The pesky obstacle to a $40bn takeover

One big update: We are a week away from the FT Dealmakers Summit, a full-day virtual conference put on by FT Live and the Due Diligence team, on November 10. And we can now reveal our final keynote speaker for the event will be Bill Ackman of Pershing Square.

Read up on the full event agenda here, and use this link to register.

Bill Ackman © Bloomberg

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Nvidia/Arm: a 50-50 shot?

Allen Wu, Arm China chief executive © FT montage

Since US chip company Nvidia first agreed to buy Arm Holdings from Japan’s SoftBank, longtime Arm boss Simon Segars knew it would be a bumpy ride.

The blockbuster deal will endure a “tough” process gaining clearance from Chinese antitrust regulators, he told the Financial Times last month, as China’s chipmakers urged Beijing to probe Nvidia’s proposed acquisition of the UK-based chip designer.

Their reasoning? One American company would control the essential technology used in many of the world’s smartphones and data centres — not an ideal ratio for its Chinese competitors in the middle of a tense trade war between Washington and Beijing.

Regulatory hurdles aside, both Segars and Nvidia’s founder Jensen Huang, who joked that he paid an “arm and a leg” for the UK chipmaker, and said it would eventually be “worth every penny” during Arm’s annual conference in October, remain confident.

Jensen Huang © Bloomberg

Huang, who envisions the deal as Nvidia’s path to becoming the dominant chip company of the artificial intelligence age, attempted to assuage concerns over his group’s ownership of Arm — which until now has been a neutral player in the chip industry, licensing its technology to all players — vowing to protect that business model.

Segars made similar promises to his customers, who, if the deal goes through, will become reliant on low-power chip designs suddenly owned by one of their rivals.

But antitrust issues and a bubbling trade war aren’t the last of the dealmakers’ worries — a power struggle unfolding at Arm’s Chinese subsidiary is threatening to throw an even bigger wrench in the proposed transaction, as the FT’s Ryan McMorrow, Qianer Liu and Henny Sender report.

Arm China, the UK chipmaker’s joint venture in the region with the private equity group Hopu, is experiencing somewhat of an identity crisis.

Its chief executive Allen Wu remains at the helm, calling the shots and controlling almost 17 per cent ($7.5bn) of the business, despite being ousted by Arm China’s board in a 7-1 vote over four months ago, accused of “serious irregularities” and “conflicts of interest” relating to his Alphatecture investment fund.

Removing Wu will be a big obstacle in Nvidia’s acquisition of Arm — gaining the approval it needs from Chinese regulators will require data and co-operation from Arm China — and it’s not clear whether the joint venture can quell the chaos in its highest ranks.

One individual close to Arm China’s board said he rated the odds of success for the deal at “only 50-50”. Another told the FT that Arm and Nvidia had yet to make any filings with Chinese regulators because of difficulties in gaining control of Arm China.

Wu, who has installed his own security team to deny entry to representatives of Arm or Arm China’s board, and blocks emails from Arm headquarters to employees through a filtering system, seems unlikely to back down quietly.

Private equity serves up success in digital payments

Anyone who has closely followed the European payments sector for the past decade will have two observations when it comes to corporate finance. 

First, they will know that mergers and acquisitions activity has been bustling. 

Second, private equity groups Advent International and Bain Capital have been behind much of the activity, driving what one rival dealmaker described to DD as one of the most successful single-sector focused strategies in the history of the buyout business. 

The latest example of both trends came on Monday, as Italian payments group Nexi entered into exclusive talks to pay €7.2bn for Danish rival Nets. That deal comes just weeks after Nexi, which is backed by Advent and Bain, agreed to merge with Italian rival Sia. 

If both deals go through — the plan is for Nets and Nexi to close before the latter merges with Sia next year — it will create Europe’s largest payments company. And guess who will be the third-largest shareholders in the combined group? Advent and Bain. 

That’s because the duo also has a stake in Nets. They agreed to keep part of their investment in the company when they sold the business in 2017 to the private equity group Hellman & Friedman for $5.3bn. At the time, H&F outbid Permira in a shootout for the group.

Advent and Bain then increased their shareholding in Nets last year when they sold Germany’s Concardis to the Danish group in an all-share deal. 

The Nets bet appears to have worked out nicely for H&F as well, which sold one part of the company last year to Mastercard for $3.2bn and will end up with a 30 per cent stake in a Nexi-Nets-Sia hybrid. 

The question now is whether the three companies can be combined in an orderly fashion. 

