BY ALEC MACFARLANE

It is shaping up to be a big year for buyouts in Asia. There’s over $250 billion of capital committed to private equity in the region, according to research outfit Preqin. KKR plans to raise a fund that would be bigger than its flagship U.S. one. Cheap debt is also available from Japan to Australia, making a mega-deal all the more likely.

Jumbo Asian LBOs are rare. Bain led the biggest one a couple of years ago, an $18 billion acquisition of Toshiba’s memory-chip business. The region’s only other 11-digit buyout, according to Dealogic data, was Singapore’s Global Logistics Properties. With so many companies controlled by tycoons, governments or entrenched boards, it has been a tougher part of the world for private equity to crack.

Overall conditions are improving for buyout barons, however. Interest rates keep falling. Banks are generally willing to lend more. Debt markets in Europe and the United States, often offering looser covenants, are opening to Asian deals. Ageing owners without clear succession plans are warming to private equity. And conglomerates such as Panasonic have been increasingly willing to sell off big businesses.

There are also plenty of listed companies with solid cash flows and modest borrowing which fit the buyout profile. A rough-and-ready screen for ones with a market capitalisation of over $10 billion, at least $1 billion in EBITDA and net debt equal to no more than that measure of earnings churned out some tantalising theoretical prospects. Among them are Japanese chocolatier Meiji and advertising giant Dentsu. Chinese appliance maker Haier’s publicly listed units could also be a target if a mooted take-private of the parent company fails.

At the decidedly larger end of the spectrum, there is Woolworths and 7-Eleven operator Seven & I. The Australian supermarket chain would cost upwards of $40 billion, including a takeover premium.

Using $20 billion of debt, or a robust 6.5 times the EBITDA forecast by analysts for its next financial year, would mean scrounging up another $20 billion. That would take at least four buyout shops and additional co-investors, such as sovereign wealth funds, to write the full equity cheque. It’d be a stretch, for sure, but given the amount of money sloshing around Asia Pacific, even that kind of deal has entered the realm of the possible.

First published Dec. 23, 2019

IMAGE: REUTERS/Aly Song

BY CHRISTOPHER THOMPSON

Daimler and BMW should quit fumbling around the backseat. Faced with slumping global demand for their pricey cars, merging would reap synergies worth more than the 13 billion euros in annual savings they’re currently targeting. As Peugeot and Fiat Chrysler Automobiles consummate their marriage in 2020, the German heavyweights will model one of their own.

Analysts forecast almost no sales growth over the next two years for cars. And luxury brands’ winning streak – premium car demand has grown above global demand each year since 2009, according to Jefferies – is coming to an end due to a Chinese slowdown. Even in the Middle Kingdom, upmarket vehicle sales hit 11% of the total, in line with the global proportion.

Ola Kaellenius and Oliver Zipse, bosses of Daimler and BMW respectively, are feeling the strain. Together with incoming European Union fines for dirty fleets, Daimler, worth 53 billion euros, plans to save 1 billion euros in staffing costs by 2022 and accelerate its transition to electric vehicles. BMW, worth 48 billion euros in mid-December, is seeking 12 billion euros in total savings by then to offset higher technology spending.

The Fiat-Peugeot deal suggests an alternative. The Germans already cooperate in mobility services and autonomous vehicles. And there are additional financial benefits. The Italo-French combo is seeking to save about 2.4% in combined operating costs. Applying the same proportion to Daimler-BMW would result in savings worth 38 billion euros – assuming a 28% tax rate and 9 billion euros in restructuring costs – to shareholders today. But given their greater overlap in products and geographies they could probably achieve synergies worth twice that much.

BMW’s controlling Quandt family has a strong independent streak and might not take kindly to having significant Chinese carmakers as shareholders. Together, Geely and BAIC Motor own a combined 15% of Daimler, although that could rise to 20%. Again, they can look to Fiat, where the Agnelli family will emerge as the largest shareholder in the group. Assuming a nil-premium merger, Stefan Quandt and his sister, Susanne Klatten, would hold nearly 17% of “BMDaimler”. The Chinese would be diluted to around 12%.

True, German unions would howl at the prospect of potential job losses. But given the financial and industrial logic in a stagnant market, the Fiat-Peugeot playbook will be scrutinised heavily in Stuttgart and Munich, where Daimler and BMW are respectively based, in the year ahead.

