A £31bn merger and a master dealmaker in action

One scoop to start: Mukesh Ambani has sold a stake in his Indian digital services group Reliance Jio for a third time in three weeks, agreeing to a $1.5bn deal with US buyout group Vista Equity Partners. More here. 

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John Malone and the art of optionality in dealmaking

Earlier this week, we gave you a short but important refresher on a legendary dealmaker: John Malone, the US billionaire known as the “Cable Cowboy”. 

We listed some of the reasons that have made him stand out in the telecoms and M&A industry ever since he first started wrangling together deals in the 1970s. 

That list includes things for which he is well known for, such as avoiding tax payments wherever possible, and the incredibly resourceful use of debt, that would impress even the most experienced private equity investors. 

But the thing that is often overlooked about Malone’s craft is actually a far more obvious observation. It is something he has yet again achieved with Thursday’s announcement that Liberty Global, the US-listed, European cable company he controls, would combine its Virgin Media business in the UK with O2, the mobile provider owned by Spain’s Telefónica. 

And that is the ability to create optionality with every move you make. Before we explain, here’s our news story on the £31bn combination and here’s the FT tick-tock on how the megadeal came together. It starts off at the five star Boca Raton Resort & Club in January. 

That was where Malone’s top team had gathered to plot their next move in the UK market during daytime meetings, which were topped off by night-time yoga sessions and a private concert by rock singer Lenny Kravitz.

Back to the point about optionality and this transaction. We’ve already explained this week that the transaction creates a 50/50 venture with Telefónica. So one obvious outcome is that in time the venture will seek a stock market listing, which will give Malone’s Liberty Global a possible route for an exit, and those plans are built into the agreement. 

But there is another intriguing possibility: that is whether the deal has pushed Vodafone, a UK competitor to O2 in mobile services, against a wall.

As Nic Fildes reports in his tick-tock:

“One Liberty Global insider argued that ‘plan A’ in the past had always been a sale of Virgin Media to Vodafone and that the O2 deal could smoke out a rival bid . . . In the UK, Virgin Media signed a deal last year to use Vodafone’s network for its mobile customer base for 5G.”

Without a partner to converge services in the market, that means it now faces a situation where Virgin Media has been valued at £18.7bn including debt. That number becomes a baseline that will need to be surpassed if any counter-strike is made by Vodafone. Oh, and of course, it will need to remember Malone’s views on paying any taxes on a deal.

Goldman gives UNFI food for thought 

Bankers attempt to win clients by gaining their trust and goodwill. But companies would be wise to remember that Wall Street can still be a hard-nosed counterparty. 

Earlier this week, Goldman Sachs successfully had a New York state court dismiss charges brought by United Natural Foods. In 2018, UNFI had acquired rival Supervalu in a $3bn deal. Goldman advised UNFI on the M&A and had also agreed to lead a $2bn bridge loan to fund the deal. 

The syndication of that loan proved rocky. Among other things, Goldman had withheld $40.5m of the loan proceeds and UNFI was stuck with an interest rate higher than it had anticipated. UNFI believed Goldman’s actions were improper and that the bank had put its interests ahead of UNFI. 

Goldman disagreed and argued that it had done nothing that its contract with UNFI did not allow. The New York court agreed, noting that Goldman and UNFI “were involved in an arm’s length transaction” and that Goldman’s “profit-seeking motive is not improper”.

In a statement, Goldman said: “Goldman Sachs is pleased that the NY court has determined that these claims had no merit, and dismissed the case in its entirety.” 

UNFI said in a statement: “UNFI made every effort to hold Goldman Sachs accountable for the harmful and self-serving actions it carried out in connection with the financing of the Supervalu acquisition. Regardless of this decision, our complaint detailing the bank’s inappropriate treatment of a trusting client speaks for itself.”

UNFI had used Goldman as an M&A adviser in the deal. But as DD’s Sujeet Indap explained last year, in a leveraged loan transaction, a borrowing company and the bank which has to first purchase and then sell the debt onwards can have diverging interests. And as the court ruled, even if there are hard feelings afterwards, the legal contract provides protection for the bank.

