Hopefully by now you’re somewhat up to speed on the dramatic fallout from the death of Saudi journalist Jamal Khashoggi and how that has upended global relations with Saudi Arabia and its Crown Prince Mohammed bin Salman, who was set to showcase his country’s landmark attempts at modernising its economy at a conference dubbed “Davos in the Desert” due to begin on Tuesday.
The story has been multi-faceted, complicated, tragic and also consequential on several levels. Since this is a corporate finance newsletter, we will stick to the business consequences.
But before we do that, let’s take a quick moment to acknowledge the surreal grievances of the folks over at the World Economic Forum, the group that created the actual Davos conference that is frequented by the same ever-in-touch global elite that have been having a meltdown over whether to attend the Future Investment Initiative conference in Riyadh.
The WEF wrote that it “objects to the proliferation of the use of the ‘Davos’ brand for events that have nothing to do with its own activities. The forum, together with the City of Davos, will use all means to protect the Davos brand against illicit appropriation.” Here’s the full release, if you need a chuckle to start your day. DD was heartened by the suggestion on Twitter that the WEF should actually rebrand Davos as “Jedda in the Swiss Alps”.
Back to the conference, which only a year ago was hailed as the coming out party for Saudi Arabia’s sovereign Public Investment Fund that was at the heart of the 33-year-old crown prince’s attempt to shake-up his country’s economy and also diversify its stakes abroad.
Last year MbS (as the prince is often referred to) was mobbed like a rock star as executives and investors fought to get a selfie with him. Now they're being advised to keep their distance. “Don’t get a photo with MbS,” one banker advised.
The fallout from the Khashoggi affair has put the PIF and its mission on the back foot. This is a huge setback for MbS, who has worked relentlessly to turn the PIF from a near-dormant state holding company into arguably the world’s most active sovereign investment vehicle, likened by some to a “parallel state”.
The sovereign fund at the heart of MbS’s reform plan has invested tens of billions of dollars at home and abroad, in companies ranging from Uber to Magic Leap, and in ventures with Blackstone and SoftBank, while targeting a doubling of its assets under management to $600bn by 2020.
Now amid macabre reports of the dissident journalist’s killing, the fund has become a glaring example of the potential economic damage for the kingdom as Riyadh grapples with Saudi Arabia’s biggest diplomatic crisis with the west since the September 11 attacks on the US in 2001.
What’s at risk in the long term is Riyadh’s ability to attract the foreign investment, skills and technology it needs to build a modern Saudi economy as MbS has promised to address the urgent need to provide jobs for a youthful population blighted by rising unemployment.
Meanwhile, Siemens boss Joe Kaeser became the latest high-profile executive to pull out of the conference. He laid out his thinking in a comprehensive LinkedIn post. His conclusion:
“I will not attend the FII 2018. It’s the cleanest decision but not the most courageous one.”
For further reading:
A deep dive by the FT’s Andrew England and Simeon Kerr into how the Khashoggi killing threatens the prince’s project.
Tom Braithwaite writes that the Khashoggi case shows bankers have become our morality police. On the audio side, here’s DD’s Arash Massoudi with Kana Inagaki on what the Saudi fallout means for SoftBank, which has staked its future in a major fund supported by the PIF.
Bloomberg also has a well-researched piece about how Blackstone got Saudi Arabia to back its infrastructure fund: by giving the kingdom a big discount. The deal the Saudis got? For every dollar any other investor paid Blackstone to oversee, Saudi Arabia would pay 15 per cent less.
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Prevailing in court does not always mean winning
Deal code names are a cute tradition. What’s ostensibly a way to maintain confidentiality on a sensitive project is often a rare opportunity for investment bankers to show some creativity. What’s, shall we say, a less common practice is bidders coming up with their own pejorative for the target company based on the deal code name.
This past weekend Sujeet Indap touched on the subject in his On Wall Street column about the medical industry’s Fresenius-Akorn deal, which had been opposed by James Bauersmith, a top business development executive at Fresenius.
While the official code name for the deal was Project Oak, Mr Bauersmith had adopted the less flattering “Project Cerafa” — Ceratocystis fagacearum happens to be the fungus that kills oak trees.
This detail, of course, came out of the now landmark case in Delaware that decided the fate of Fresenius's acquisition of Akorn. Earlier in October the Delaware vice-chancellor Travis Laster allowed Fresenius to walk away from its $5bn deal because both Akorn’s business had fallen apart after signing and, separately and importantly, Akorn hadn’t lived up to certain reps and warranties in the merger contract. As legal commentators have noted, this is the first time a Delaware court has ruled a material adverse effect occurred, allowing a deal to be terminated. But what struck us when reading the 247-page opinion was that Fresenius already had suspicions that Akorn was a pig — as evidenced by the doubts expressed by the executive who came up with the nasty nickname for Akorn — but did the deal anyway.
Now less than a month later, another shock ruling has captivated Wall Street. A New York state appeals court last week overturned an injunction that had blocked the merger of Xerox — where billionaires Darwin Deason and Carl Icahn are major shareholders — with Fujifilm in a deal calledProject Fruit.
As Sujeet writes in Tuesday’s FT Inside Finance column, such injunctions are extremely rare — courts prefer wrongdoing to be litigated after a deal closes — and no one involved at the time the injunction Deason sought had any chance of success.
