Who wants to do a buyout of PSA?- Not really entirely kidding?

chrisrenaud

I know that perhaps this post sounds ridiculous, but given that my background is finance for many years (venture capitalist, not investment banker) I wanted to postulate the following thoughts and ask for others' opinions:

1) First, from the posts that I read, a lot of people seem to be upset with the service that PSA and BGS provide, and believe that the other services provided are borderline fraud (pther than SGC). Most of the negative comments that I have read relate to how the business is run rather than the business concept, and about how there is a perception that inside deals are done between certain dealers and the some people at PSA, rather than having the collector in mind, and that the quality of service is uneven.

2) There certainly is a lot of money spent in this business, and the product that is provided is not the most complicated product in the world.

3) The economy has weakened, and as such there are fewer funds flowing through the baseball and sports card industry than there were a few years ago. When this happens, it encourages some to cut corners which leads to lower customer service and cutting corners.

4) PSA has seemed to back itself into a corner - it has a really weak balance sheet, poor financial results that have been getting worse as it cuts it prices to compete and it seems to have a hard time from time to time keeping employees, and it creates competition via unhappy employeees leaving and setting up competition. PSA is also unprofitable from a company perspective, although it is hard to tell if this extends to the perception of the employees or what their view is on the future of the company. Whatever people say about PSA on these forums, let no one be mistaken that unless things change the business will go bankrupt within 18 months unless the founding shareholders put in their personal funds (I invite technical debates with anyone who would like to discuss this subject)/

5) If one looks at businesses like Christies and Sotheby's, even though they have had problems in the past, they have survived on quality and quality service and consistency, albeit with mistakes.

6) I do not believe in starting another silly crazy grading company to sell to the shop at home crowd. On the other hand, I am curious if collectors and dealers would be willing to spend a bit more per graded card to get consistent quality and a resale reputation, or is there really no price premium to be found in this industry. Perhaps this is what BGS wanted, and then screwed up in implementation.

7) I am getting fairly tired as it is after 2am here in New York, but I would love to create a long string here about how collectors, many who have a lot of financial background, could pool their thoughts and efforts to create a company that provides consistent service that collectors respect, but where special deals / employee turnover create such problems that the very concept of a equitable grading (the very reason that these companies were created) is lost.

Please tell me to get lost if this is a stupid post, but if people speak to a few of the dealers that I deal with they will say that I am not really coming just out of left field.

Good night to all

Chris

chrisrenaud

By the way, for those who are interested in the financial background of PSA, look up CLCT with a subscription (complimentar or not) in www.edgar-online.com

might be boring, but it is instructive

calleocho

how much money could CU make out of selling its psa unit?

zardoz51

Chris

"the founding shareholders put in their personal funds (I invite technical debates with anyone who would like to discuss this subject)/"

With all due respect, a technical debate? Unnecessary. It would be a cold day in hell before that ever happened. The cardinal rule for any founder of any company is to take the money and run.

Having been involved in the M&A rackets, as well as the formation of public companies, albeit, reverse mergers into reasonably clean shells, deal with the market makers and get the Co. trading on the OTC for a year+ and then get it on the AMEX, I can tell you that it would be virtually impossible to pry PSA from the CU empire. What a revenue stream! Do you really believe that they would give that up?

As I have stated previously, the CU company is spread over several states all with their respective overheads and duplication of administrative work. A pretty large nut to crack. Should have been put under one roof long ago. Instead, the small companies kept their respective fiefdoms. CU shows what can happen when you take a core company, merge with other companies that have revenue so the financials to please the market and go public. Meanwhile the founders of these respective, now merged companies capitalize when the new company goes public. Do you really believe that they are going to put this newly found wealth back into the company for the good of the shareholder? CU has done little to enhance the value of the stock for the shareholder. They haven't even made it sexy to own. No excitement. Little or nothing in the PR department. Ever check the big message boards, Ragingbull, etc.? Nada, zip, zero. For the financial world, we're talking amateur city

LJB17

Does anyone know the rate of submittals at PSA compared to Beckett over the last few months?

chrisrenaud

Returning to my prior ideas, although PSA is part of collectors universe, the parent company appears to be running out of money, and even with the additional submissions that they have had, it seems to me that the company is headed to bankruptcy unless someone steps in and gives them money. The parent company is about to be delisted from Nasdaq and they are burning cash (they lost cash the last four quarters even as they drew down cash from their receivables). If people are interested, I could walk through my logic based on their recent 10K (filed on the 27th of September).

I bring up the question because there are a lot of successful business people who collect cards and who really do not need something like profits from a business from PSA to live, and as such I thought there might be people who would want to buy out the company when the parent is in or nearing bankruptcy and then change a lot of the business practices that need to be changed and not focus on the problems that are plaguing PSA and the other grading companies. Perhaps I am suggesting a cooperative amongst capitalists who care more about the hobby and consistency in grading and terms than using the hobby to just make a living (I mean no disrespect to dealers - particularly since those I have met are really nice people - but I am still concerned like many about what has happened to third-party grading).

TheCARDKid

Just glancing at CLCT's balance sheet and 10k revealed some interesting tidbits. A 30% decrease in Sportscards submissions for fiscal 2002! There was also a decrease in fiscal 2001 and one of the reasons they gave for it was the reduction of hot cards like Pokemon being graded, I kid you not! Oh man, relying on some fad to prop up your modern submission business.

Chris, what would the PSA unit be worth?

Their gross margins are going down because of the high relative fixed costs coupled with a decrease in revenue.

One thing I didn't get was their policy of paying consignors 45 days after an auction yet collecting their money 60 days after auctions? Why would they have this type of policy?

