Something has gone wrong at the top of corporate Germany.
Don’t take our word for it, consider the following:
the emissions scandal and ongoing fallout at Volkswagen
the troubles at Deutsche Bank and Commerzbank, the country’s two largest-listed lenders
the accounting scandal at payments group Wirecard, revealed by the Financial Times
the meltdown in shares of Bayer since its (so far disastrous) $63bn Monsanto acquisition
Such was the fury directed at Bayer, the aspirin to agrichemicals conglomerate, that shareholders delivered an unprecedented vote of no confidence last month to the company’s management.
“What have you done to our Bayer?” asked one emotional investor in his tirade to Bayer boss (and mastermind of the Monsanto takeover) Werner Baumann, pictured above.
The FT’s Guy Chazan explores this growing sense of frustration among shareholders in German blue-chips in this feature, in which he finds that investors are less willing than they used to be to put up with bad management.
Let’s be clear, there are plenty of solid, scandal-free and successful German enterprises. But we recommend that you read the piece for an examination of how the investor mindset on governance in the country has shifted over the past decade or so, including a look at the two-tiered management/supervisory board structure that often trips up foreigners.
There is also the legacy of cosy relations between large German companies and a small cabal of directors who seem to have accumulated some serious power at the top through their supervisory boards. (This is a good BBG piece from a few years back that shows just how concentrated boardroom power is at the top).
“A lot of the chairmen of German companies are still old-school corporate titans who are not open to considering shareholders’ interests, or at least not to the extent that is necessary,” says Thomas Schweppe, a former Goldman Sachs banker who now runs 7 Square, which advises investors.
The DD takeaway from Guy’s feature is one we’ve been alluding to recently: you can expect activism to pick up in Germany. The first company in the crosshairs is Bayer, but there will be more.
Altice: Banks fight over a giant fee payer
If you’ve been following the story of Altice — the publicly traded cable company run like a private equity firm — you will have seen the wheels come off its growth story over the past 18 months.
The Altice playbook went from gobbling up as many telecoms operators as possible, to selling and spinning off assets in a bid to reduce the enormous debt pile accumulated in its acquisition spree.
But Wall Street banks are less concerned with value creation than they are on fee-making. And that’s why Altice remains a coveted client despite its mixed fortunes.
Do we exaggerate? Altice has paid out over $400m in fees to JPMorgan Chase alone, while Goldman Sachs has pocketed over $220m in fees, according to data from Dealogic.
We suspect these numbers are far below what either bank has really made from Patrick Drahi, the Franco-Israeli billionaire who founded the group after leaving his business idol John Malone’s Liberty Global in 2000. In addition to deals, Drahi, pictured, has tapped up Wall Street banks such as Goldman for a number of private margin loans and other forms of leverage on his sprawling cable empire.
Just how close is the Altice founder to JPMorgan? Besides deal fees, his son Nathan worked in the US bank’s leveraged finance group until recently.
For all these reasons, it struck certain Altice watchers as peculiar that JPMorgan — the biggest beneficiary of the heavily indebted group’s fee-paying largesse — was nowhere to be seen on Altice’s nearly $3bn junk bond sale last week.
It turns out there’s a story behind that — which DD’s Rob Smith takes you behind the scenes of here.
In short, Goldman thought they could do the deal at a better price than their rival. And when Altice asked its banks to step up and backstop the trade, JPMorgan was unwilling to commit balance sheet to a deal lead by its competitor.
The thing was, JPMorgan had already been sounding out certain asset managers about a potential Altice deal at higher yields. It was perhaps no surprise that large US fund managers gave the company a fairly frosty reception when Goldman approached them with a less generously priced alternative.
One question remains: if Nathan has left JPM, where is he now? The answer is private equity group BC Partners since the start of the year. That’s the same BC Partners that made a windfall in 2017 from the IPO of the cable company’s US division, and in which it remains invested.
Pet project: BC Partners lock horns over Chewy IPO
In the Wild West 1980s era of hostile M&A, corporate raiders would make so-called two-tiered tender offers. These bidders would offer an underwhelming amount of cash to the first 51 per cent of shareholders selling their shares. Anyone, however, coming in after would get stuck with a pile of unattractive junk bonds as consideration.
The Delaware courts basically put an end to these essentially coercive structures that created a prisoner’s dilemma for shareholders. Yet, the craziness of a bygone era of corporate M&A has seemingly shifted to the world of distressed debt today where private equity firms and hedge funds posture to stay one step ahead of the law.
DD’s Sujeet Indap this week took a look at the fight at PetSmart over its high-flying subsidiary Chewy, where PE owner BC Partners is locking horns with a multitude of savvy hedge funds.
Chewy, an online pet supply retailer, put out an IPO prospectus last week that could portend a valuation approaching perhaps $10bn. It would be a major game-changer for BC Partners, whose stake in debt-strapped PetSmart is effectively worthless. But, as Sujeet describes, a BC Partners proposal with creditors in early April to withdraw litigation over a 2018 equity transfer at Chewy created a classic prisoner’s dilemma.
BC Partners was indeed able to get a last-minute defector to clinch the deal. Creditors were furious over the shenanigans, but as it turns out, there may be so much value at Chewy that everyone will put aside their differences.
The precedent may be set, however, and the next private equity/hedge fund showdown may get ugly as the law is still a step behind.
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Brian Levine, Goldman Sachs’s co-head of global equities trades and execution services, is retiring after 25 years at the investment bank, Reuters reports. Philip Berlinski and Jeff Nedelman, together with Michael Daffey, will lead global equities.
Purplebricks has parted ways with its chief executive Michael Bruce as the struggling online estate agent looks to scale back its international operations. Bruce, who set up the group in 2012, will be replaced by the company’s new chief operating officer Vic Darvey. More details here.
Ashurst has hired Luke Robottom as a partner in the law firm’s Middle East oil and gas team in Abu Dhabi. Robottom was previously a partner in the construction and engineering group at White & Case.
The Carlyle Group has hired Ruulke Bagijn to lead the investment solutions group, which builds private equity and real estate portfolios. Bagijn was previously co-head of AlpInvest Partners’ primary funds investments team.
The rise of Greensill What ties together former prime minister David Cameron, Swiss fund giant GAM and the star trader they fired? Australian billionaire Lex Greensill. Here’s a look at the financier who’s at the heart of GAM’s recent troubles. (FN) + (FT)
Fix it, genius Can Apple’s new retail chief Deirdre O’Brien return the Apple store to its former glory? (BBG)
Clearing market shifts south While London focuses on keeping its prized business, the clearing of euro-denominated interest rate swaps, from moving to Europe, another part of the market is quietly shifting to the eurozone — clearing repurchase agreements. (FT)
Due Diligence is written by Arash Massoudi, Javier Espinoza and Robert Smith in London, James Fontanella-Khan, Ortenca Aliaj, 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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