Deep Dive: Bending Spoons - Genius or Disaster?

26:09Of course you're going to pay this multiple. If you're trading on 17 times – Totally. Or 10 times revenue. 10 to 15 times revenue. You can buy five times. Yeah, exactly. Yeah, that's a pretty – basically you can buy hardware multiples as an orphan from the software multiples that you're getting. But the thing is, they buy this business. What do you think the first thing is they do to this business? I presume they started sacking people, right? They fired half the staff. Yeah. And so there's no way this business can keep growing 40 % after you fire half their staff. Presumably they'll be jacking prices.

26:40But this is not the only such business they bought. They bought another business. They like buying German businesses quite a bit. They bought a business called Komoot, which is another kind of like a planning and navigation platform for like outdoor activities, also growing fast, et cetera. And so the reason I'm telling you this is because they've gone from let's buy little things and milk the cash to let's buy big fallen things and milk the cash with lots of debt to let's buy really good things that are growing fast and profitable presumably but let's just keep the same playbook buy slash milk and so I think that's the difference to Berkshire apart from all the metric stuff and the debt the difference is that um that Berkshire is trying to buy fundamentally good businesses, great businesses, and support their ongoing development and growth.

27:32And even when Bending Spoons pivots to buying good businesses, they still stick to their buy slash milk philosophy.

27:48Can I just look at, so you talk about all this debt they've used to buy this stuff like that business you just talked about. So the interest bill, so let's look at that operating income before interest. So call it that EBIT, has gone from, in 2023, this is all US dollars, 84 million to 127 million to 277 million. So decent growth. But there's a lot of eye here because I've had to use a lot of debt to buy this up, as we said. They don't use equity, they use debt. But if you look at their interest, so last year, their interest payment in the first, in the March quarter was 19 million this quarter as in the quarter just passed 93 million so they've massively so that's almost i'll call it a 400 million dollar interest run rate well that's the that's post acquisition of these three titans plus some other stuff that i spoke about not including not including any you know they've got another one and a half bill they can draw down on or something like that so like there's plenty more where that came from yeah so if you look at their um interest So operating income of$277 ,000, they're not making any money from that because the interest completely wipes out the income.

28:58So they've got to completely improve the operations of this business to justify the purchase price. So this is like – they talk about Tom Murphy in Capital Cities who was a Warren Buffett acolyte. It was ABC and he was an incredible businessman. And what he basically did was roll up lots of TV stations across and created ABC, which eventually sold to Cap Cities. is we bought ABC, which became part of Disney, essentially. It was this incredible acquisition and one of Buffett's best ever investments by return. And they said, oh, we're like this Tom Murphy guy. We buy stuff cheaply and roll it up.

29:31But the problem is they're rolling up all this random stuff that has no real linkage. They're not rolling up a bunch of TV stations across America. They're rolling up these completely unlinked businesses that happen to be generally digital, but there's no similarity between them, and they're not paid acquisition geniuses way in this stretch. We actually did a version of this in our business in the early 2010s when we had that group on clone called deals.com.au. And we knew that business wasn't a great business. So we started buying lots of other businesses, not just in the deals space. We bought all this other crap.

30:05We bought like a pinch me, this coupon, this sample business. We bought brands exclusive. Oh, you bought that business? Yeah, it was a shocking thing. You bought every one of these failures in this industry. So we did this almost exact thing. Fortunately, we had luxury escapes in the background, which is a great business, we realized buying all this crap and having one monolith backend, which is what these guys are trying to do, is actually a really dumb thing to do. It took us probably three years too long. Well, at least your businesses were connected. Although, pinch me, I reckon, should have become slap me to wake you up from that acquisition, to be honest with you.

30:34That was a case. We basically paid almost nothing for it. And we thought, well, it was a database. It was a database. Jeremy Reid had it. It was database play. And the principle was we had these other businesses like Brands Exclusive, which sold, It's a bit like what Mecca does with its boxes, but it doesn't work when you have to send it. So it was clearly a disaster. Like we don't resolve for the fact that it was really dumb, but what we did was not to - It might not have been dumb in fairness. It's just that you learned the hard way that that model doesn't really work. Yeah, it was clearly dumb.

31:04It was clearly dumb. I don't think we can resolve for the fact that it was really dumb, but at least we didn't use debt. But do you think it's dumb if you had a good thesis? But the thesis was wrong. No, the thesis was wrong. Yeah, but that's all right. But thesis wrong and thesis dumb are not the same thing. I just want to be clear about that. I think in this case it was dumb and wrong. But like – and we all – all four of us, we all agree with this now. But because we didn't use debt, we weren't – we didn't have this sort of Democles hanging over us. And because we had Luxury Escape sort of growing its income in the background, we eventually ran into 2016, 17.

