Santa Claus the Tax Haven Maven

Express Logistics or a Platform Business?

How did Santa get so dominant? His charm?

No, he runs an international business that doesn’t have any antitrust law.

What is his business?

He doesn’t appear to be a retailer because parents aren’t paying him.

We know that he has overhead costs in the form of elves and significant property.

Some have suggested that he is a retailer or runs a distribution business. I don’t think either of these is the case. He doesn’t collect cash from any children, so really his “customers” are the brands, retailers, and manufacturers.

I see two options. In one case, he operates a “platform” where others make the products and sell under his name. He earns a royalty stream, and I suspect he would have some digital backbone to the business that enables retailers.

In another case, he runs the largest express logistics business, in which brands put their products in his warehouses after Thanksgiving (probably on their own balance sheet because Santa doesn’t want the inventory risk), and he delivers them all on Christmas Eve.

If he operates a platform, what does such a royalty stream business look like? Following similar businesses, he probably charges some portion of revenue. However, I think that it’s more like, say, a software business charging 0.5% of revenues rather than, say, a franchisor like Domino’s or Dunkin' Donuts.

Let’s go through the numbers. There are 1.8 billion children under 12 right now. On average they receive five Christmas presents each. Global per capita GDP is around $13,000. Christmas spending per child is usually around 0.5% of per capita GDP. And let’s assume that Santa doesn’t discriminate. So that means around $70 per child worldwide which equates to $140 billion in Christmas GMV if my calculations are correct.

I lean toward the platform business theory. He happens to deliver the products, but he isn’t taking any inventory risk. (We also know he occasionally drops presents off the roof and breaks them on the way down, so quality control may be an issue.)

At 0.5% of the value of the products running through his platform, I estimate around $1 billion in sales. That’s a little lower than I would have thought initially. But let’s think about his P&L. The retailers pay him to be part of his global empire. They get his branding and access to his CRM. I would say, perhaps riotously, that actually, the elves are NOT his employees. Instead, they work on behalf of the retailers to put the right products in the right places.

Santa must reinvest in his business each year. I’m not sure of the exact figure, but I guess he must spend 10-20% of revenues on marketing to maintain his brand. We see his image everywhere, and that kind of placement isn’t free. From there, we probably have some R&D. He must maintain his platform, which requires investment. More importantly, I think he actually does own his property, much like Salesforce—an otherwise asset-light company that still owns a massive, expensive set of office buildings. He also owns a sleigh and must maintain the reindeer, which costs money, but otherwise, he has a remarkably efficient business. I’d guess he runs a 40% cash EBIT business. Considering his longevity, I doubt that he is very heavily leveraged, so I suspect he doesn’t have much, if any, debt.

I’m not sure about his tax situation, but such a global empire would attract serious attention from tax authorities. Operating in every corner of the world must be incredibly complicated. I imagine he employs a massive team of tax attorneys. Even the most free-trading country doesn’t have double taxation treaties with every nation. Many companies must pay taxes in the country where they operate and then another set of taxes on dividends just to take money out. So Santa’s corporate tax rate is likely high—over 35%. With major customers in China and India, one might assume he incorporates in a country like Canada—close to the North Pole and with a double taxation treaty with both countries. But “treaty shopping” is frowned upon, so I doubt he can avoid paying a high corporate tax rate. That leaves around a 20% after-tax margin. Given his market dominance, I suspect he has a highly sophisticated working capital strategy—getting prepaid, with hefty deferred revenue accounts, few receivables, and a goodly amount of payables. As he grows, his changes in working capital probably add cash to his accounts.

On the other hand, perhaps Santa’s business is more like DHL, UPS, or FedEx. In this case, he would charge a delivery fee. I’m not sure of the rates for this sector. Does he promise 24-hour delivery, or are brands placing their inventory in his warehouses a month before Christmas Eve to cut costs? Let’s estimate around $30 per package, at around 30% gross margins, 10% operating margin. Spread across 1.8 billion children and five packages each, that’s $270 billion in revenue and $27 billion in operating profit!

The trouble with this model is the receivables. He isn’t collecting cash from the parents. He’s collecting from brands, retailers, and manufacturers. On one hand, he has a monopoly—maybe he demands payment upfront. That’s one thing for a software company, but even the strongest logistics companies rarely get prepaid. Tracking down receivables from so many different players must be a nightmare. If this is true, Santa must have an incredible, bare-knuckled accounts receivable department.

But the real challenge? Growth isn’t impressive. Global GDP growth hovers at 2-3% above inflation. I haven’t heard anything about his M&A activity.

So where does all the cash go? Well, the North Pole isn’t technically owned by any country. Like any savvy capital allocator, Santa probably pays himself and Mrs. Claus a hefty dividend and keeps little cash on the balance sheet. Then he reinvests, probably in North Pole real estate or other off-the-radar assets. If his after-tax dividends reach $100 million in the case where he’s operating a digital platform business, that’s substantial but may not get a lot of attention. But, if he’s running a $6 billion free cash flow logistics business (or some $3-4 billion in dividends), that’s a very big number.

So what’s Santa’s business worth? I know, I know—it’s priceless. But if he’s eyeing an IPO, we need a valuation. At $100 million in after-tax free cash flow, Santa’s platform business would be worth around $2 billion (assuming a 5% free cash flow yield and 20x multiple). That’s lower than I expected.

If it’s a logistics business, with $6 billion in free cash flow, Santa’s empire would be one of the largest logistics companies on Earth. If so, his family office must be making some serious global investments.

Would Santa’s valuation increase if he aggressively reinvested or pursued M&A? Absolutely. And let’s be honest, Mrs. Claus would run a ruthless M&A desk. She’d get meetings effortlessly. Who would turn down coffee with Mrs. Claus?

This document is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any securities or investment advisory services. I am the Portfolio Manager of Barca Capital, LLC, but the views I express are my own and not necessarily those of my firm. Also, of course, this article is intended to be humorous and not serious. Don’t write comments here as if this were totally real.

I have never written it but I will here: If this gets turned into a movie, you would hear from my intellectual property attorneys.