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Behind closed doors and at fancy restaurants in midtown Manhattan on Monday, dealmakers were subtly talking trash about how Morgan Stanley had overpaid for Solium Capital, the stock plans administrator.
Paying nearly $1bn for a little-known Canadian company with only C$150m in expected 2018 revenue does appear somewhat steep (Lex thinks so too). But given this is the biggest M&A deal the US investment bank has done in ages, it seems more prudent than blowing tens of billions of dollars on a regional bank or asset manager. It’s at least one way to test the water.
Why? Small is beautiful. Some of the best deals ever struck by companies are the ones few thought would even matter. Think of Priceline’s $133m acquisition of Booking.com back in 2005. The FT and many other global news outlets didn’t even bother to cover the deal at the time. Today Booking.com is pretty much the whole of Priceline and its value is $86.4bn (yes, billion). Check out this crazy chart in this Recode piece about the impact of that deal.
The point we’re trying to make is that what might seems pricey today could turn out to be a game changer for Morgan Stanley 10 years from now. It’s taking on an administrator of stock plans for companies filled with young, up-and-coming paper millionaires whose fortunes are being eyed by all of Wall Street’s top banks.
If the deal turns out to be a dud, few will remember and Morgan Stanley will continue to march on. That simple.
Compare this to the risks BB&T and SunTrust are taking by combining in a $66bn (albeit all-stock) deal. A lot can go wrong as the banks ready to close branches, merge technology platforms and mesh two different leadership groups. And that’s before the uproar that job losses may inspire.
The deal on Monday also looks like it will be much easier to digest than Morgan Stanley’s last major acquisition: the $13.5bn buyout of Citigroup’s Smith Barney wealth management unit. The Smith Barney moniker has since been phased out, another Wall Street brand lost to history, but the takeover catapulted Morgan Stanley’s wealth management business. It currently ranks among the largest in that segment, alongside UBS and Bank of America Merrill Lynch.
The bet by James Gorman, the chief executive of Morgan Stanley, is that the privately held technology start-ups that have turned to Solium for back office help managing their employee stock plans will mint millionaires. And those potential millionaires will one day need wealth management services.
Smith & Nephew opens up the hunt
Namal Nawana couldn’t have been more clear with his investors last week. The boss at Smith & Nephew, the UK-listed medical devices group, told the market that he was hunting for deals and that he had the firepower to deliver them. DD took his word.
Late on Friday, we revealed that S&N had approached US-based NuVasive about a takeover of the maker of medical instruments used in spinal surgery. Any deal would value the company at more than NuVasive’s enterprise value, which sat at $3bn at the time of writing. As we wrote in the article, the timing of any deal between the two sides is unclear as were the terms being discussed. We also flagged the possibility that us breaking the news may lead to one or both sides walking away from the talks.
With both stocks having closed by the time of publication on Friday, Monday was the first day for both stocks to digest the news.
S&N, which managed to avoid having to make a statement to the market, saw its shares drop as much as 5.5 per cent. They settled down 3 per cent. We believe that’s due to the fact that some investors finally got the message that there just isn’t a buyer of the company. Instead, they’re now realising that Nawana is going to do deals (he’s already done one small bolt-on) in adjacent categories to the company’s existing portfolio. The share price decline may have also been affected by the lukewarm reaction from the analyst community. NuVasive shares jumped 13.3 per cent.
How much firepower does S&N have? We hear anywhere in the range of $3bn-$5bn. As we reported, the S&N chief financial officer told investors last week that they should expect the group to maintain its investment grade credit rating but that its ratio of net debt to earnings before interest tax depreciation and amortisation may rise to between 2 and 2.5 times, up from its current level of about 0.8 at the end of 2018.
Dia: An oligarch takes on European retail
Is Mikhail Fridman a turnround artist who can work his magic in the challenging European retail sector?
The question is one we also asked last week when we took you inside the world of Mike Ashley, the UK dealmaker whose prowess in financial engineering allows him to gobble up the high street with money making as his primary motive.
Now we consider the acquisition spree that has seen Fridman buy up Holland & Barrett, the health food chain, in 2017 and his stab at Dia, the Spanish supermarket chain.
Not so long ago, the Russian oligarch bought a 29 per cent stake in Dia. That investment may have already lost him €700m.