31:37Hold on. All this stuff's garbage. Let's quickly just sell it all. And we shut it down or sold it all and became a pure play travel business and became a much better business. But we learned the hard way that buying a shit business for a cheap price is a really dumb idea. And using debt to supercharge this is even a dumber idea because you just have this dagger on. This is, as you said, Warren Buffett would hate everything about this business. The notion these guys are trying to claim to be sort of Warren Buffett-like, Tom Murphy-like, Charlie might be turning his grave if he saw this debacle.

32:07Like, they would hate this. They could have been. So the debt's a problem because the problem is this. They should really retire the debt. Like their business is worth$20 billion. They're growing the debt though. I know, but they've got 20-bill market cap, four-bill debt let's call it. They could go and raise$4 billion and retire all of the debt, but they won't do that because their entire thesis written in black and white is they're a high-leverage business that believes they can achieve this 65 % IRR by loading up with debt. And then they've got this forecast EBITDA for 2026. Did you see this?

32:46It's like$1.4 billion or something. Then you start unwinding it, right? So how much interest comes out of that 400 mil? That knocks it down to a bill. And then you say, well, how much in restructuring costs? Because they don't put that in either. Well, I think there's going to have to be at least 150 or 200 mil of restructuring costs. And then it's how many, then they've got acquisition expenses. Well, that might be another 50 million. God knows what else. And like I think they are going to generate hundreds of millions of free cash. But they're going to need to because the interest cover they have or the debt ratio to their EBITDA, like it's pushing the boundaries a bit.

33:25I mean this is a high-risk bet. My personal view is they could turn this into a Berkshire Hathaway. Like they have to basically say the model we believe in with our heart and soul, which is opportunistic acquisitions funded by debt where we then slash and burn to make profits. We're going to pivot away from that model and use what we've built now to buy high quality businesses. They could do that and they could start turning into more of a Constellation Brands or a Berkshire Hathaway. No one's going to be a Berkshire Hathaway because it's Warren Buffett and Charlie Munger being, you know, like the Tiger Woods and I don't know who the other equivalent is, Roger Federer of their sports, right?

34:11But I think the problem is they're not doing that, that they did buy these two very good growing businesses and they seem to be following the same playbook with those businesses. If you look at they've got about$900 million of real assets, as in cash and cash-like assets. Obviously, they've got all these businesses. They've got roughly$4 billion in liabilities. So this is a balance sheet that's crazy leveraged. It feels like it's very much a publicly listed private equity firm, but private equity firms don't, well, they have been buying more SaaS businesses lately than the Vista. Obviously, Vista Equity Partners does a lot of that sort of stuff.

34:52But if you look at the historical model of private equity, the KKRs and the TPGs, they historically haven't bought businesses like this which don't have hard assets. because once you don't have hard assets, you start really raising the risk when you start cutting stuff. So the problem with these guys is they bought these digital businesses that could go – there's no assets to sell. If something goes wrong with these businesses, they've only got all these debts and no assets because they're all just intangibles that gets written off. But the other – yes, that is true. And to compound that problem, private equity, they quarantine the debt into each company that they own.

35:24This is a situation where all of the four, $4.5 billion of debt. I thought it was$3.5 billion. Let's call it$3.5 to$4.5 billion. Yeah. We'll draw down. Like that is sitting in this big pool. So on the plus side, one great winner might save them. But on the downside, a great winner might end up getting dragged under the water as well because all of this is wrapped up together in one entity. I think the hardest thing about this business, because this is not a case of saying it's good or it's junk in my view. Like I don't think it's worth$20 billion. But there are very good things and smart things about what they've done.

36:03They've moved into a very high-risk game. And my main issue here is there is a heavy degree of, I don't want to say opacity, but translucency instead of transparency about a lot of the numbers. And one of the key criticisms of analysts has been just the lack of transparency around cash because ultimately in this situation you've got a business where you're using this cash off the balance sheet to buy assets. So that expense is actually not an expense. You never see that on the income statement. And then when they report their EBITDA, there's no amortization of any of the actual intangible assets they've acquired with that money.