The injunction set in motion a series of events that ultimately backfired for Xerox shareholders, Sujeet argues. Xerox wasn’t able to negotiate a better deal with Fujifilm, which is now suing Xerox for breach of contract. The Xerox stock price has also retreated to well below where it was at the time of the January merger announcement.
Icahn (pictured above) told the FT that the Fujifilm deal may come back but also that the Japanese company needs Xerox more than vice versa.
Will a new round of negotiations require a new code name?
Private equity finds a new reputation in Japan
For some years now, the private equity scene in Japan has involved the likes of KKR, Permira, Carlyle and Bain Capital punctuating a lot of very enthusiastic chatter and some hefty fundraising with a handful of eye-catching deals.
That particular quartet have always argued that, even without a consistent pipeline, they’re playing a long game in Japan. Other big players held back, judging that they would know the turning point when they saw it.
As the FT revealed this week, Apollo Global Management (which has $270bn of assets) is preparing to open an office in Tokyo, echoing Blackstone’s move to do the same earlier this year. Headhunters say they’re seeking out similar PE dealmakers to set up local Japan operations for at least two other global PE firms.
Clearly, it’s now received PE wisdom that Japan’s turning point has come — that corporate governance pressures on Japanese conglomerates will generate some juicy carve-outs and Japan’s business succession crisis will also send more ageing CEOs into the arms of PE. We kicked the tyres on that theory too and concluded that, critically, corporate Japan itself is tangibly more open to discussions with PE than it was just a few years ago.
Speaking of tyres, KKR-owned Japanese car parts maker Calsonic agreed on Monday to acquire auto component maker Magneti Marelli for €6.2bn from Fiat Chrysler Automobiles. KKR had acquired Calsonic from Japan’s Nissan two years ago.
To read more on Japan’s changing attitude towards PE, check out this piece by Leo Lewis and Martin Arnold. And to read further on dynamics in the Japanese dealmaking market, try the country briefing that team DD produced a few weeks ago.
Uber’s efforts to overhaul its troubled workplace culture were back in the spotlight as the company’s top dealmaker resigned. The departure of Cameron Poetzscher, a former Goldman Sachs banker who has played large roles in securing equity and debt financing for the ride-hailing company over the years, followed accusations of sexual misconduct for which he was disciplined last year, according to a person familiar with the matter.
Facebook has hired former UK deputy prime minister Sir Nick Clegg as head of its global affairs and communications, the FT reported. He will succeed Elliot Schrage, who said he would leave Facebook in June.
Andrea Vella, the Goldman Sachs veteran famously quizzed about banging his shoe on the table in his evidence in a legal battle against Libya’s sovereign wealth fund, is moving aside as the bank’s top investment banker in Asia. He and Kate Richdale, who joined GS from Morgan Stanley in 2013, will move from co-heads of Asia Pacific investment banking to Asia IB chairs. Todd Leland, an investment banker who moved to Hong Kong a year ago as the region’s co-president, will become head of Asia IB. Here’s the FT story.
Andrew Dowler, managing director of external relations at Blackstone in Europe, will join Greenbrook Communications as a partner. Before Blackstone, he worked at Finsbury, a financial and corporate communications consultancy.
Richard D Parsons, CBS interim chairman, has resigned less than a month after being appointed for the post due to illness, The New York Times reported. CBS has named Strauss Zelnick, the head of the video game publisher Take-Two Interactive Software, as his replacement.
David Marchick, a member of Carlyle’s management committee, is set to leave the US buyout group by the end of the year, The Washington Post reported. Before Carlyle, Marchick worked at Covington & Burling.
RBC Capital Markets has hired Ralph Ibendahl as a managing director and Meena Samaan a director to its European utilities and renewables business. Before RBC, Ibendahl worked at Barclays. Samaan joins from DC Advisory. Before that he worked at JPMorgan Chase.
Neptune Energy, the private equity-backed oil and gas vehicle, has hired Armand Lumens, the former chief financial officer of commodity trader Louis Dreyfus Company, the FT reported.
Snap’s vanishing prospects Life at Snap, Snapchat’s parent company, has been hard this year. The clock is ticking for Snap to turnround its business as it rapidly burns through cash. Evan Spiegel, the creator of the mobile messaging app, has acknowledged as much in his latest memo to staff. ( FT)
Reconsider that Chinese travel Several banks, including Citigroup and Standard Chartered, have asked staff in their private bank to delay or reconsider travelling to China. The reason: authorities there recently stopped a UBS banker from leaving the country. (Reuters)
Chinese crossholdings Huarong, the Chinese asset manager we have been following, along with China Minsheng Bank, have been financing a bubble of highly leveraged and highly-interconnected Hong Kong-listed small-cap companies. Similar networks have been shown to suddenly collapse. ( FT)
Lax bros unite Wall Street is dominated, for better or worse, by lacrosse players, a portion of whom have come together to start a pro league. (Bloomberg)
Evergrande’s puzzling debt raise (FT Alphaville)
Due Diligence is written by Arash Massoudi and Javier Espinoza in London, James Fontanella-Khan, Sujeet Indap, Eric Platt, Jennifer Bissell-Linsk, Lindsay Fortado and Mark Vandevelde in New York, and Don Weinland in Hong Kong.
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