against Amazon in the past and we know how that’s worked out.
⛽️New Chapter 11 Bankruptcy Filing - Kingfisher Midstream LLC⛽️
Well, kind of “new” anyway. The truth is that this entity has basically been a chapter 11 debtor since September 11, 2019 when Alta Mesa Resources Inc.($AMR) filed for bankruptcy in Texas. At or around that time, it lost access to crucial liquidity, got embroiled in nasty governance disputes, fast-tracked a “strategic alternatives” process, and helped set some Texan precedent relating to gas gathering agreements. Good times. To say that the Alta Mesa/Kingfisher situation has been a complete and utter sh*tshow would be an injustice to everything else we’ve labeled “sh*tshow.” And we’ve labeled a lot of things “sh*tshow.” This one may just very well take the cake. Hooray!
In a nutshell, what the hell is going on here? Here’s our attempt at a succinct summary to get you up to speed:
AMR Filed for BK. As noted above, AMR filed for bankruptcy in Texas back in September. At the time it was just the latest in a string of oil and gas related bankruptcies. In fact, we were mostly interested in its history as a SPAC. Of course, everyone knew it was going to be a hot mess. But we’re not sure anyone anticipated that it would be the hottest mess of the last year (which is saying a lot given PG&E).
Governance Muck. In part, the “First Day Declaration” for Kingfisher encapsulates why this thing was hairy from the get-go. If you’re paying attention you’ll note that the declaration for both Kingfisher and AMR was by the same person, John Regan, who happens to be the CFO for both entities. If you’re wondering whether this is the only managerial or governance overlap between the two entities well, pat yourself on the back: you’ve got good instincts. And the answer is clearly ‘no’ which is why both AMR and Kingfisher pulled “independent directors” into the mix and gave them extraordinary oversight over the direction of their respective entities.
Advisors Galore. Of course, this means that there needs to be an army of advisors too. AMR has their own set: AlixPartners, Latham & Watkins, Perella Weinberg Partners and Prime Clerk. And since November or so, Kingfisher has had its set: Weil Gotshal & Manges LLP, Evercore Partners ($EVR), Quinn Emanuel Urquhart & Sullivan LLP, Opportune LLP and Perella Weinberg Partners and Prime Clerk. Wait, huh? It makes sense that PWP and PC would overlap given the circumstances here but hot damn(!) they appear to be the big winners here. 💰💰💰 Naturally there are tons of other advisors milking this thing too. An advisor here, an advisor there, everywhere an advisor.
Hopeless Entanglement. Kingfisher as an entity is wildly dependent upon AMR. It was formed in 2015 as a partnership between affiliates of ARM Energy Holdings LLC, High Mesa, Inc., and HPS Investments Partners LLC to provide crude oil gathering and natural gas gathering and processing services in the Anadarko Basin. Kingfisher’s midstream capabilities were later combined with AMR’s upstream business in early ‘18. Other integrations and sales followed. Employees are shared. Intercompany obligations fly left, fly right, and fly right down the middle. Kingfisher derives 80-90% of its revenue from gas gathering agreements entered into with AMR and its affiliated “initial debtors.” This ought to give you some indication of why it was so important for both entities to bring independent directors on board — something that should have been done long before it was. Kingfisher has its own funded debt obligations: $224mm under a prepetition credit facility. It has not, however, had access to funds thereunder as its lenders have asserted violations since September.
Running With the Land. The entangly entanglement got especially entangled in September when, shortly after the AMR filing, certain Alta Mesa debtors filed an adversary proceeding against Kingfisher seeking a declaratory judgment that the gathering agreements between the parties do not contain covenants that run with the land under OK law. In English: they were trying to reject the gathering agreements. For anyone following oil and gas bankruptcies over the last 5 years or so, the rejection of gathering agreements has been a hotly contested issue — one that demonstrates the interplay between state property law and bankruptcy law and the Texas judges have been chomping at the bit to get in on it ever since they took the view that those damn Yankees in the northeast were opining on something outside their area of expertise. Yes, this is a very bankruptcy-oriented “Get Off My Lawn” moment. And, predictably, Judge Isgur didn’t squander the opportunity; he denied the Alta Mesa debtors’ attempt to reject the agreements. SHOCKING. This simply reinforces the entanglement. If you want to get deeeeeep into it, Sidley Austin LLP’s Duston McFaul, Charles Person, Michael Fishel and Juliana Hoffman discuss the recent Isgur decision and note how it creates a split from the Second Circuit’s holding in the Sabine matter. For additional reading, see also this from Shearman & Sterling LLP’s team.