One interesting footnote to Judge Andrea Masley’s ruling: UNFI said it had been harmed by so-called net-short debt activism, where hedge funds who bought the loan were allegedly seeking a future default of UNFI. Masley rebuffed that concept, writing that the idea of such harm for UNFI was “impermissibly speculative”. 

The rush for the M&A exit door continues

The pile of pre-crisis deals being called off or renegotiated, as the full scale of the coronavirus pandemic’s economic impact becomes worryingly clear, is growing by the day. 

Already we’ve seen Xerox ending a hostile takeover bid for HP, aerospace companies Woodward and Hexcel terminating a multibillion-dollar merger, Delphi Technologies agreeing to sell itself more cheaply to rival BorgWarner, and of course Sycamore terminating a $525m deal for Victoria’s Secret. 

Plus Bed Bath & Beyond has sued 1-800-Flowers.com, which failed to complete a $250m asset purchase, and Anbang has sued Mirae, saying it failed to pay $5.8bn for 15 US luxury hotels. 

Now there are two more deals, both struck in January, where the buyers want out. 

Hedge fund billionaire Daniel Loeb, below, wants to back out of a $2.6bn deal to buy Swiss payments company Global Blue, a blow to its private equity backers Silver Lake, DD’s Ortenca Aliaj and James Fontanella-Khan report. 

And the payments company Wex says it isn’t required to go through with a $1.7bn deal to buy two London-based fintech groups, one of which, eNett, is ultimately owned by hedge fund Elliott Management and private equity group Siris Capital. 

The sellers are not impressed, saying they’ll “vigorously enforce their contractual rights” to force Wex to go through with the deal, which raises the possibility of one of the first UK court cases over whether the pandemic gives companies the right to walk away from deals. 

If there isn’t much M&A for law firms to be working on this year, it seems there’ll at least be plenty of failed-deal litigation to keep them busy. 

Job moves 

• Frank Bisignano, a former lieutenant of Jamie Dimon at JPMorgan Chase, is set to take over from Jeffery Yabuki as chief executive of Fiserv, the payments processor that acquired First Data in 2019. Yabuki will remain at the company for the rest of 2020 as executive chairman. 

• Charles Li, chief executive of Hong Kong Exchanges and Clearing, announced he will step down when his contract expires in October 2021. Li led HKEX’s failed $32bn attempt to buy the LSE Group last year. More here.

Smart reads

Powerful family dispute Billionaire Rami Makhlouf, Syria’s most powerful tycoon, has pleaded with the country’s authorities to stop ransacking his businesses and targeting his employees. The conflict has pitted him against his cousin, who just so happens to be Bashar al-Assad, the war-torn nation’s president. (FT)

Unplanned departures Some of us may have the impression that holidays are about to get cheaper but we could see the opposite result. Look at London’s Gatwick airport where Virgin Atlantic has said it will close operations at the UK’s second-biggest gateway and British Airways has threatened to walk away.* (FT)

Disappearing dollars Europe’s wealthiest resident, Bernard Arnault, has seen his net worth shrink by more than $30bn. Now the luxury goods tycoon is plotting a big comeback once markets rebound. (Bloomberg)

News round-up

StanChart and HSBC face losses on loans to rice trader (FT)

GlaxoSmithKline to sell $3.3bn Unilever India stake (BBG)

US companies got emergency government loans despite having months of cash (Reuters)

Pandemic cuts sales volumes by a third at brewer AB InBev (FT)

Elliott, Fidelity pump $1.4bn into utility CenterPoint Energy (Reuters)

Uber leads $170m investment in Lime (FT)

Neiman Marcus files for bankruptcy protection (FT)

Cocaine trade caught in disrupted global supply chains (FT)

Thyssenkrupp lift deal becomes $18bn albatross (Breaking Views)

Fiat Chrysler, Peugeot deal math complicated by pandemic fallout (Wall Street Journal)

Paul Tudor Jones buys bitcoin as a hedge against inflation (BBG)

* This article has been amended since initial publication to correct that the Virgin Group company leaving Gatwick airport is the airline Virgin Atlantic