Split Decision

Why are gas prices still so high?

April 12, 2022 Read in Browser TOGETHER WITH Good morning and attention, Kmart shoppers. This Saturday, Kmart is shutting down its Avenel, New Jersey location for good. That will leave only three locations in operation of the once-storied retail chain, which boasted more than 2,000 outlets in the late 1990s. The three remaining Kmarts are in Westwood, New Jersey, on Long Island, and in Miami. Because apparently, even companies like to retire in Florida. Morning Brief • Oil prices are falling, and gas stations couldn’t be happier. • Shopify is the latest big name in tech to announce a stock split. • The long-awaited Atlantia deal is finally, maybe, happening. Oil Crude Oil Prices Are Plummeting, but Gas Pump Prices Stay High Gas prices, plastered in giant numbers on every third street corner and underpinning the shipping cost of just about everything, are perhaps the most annoying consequence of inflation. We see them with our eyes and feel them with our wallets, whether we’re at the pump or the grocery store. So with crude oil prices beginning to tumble, one would think there is cause to celebrate. Unfortunately, the current state of oil and gas prices is more complicated than that, because it can never be so easy. Fall Like a Feather, Sting Like a Bee After a massive increase spurred by war in Ukraine, crude oil prices are falling quickly: West Texas Intermediate, a commonly traded grade of crude oil, is down more than 20% since a mid-March high, with a barrel of oil trading at less than $100 for nearly a week in the US. Although you might not have noticed it yet, that means gas prices at the pump are falling, too. Just very, achingly, annoyingly slowly.  Economists call this the rockets-and-feathers phenomenon. When crude oil prices spike, gas prices spike with them (like a rocket), lagging just a couple of days behind. But when crude oil prices plummet, gas prices slowly fall like a feather, over weeks if not months. The phenomenon explains, perhaps paradoxically, why gas stations prefer falling oil prices to rising ones: • As oil costs tumble, gas stations, in turn, collectively drag their feet to lower pump prices in what some economists have called “tacit collusion”— it’s the feather slowly falling. • Profit margins balloon, according to Oil Price Information Service data reported by The Washington Post: In March, as oil prices soared, gas stations earned $0.35 for each gallon sold; this past week, they pocketed $0.55 per gallon. The Halcyon Pandemic Days: Demand for gas may have been extremely low, but profit margins were extremely high in the early days of the pandemic. At one point, stations bagged $0.87 for every $2.07 gallon sold, according to OPIS data. Investing Shopify is the Latest Big Tech Company That Wants to Split Its Stock If the stock can split, you must commit. On Monday, e-commerce giant Shopify became the latest tech company to propose a stock split, an increasingly favored tool for stimulating retail interest by making stock ownership seem cheaper. Retail traders, start your engines. Split's Always Sunny in Ottawa Technically, a stock split doesn’t do anything except increase share count. A company’s board proportionately issues more stock without diluting current shareholders’ stakes, thereby increasing the number of outstanding shares. This inversely lowers individual share value, but nothing happens to the market value of the company — it doesn’t change revenue forecasts or any core financials. However, in defiance of logic, it routinely excites traders anyway, especially retail investors who can buy a seemingly cheaper (in reality, smaller) piece of the pie. Ottawa-based Shopify, which climbed to more than $1,600 a share last year, is among the worst hit by this year’s tech rout. At $603, the company is down 55% in 2022. Shopify’s proposed 10-for-1 split aims to get some of its mojo back by capitalizing on investor excitement: • S&P 500 companies that announced splits since 1980 have, on average, performed 16% better than the index in the following 12 months, according to Bank of America Securities. • Alphabet, Tesla, and Amazon have all announced stock split plans this year. Tesla shares rose 8% the day it announced its split, Alphabet jumped by 7.5%, and Amazon went up by 5.4%. Complicated Accounting: Shopify, which went public in 2015, is known for an especially weird share structure. CEO and founder Tobi Lütke and other key personnel own Class B shares with 10 times the voting power of Class A shares. If their Class B supershares ever fall below 5% of outstanding shares, they