It preceded a set of woes that have seen the Spanish supermarket chain stumble into deep trouble. Sales have tumbled, the chairman resigned, the chief executive was replaced twice, and its debt was degraded to junk. Its shares are in the gutter.
Now, Dia’s management is facing its toughest obstacle yet in the form of Fridman himself. Last week, Fridman’s L1 Retail group launched a takeover bid reminiscent of his bruising days building Alfa Group at the dawn of Russian capitalism.
To take full control of Dia, L1 is offering shareholders a promise of a €500m injection and a buyout that gives the Spanish company an equity value of €417m — a fraction of the grocer’s €2.7bn price tag when it first bought in.
It’s clear Dia wasn’t the choice portfolio asset Fridman thought he was getting, particularly after it was forced to restate its accounts for 2017. To recoup his investment, Fridman says he wants to perform a “U-turn” in Dia’s fortunes, much like L1’s Stephan DuCharme did while running Alfa’s Russian supermarket X5.
The oligarch has been trying to reinvent himself as a western investor in London, where he relocated after he and his partners pocketed $28bn from TNK-BP’s sale to Rosneft in 2013.
But leaving the past behind is hard — even if Lord John Browne, his old adversary at BP, now works for him. Alfa has found itself embroiled in “Russiagate” investigations into Donald Trump’s election — it denies any involvement — and has faced regulatory rejections in the US and UK over its Russian roots.
“We just want to be normal business people,” Fridman laments. (If you want some Lunch with the FT action, here’s a piece by Guy Chazan from 2016).
That’s a sentiment DD can understand. But Dia feels like a challenge that even the best turnround firms would struggle with.
Tête-à-tête on corporate debt If you ask an economist and a credit investor about the dangers of the burgeoning leveraged loan market, they’re bound to disagree. Megan Greene and Dwight Scott answer the question on everyone’s lips: Do leveraged loans pose a threat to the US economy? (FT)
Buyer’s remorse While Andrea Orcel was enjoying his gardening leave under the Peruvian sun, Santander was getting cold feet about its new chief executive. Here’s a look at how a fight over Orcel’s €50m pay package ended his time at the Spanish bank before it began. (FT)
Diversifying activism Two activist investors are defying statistics by launching a hedge fund led by female and non-white executives. Lauren Taylor Wolfe and Christian Asmar have received a $250m commitment from Calstrs for their ESG-focused fund, Impactive Capital. (WSJ)
‘The song of the factory’ Marco Tronchetti Provera dances to the beat of his own drum. Pirelli’s executive vice-chairman talks to the FT about his contrarian view on dealmaking and the synergy between man and machine. (FT)
Dishing the dirt on Bezos “I didn’t realize The Wall Street Journal trafficked in warmed-over drivel from supermarket tabloids” . . . when Amazon says that to the WSJ it’s automatically a must-read. (WSJ)
Colgate-Palmolive announced on Monday that Noel Wallace, its chief operating officer, will replace Ian Cook as chief executive in April. Cook, who has led Colgate-Palmolive since 2007, will remain with the company as executive chairman for up to 12 months to assist with the transition.
Tom Barrack, the real estate tycoon who helped his ally Donald Trump win the White House, has agreed to explore a reorganisation of his Colony Capital business after pressure from a little-known activist investor. Colonyhas appointed Raymond Mikulich and Craig Hatkoff to its board of directors as part of a deal with activist investor Blackwells Capital. Colony and Blackwells will jointly appoint a third new director. More here.
Dentons has hired Ed Reilly, the former chief executive of FTI Consulting’s strategic communications arm, as a senior adviser to the law firm.
New York based advisory firm BDA Partners is expanding its presence in Japan with two new additions. Hideyuki Tozawa joins as managing director and co-head of the Tokyo office and Shinsuke Hashimoto joins as director.Tozawa was an equity partner at Deloitte Tohmatsu Financial Advisory and Hashimoto spent 13 years at GCA.
Law firm Morgan, Lewis & Bockius has hired Vanessa Ng as a partner in its Singapore office. She joins from a regional Singapore law firm.
Arnold & Porter has hired John Hagan as a partner for the law firm’s litigation practice in Chicago. He was previously a partner at Reed Smith and before that Kirkland & Ellis.
Covington & Burling has hired Denny Kwon from Wilson Sonsini as a partner for its corporate practice in San Francisco.
Baird Global Investment Banking announced eight new managing directors. You can find a list of the all-male appointees here.
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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