How ‘Bout Them TPGs?

May You Live In Interesting Times--An Ancient Chinese Curse

Unless you have been at sea or at a secluded resort with crappy internet connections, you probably know that Collectors (PSA’s parent company) acquired SGC.  Lots of chatter around the card world about the deal, so let me throw my $0.02 into it. 

Let’s start with what we know and (more importantly) what we do not know.  It is not possible to definitively opine on what Collectors might be thinking in making this deal unless we get a look at the actual deal structure; take my comments and those of anyone else not inside the deal as reasonable speculation, at best.  We do not know what PSA paid, how it paid (stock or cash), what incentives it got, etc.  I assume that the sharks who own PSA made that analysis and decided that buying SGC made sense.  Now, why would that be? 

For the folks who think Collectors bought SGC just to get rid of a rival and think it is going to dismember SGC right off the bat, I have one question: why would Collectors acquire then shred the SGC brand?  It makes no sense.  This isn't a Topps-Bowman conquest where one rival puts another out of business because it needs to take over its player contracts, this is more of a GM acquiring Chevrolet thing.  SGC fits in perfectly with the vertical integration that Collectors has been pursuing.  More on that below.  I think the doom-posters on social media need to remember that it is possible to have more than one division in your company doing the same thing; sometimes it even makes sense to have some brand differentiation if a brand has loyalists.  Unilever owns Ben & Jerry’s and Magnum.  For Unilever, it makes sense to have two ice cream brands. Some people fear that that SGC’s fees and turn times will be adjusted to PSA’s slower and more expensive levels.  That is possible but I do not see it happening in the short term.  Again, why kill the brand you are buying? 

I am also going to disagree with the analysts who think that SGC’s Florida physical presence is the main reason for the deal.  In terms of real estate, we do not know the details of SGC's existing lease.  What I do know (because I am embroiled in it with a few investments) is that the commercial real estate sector has gone into the toilet in nearly every area since COVID and anyone just looking for space can readily rent at a very low cost with huge incentives.  There is simply no need to buy a company to acquire an existing lease on what are likely above-market terms if adding an office space is all you want, so I don’t think that is a motive here.  Also, it is not at all clear that PSA mail orders will flow through SGC's space or that PSA is going to grade on site in Florida, so the SGC offices in Florida do not necessarily help PSA establish a regional grading presence.  Nor is it clear in this virtual day and age that PSA needs a physical presence in any American area; shipping works just great for 99% of the orders.  No, it seems to me that the value of the acquisition in terms of the physical elements is a fully outfitted space with a fully staffed business, not establishing a PSA beachhead.

Next is the registry. Here, people are overoptimistic about what PSA might to to with the moribund SGC registry.  SGC has a registry; I swear it does.  Sort of. It has a crippled database of cards it graded with most of the early stuff lost in a tech issue, and a ton of slightly different descriptions of the same cards screwing up the rest, so its registry is not viable and never has been.  And I say that as a former SGC Registry winner (I received the silly certificate years ago to prove it).  I think PSA will leave the SGC registry to rot.  Integrating it would mean paying someone to clean up the mess and then to integrate the data into the PSA database.  Way too expensive for not much reward.  Instead, my guess is that PSA will offer SGC registry participants a discounted cross-over for registry sets.  In essence, make the SGC registrants pay for their own re-registration under the PSA aegis and fold them into the PSA registry competition in the process.  After all, the real value of a registry is that it attracts collectors who will spend a fortune in grading fees because they enjoy comparing pee-pees, er, competing with other collectors to be crowned King Of The Dipshits over a bad lunch at the National. 

Those are the ‘no’ issues; what are the ‘yes’ items behind this deal?