automatically become Class A shares, essentially stripping away management’s control. In addition to the stock split, Shopify is proposing to give Lütke a special “founder share” that will increase his voting shares to 40% — and which he can keep as long as he remains with the company. SPONSORED BY ALUMNI VENTURES Your Venture Portfolio Awaits You’ve been reading about it for years — the tech cycle is in full swing (and has been for some time). For certain growthy startups, that means the path to hypergrowth can now be measured in months and years, not decades. And for investors, it is more important than ever to get in early. Breakout venture-backed companies like Stripe, Airbnb, Doordash, and Snowflake are staying private longer, with more gains happening before a company goes public. So if you don’t get in early, you miss out on much of the explosive growth. But how?  Alumni Ventures has broken down the barriers that have long prevented most individuals from investing in venture.  Alumni Ventures helps YOU invest in the next generation of great ventures alongside well-known VC firms. With one simple investment, they will build for you a professional and diversified venture portfolio — deals most investors could never access.  Forget the idea that professional venture capital is only for the ultra-wealthy. See how Alumni Ventures has made investing smartly in this important asset class easier than ever.  Sign up to learn more.  Private Equity The Biggest Deal of the Year Will Tie Up Benetton, Blackstone, and Highways “Acqua in bocca,” or keep the water in your mouth, is an Italian expression used to tell someone to keep a secret. It literally means to keep your lips shut so no liquid drips out. But, in the case of Italian infrastructure giant Atlantia, the water’s been dripping out for weeks. It’s no secret that the fashion-famous Benetton family and US private equity powerhouse Blackstone are eyeing the firm in what would be the year’s biggest acquisition. On Monday, news leaked that a deal could finally be announced as early as tomorrow. Italian Lesson There has been a lot of noise that Atlantia could sell at a high price, and that’s because its portfolio is gigantic. Atlantia has a majority stake in airports in Cannes, Nice, Rome, and St. Tropez. It owns highways in Argentina, Brazil, India, Mexico, the US, and six other countries. It also operates toll roads in 24 countries. As we told you: their portfolio is gigantic. That’s why Atlantia has a market value of $17 billion. A takeover by the billionaire Bennetons and Blackstone, which Bloomberg News reported could be announced Wednesday, would easily become the year’s biggest deal and one of the largest infrastructure acquisitions in history. But there is still a chance that another high-profile European could off-ramp the deal into his lane in a battle over who gets to take on the most debt: • Atlantia has almost 50 billion euros in debt, according to Bloomberg data. That means any deal, including debt, would likely be in the range of $71 billion. Edizione, the Benetton family’s holding company, has a head start with a 30% stake in Atlantia. • Florentino Perez, the Spanish construction tycoon and president of Real Madrid football club, is working with NYC fund Global Infrastructure Partners and Canadian investment giant Brookfield to make a competing bid. Perez leads civil engineering giant Grupo ACS, whose projects also include highway developments and toll roads. Bad Reputation: Atlantia, which grew out of the privatization of Italian highways in the 1990s, has been mired in controversy since a 2018 bridge collapse in Genoa led to the death of 43 people. The Italian government forced the company to sell Autostrade, its Italian roads unit, in the wake of the disaster, and a sale was agreed to last month. Ironically, the consortium acquiring Autostrade for $9 billion includes Blackstone, which could ultimately end up with a piece of both entities. Extra Upside • Are you a student? DoorDash just got cheaper for you. • A new high-tech tool could help save the ocean’s “rainforests.” • What do you get when you mix digital advertising, Don Draper, and The Daily Upside?  That would be Stacked Marketer — the newsletter that provides unique perspectives on all things advertising. Trusted by 30,000 marketing-minded individuals, Stacked Marketer sheds light on the most interesting trends shaping the digital landscape, covering everything from Meta’s battle with Apple to Elon Musk’s Twitter strategy. Sign up at no cost here.* *Partner You have 0 referrals. 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