Out of Court Options. There really weren’t any. Surely any stalking horse purchaser was going to want a “free and clear” order from a bankruptcy court and that’s precisely why a chapter 11 sale of Kingfisher is now necessary.
Joint Sale. The entanglement also explains the strategy to pursue a joint sale of the Kingfisher and Alta Mesa assets. Both Kingfisher and the initial Alta Mesa debtors selected the same stalking horse bidder for their respective assets, an indirect equity owner of the Kingfisher debtors, BCE-Mach III LLC. Last week, the stalking horse bidder’s requested break-up fee and expense reimbursement in connection with the Alta Mesa assets got dunked on by the bankruptcy judge. While this was a termination event under the proposed asset purchase agreement — which, of course, cross-terminates the Kingfisher asset purchase agreement — BCE-Mach III LLC has apparently opted to move forward in any event. The auction is today, January 15 2020.
While that ⬆️ about sums it up, we haven’t really done justice to have messy this case has been. Something tells us it will be discussed for years in the context of, among other things, governance and venue.
⚡️Notice of Appearance — Andrew O’Neill, Sidley Austin LLP⚡️
PETITION: First, welcome back. After a highly-contested multi-day (6!) confirmation hearing in the Legacy Reserves Inc. bankruptcy case, we understand you took some much-needed R&R. What was it about that case that lent itself to such intense challenge? Do you anticipate valuation will continue to be hotly contested in future oil and gas restructurings given the current commodity pricing environment?
Several factors contributed to the contested hearing, among them an active committee, a dissenting notes class, and as you note the ever-active commodity pricing environment. I’m not sure many cases will lead to a full valuation trial like we saw in Legacy – the disincentives, chiefly cost and uncertainty, will continue to motivate all parties to deal rather than go hammer and tongs. We’ll see, but I’d bet on even more prepacks rather than more valuation trials. Of course, having just said that, we are now observing a willingness by parties to litigate just about everything in the Alta Mesa matter, so who knows.
PETITION: Are we setting up for another wave of oilfield services bankruptcies, including chapter 22s?
That would make sense given the pain on the upstream side, although certain of these companies may be able to do out of court deals initially to avoid filings in the near future – their capital structures were simplified in the first go-around (right?), and may enable such deals without the attendant costs of the bankruptcy process.
PETITION: And, if so (and, yes, the question presupposes an answer), WTF?!?
Well, there is always the Middle East conflict(s) to potentially boost crude prices, and if that happens perhaps there will be more drilling and the services guys can get back in the groove. But I take your point, and no I don’t think it’s true a lack of 1129(a)(11) rigor, but rather an unexpectedly tough business environment (again!).
PETITION: What are some concerns you’re hearing from clients that not enough people are talking about? What themes do you expect to prevail in 2020? Will it be more of the same, e.g., retail and energy, or will other industries be a notable trouble zone?
Are there any more milk producers out there? I think again many of us in the guild are expecting a downturn at some point – will 2020 be the year or will financial engineering/central banking continue to stave off the inevitable? I’m done predicting that THIS WILL BE THE YEAR but have seen those articles about CEO and CFO types predicting recession or significant slow-down cropping up, so perhaps this is the year. As one of my colleagues is fond of saying, the longer the counter cycle is delayed, the bigger the tidal wave will be when it hits. Right now I see a year much like 2019. Lots of chatter about auto and health care, and then there will always be retail (or will there be?) and mass torts. We are seeing more of the latter already to start the year, as you folks have been good enough to report on.
PETITION: What is the best advice that you received that’s helped you in your career? Don’t give us any trite BS: we’re looking for some gems here!
