Buyout Breakdown: The Rewards of Rejection
Boom! A marketplace announces a lucrative buyout offer for one of their assets. It’s a handsome return on both the IPO price and the most recent trading level. We did it! We made it! This is what it’s all about, right?!
Or is it…
According to our data, there have been 28 publicized buyout offers across the fractional universe dating back to April 2019. Of those 28, shareholders have given the Mutombo to 12 of them. No, no, no – not in my house! In fact, 10 of those 12 rejections have come this year, against 15 total offers in 2021. When rejected, the margin has not been particularly narrow, with just 29% of shareholders voting in favor of accepting on average.
Shareholders in fractional markets might reject a buyout offer for a variety of reasons. Most simply, they may consider it too low. But beyond that, for many investors, there’s a great degree of nuance to these decisions.
Maybe the offer is attractive in the short term, but most have long-term conviction in the asset. They believe that relative to other opportunities for their dollars over the long term, whether in the fractional space or not, this asset represents a risk/return profile they are more comfortable with.
Maybe the investor believes bigger money is preying on the fractional space, submitting an offer at a discount to a recent, comparable full priced sale. Surely, secondary markets that are slow to catch up to and price in such comps are bait to such well-funded predators.
Maybe the offer has immediately followed an IPO. Attractive though the fast return may be, the fractional investor can’t help but feel such an offer itself is evidence that they’d be calling it quits on the asset too early. That their gain would actually be the buyer’s larger gain.
Whatever the reason, the fractional crowd has certainly become anything but shy when it comes to swatting offers into the 14th row. But has that activity been prudent?
In fairness, it’s too soon to make a definitive declaration on the success or failure of a decision likely made for the long term (at least for some) after only a few months. Nonetheless, it bears watching how quickly secondary markets adjust to price in the news of an offer. After all, some argue that these assets are worth only what the next person is willing to pay for them. These offers are literally just that – an indication of exactly what a real-live next person is willing to pony up.
Of the 12 rejections, 8 of the assets were either already trading or later went on to hit the secondary market. On average, the first time they traded post rejection, whether immediately or at their eventual trading launch, those assets traded at an average of a 30% premium to the rejected offer price.
Now, there are some outliers that influence the average significantly higher. For example, Collectable’s Fleer Jordan rookie received an offer in January 24th, 2021 at 265k, but didn’t begin trading until February 9th. By that point, strong auction results for the asset pushed the opening price to $60, a 126% premium to the offer price. Rally’s First Edition Pokémon set received a buyout offer of $80.16/share or just over $400k on November 3rd, 2020. This was shortly after it’s late October trading launch, however, and it didn’t trade again until December 2nd, a month after the offer. It closed at $150 per share that day, an 87% premium to the offer price.
There have actually only been two instances thus far where a buyout offer was rejected and the asset traded again immediately the very next trading day: the O-Pee-Chee Gretzky Rookie and the Wilt High School Uniform.
On the Gretzky card’s first day post rejection, it traded up 22% to $33, sitting at a 2% discount to the net offer price of $33.58. Oddly enough, it traded down the next day to $29.50, declining further before retrenching and regaining ground towards the offer level. Despite persistent, encouraging auction results, the card has yet to breach the offer level on the secondary market.
The Wilt uniform’s first trading day post rejection saw it gain 29% to $45, a 7% discount to the net offer price of $48.37. Unlike the Gretzky, this represented the first step towards closing the valuation gap, and it traded immediately to $51 the very next day.
Not a perfectly efficient reaction to a buyout offer in either case, but not absurdly befuddling either. Once prices begin to improve to reflect the offer, one would expect those that were in favor of accepting to put some downward pressure on prices as they begin to unwind their positions near the elevated level which they felt was sufficient. As volumes in the space grow larger, we may see prices more quickly tighten to their offer levels in the event of a rejection, and the influence of incumbent selling pressures would be somewhat mitigated. Still, the Gretzky activity is evidence that the market may have some ground to cover to reach this level of efficiency.
So, how are the spurned offers looking now? If we include rejected offers for assets that later went on to be bought out, the current value or eventual buyout value sits as of 5/14, on average, 24% higher than the offer price. This average includes three rejected offers which eventually led to accepted offers. On average, those accepted offers were at levels 38% higher, as fractional shareholders twisted arms at the negotiating table to earn more attractive terms.
(Note: we're considering one of these "rejections" a rejection by default, as the buyer of the Stephen Curry Signed Rookie Card Basket proactively upped their offer before the 48 hour voting period was completed. This inclusion lowers the above average for bought out assets. Without it's inclusion, the two rejected Koufax offers resulted in prices realized an average of 43% higher than the rejected offer, and the average excess return earned across all rejected offers would be 23%.)
Nine of the rejections look savvy for the moment, trading or bought out above the offer level. Just two are worse off at present, with the Gretzky card trading at a 2% discount to its rejected offer price, and the Topps Ernie Banks card trading 12% below its rejected March offer price of $40.51. One asset, the Carl Yastrzemski Rookie Basket, has not yet started trading. Below, we see those assets still trading at present.
For the four assets that had launched trading before an offer was made, their return since the offer is 84% on average, elevated by 140% and 130% returns for the Pokémon set and Super Mario Bros respectively. This return figure utilizes the asset’s trading value at the time of offer as the base value. In the chart below, we see those returns compared to the proposed return at the presentation of the offer.
On the flip side, it’s actually in instances where shareholders have voted to accept offers that it appears they have more frequently “erred”, at least in the short term. “Erred” belongs in quotation marks, as any error resulting in strong double or triple-digit returns is not one that will cause irreparable damage. Still, in the interest of balance, we must detail some of these decisions which appear misguided in the context of a rising market, particularly in the world of sports cards.
In June of 2020, Rally shareholders called it quits on a PSA 10 Jordan Fleer rookie for $72,000. As we know, Collectable’s example trades today at $360,000, representing a 400% improvement on the buyout in under a year. In October, it was a wrap on Rally’s 1950 Bowman Jackie Robinson in a PSA 8 for just over $12k. Another 8 sold with Heritage auctions on May 6th of this year for $24,000, effectively doubling that buyout result. Hindsight is 20/20, but the heightened frequency of rejections in 2021 tells us the fractional participant might be growing more cautious about throwing in the towel too early. Then again, it was just early April of 2021 when Collectable shareholders capitulated to a $350,000 offer for their PSA 9 Wilt Chamberlain rookie. That same card sold just weeks later with Goldin auctions for $450,000, a 29% improvement.
Outside of the card world, while we don’t have a direct like-for-like comp due to the high grade (9.8 A+) of Rally’s copy, it seems safe to say that their Super Mario Bros 2 asset would now fetch a sizable return on the $53k buyout price. It is hard to dismiss such a decision as foolish, though; it’s easy to see the rationale of shareholders offered a 76% return on the IPO price in a very nascent asset class.
While fractional shareholders won’t always get every call perfectly “right”, the expectation that they should is ultimately unfair. The voting decision is ultimately a personal one, each shareholder assessing their own view of the risk/return profile and how it meshes with their goals and time horizon. Certainly though, as the space continues to mature, the fractional markets should no longer be an easy feeding ground for bigger, bargain-seeking money.
Overall, so far, so good for the fractional investor looking offers of big returns in the face and saying “no, thank you.”
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