First published Dec. 18, 2019

IMAGE: REUTERS/Lucy Nicholson

BY ANTONY CURRIE AND CHRISTOPHER THOMPSON

The looming $46 billion merger of France’s Peugeot and Fiat Chrysler Automobiles may go down as one of the first major corporate tie-ups driven by climate risk. Yet the novelty will quickly wear off as chief executives wake up to the financial impact of global warming. That gives climate-conscious advisers an edge.

Investment bankers spent little time on green issues in 2019 – or before. Lazard boss Ken Jacobs has said environmental, social and governance concerns may play a role in deals, but reckons they are “not a factor yet.” He’s mostly right. Of the 39 transactions worth over $10 billion announced up to Dec. 10, only Fiat-Peugeot counts. The Italian-American carmaker could avoid a potential $2 billion in European emissions fines in part by teaming up with its French rival, Jefferies reckons, and ease industry problems like overcapacity and low margins.

Others may follow suit. Carbon-intensive sectors like steel, cement and airlines are grappling with the prospect of higher prices or even a tax on carbon, incentivizing a shift to cleaner energy. Royal Dutch Shell in 2019 bid for Dutch renewables utility Eneco, which instead agreed a 4.1 billion euro sale to a consortium led by banking-to-energy conglomerate Mitsubishi Corp. Chevron, ConocoPhillips and even climate laggard Exxon Mobil may similarly need to buy their way to a greener future.

Avoiding bad deals is equally important, even if climate due diligence virtually never happens, as one veteran banker told Breakingviews. Drought in the Colorado River basin could drain up to a fifth of defense group Raytheon’s revenue, yet received no mention in its $120 billion merger with United Technologies. BB&T’s $28 billion acquisition of rival U.S. lender SunTrust ignored potential flooding in Florida and the southeast United States. As such risks materialize, climate-conscious advisers can more convincingly pitch their services to CEOs.

Green bankers are admittedly a rare breed. Former UBS investment-banking boss Jeff McDermott set up Greentech Capital Advisors to work on clean energy a decade ago, and in December agreed to sell to Nomura. Erstwhile Lazard dealmaker Tony O’Sullivan and Baker McKenzie climate lawyer Martijn Wilder recently founded Pollination. As climate concerns rise up the corporate agenda in 2020, more Fiat-style mega-deals are possible. That’ll give Lazard’s Jacobs and other fast-moving rivals more ways to rake in fees.

First published Dec. 19, 2019

IMAGE: REUTERS/Maria Alejandra Cardona

BY JOHN FOLEY AND ROB COX

Steve Schwarzman has one big regret. In 1994 the Blackstone boss sold a stake in some funds that later became BlackRock, the $7 trillion asset manager run by Larry Fink. Schwarzman describes the sale as “a heroic mistake.” It’s not too late to fix it.

Yet he might not be alone in coveting the investment manager. The stability of BlackRock’s earnings has won it the respect from investors that its Wall Street peers, such as Goldman Sachs, covet. It fetches 16 times the next 12 months’ forecast earnings, according to Refinitiv, compared to 9 times for the investment bank and money manager helmed by David Solomon.

Today, BlackRock serves opposite ends of the market from Blackstone and Goldman Sachs. Fink’s company houses two-thirds of its assets in exchange-traded and passively managed index funds. Blackstone’s $545 billion of private equity, real estate and other investments, managed for wealthy clients and institutions, are active. Ditto most of the $1.5 trillion Goldman oversees.

Yet all are hungrily eyeing the middle. BlackRock’s fees from easy-to-trade products are under pressure amid tough competition, so Fink is growing alternative investments like private equity. Blackstone is eyeing more retail money – so it’s perhaps no wonder Schwarzman says he often pictures the two together. As for Goldman, it’s somewhere in between but looking to grow at both ends, having entered consumer financial services with its Marcus electronic bank and Apple credit card.

Valuation has always been the obstacle, though needn’t be for much longer. Blackstone’s shares had risen around 85% in 2019 by mid-December, helped by a restructuring that let passive funds like BlackRock’s buy shares. The $63 billion buyout firm even trades at a higher multiple of 2020 earnings, after a decade of trading at a discount. Goldman is only a couple of billion dollars larger than BlackRock, which was worth $78 billion in mid-December. Mathematically, a merger of equals is doable.

Fink has little reason to contemplate such a deal for now. But at 67, and an oft-cited contender to lead the Treasury under a Democratic president, succession is a live topic. One of the candidates to replace him, Mark Wiseman, was fired in December for having a relationship with a subordinate. Fink shouldn’t be surprised to see a pitchbook with his company’s name on it do the rounds on Wall Street in the year ahead.