One of my mentors, who happened to retire this year, was fond of saying that if you are going to succeed in the bankruptcy (or what we at Sidley now call the Restructuring) practice, you need to have the 3 Fs: Fortitude, Fearlessness, and Fire in the belly. That’s probably only a 5 or 6 on the triteness scale. In addition to being a nice, catchy saying, I think it’s largely true, but another good piece of advice that I received early on is that it’s a good idea, if you can, to extract something useful out of even the most mundane or seemingly pointless assignment, task or matter. This is really effing difficult when you’re sucking wind at the office late on a weekend on something that isn’t super interesting. However, if you try really hard you can probably learn something new – or perhaps at least look forward to the hours counting towards an enhanced bonus or the enduring admiration of your colleagues. In other words, stay positive! Now we’re ratcheting up on that scale ….
PETITION: Have you read any books or listened to any podcasts that you think our community of investors, advisors, bankers, and lawyers would find interesting? What’s piquing your curiosity these days? Keep in mind: we have a lot of students who read us too.
We’ve all heard of the banality of evil, but how about the sometimes banality of negotiation? Take a read of “Our Man” by George Packer. Terrific eyes-wide open account of the life and times of Richard Holbrooke - the man, the myth, the legend. Reading books is a really good idea for those of us that also have to read credit agreements and indentures from time to time, for sanity’s sake, and I usually have a few going at once. Lately, I’ve taken to reading more non-fiction, which is probably a function of advancing age – I’ll be in the lazy boy watching old WWII movies on the history channel before I know it. What’s a podcast?
PETITION: Here ya go, Andy.
We’ll send you our bill for 0.1 hours (research).
Angela Tsai joined Stretto from Epiq Bankruptcy Solutions LLC.
Anupama Yerramalli joined Latham & Watkins LLP from Kramer Levin Naftalis & Frankel LLP.
Matthew Pietroforte joined Mudrick Capital Management from Davidson Kempner.
Paul Maniscalco joined MACCO Restructuring Group LLC in Denver CO.
Zach Contreras joined Accordion Partners from FTI Consulting Inc.
Andrew Behlmann on his promotion to Partner at Lowenstein Sandler LLP.
Dan Forman on his promotion to Partner at Willkie Farr & Gallagher LLP.
David Tiffany on his promotion to Partner at CR3 Partners LLC.
Eric Chafetz on his promotion to Partner at Lowenstein Sandler LLP.
Evan Zucker on his promotion to Counsel at Blank Rome LLP.
Gabriel Sasson on his promotion Special Counsel at Stroock & Stroock & Lavan LLP.
Lee Goldberg on his promotion to Director at GLC Advisors & Co. LLC.
Jack O’Connor on his promotion to Partner at Sugar Felsenthal Grais & Helsinger LLP.
Jacob Frumkin on his promotion to Member at Cole Schotz PC.
Joe Mintz on his promotion to Partner at Blank Rome LLP.
John Beck on his promotion to Counsel at Hogan Lovells LLP.
Joseph Esmont on his promotion to Partner at BakerHostetler LLP.
Kevin Lavin on his promotion to CEO(!!) at Ankura Consulting Group.
Mark Tsukerman on his promotion to Partner at Cole Schotz PC.
Matthew Garofalo on his promotion to Special Counsel at Stroock & Stroock & Lavan LLP.
Matthew Harvey on his promotion to Partner at Morris Nichols Arsht & Tunnell LLP.
Naomi Moss on her promotion to Partner at Akin Gump Strauss Hauer & Feld LLP.
Rob Jordan on his promotion to Senior Managing Director at KCC LLC.
Randa Karambelas on her promotion to Director at ToneyKorf Partners LLC.
Sara Brauner on her promotion to Partner at Akin Gump Strauss Hauer & Feld LLP.
Sasha Gurvitz on her promotion to Partner at Klee Tuchin Bogdanoff & Stern LLP.
Weston Eguchi on his promotion to Partner at Willkie Farr & Gallagher LLP.
All of the (nearly all male) folks newly promoted to Director at Alvarez & Marsal LLC: James Cooper, Patrick Dean, Douglas Donoghue, Bryan Fleming, Jonah Galaz, Ryan Gruneir, Kara Harmon, Bryan Krol, Theodore Langer, Jeffrey Liu, David Petty, Samuel Schreiber and Kevin Young.
All of the (nearly all male) folks newly promoted to Senior Managing Director at FTI Consulting Inc: Anton Chernousenko, Leonardo Florencio, Heath Gray, Rick Jordon, Christopher Lee, Dustin Oliver, Michael Ovalles, Brian Pitkin, Christopher Post, Devi Rajani, and Abhinav Trehan.
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