36:45And so shareholders, investors will never see the money that they've spent on businesses flow through the income statement in any way unless they look at the Gap Accounting NPAT. That's the only place that they'll actually see it. Yeah, I think everything has its price. Like these guys clearly aren't complete idiots. They're high risk. Well, they're not idiots at all in fairness. I think they're very smart and playing a game of high risk enrichment. Where I think they could be idiots is they had a decent business that was going well. I think the model, the Cigar Butt model, we can criticise elements of it, but it's actually it.

37:22the phase one model makes the phase one or even phase one and phase two kind of makes sense and phase three in isolation with the right debt structure also makes sense uh but it's more the way they put phase one two and three together is they've got this interesting cigar about business like and it's got a price like at a billion dollar valuation whatever i'm probably comfortable with this but as you start if you look at their earnings they're basically a break-even business now but they won't be break-even on cash i think they'll throw off 600 mil of cash after interest? Yep. They're going to throw, I think their EBITDA is 1.4 bill.

37:57You can check this, but I think it's about 1.4 bill. And the interest bill is going to be 400 mil. And then there's other bits and pieces. The restructuring costs are a killer for this business. Yeah. Killer. I mean, you talked about, I think you said there was 75 mil or 96 mil or whatever it was of restructuring costs in Q1. I mean, you know, firing people, that costs money. And so these are a killer, but they're going to make hundreds of mil of free cash, this business. So I wouldn't write that off. Yeah, but I'm very skeptical of the free cash number. I'd much prefer to look at a profitability number, and a profitability number hasn't been debauched.

38:29And the real profitability number is close to zero. So to get profit to a – to justify its$30 billion valuation, it's got to be making a couple of billion dollars in profit. It's not even close to that. And at this level, it's probably never going to hit that. But isn't there prospectus NPAT, like 200 mil or something like that, for FY26? I'm looking at – I'm seeing one table here, which is basically the first three months of this year, how it's trading. Would they make 27 or 28 mil or something in the first three months? Well, it's a$13 million loss after tax, but before tax. But there's a weird tax thing, so ignore the tax.

39:07Oh, they had a weird tax, which is they basically shifted all of these assets to Italy and paid a whole lot of tax. Which is fine. So$33 million before tax, so let's call it annualizing at 130 based on quarter one, obviously less potentially some tax. But, yeah, so that's an annualised number of, like, yeah, $130 million compared to a$30 billion valuation. I know. I thought they were doing$200. And as I said, like, they forecast$200. They're presumably forecasting some growth in there as well, but that's a fair chunk of growth they're forecasting. Look, I think fundamentally the thing is, this is my overarching view, there are two games you can play in this acquisition world.

39:48let's call it opportunistic acquisition constellation and bending spoons are playing the opposite games constellations game is buy build make great hold on to it that's their game this is not a private equity game that's a different kind of game that's more like an that's more like a magnet game as in not like a magnate that's what a magnate does right they buy assets and build them and build an empire so constellation brands is building an empire and if you're going to do the buy slash milk that game should be a private equity game which is after the slashing and the milking is the flogging off to somebody else part of the process and that's not empire building that's private equity flipping and then you can load up with debt and do all of those kind of things and i think maybe the problem with this model is you've got an empire-building corporate structure with a private equity-flipping business model sitting underneath it.

40:51That's the risk of what's going on. Well, they're not flipping. They want to hold forever. So it's just a weird – and I love it. Actually, I love Constellation. I think Constellation is an unbelievable business. It makes profit. It grows its earnings. It's a really great – it buys good businesses for a fair price. It doesn't try and buy cheap shit that nobody else wants to buy. In fairness, the last couple of acquisitions have been much better. But even AOL, they did a good job with AOL. Like if these guys were private and they came to you and they said, we've got this business model, we buy these unloved brands that have still got revenue flowing through them and sticky customers, we slash costs, we increase prices, we milk the money and then we flip them, you'd look at AOL and you'd say, well, they bought that for a few hundred million dollars.

41:34It's done really well. They could have flipped that for a ton. I mean, that underwrites a lot of the gain of this business. That's a pretty good model. I think that we're going to hold on to them and watch them degrade over time is the bad part of this model. Yeah, and I think the one thing that I noticed, they don't do really any paid acquisition. And to me, if you look at e-commerce, and look at what Tim Doyle's great strength was, both at Coral and Eucalyptus, getting paid acquisition right is so critical to getting an e-commerce business to work. Booking.com, one of the best e-commerce businesses, probably the best e-commerce business in the world after Amazon, is no coincidence, the best paid marketer in the world.