First published Dec. 23, 2019

IMAGE: REUTERS/Lucas Jackson

BY LIAM PROUD

Germany’s big lenders suffer from high costs in an overbanked market offering customers abundant access to credit. But Commerzbank and Deutsche Bank will get a small but welcome boost from an unlikely source in 2020: the generation of entrepreneurs who founded businesses after reunification in 1990.

October 2020 will mark 30 years since the Soviet-backed German Democratic Republic rejoined the Federal Republic of Germany as a single country. It was a rough transition for workers at former state-owned companies in the East: they had to compete on the open market with more competitive rivals, and a stronger currency made their products more expensive than previously.

Amid the chaos, however, entrepreneurship soared. Historian Michael Fritsch calculates that the self-employment rate in the East was just 1.8% in 1989, but had almost tripled to over 5% two years later. By the end of the decade it was almost 10%. 

Success stories include tech-services firm Comparex, founded in Leipzig in 1990 and now part of Switzerland’s $3 billion SoftwareONE. There’s also sparkling wine maker Rotkaeppchen-Mumm Sektkellereien, previously a state-owned group bought out by management in 1993, whose revenue was 1 billion euros in 2018. Many of the companies founded or taken private in the 1990s are part of what Germans call the Mittelstand, or small- and medium-sized companies.

So what does that have to do with Commerz and Deutsche? It’s all about age: An entrepreneur who was, say, 40 in 1990 would now be 70 and thinking about retirement. A 2017 Commerzbank study found that 39% of Mittelstand companies with at least 2.5 million euros of annual revenue expected a change of management within five years.

Corporate financiers are hoping that many heirs would rather sell or merge the family business than take over, for example, a slow-growing manufacturer at the end of an economic cycle. That would mean deals, and therefore fees for bankers.

It might not be a lifesaver for the lenders: just under one-tenth of the companies Commerzbank surveyed had over 100 million euros of annual sales. Still, interest rates are falling and Germany’s economy is slowing, hurting banks’ bottom lines. In 2020, they’ll be grateful for any help they can get.

First published Jan. 3, 2020

IMAGE: REUTERS/Fabrizio Bensch

BY ANTONY CURRIE

The global water crisis is getting worse. By 2030 humans will be using 56% more than is sustainable, according to new research out later in January from the World Resources Institute, a climate think tank. Luckily, investors and companies are investigating some solutions.

The WRI reckons it’ll cost $1 trillion a year to fix the problem, almost half of which is required to boost water supply, with the rest going towards managing demand. Buyout shop KKR is hoping to do its part, announcing in December that it would invest alongside specialist fund XPV Water Partners to develop wastewater-treatment solutions.

It’ll be hard to solve the crisis without addressing farming, since the industry accounts for around 70% of global water use and the same proportion of the WRI-calculated sustainability gap.

Encouragingly, a fix would soak up only 38% of total investment. Trouble is, it can take three or more years for water and other sustainability projects to pay off for farmers, points out Continuum Ag, an agriculture consulting firm set up by Iowa farmers. Yet many eke out a living from season to season. The companies who buy farmers’ goods therefore need to help.

Some are already doing so, like brewer Anheuser-Busch InBev and Mars. The confectioner recently helped Pakistani smallholder farmers cut water use by a third over three years, while increasing their income by a similar amount. On a larger scale, such projects lend themselves to green-bond financing, as PepsiCo showed with a $1 billion deal in October. Some of the proceeds will go towards smarter water use, including for farmers.

Shareholders, meanwhile, are targeting slower-moving companies. A coalition managing $6.5 trillion is haranguing fast-food providers like McDonald’s to force their suppliers to up their game. That pressure will increase in 2020. A number of discussions are underway involving investors, companies and a couple of governments, with goals ranging from setting science-based targets to corralling big water users to publicly set more ambitious targets.

Others, meanwhile, see a big investing opportunity. UBS Global Wealth Management, with $2.5 trillion in assets, has identified water scarcity as one of its top longer-term investment themes. That came after some three-quarters of the 3,400 high-net-worth clients it recently surveyed tagged clean water and sanitation as the most pressing issue facing the world.    

Ignoring water risks can drain earnings. Salt and potash supplier K+S lost 11% of quarterly revenue from lost production as last year’s German drought prevented it from shipping out its wastewater. Meanwhile, investing in solutions can return several times the principal, the United Nations, among others, has calculated. More big players are starting to notice. There’s a flood of money looking to flow into action, and the WRI’s startling new data should help unleash that. But it’s a race against time.

First published Jan. 6, 2020

IMAGE: REUTERS/Mike Hutchings