One thing to start: Arm is on the cusp of regaining control of its renegade China joint venture, which would remove a major obstacle for SoftBank’s plan to take the UK chip designer public.
Due diligence? What due diligence?
Pulling together a large leveraged buyout can take months, even years of planning.
Not for Elon Musk. As his bankers and lawyers hurriedly assembled the $25.5bn financing package for his Twitter bid in under two weeks, skipping over the typical checks, one dealmaker involved summed up the feeling in the room.
“What could go wrong?” the person told DD. “He’s literally the richest man in the world.”
But now that the ink is drying on Musk’s $44bn deal to buy the social media platform, questions linger.
“He succeeded in selling the vision that there was a lot of revenue [in Twitter] that was untapped,” another person involved in the deal said.
“[He] persuaded people that they can make that decision without the usual kinds of credit committee discussions and diligence processes.”
The Tesla and SpaceX boss has pulled Wall Street’s leg before. And broadcasting his unfiltered thoughts (and questionable memes) on Twitter has landed him in hot water.
This time, though, the mood was different. The billionaire has lined up backing from Morgan Stanley and a host of other top US lenders to assemble one of the largest take-private deals in history.
Musk’s wealth, about $150bn of which is tied to his Tesla stake, eased concerns for his lenders who sped up their due diligence processes at the behest of Morgan Stanley. His Tesla holdings have been pledged as collateral for a $12.5bn margin loan, which accounts for just under half of the debt backing the deal.
But Tesla’s tumbling shares present a red flag. This week the electric carmaker registered its largest daily loss since September 2020 after Twitter approved the takeover, and more than $200bn has been knocked from its valuation since Musk revealed his stake in the social media company.
Banks have been burnt by lending based on volatile stock before. See: Archegos. But many dealmakers have shrugged off the possibility. Musk is the richest man in the world, after all.
“He would just pay the debt down. It’s how a lot of banks got comfortable [with the deal],” one banker said.
The billionaire could sell between 15 and 20 per cent of his Tesla shares if necessary, but he would likely need to sell even more than that to cover $3bn to $4bn in capital gains taxes, according to DD’s analysis.
Musk has also yet to explain how he intends to raise the remaining cash needed for the deal, which could reach up to $21bn. In a letter to Twitter chair Bret Taylor, Musk said he’s exploring how to allow some existing shareholders to invest in the company once it is private.
The rapidly assembled financing shows how far banks are willing to go to win business — and the lucrative fees that come with it — and how comfortable Wall Street has become with debt, despite the risks.
As one person involved in the debt financing explained, when it came to the world’s richest man, the due diligence “was easy. There was none. Not in the classic sense.”
Wall Street cuts back on subscriptions
Earlier this week Spotify chief Daniel Ek was quick to distance the streaming company from Netflix, which has seen its shares cascade as subscribers cancelled their subscriptions in droves and major investors including Bill Ackman cut their losses.
“I think a lot of people are grouping us and Netflix together . . . despite both being media companies and primarily subscription revenue companies, that’s kind of where the similarities end for me,” said the Spotify chief in an appeal that signalled hope that the music service would not suffer the same fate.
While they may have different business models, both face the same uphill battle as investors rethink streaming’s profitability after pouring billions into online platforms.
Of all the media stocks that have been dragged down by Netflix’s gravitational pull, Spotify has fared among the worst, losing nearly 25 per cent from levels just before the crash.
For all its recent financial woes, Netflix’s relentless push to become one of the biggest studios in Hollywood offers some security. But it faces a highly fragmented market rife with competition, as Big Tech rivals churn out their own cheaper, equally binge-able content.
Spotify’s own attempt to cut out the middleman in the far less fragmented music industry, however, ended in failure. The company signed a handful of up-and-coming artists several years ago, but quickly reversed course after facing the wrath of major labels.
With little content to call its own, other than its recent push into podcasting, Spotify has struggled to raise its monthly subscription price as Big Tech rivals such as Amazon and Apple peddle the same songs.
That could now become a source of strength for the Stockholm-based group, the FT’s Anna Nicolaou writes. As inflation in the US hits 40-year highs and Americans re-evaluate their budgets, the streaming group’s premium $10-a-month and free-with-ads options suddenly look like a better deal than Netflix’s $16-a-month package — which offers only a slice of the sprawling entertainment landscape.