42:10The fact that these guys have apparently, despite the 0.04 ridiculousness of employee selection, somehow have no expertise in digital marketing. Well, it's the opposite. It's not no expertise. They are fundamentally believers in this thesis because what you need to think about is they're buying, they're exclusively buying consumer businesses. They're not buying enterprise businesses. Yeah. Their thesis is. That's why digital marketing is so relevant. It's not relevant. Yes, but their thesis is this. a well-established sticky product software product yeah should not need any significant marketing behind it it should just be able to be price increases slash the costs and people will some percentage of them which will be high will stick around and we can net revenue retention 100 maybe get a bit of growth on new customers this is part of their thesis it's not a lack of capability in marketing.

43:07It is an ideological view. I think the ideological view comes from the fact that I don't think they're very good marketers. I think that probably explains why their first business didn't work. And they've stumbled across this great run of buying sort of cigar butts. And I'm not, again, I'm not being critical of that. I think that's actually a good thing. I think that when it comes to growing businesses in the future, if you haven't got a digital marketing experience, if you can't get customers into what's the value of any business, it's the delta between the cost of a customer and their lifetime value.

43:34So what these guys have basically said is, we're not going to pay anything other than the acquisition price for the customer. We're going to squeeze as much LTV out of it as we can. Eventually, they run out of stuff just to squeeze. That whole expansion revenue thing just doesn't work forever. It works for maybe a year. But what about this? If they're doing 94 % net revenue retention, so we should say what that means. This is a weird metric. But you take all the customers that were there a year ago, and just in that group of customers, you work out how much of that group is spending today, including any upgrades, i.e.

44:06price increases in particular, and they have got 94 % of last year's spend continuing this year. Any new customer is spent on top of that 94%. Yeah, but this is my point. This is my point is even with the price increases, that's still the bucket is leaking. You can only increase prices. They've probably hit the cap of a lot of these price increases. Suddenly it starts churning at 30%, which is probably what the underlying churn is based on this, I imagine the 94%. So without the digital marketing low enough CPAs to fill this bucket, these businesses eventually just drown down to zero. And so your argument is in the early year or two after you buy them, you get a churn of X, but the price increase obscures that churn.

44:50Then in years three and four, I'm just making up numbers, but it could well be about right. In years three and four, the churn is the same or higher, and you don't have the price increases to obscure it. So suddenly your net revenue retention falls through the floor. And I think what's clear, I mean, I think that's a very good thesis, by the way, that you've got there. And what you need is an endless pipeline of acquisitions to keep pouring new versions of these businesses in to make up for what's happening at the tail end of the businesses that you bought five years ago i hate the model although i can see well i could have made some money out of it so but and i even what i hate even more is this value like this is a bubble epoch value where this isn't how we know we're in this got bubbles everywhere ai bubble whatever um data center bubble crypto bubble we're in bubbles everywhere everywhere look there's bubbles, it was like a massive bubble bath with a redhead foam party.

45:47And this is just a classic example when you've got this kind of garbage listing at 30 billion, like come on. It's just so ridiculous. Run out of Milan of all places, like for God's sakes. Like, come on. Well, what's wrong with Milan? I like Milan. Great dress designs. This is not where you're going to find great tech talent. There's definitely a tech scene in Italy. It just tends to often be quite constrained to Italy. You're working, what, the five hours a day these guys work? Like, let's come on. Come on. Now you're getting worked up. Seven weeks of sick leave. Have you seen those memes, those European VC, fake VC memes?

46:20They're the best memes on Twitter, I reckon. I'm not joking how European companies go in and they have raised$100 ,000 and working four hours a day and the startup's focusing on GDPR. It's just, they're amazing. I love Italy and especially Northern Italy. I love to visit Italy, just I don't want to invest in it. So this is my question though. You don't like my question. Did the founders take money off the table as part of this IPO? I don't think they did. They raised like 1.8 bill or whatever it was. I think apart from some transaction costs, it all went into their cash balance. They certainly didn't use it to pay down any kind of material debt because they don't believe in paying down debt.

46:57They believe in leverage to drive the IRR. Actually, you'd be wrong there. The existing shareholders of Bending Spoons cashed in by selling$1.68 billion worth of shares according to TechCrunch, which is a massive windfall for Luca Ferrari, Francesco, Petronello, Matteo Dinelli, Luca Cordrella, and Tomas Gerber. So they are now literally almost on the way to being self-made billionaires, not in cash terms yet. So according to, I'm just looking at Google here, 953, so almost a billion dollars in primary went into the company. And then 650 in secondary went to existing shareholders, including the five co-founders, as well as major backers like Bailey Gifford who offloaded 23 million shares.

