Two things to start: Blackstone shares dropped more than 7 per cent on Thursday after it reported weaker than forecast earnings. Lex writes the second trillion is always the hardest.
And: We reveal what the future holds for Manchester United football club as it looks to welcome in Jim Ratcliffe as a minority investor. Plus, Sequoia’s Mike Moritz writes that the club is a tarnished trophy asset.
In today’s newsletter:
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‘Arb-ageddon’ at VMware
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Special conflict, special interest
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The next big luxury IPO
A Broadcom mega-deal blindsides Wall Street
Broadcom chief executive Hock Tan may earn the title as the serial acquirer to have two megadeals get caught up in geopolitical tensions between the United States and China.
Tan in 2017 reincorporated Broadcom’s headquarters in the US and was celebrated at the White House as a corporate hero by then president Donald Trump as he sold aggressive corporate tax cuts to the nation.
But Tan’s political dalliance proved to be humiliating. Weeks later, Trump blocked Broadcom’s attempt to buy Qualcomm for $142bn over national security concerns as he pressed a trade war against China.
Now Tan may find more disappointment from spiralling tensions between the world’s two largest economies. China’s regulators are threatening his $69bn takeover of cloud software group VMware by not signing off on the blockbuster acquisition, according to the FT’s Qianer Liu, Cheng Leng and Ryan McMorrow.
The news has major implications for Wall Street. It threatens the close of a deal many arbitrage funds had considered all but wrapped up.
VMware earlier this month said it expected the deal to close by the end of the month and had just asked shareholders to make elections on the stock portion of the takeover.
It could have an even bigger impact on private equity. VMWare’s existing owners Michael Dell and US technology private equity group Silver Lake stand to get billions in cash from its close.
Now the outcome hangs in the balance for a half-cash and half-stock deal that has risen in value since being agreed in May 2022, due to Broadcom’s soaring stock price.
Everyone now has to rejigger their expectations. “On Friday last week, this was trading with a greater than 90 per cent probability of success and now it is trading like a coin flip,” said one large hedge fund investor.
Beijing is unlikely to block the deal formally, industry insiders told the FT, but it could extend the review process indefinitely until both parties give up the deal. Such a move comes after Washington further tightened strict export controls this week on artificial intelligence chip sales to China, which will severely hamper Chinese tech groups’ AI development.
Shares in VMware fell nearly 10 per cent in trading in New York on Thursday.
Deals between large multinationals in which either party generates revenues in China of more than $55mn must be approved by Beijing’s anti-monopoly police. This would be the latest time China has used its anti-monopoly oversight to scupper a large acquisition by a US tech group as relations deteriorate between the two superpowers.
Semiconductor giant Intel in August cancelled its $5.4bn acquisition of Israeli chipmaker Tower Semiconductor after failing to get the green light from Beijing.
Were the deal to prove undoable, it would be yet another hit in a rough year for merger arbs, whilst cancelling a massive private equity exit at a time when limited partners have grown frustrated with the slow drip of cash being returned to them by buyout firms.
The romance that unleashed a firestorm in the US bankruptcy world
When Liz Freeman started her own law firm in Houston at the end of 2022, some old friends quickly offered her some work. In at least two big 2023 bankruptcies, Freeman was signed up to be a so-called “special conflicts counsel” by the big Texas firm, Jackson Walker. Her rate was to be a cool $750 per hour.
As it were, Freeman had just departed Jackson Walker after more than four years as a partner. And David R Jones, the judge overseeing the bankruptcy cases of Diebold Nixdorf and Venator Materials happened to be well known to Freeman too: she was living in a house with Jones as his romantic partner.
The relationship of Jones and Freeman — a previous law clerk to Jones as well — has unleashed a firestorm in the US bankruptcy and distressed debt worlds.
Two weeks ago, media reports surfaced of a lawsuit against Jones that alleged the pair had failed to disclose their relationship in a case where Jackson Walker appeared in front of the judge.
This past Monday, Jones resigned after the 5th Circuit Court of Appeals, which oversees the Southern District of Texas bankruptcy court where Jones sits, said there was “probable cause” of wrongdoing by the judge in overseeing cases where his girlfriend or her law firm was involved without any public notification (such a revelation would have likely prevented either or both from being in a case together).
Ever since, lawyers and reporters have been scrambling to find cases where Freeman was involved and the matter ended up before Jones, who had become perhaps the single most well-known bankruptcy judge in the country after making Houston a magnet for blockbuster bust-ups. DD’s Sujeet Indap was the first to identify two.
In the Diebold and Venator cases, Jackson Walker was assisting national firms, Jones Day and Kirkland & Ellis, respectively. According to Jackson Walker’s retention application and engagement letter submitted to the court, Freeman was to help in matters where the two primary law firms encountered a conflict of interest.
Bankruptcy advisers who are to be paid by the filing company’s estate face strict rules on “disinterestedness” and must submit detailed reviews of conflicts.
Representatives for Jackson Walker and Freeman told the FT that once Jones was finalised as the case judge in Diebold and Venator, she did not participate in the case, even as they declined to discuss the circumstances of her initial selection.
The irony of the saga is obvious: the “special conflicts” counsel was the person with the most legally thorny relationship to sort out.
Further reading: How Houston became a magnet for blockbuster US bankruptcies
The Spanish luxury roll-up considering an IPO
Most Kate Moss fans can’t afford her lifestyle. But they can afford her favourite £26 Charlotte Tilbury Magic Away liquid concealer.
Puig, the deal-hungry group that has spent billions collecting high-end beauty labels including the concealer maker, Byredo and Paco Rabanne, is evaluating whether its portfolio of “affordable luxury” can make it on the public market even as high-end luxury brands falter.
The Spanish beauty and fragrance conglomerate is considering a multibillion-euro initial public offering that would impose market “discipline” on the company without relinquishing its founding family’s control, its chair Marc Puig told the FT’s Barney Jopson.
As the third generation of his family to lead the company, he has helped spearhead a relentless dealmaking spree over the past decade, scooping up 10 brands in the past 12 years and accumulating a significant amount of debt in the process.
Puig is considering a debut on the public market amid a global slowdown in the luxury sphere as powerful conglomerates including LVMH and Richemont feel the pain of consumers cutting back on unnecessary spending.
But Puig was on track to record more than €4bn in sales this year, the chair said, placing it ahead of schedule in its plan to reach €4.5bn by 2025. Its debts, equal to 1.6 times earnings before interest, tax, depreciation and amortisation at the end of last year, would not limit Puig’s ability to do more deals, he added.
While the group is still pondering what ownership structure would best suit it, the chair called out peers including Kering, Estée Lauder, Hermès and Prada as successful examples of publicly-listed groups whose ruling families retained some control.
Job moves
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Dow Jones chief financial officer Liz O’Melia is leaving the company after only 15 months, according to two people familiar with the matter.
Smart reads
Venture capital’s Minsky moment After burning billions of dollars on crypto and metaverse investment, the venture capital industry is having to rethink its approach, the FT reports.
The Gun Show The US Commerce Department is helping American gunmakers win new business in some of the most violent countries in the world, Bloomberg writes.
Crypto craziness Kobus Steyn thought he’d found a whale of a client. Then his assignment turned from make-work to murder, the FT reports.
News round-up
ChatGPT parent OpenAI seeks $86bn valuation (FT)
New York sues Digital Currency Group, Gemini and Genesis over alleged $1.1bn crypto fraud (FT)
I Squared buys red London bus operator Arriva (FT)
Chinese developer Country Garden misses payment on dollar bond, say creditors (FT)
Hipgnosis launches strategic review ahead of crucial vote (FT)
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