One party that might not feel so great about all this dealmaking, however, may be advisory firm Lazard. Centerview Partners featured alongside HSBC as the advisers to Nexi. DD is told ex-Lazard man Matthieu Pigasse served as the key banker for Centerview. 

Dealmaking beats the odds. For now.

“Arb-ageddon”, it was called.

In the March market swoon driven by coronavirus fears, roughly 40 listed US companies were waiting to close their sales to either private equity groups or strategic rivals. 

Seemingly ironclad merger agreements were no match for plummeting stock prices as the coronavirus crisis began to take hold.

Merger arbitrage funds — which purchase and sell the stock of two merging companies simultaneously in an attempt to minimise risk — were staring at massive paper losses as even the safest deals were trading at double-digit discounts.

The arb spread for Apollo’s buyout of Tech Data had blown out to 45 per cent on March 18. Caesars Entertainment was trading 60 per cent below its implied buyout price from Eldorado Resorts. 

Fast forward almost eight months and things have gone about as well as possible for merger arbs who went long. 

Most deals did close on the original terms, including Tech Data/Apollo and Caesars/Eldorado. For those funds brave enough to go long in late March, the returns were juicy. Still, most merger arb funds are only up low single-digits in 2020, including the popular Merger Fund which is publicly traded.

Caesars Palace in Las Vegas © AP

As DD’s Sujeet Indap explores this week in his Inside Finance column, merger agreements largely stood up even as buyer’s remorse popped up à la LVMH and Tiffany. 

A few deals got recut (Forescout/Advent), a few were mutually cancelled (Hexcel/Woodward), but in large part buyers knew better than to try to re-trade even if they believed they were paying too much.

There’s one big showdown remaining: Simon Property Group goes to trial in Michigan this month, hoping to wiggle out of its agreement to buy fellow mall operator Taubman Centers. 

Lawyers are looking for a precedent for deal termination law. And, with Taubman trading at 40 per cent less than the deal price, arbs have one more fun play for the year.

Job moves 

• Citigroup’s head of risk Brad Hu will step down after a series of run-ins with regulators. Meanwhile, head of US consumer operations Anand Selva has been promoted to global chief of Citi’s consumer bank, a position currently held by the bank’s soon-to-be chief executive Jane Fraser. More here.

• General Motors has poached Delta finance chief Paul Jacobson to succeed its former finance chief Dhivya Suryadevara, who departed the company in August. 

• Ted Fike and Justin Wilson have stepped down as partners at SoftBank’s Vision Fund to join Gores Group, the private equity company known to be a prolific Spac launcher, according to Axios.

• Sam Whittaker has rejoined Lazard as a managing director in its global restructuring group. He returns to the advisory group in its London office after spending five years at PJT Partners. 

• The Carlyle Group has hired former HDFC Bank chief executive Aditya Puri, one of India’s top banking executives, as a senior adviser to the investment firm in Asia. More here.

• Cleary Gottlieb is adding seven partners and three counsel to its practice, effective January 2021.

Smart reads

The new face of Goldman Sachs Omer Ismail knows he doesn’t look like a typical Wall Street insider. But a life spent challenging onlookers’ perception may prove useful in his quest to win over Main Street as head of Goldman’s consumer banking division, Marcus. (BBG)

Smith vs Sheth Vista Equity Partners founder Robert Smith admitted to years of tax evasion on the public stage. The private equity group’s woes continue behind closed doors, as its president Brian Sheth negotiates his exit. (Business Insider)

Wall Street’s Biden backers Over 30 executives tied to big financial institutions are helping bankroll Joe Biden’s presidential campaign, with the big spenders hailing from Avenue Capital Group, Blackstone, Siris Capital, Moelis and Centerview Partners. (CNBC)

News round-up

Alibaba in talks to invest in online fashion retailer Farfetch (The Information)

Beijing interviews Jack Ma over $37bn Ant IPO (FT)

Former Wirecard CFO released on bail after three months in prison (FT) 

SoftBank share sales provide derivatives bonanza for banks (IFR)

Stonepeak to buy cable provider Astound from TPG in $8.1bn deal (FT)

PetSmart scraps debt deal after investor push back (FT) 

Lenders pull IPOs even as mortgage market thrives (FT)

US mall owner CBL files for bankruptcy (FT)

Nielsen to sell retail Arm to Advent in $2.7 billion deal (BBG)

Naspers $5bn share buyback plans signal unease with tech valuations 

Sainsbury’s considers sale of banking arm (FT) 

Source: Economy - ft.com