Yellow Corporation (NYSE: YELL) and now, given the Chapter 11 (OTCPK: YELLQ), has managed to prove an interesting contention. Does a union contract – which gets the workforce partnered up with the management – add or subtract value from the company? From this example it would seem that the union is very definitely a negative. In fact, the union is the very thing which has tipped Yellow over into bankruptcy. The assets, absent the union, are worth more than the debt pile. The assets, including the union, are worth less. The union must, therefore, have a negative value.
Now, yes, this is contentious and certainly not as fun as discussing the meme stock attributes of YELLQ now that the Chapter 11 is underway. And we should discuss these meme stock attributes – but that the union contract has a negative value is an answer of doing so.
So, the base problem, Yellow was a trucking firm – specialising in part loads. OK. It was unionised, which means dealing with the Teamsters. The union contract was up for negotiation, the Teamsters were either going to be aggressive or strike. That meant that business fled because who wants to have cargo stuck in a strike bound firm? So, busteroonie. So far just so normal.
But then the Yellow stock rises after Chapter11: “When Chapter 11 beckons, shares go off a cliff. When Yellow stopped operations, the stock fell from just over $1 to 57 cents (it had been at $13 two years earlier). Then something curious happened: just before the filing, the shares shot up, climbing to $3.90. They have retreated from that level since then, going back down to $1.10, but that’s still double what they were before bankruptcy.” Well, we’re not entirely unused to this. We know of GameStop, AMC and so on. Companies circling the drain that become meme stocks, rise ludicrously and gain refinancing. Not that it seems to have sorted out the base business positions of either firm – a lack of capital wasn’t really their base problem that is. Therefore more capital doesn;t solve that problem. Cineworld’s problem was lack of capital but the amount needed was never going to be provided by meme stock status – not that that stopped people playing.
We can go on. There are several Hong Kong financials where something, you know, something, was going to happen real soon now. And it’s as if no one can in fact go bust without some at least insisting that there will be that revival.
My opinion – and it’s not a bad one even though it is mine – is that this is driven by a combination of two things. One simply that there are those who want to gamble in the markets so, they use the markets to gamble. So, fine, they’re happy, why not? The other is that this all really did work for Hertz. But it’s important to know why it did work there.
Hertz financed its car fleet with bonds. One of the terms of the special vehicles (sorry) which owned the cars and issued the bonds was that if the value of the fleet fell then Hertz would top up the cash security backing those bonds. So, lockdown. Hertz cashflow disappears, everyone thinks the fleet’s worth much less – hey, guys, we need more security. Hertz didn’t have it, they’re bust. Into Chapter 11. But then something else happens. New car production falls off a cliff during lockdown. Used cars become – often enough – more valuable than new. That fleet is now worth vastly more than the bonds. Hertz comes out of Chapter 11 with value to the equity holders.
Coming out of Chapter 11 with value to the equity is truly, weirdly, weird. But it’s just happened at Hertz for highly specific reasons. That’s enough to trigger all that meme stock activity in what might more seriously be thought of as complete dogs. Meme stocks have been great fun of course and being on the right side of the trades has been very profitable. But there’s been damn little change in the end point of the varied companies folk have been playing in. Even those that have recapitalised don’t seem to have done all that well – fatal flaws in the business structure don’t get solved by issuing more equity.
Which gives us Yellow. It might actually be true that it’s worth more in bankruptcy than as an operating firm. That’s the bet here but it’s not that there’s going to be a revival of the trucking business. Instead, the bet is that the property – the transfer locations effectively – are worth more than the debt of the company. In strict economic logic therefore the trucking should stop and those locations be used for something else. But that then leads to that idea up at the top.
It’s being a union firm that made Yellow worth less. If the Teamsters weren’t sucking all the cash via high wage demands then maybe Yellow would work doing trucking. But they are and it doesn’t. Oh well, shrug.
But this then tells us something about speculating in YELLQ. Assume the above story is right – and don;t forget that it’s differences of opinion that make markets – and the reason YELLQ still have value is nothing, at all, to do with the potential revival of the trucking firm. It’s the entirely the opposite. It’s that trucking – and the trucker’s union – will cease and so we can gain purely the value of the property. Which might – maybe – be worth more than the debt pile.
That is, Yellow is worth nothing, because the Teamster’s union contract makes it so. The assets of Yellow might be worth more simply by the absence of the union contract.
Now, as it happens I like that story just because I’m like that. But the more general point is still true even if you don’t want to follow me through this example of it. Sometimes, very rarely perhaps, a company in Chapter 11 is worth more than outside it. Maybe just happenstance, as with Hertz, maybe because a huge cost can be dumped as with my story about Yellow. But to play with the meme stock-ie idea that a company going bust is worth more because it’s going bust it does help to distinguish. Often enough it’s going to be just the froth and gambling of meme stockia. But sometimes, sometimes, it might actually work.
And there’s the difficulty – when will it work?
