Mint Condition - March 4, 2024
Breaking down Collectors' (owner of PSA) acquisition of SGC
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Leading Off
The shocking news dropped last week that Collectors, the holding company of PSA, Goldin Auctions, Wata, Card Ladder, and more, was acquiring SGC, the Boca Raton, FL-based authentication and grading company, bringing together under the same HoldCo two different grading businesses, PSA and SGC. SGC’s current president, Peter Steinberg, is slated to continue running the day-to-day operations of SGC, which will continue to operate independently under the Collectors umbrella (as in, SGC will not become a subsidiary of PSA, its grading industry rival). No information on what Collectors paid for SGC has been shared. While the initial reaction around the hobby was surprise and skepticism, there are numerous layers to this deal that need to be considered and appreciated.
As a reminder, Collectors was previously known as Collectors Universe, a formerly publicly traded company that Nat Turner alongside an investor group helped take private in 2021 and whose core business at the time was PSA. Since then, Collectors has expanded further into collectibles through acquisition, including Goldin Auctions (auction house), Card Ladder (pricing and data tool), and Wata (video game grading). Collectors has been working towards being a collectibles ecosystem of sorts that customers can use as a one-stop-shop for grading, valuing, and selling their items. All of Collectors’ prior acquisitions helped the company enter into a business line (the one slight exception is Genamint, an AI grading company, though that deal added a capability that PSA did not have before). With its acquisition of SGC, Collectors is doubling down and expanding within an existing offering: grading and authentication.
What precipitated the deal, how will PSA and SGC coexist, and are calls of PSA + SGC being a monopoly legitimate?
Let’s get into it…
Mint Condition’s Take:
SGC was attempting to sell itself for a while: SGC has been on the auction block for a few years now as it tried to take advantage of the post-COVID boom in the industry and in the demand for its grading services. Nothing had materialized until recently as the buyers - including private equity firms - couldn’t get comfortable with the slowdown and normalization across the card industry. This sale to another collectibles company, rather than to a private equity firm as a standalone, new platform company, shows me that collectibles is starting to be viewed as a more difficult, higher bar space for institutional investors - like private equity and venture capital firms - to put their money given the industry slowdown. The key open question for me is why Collectors pulled the trigger now on the deal if SGC has been on the market for a bit already. A few guesses…(1) SGC only recently considered selling to another collectibles company, as perhaps they initially tried to receive an investment from private equity and when that didn’t materialize, they pivoted to talking to the likes of Collectors and Fanatics or (2) Collectors and SGC had been talking for a while and only recently agreed on major sticking points, like selling price and how SGC would operate moving forward. These guesses are pure speculation, though I am sure we will learn more at some point about the timeline of events.
How PSA and SGC will co-exist: Both Collectors and SGC, in their press releases announcing the deal, stated that PSA and SGC will each operate independently moving forward. Operating 2 brands under the same parent company isn’t uncommon in different industries, but the shock here is that it hasn’t happened all too often in collectibles. I expect PSA and SGC to operate as standalone businesses from a customer-facing perspective (i.e., as a grading customer, we might not notice many differences), but would expect back office adjustments as Collectors looks to streamline operations - as in, it makes sense from financial (cutting costs) and efficiency (workflow productivity) perspectives to consolidate certain teams, like sales, marketing, or finance. Typically, those decisions aren’t made on day 1 but as Collectors starts integrating SGC, they will get the ball rolling on those to-dos.
How will this deal impact customers: Too early to definitely say. As mentioned above, PSA and SGC will operate independently, so no major changes should be felt in the near-term by customers. However, now with a larger grip on the grading market, Collectors is in an even better position to increase prices, if they so choose. Note per GemRate, Feb-24 data showed PSA and SGC grading 77% and 9% of all sports cards and TCG, respectively. Although I don’t expect any pricing updates in the next 1-3 months while the dust settles and Collectors focuses on integrating SGC, I would not be surprised to see Collectors address pricing changes in the second half of the year, ones that could be met with some scrutiny from collectors.
A potential catalyst for this deal: Although the grader shortage is not as pronounced as it was in 2020/2021 (as I wrote about a few years ago), there is still a premium placed on grading talent by the likes of PSA, Beckett, and others. With its acquisition of SGC, Collectors is adding another base of grading talent to its stable. Stockpiling scarce talent will continue to provide a competitive advantage for Collectors and must have been one of the driving forces behind getting this deal done.
Collectors IPO: If and when does Collectors go public? The IPO market isn’t too hot right now, and I would be surprised to see either Collectors or Fanatics look to go public until we see a steady stream of companies in other industries go public and their stock performing well thereafter. My current guess is Q4 2024 or Q1 2025 for both companies.
How real are monopoly concerns: My subscribers have reached out asking for my take on why this deal can be allowed given Collectors now controls 85+% of the card grading market, per GemRate’s data from Feb-24. As such, it would seem that Collectors has a stronghold on the market and could be classified as a monopoly. To be clear, a monopoly is a “business characterized by a lack of competition within a market where there are no similar substitutes” and a business that “can dictate price changes and create barriers for competitors to enter the marketplace.” My take on this dynamic is two-fold. First, the deal was just announced and it is unclear whether the deal is officially “closed” and the government’s review of the deal, for purposes of antitrust (the law which governs preventing monopolies) has been completed. There is a chance that this review is just beginning or ongoing, so we could expect to hear more about it in the coming months. Second, when considering whether or not a business is a monopoly, it depends how the market in which the business operates is defined. If the market in which PSA and SGC operate is defined as “sports cards and TCG grading”, 85+% market share with only two smaller players would raise eyebrows for me. However, if the market is defined as “all collectibles grading and authentication”, then once you factor in art, wine, and watches, among other categories, the total market size balloons and the implied market share of PSA and SGC shrinks to a point where they are not even in the conversation to be considered a monopoly. Should the government look closely at this deal, I would expect how the market is defined to be a key area of review. I think there is more to come here and am excited to see how it plays out.
As always, I would love to hear your thoughts. You can reach me at jbmintcondition@gmail.com or on Twitter @jbmintcondition
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