47:39So the founders definitely did get some cash, not billions, but if you look, call it 100 million bucks each probably in that vicinity. So they definitely took some cash off the table, but the majority of that cash still remains in this theme. And they've got your favorite thing, Class A, Class B shares. So they have 87.5 % of the voting power of this company. Which I do think is a good thing if the underlying business is a good thing. I think if the underlying business is problematic, then that's not a good thing because it allows you to get sucked down the drain along with the founders which i think will happen in this business i'll be shocked if this business is worth more than five billion in two years time shocked not investment advice well bailey gifford selling down because you know bailey gifford they're a great investor they were i mean i think they've been a catapult investor in the past by the way them selling down into the ipo tells you something about what they think about valuation because they have essentially an unlimited amount of money they're trying to deploy.

48:35And so I think they were quite happy to take some money off the table. I appreciate it. And it's just inconceivable to justify buying into this business, in my view anyway. To me, this is a blazing red hot sell. Again, it costs not investment advice, but this is my personal view. What could you – let's finish with – well, my last two minutes would be this. What could make this wrong? So I'll tell you what I think we could be wrong about. Because let's fast forward five years. So let's say there's been an AI crash and like things have reset to reality. What could make this wrong? They could keep buying high quality businesses, which is where they've headed now.

49:16And they could say, you know, in this new era where we're not just being rewarded for slash and burn and we just can keep doing the next one and like maybe debt is harder to come by and we're a bit capital constrained, we're going to be forced to run these businesses really well and grow them and nourish them and nurture them, I think if – because I think these four founders are fundamentally there's something good about them. I think if they do that and that is where the new reality pushes them, that could prove us wrong on this business. I think the challenge could become as if some of the – if my theory on these businesses' performance, the churns starting to increase and they can't – they get capped out on price rises, which – The upside is if they can keep pushing through these price rises.

50:03That would be the massive upside if the demand really is inelastic, in which case they can sort of keep the charade going for a bit longer. But if they can't keep pushing up prices and churn starts coming through, they get devalued. Suddenly they can't raise equity. The debt stays massive and they've got some real problems. But I think your point on they should be raising capital tomorrow and paying back this debt. That would make me a lot happier. If I saw this debt gone, and yes, there's some dilutive equity raising, whatever. But if you raise$5 billion, paid it all back, just said, we're going to focus on just growing these earnings.

50:32We're not going to be this highly leveraged thing. I'd be far more comfortable. But that is not their business model. And that is not what they took to the IPO. But people, business models change. We know that. But Atlassian has been increasing their prices, you have to admit, longer than you thought they would be able to keep increasing their prices. I think for all my criticism of Atlassian, I think it's a better, more relevant, more necessary product than Vimeo and WeTransfer and Evernote. Like Atlassian's a core product for a lot of tech and product teams, whereas this stuff, it's kind of weird consumer stuff that's a fallen angel for a reason, right?

51:05And look at Eventbrite. Eventbrite had incredible operators in there. I had Rachel Newman working in there. They had some amazing operators, and these guns couldn't get it right. How are these Milan three-hour-a-day guys going to get it right? Like, come on. Well, they don't feel like they're working three hours. I think you're too harsh on the founders. No, the founders are obviously smart guys. It's more that everybody else. They claim to have this incredible team,.04, like come on. Like if they're talking about that, that's ridiculous. The harder question is how is a business that tracks pets going to survive in the next five years against an air tag or the likes of that type of thing?

51:43Like I think there are some structural problems with some of these businesses and by the way, this is what I want to finish on. like if you wouldn't have come across bending spoons would you even know that aol still exists like what the hell is that company doing no i would because i used to own used to own tech crunch i thought it was actually a great example of the rusted on there are still customers who use aol i don't know how many there are but there's like as an isp i think so oh my god i wouldn't have even known they still exist there's a non-zero i don't know maybe it's not a million but they used to own they used to own a bunch of media assets remember they were the original Yeah, of course.

52:17Like if you wanted to – so there's still people that use it. I've definitely heard of it over the years. I'll top that. I'll say in Australia there was something called CompuServe. I guarantee you don't remember – you remember that name? I never used them, but I remember them. No one – well, you wouldn't have been able to afford them. They were so expensive. Okay. So expensive. Yeah. That was a great deep dive. Thank you, listeners, for sitting through it. We'll be back, of course, on Tuesday for our big episode and see everybody then. Thank you.