One of the acquisitions buzz-words is “synergy”.  Companies always claim the whole will be more than the sum of the parts due to synergy between the parts.  Mostly, that is bullshit; the acquirer is more Borg than Federation (Trek reference for the fans; we know who we are).  Sometimes, however, it is truly a good fit.  Ask Pepsico about synergy (which is why we get Doritos branding in Taco Bell tacos and Taco Bell and KFC serve that tasteless piss that Pepsi calls a cola). This acquisition seems to be a true example of a synergistic fit.  SGC has a proven brand with a loyal customer base and a record of handling things that PSA does not handle (and that PSA may not want to develop the expertise to handle).  It is a niche rival that Collectors can gain from by adding SGC to its empire as a brand and division, not an arch-rival to be destroyed and cut up for parts.  My suspicion is that instead of training up the expertise within PSA to compete with SGC by grading the stuff SGC handles, Collectors simply bought SGC because acquiring that expertise and market share was cheaper, like buying an oil company with proven reserves for less than it would cost to explore and find a comparable amount of new oil.  I think that in the longer term SGC will become a division of Collectors devoted to the niche stuff that SGC does well.  You want a mainstream card graded, click on PSA.  You want to grade a real photo postcard or an non-baseball Exhibit card, click on SGC.  Seems to me to be a perfect fit, and a profitable one, especially once you get rid of most of the back-office workers and infrastructure at SGC and integrate its financial, website, support, and management functions within the PSA infrastructure.  If I was one of those workers at SGC I’d start polishing up the resume and getting my LinkedIn account active again, because your future career at SGC has about the same lifespan as a $50 BIN listing for a T206 Cobb on eBay. 

At the C-Suite level, Collector’s move to acquire SGC is best understood, I think, because of the hobby ecosphere as it exists today.  Remember, PSA is not acquiring SGC, Collectors is acquiring SGC.  I think a big driving force behind this deal is that Collectors gets to add SGC to the grading-vaulting-selling pipelines its management has created.  We are rapidly moving into an era of duopoly, with cards going into the grading maw and into the vaults and auction houses from there that are controlled by one of two well-funded companies. Those businesses have been taking over others with significant stakes in different segments of the hobby.  Collectors had the biggest grader (PSA), a vault, and a captive auction house (Goldin).  SGC simply adds a new line of graded products into the pipelines.  Now consider what is up against Collectors.  Certified Collectibles Group dominates in comics, magazines, TCG, and created then integrated CSG into CGC, which has graded over 5 million cards.  The group that owns CGC is as well funded as Collectors; Blackstone is the majority owner.  More important, Michael Rubin, founder and executive chairman of Fanatics, is one of the minority owners of CGC.  Yes, Fanatics, as in licensed to make cards, acquirer of the Topps brand, and the company that bought PWCC for its vault and auction site.  See the pipeline?  Send a card to CGC, then to the PWCC vault and sales apparatus, likely at a preferred rate in a sweetheart deal courtesy of the interweaving management and investors.  

About the only independent player left in the field is Beckett.  I would not be surprised to see one of these emerging conglomerates take a run at Beckett’s grading and (more importantly) publishing.  Beckett grading is a joke but the media leads the field.  For that matter, I would not mind being an owner of Sports Collectors Daily or Sports Collectors Digest (and the Standard Catalog brand) right now.  Publishing/media is the last prize in the war. 

Finally, and of the utmost importance to collectors: what’s this gonna do to the values of SGC cards?  Not much, I don’t think, at least for a few years. This isn’t like GAI going down the toilet financially and taking its rep with it by grading any crap it can get, or SCD deciding to abandon grading and selling its company to a hack who wrecked it (red label good, blue label bad).  A lot depends on how Collectors handles the integration.  If PSA pushes to cross SGC cards and asks collectors to risk downgrades (which is how it handles them now), then SGC cards will likely devalue by a grade or two in the fields where a grade or two really matters (modern, postwar mainstream).  I don’t see as profound an effect on prewar and rare stuff because collectors in that arena tend to take what they can get.  Now, if PSA decides that some or all SGC cards will be eligible to cross over without regrading at the same grades, it will be a big boost to collectors who put PSA-gradeable cards into SGC holders to move those cards to the PSA brand.  Either way, I would not be panic-selling SGC cards right now (unless you want to sell them to me).  We are a long way from understanding the fallout of the transaction.