The $2 billion deli

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SvD Näringsliv

This column was first published in SvD Näringsliv, in Swedish, on May 10th, 2021.

It has a turnover of a few thousand dollars but has a multi-billion valuation on the stock exchange. This is what happened when a small restaurant in New Jersey ended up at the center of the debate about how the financial market is really doing.

The American flags are flying outside a gray, anonymous room in Paulsboro, New Jersey. The sign outside promises Italian delicacies. The Hometown Deli restaurant looks like it was taken from any American suburb. But it stands out on an important point. It is the primary asset of a listed company that with warrants – a leveraged instrument with long call options – included is valued at over two billion dollars.

Hometown Deli – and the parent company Hometown International – have quickly come into focus when analyzing the current market conditions. The debate started when hedge fund manager David Einhorn from Greenlight Capital described the market as “quasi-anarchy” and sourly commented on Hometown Deli that the “pastrami must be fantastic”.

It is easy to understand Einhorn’s criticism. The cryptocurrency dogecoin, which started as a joke, currently has a market value that is three times higher than the tech company Slack, and so far this year, as many as 314 new spac companies have been listed in the USA. The Gamestop share, which was temporarily pushed up to astronomical heights after an internet forum united to buy it, is still up over 800 percent since the beginning of the year.

When you, like Einhorn, belong to a more kind of traditional player in the market, it is easy to look what is happening as both strange and threatening. When individual stock holders succeed in influencing the market in the same way as established banks and funds, a transfer of power takes place which is to the detriment of the establishment.

In the case of Hometown International, however, it is not the individual stock buyers that have had another run, even if at first glance looks like the next Gamestop rally. Instead, it is investors from Hong Kong with a background from hedge funds that are behind the sky-high valuation. The assets mainly consist of Hometown Deli (which only had sales of a few thousand dollars last year), but it would be wrong to see this as a future restaurant empire. A better parable is rather a SPAC, but in a miniature format. Or as John Coffee, a professor at Columbia University, put it: “a parody of a SPAC”. He also added that “this is what I would expect in the final stages of a bubble”.

Hometown International is thus rather a shell company, where the value mainly lies in the position as an American listed company. After that, you can merge the company with an unlisted company and thus get directly to the American stock exchange. It’s cheaper than a SPAC, which can cost millions of dollars in administrative fees alone. The restaurant thus becomes a way to avoid being classified as just a shell company, which means different regulation by US authorities.

New forms of investment such as cryptocurrencies and SPACs are both volatile and complicated to understand, even for the most experienced investors. However, this does not mean that the people behind it necessarily have a bad intentions. In Einhorn’s letter, he writes that “it is as if there are no prosecutors in financial crime”. Although Einhorn exaggerates, his concerns can be understood. Given that interest in the stock market and investments has increased so much, those who want to make quick money at the expense of others are also attracted. The combination of new types of investors and new forms of investment quickly risks leading to costly misunderstandings.

At the same time, it is difficult not to see Einhorn’s letter as a desire to stick to the old view of the market – the one where Wall Street’s most powerful institutions sit in the driver’s seat and make billions. It would be easy to write off Gamestop, for example, as an anomaly, but Hometown International shows that the changes come from all sides – both from private individuals and institutions. It is a transfer of power and influence from the establishment to new, risk-averse, players. What remains to be seen is how many of these individual investors dare to entrust them with their savings.

This column was first published in SvD Näringsliv, in Swedish, on May 10th, 2021.

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