The frustration among media executives is palpable. As one veteran media baron lamented to Anna: “I did everything you wanted!”
But as Wall Street turns its back on the streaming model, both Netflix and Spotify will be forced to evolve past their subscriber-heavy, cash-burning methods or risk extinction.
The top Hong Kong private equity boss bearish on China
Last week DD checked in on things in Shanghai, where investment bankers are sleeping on camp beds in their offices and Goldman Sachs had to finagle a special vehicle permit to make sure its employees could access food and baby formula.
The lockdowns across China as a result of the country’s zero-Covid policy have not only put Shanghai’s ambitions to become a bustling global financial hub on ice, but also further froze market sentiment on China, triggering a sharp sell-off in Chinese stocks. The lockdown in Shanghai is just the latest difficulty after a year of regulatory shocks and geopolitical brinkmanship that have hammered Chinese companies and markets.
Particularly feeling the effects are China-focused private equity and venture capital groups, which reaped the returns of a surge of IPOs in New York and Hong Kong by Chinese companies as recently as the first half of 2021 — before Beijing began to tighten its fist on overseas listings as part of President Xi Jinping’s drive for “common prosperity”.
Weijian Shan, the founder and chair of PAG — one of Asia’s biggest private equity investors with more than $50bn in assets under management — has said that the most recent lockdowns have put China in an economic “crisis”.
“We think the Chinese economy at this moment is in the worst shape in the past 30 years,” he said in a video of a meeting viewed by the FT, adding that large parts of the Chinese economy, including its big plans for Shanghai, had been “semi-paralysed” by “draconian” zero-Covid policies and that the impact on the economy would be “profound”.
“China feels to us like the US and Europe in 2008,” he said.
It’s extremely rare for top executives doing business in China to criticise the local government. JPMorgan boss Jamie Dimon learned the hard way that substantial grovelling is the logical next step if you criticise the Chinese Communist party but want to continue doing business in the country.
Shan is one of the most high-profile veteran financiers in Hong Kong and mainland China and also serves as an independent director to Alibaba. His comments that PAG is diversifying away from China are a swift departure from business as usual under the watchful eye of the Communist party.
One person with knowledge of the meeting told the FT’s Tabby Kinder that the video was recorded during a roadshow for PAG’s impending $2bn Hong Kong IPO, expected to be the city’s largest new listing this year.
DD wonders if there was a time when he’d hoped to take the listing overseas.
Job moves
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Goldman Sachs has hired Andrea Hurst as managing director for communications in the investment bank’s executive office. She joins from Moelis & Company where she was global head of media & external affairs.
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David Chin is stepping down as China country head at UBS but remaining as the bank’s head of Asia Pacific investment banking, per Reuters.
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Herbert Smith Freehills has promoted 34 new partners.
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Clifford Chance has elected 37 new partners.
Smart reads
You’ve got mail Serving court papers is “an art”, veteran investigator Paul Austin tells the FT. It’s a tricky and sometimes comical endeavour at that. The industry has become even more of “a wild west” as the hunt for Russian oligarchs picks up steam.
Miracle medicines UK biotech group SpectrumX claims to have rights to “one of the most revolutionary treatments since the discovery of penicillin” and is gunning for a London IPO. Is it too good to be true? The FT’s Bryce Elder investigates.
Denim and discourse Levi’s corporate history has long been interwoven with progressive ideals. So when its marketing chief grew a loyal Twitter following on the right, the retailer found itself dragged into America’s culture wars, Bloomberg reports.
News round-up
Twitter admits overstating audience figures for 3 years (FT)
KKR to take Hitachi Transport private in $5bn deal (FT)
Elliott calls for Suncor strategic review, board changes (FT)
Hwang’s acolyte Tao Li is mystery fund manager in Archegos Case (BBG)
EY Germany to cut staff workloads in post-Wirecard overhaul (FT)
Standard Chartered beats estimates despite volatility in Asia (FT)
Barclays’ profits hit by jump in litigation and conduct charges (FT)
James Murdoch, Uday Shankar lead $1.8bn investment in India’s Viacom18 (Reuters)
Chinese banks and bad-debt managers urged to rescue real estate (Caixin)