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Fanatics making an acquisition isn't shocking. It's more shocking when significant time passes without a Fanatics acquisition.
Fanatics acquiring PWCC? Also not really sending jaws to the floor in surprise.
Fanatics acquiring PWCC in part because the latter was allegedly closing in on insolvency? Okay, now you have our attention.
While there isn't yet clarity on how much Fanatics paid for PWCC or just how dire the situation was, rumors swirled earlier in the week about PWCC's financial instability. Darren Rovell reported PWCC would not have survived much longer without being bought, sentiments which were seemingly supported by a large recent wave of employee terminations.
How did such a large and bustling auction and marketplace business run into such trouble?
Many have been quick to point to the company's card lending program as a significant culprit.
PWCC had been advertising its lending capabilities since the early height of the card boom in 2021. Using their cards held in the PWCC Vault as collateral, customers could receive loans amounting to some percentage of the cards' market value. In September of last year, PWCC announced that it had expanded the program, establishing a $175 million asset-based credit facility led by Whitehawk Capital Partners to pursue the lending opportunity with greater firepower.
Alas, over the past year, in this very newsletter, we've highlighted numerous failed flips of modern cards at PWCC....six-figure losses crystallized in mere months. Why, oh why, would the seller ever take the card to market in such choppy times, when a massive loss was all but assured? There was conjecture that it was the result of borrowing gone bad. Now, the suggestion is that it could perhaps more accurately be described as lending gone bad.
With the swirling speculation about PWCC's tenuous financial position, there are some reports that borrowers willingly defaulted on their loans as the card market went south. Effectively, borrowers would fail to repay their loaned funds, keeping those funds and instead saddling PWCC with the rapidly depreciating card collateral. If PWCC's liquidity position was indeed challenged, it makes sense that they would then turn to the market and sell those cards as quickly as possible to raise whatever funds they could.
Whether the lending program and its failures were large enough on their own to sink PWCC is another question altogether. The company had been aggressive in investing for growth over the last few years, and the combination of that investment, the market's rapid and severe decline, the lending program troubles, and rising rates may have eliminated any margin of safety in terms of ongoing liquidity.
With Fanatics at the wheel, there will no longer be immediate pressure to foist the defaulted card collateral into the market for whatever proceeds may be available. The company, instead, will be able to return its focus to operating an active and popular marketplace and auction business, backed by what is - in relative terms - a quite technologically-advanced platform.
At face value, the acquisition is a natural and logical step for a Fanatics Collectibles business eager to offer a full end-to-end suite of products and services to collectors. The PWCC acquisition will bolster the company's vertical integration, engaging collectors from the time they purchase a card at retail until they sell it on secondary markets and start the process all over again. The ability to reach the customer at every step of that process is powerful, and Fanatics will surely benefit from the flywheel effect of an effectively closed loop of Fanatics card commerce.
When cards and collectibles never really leave the Fanatics ecosystem, the opportunities to generate revenue on them multiply. This is an opportunity recognized by the various companies who put significant marketing push behind vaulting, PWCC included. That opportunity expands considerably when a product can go straight from retail purchase to vault.
The most notable competitor in the vaulting and marketplace business is Collectors (with Goldin in the fold). With the PWCC acquisition, Fanatics moves into more direct competition with Collectors, though it leaves one glaring void in the company's growing arsenal: grading.
Whether or not that's a business Fanatics will pursue to compete with PSA and further close off its ecosystem is unclear; there is something awkward about a company that manufactures cards owning a business that grades - among other things - the production quality of those cards. PWCC has partnerships to streamline grading with Beckett, CSG, SGC, and MBA, and perhaps those will be considered sufficient for the moment.
There's another element of potential awkwardness at play. It's often the case that manufacturers of coveted products with active secondary markets like to keep those secondary markets at arms length, enjoying the retail demand they create but effectively ignoring them or pretending the to be blissfully ignorant to the huge profits generated when their products are resold. With a major secondary marketplace now under its ownership though, it'll be interesting to see if Fanatics maintains or softens the same stance.
Would a manufacturer be so bold as to explicitly acknowledge the cards it produces can fluctuate considerably in value, both immediately after purchase and over time? Will it market those data points, or does it invite too much scrutiny and too much legal expense?
Expect the arms-length treatment to continue in the near term, before PWCC is gradually eased more directly into the fold over time, but don't hold us to that.....we can't even promise Fanatics won't have acquired three more assets by the time you read this.
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