RedHeart54

Card grading is somewhat of a finite business. Yes, there will always be cards to grade, but will it be profitable to continue to send cards in- especially if most of your cards are relatively easy to find, graded or not? Volume-wise, most of the gems of the card hobby have already been graded. Set-collecting in graded form has become popular, but is there really a large enough base of collectors sending in commons that will sustain PSA's revenue? I doubt it because there aren't enough worthy commons to send in. We've read the comments on this board. People who open boxes or even cases of 20 year old Topps cards say that 90% aren't even worth sending in. Ungraded PSA 8 (let alone 9) quality commons from the 50s and 60s have about dried up. I think the only way PSA can survive is to become a much smaller operation. Obviously, that's not what CU wants. But that's the price of too much growth too soon, especially in a relatively finite busniess as card grading. PSA, it appears, would be better off by itself. It can retain its name, it has essentially free advertising every time one of their cards is sold or offered, and as long as they don't sell out its reputation by grading trimmed cards like BGS or the others do, collectors will continue to send cards to them.

crazysc

The other thing is that a LOT of the "fresh" modern cards have already been taken from unopened cases. As the amount of unopened cases has dried up, the price has remained hi while the price of the graded cards has declined. For instance:

86 Topps Traded Case - 100 sets (Bonds RC)

"Average (can vary wildly, but this is expected value)" break:

3-5 PSA 10s
30-40 PSA 9s
50-60 PSA 8s or worse (i.e. not worth grading)

Let's use 5 10s, 40 9s, and 55 8s/worse. In mid 2000, cases cost $2000 or so and 10s were $1000, 9s $35, 8s $15 so you'd get about $7000 out of $2800 cost (case + $800 grading).

Zoom to 2001 - cases are $2500 (due to a HUGE reduction in supply) with 10s $400, 9s $40, 8s $15 = you're getting $3500 with a $2800 cost. Much riskier, especially if you don't get any 10s (which is VERY possible).

Right now Oct 2002 - cases are still $1800 (if you can find them, many MBs on ebay are $2500-3000) with 10s $125, 9s $30, 8s $15. Your projected net on a case is ~$2000, and you've got more than that into the case & grading.

Of course, this explains why I broke ~100 cases of the product in 2000, maybe 30-40 cases in 2001, and zero in 2002. But, PSA hasn't changed their price structure much over the past 2 years for modern cards. So, they're not getting the huge volume of modern, 1) because prices don't warrent submission, and 2) supply has fallen so much that costs haven't gone down dramatically.

During the "boom" modern market of '99-00, I often wondered if the supply would ever run out on modern cases. It has. Now I really wonder where PSA will get their submissions in the future. Think of current sources for submissions:

1) Hi grade modern rookies - they'll continue to grade some, but the $$ have fallen so much that few are worth being graded anymore. Really - try to name that many modern cards which are worth getting graded consistantly if you don't get 10s...

2) Hi grade vintage stars - I'm sure more will come out, but much of this market is already slabbed.

3) Hi grade vintage commons - again, much has already been done. Especially commons through the mid to late '50s, and many '60s commons are in the process of being slabbed. I'll bet the set registry for '60s and early '70s is a lot of their business right now - but what happens when many of those are gone?


Frankly, to the subject of the title, I really wonder if PSA is WORTH buying from a financial standpoint, or if it wouldn't be best to revisit the issue in 2-3 years, when they have to consolidate much more.

I think their future in authenticating autographs is much brighter...

RedHeart54

I just wonder why the '86 TT case prices remain high when there's no real incentive to open them. From your example, the market is flooded with PSA 9 and 10 TT Bonds (as well as '86 Fleer Update Bonds as I'm sure you're well aware) and the current prices dictate you'll never profit considering the average number of 10s the Bonds card gets. Or, is it simply the hope that the buyer will get more than the average number of 10s? Either way, I'd rather put money into something where the star card isn't so prevelent in a given grade.

crazysc

But that's the problem - the cases are priced due to the scarcity of the case, not due to the potential for grading. It was just the opposite 4 years ago - unopened product sold at a discount for what it would get graded (discounting grading costs).

Now people are buying cases of such product just like you buy packs of 50s/60s product - due to the value of it as a sealed case, not for the break value (no, I'm well aware it's not a valid comparison, but the basic premise is).

Add to the fact that most people who now own '86TT cases are either 1) people who bought them well over the current market, or 2) "old-timers", people who have held them for 16 years, saw them hit $3000 and still didn't sell. Yes, there are a LOT of people out there like that - and they think it'll be a $5000 case in a few years. Maybe they'll be right - I've certainly been wrong on enough stuff in the past!

chrisrenaud

In terms of what PSA would be worth, my guess is not very much, under $5 million. What I was suggesting as a buyout was not for profit - there are other and better opportunities in the general market given the overleverage with a lot of companies from the late nineties, but that I am surprised that collectors who have more of an interest in there being a well run and consistent company that is run for the benefit of collectors and the hobby - it would be like a consortium where partners fund the operations but do not try to list the company or reap significant financial rewards.

I say this because there are a lot of collectors who earn enough in there regular jobs to not need to make profits from a PSA like business and therefore could do a buyout of PSA and change the way it is run.

For those who asked how long the company has to live, I would say 18 months without new external financing, and perhaps 2 months or less before it is delisted.

Thanks

Chris

qmayer

chrisrenaud,

A weak argument for your plan would be against the people who would buy them out... would it create a conflict of interest? Most likely the people who would be part of the buyout would be large PSA collectors. I know I've heard people talk about Mr. Orlando having his cards PSA graded.. even through the system they have now of the graders not knowing whose cards they're grading, wouldn't people point their finger and accuse these new owners?

On the other hand, I think a buyout would be nice. Have the company run by the collectors, not by the profits. Get some fresh ideas in the system.