Who Needs IPOs?

Plus: Regulators and lawyers slam the freight train industry ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

February 20, 2023

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TOGETHER WITH

Good morning.

Scientists are going to drill a hole the size of One World Trade Center inside a 14,000-foot underwater mountain looking for clues to how life on Earth began… oh, how’s your Monday morning going?

A team of geologists, microbiologists, and general science-y types will embark on their journey to the center of the Earth in April. They will deepen a 20-year-old 4,640-foot hole inside a mountain on the floor of the Atlantic Ocean to 6,750 feet, giving them the closest look humanity has ever had at the mantle of the Earth. Once there, they hope to study how a mineral called Olivine might explain the existence of life on our planet. Even if they don’t learn anything mind-blowing, they should at least inspire a Godzilla reboot or two.

Morning Brief

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IPOs just ain’t what they used to be.

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The fallout continues for Norfolk Southern.

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Disney scores big money from its smallest hero.

Markets

Newly Public Companies are Going Back to Private

Initial public offerings were all the rage during the pandemic, but as with baking bread and obsessive Zillow browsing, they have since fallen by the wayside.

In fact, some companies miss their former selves so much they want to go private again, often at a lower valuation than their recent IPOs, according to a report from The Wall Street Journal. They might be onto something as investors once hungry for growth stocks are now fearful that rising interest rates and persistent inflation have the market on the brink. That makes 2023 all about bonds.

Respect Our Privacy

During the height of the pandemic, IPOs boomed as hundreds of companies looked to capitalize on cheap money and a quarantine-fueled surge in market trading. According to Ernst & Young, global IPOs raised nearly $460 billion in proceeds in 2021, but just under $180 billion in 2022 – a 60% drop. Now companies like grill maker Weber are turning the ship around and selling to private equity firms at a loss compared to their IPO valuations.

Weber and its fellow go-privateers are bowing to the reality of a contracting stock market, stubborn inflation, and a Federal Reserve pushing rates higher and higher, all of which has them reassessing their attitude about growth and risk. But investors have a new play. Year-to-date, $19 billion has been poured into funds that buy high-quality corporate debt, according to the Financial Times, vehicles that offer investors a low-risk hedge against more rate hikes and general widespread uncertainty:

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Not every company that went from private to public and back to private is doing it at a loss. KnowBe4, a cybersecurity business, agreed to sell to Vista Equity with a valuation of $4.5 billion, a roughly 15% increase compared to its market debut.

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Average US investment grade yields hit a peak of 6.42% in November — their highest level since the Great Recession. They’ve since dipped back down to 5.69%, but investors remain enthusiastic.

US Bonds: Speaking of being thirsty for bonds, US Treasury bills are also suddenly seeing alluring, i.e. safe, returns of 5%…for now. We distinctly remember the US hitting its $31.4 trillion debt ceiling last month, and if Congress fails to approve raising the debt limit, Washington could run out of money by the summer and have to default on its debts. That means all those investors who purchased one-year and six-month treasury bills might be more SOL than if they backed a pandemic IPO.

-Griffin Kelly

Infrastructure

Norfolk Southern Faces Backlash After East Palestine Derailment

It’s been over two weeks since a Norfolk Southern freight train carrying toxic chemicals derailed in East Palestine, Ohio.

Now, investigators and lawyers are laying tracks into the freight railroad industry.

Dangers on a Train

For a mode of transportation that’s literally attached to a set track, train crashes occur more often than you may think. Roughly 1,700 derailments occur every year on the 140,000 miles of US railway infrastructure, railroad industry analyst Anthony Hatch recently told the Financial Times. Critics argue that the railroad industry — more or less dominated by seven companies, including Norfolk Southern — has grown increasingly dangerous over the past few years thanks to layoffs that have cut the workforce by roughly one-third and the closure of important rail yards where safety inspections typically occur.

The Norfolk Southern derailment triggered an evacuation warning for roughly 2,000 people, devastating local wildlife, and spurring fear of continual health risks. While the accident has resulted —at least so far— in zero human deaths, the company admitted that it has experienced an increase in accidents in the past four years. Exactly how the accident could have been avoided remains an open question. Regardless, Norfolk Southern is still sifting through the accident’s various financial consequences:

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Last week, law firm Morgan & Morgan filed a class action lawsuit on behalf of two East Palestine residents, alleging the derailment exposed thousands of the town’s residents to the toxic chemicals. It’s one of at least seven lawsuits so far seeking damages from the company, which has created a $1 million community recovery fund.

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Any possible payouts or settlements may be what stings Norfolk Southern the most. “I don’t think [the accident is] an enormous financial hit,” Hatch told the FT. “They are insured, they are in good financial condition, but it is a reputational hit.”

Safety Check: The National Transportation Safety Board said the accident likely occurred due to a wheel bearing overheating, which safety experts recently told The New York Times is likely unrelated to braking rule that the railroad industry successfully had repealed in recent years. A worse outcome was likely avoided, however, thanks to a different still-intact rule requiring more fortified cars for transporting explosive and dangerous liquids.

– Brian Boyle

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Entertainment

‘Ant-Man’ 3 Sees Big Box Office Draw During Industry’s Slow Season

(Photo Credit: Krists Luhaers/Unsplash)

The latest film from Disney and Marvel — Ant-Man and the Wasp: Quantumania — suffered no apparent shrinkage, earning $104 million in its opening weekend.

That’s exceeding the company’s projections and bucking a trend that often plagues films released early in the year.

Blockbusting

January and February are affectionately known as the “dump months” in the film industry. This is when movie studios tend to release their least bankable films — a.k.a. clunkers — to try and make some quick cash without competition from summer blockbusters or early-winter Oscar bait.

That’s not to say there aren’t outliers, especially this year. M3GAN, the story of a killer robot, earned $170 million on just a $12 million budget. It may have helped that James Wan, the film’s producer and one of the hottest directors in horror today, had his name plastered all over the marketing. But even sleeper hits like the simply-monikered Plane starring Gerard Butler doubled its budget of $25 million.

And now, Ant-Man’s third installment is bringing some extra vigor to Hollywood’s winter doldrums:

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The first two Ant-Man movies, released in July of 2015 and 2018, earned $57.2 million and $75.8 million in their domestic debuts, respectively.

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While Quantumania has gotten a lukewarm reception from critics, the fan appreciation and box office return were likely aided by Johnathon Majors appearing as Kang the Conqueror, the MCU’s next big bad guy.

Wakanda Forever: This is only the second time an MCU movie has been released in the first two months of a year. The one other film that did it was 2018’s Black Panther, which proved to be a huge success for Disney and Marvel and earned $1.3 billion at the box office. Ant-Man 3 will likely never see those numbers, but it still has plenty of room to… get bigger.

-Griffin Kelly

Extra Upside

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Stealing a page from Elon: Mark Zuckerberg wants you to pay for a blue checkmark, too.

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I hate the smell of packages in the morning: Robert Duvall decries Amazon data center in rural Virginia.

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Just For Fun

Black out.

Paging Alfred Hitchcock.

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