Bumper M&A Special (UniCredit, Intel, Rightmove)

Welcome back to The Deal Room. And Steve and I had some wonderful feedback from your last episode, mainly because I think it was absolute optimal timing for a lot of people going through application season. So I've got a strong feeling that this episode is a great follow-up because it's very much like an extension, further deep dive into the world of M&A speculation. So just to whet the appetite for our listeners out there. We've got 4 topics that we're going to cover. UniCredit acquiring Commerzbank. I think if you're engaging with any financial media at the moment, you've probably seen that headline act dominating the financial newswires. Then Qualcomm interested in buying Intel. These are huge firms, particularly as well in the niche of technology and chips. So we'll dive into that one. And then BlackRock and Microsoft's $30 billion AI infrastructure fund. What is that? How does that work? What does it mean? And then we'll end up with an update on Rightmove. We talked about this a few weeks ago and that has ping-ponged as a deal back and forth. So good to get a status check on that as well. But Stephen, how are you? And tell me about UniCredit and Commerzbank.

Yeah, thank you, Anne. I'm very well. I'm very well indeed. And it's always interesting when banks try to acquire other banks, because there are so many different elements to these types of transactions. And one of the biggest elements is that these banks tend to be national champions. Countries like having their own banking infrastructure. In the UK, we have our national champions of obviously Barclays and HSBC and Lloyds and things like that. Spain has got Santander and BBVA. Italy's got UniCredit and Germany's obviously got Deutsche Bank, but also Commerzbank. And there's an element of national pride here. And there's always more scrutiny when there is a potential bank takeover, especially when those banks are from different countries. And the one that's on the docket at the moment, and this is just such an interesting story. If you guys, interested in M&A and are willing to get a little bit M&A nerdy, then this is about as good as it gets. So the story, the headline is that, that UniCredit, the large €65 billion market capitalisation Italian bank led by legendary or infamous ex-investment banker Andrea Orsell has built up Through a combination of, of the dark arts of M&A and, uh, and regular stake building, has built up a 21% stake or an effective 21% stake in German beleaguered German bank Commerzbank. Now I say beleaguered because Commerzbank was one of those wonderful 2006, 2007, 2008 stories of banking hubris. If anyone's ever been to Frankfurt, they'll see the Commerzbank Tower. It was briefly the, the largest, tallest building in Europe. And it was a little bit like RBS in the UK, a smallish bank that got over its skis and, and did a lot of risky stuff, which led to the German government having to intervene and bail out Commerzbank. So this story has got everything, including the German government that up until recently had a 17% ownership in Commerzbank and still has a 12% ownership in Commerzbank. So the story, and we're going to break it down into kind of 3 or 4 different bits. The high level is that UniCredit has built up this stake and Andrea Orsell, the CEO of UniCredit, has been quite bullish in saying, look, we think it makes a lot of strategic sense to have a tie-up with Commerzbank. We're building 'up our stake. There's economies of scale. We already do a lot of business in Germany. This would be a great tie-up, a great consolidation of the European banking space.' Olaf Scholz and the German government have pushed back quite significantly, saying, and I quote from Olaf Scholz, 'We do not support a takeover. We support the strategy of Commerzbank, which is geared towards independence, and we want Commerzbank to exist to support and lend to the German Mittelstand, which is that great swathe of SMEs and medium-sized companies, uh, that power the German economy. So Unicredit and Orsell making advances, 12% owned by the German government who really don't want this to be sold. So it's feeling pretty hostile. And in fact, Orsell's gone so far as to say, look, well, we, we, you know, we're engaging with dialogue. In dialogue with Berlin, but we're happy to go behind the back and we're happy to push forward because we think this makes sense. So that's the headline.

Can I ask just one question that came to mind there? Is that there's obviously a lot of politics wrapped up into this. I remember just because I got to meet him a few times was Chuka Umunna, who used to be the shadow— I think he was the shadow chancellor or he was on the Treasury Select Committee. He was running for Labour leader a few years back, but he now works for JPMorgan. And I know that a lot of the politicians have done that previously as well. Is it common for an M&A team to acquire in this scenario some, someone of that political experience and expertise and bring them in on a temporary contract almost to support the M&A advisory team?

Yeah, it's a really, really common thing that once you've Once you've served your time in politics and you've been paid reasonably well, but not the kind of big bucks, uh, M&A houses come knocking on the door and George Osborne's another very prominent example. And, uh, yeah, politicians have a way of opening certain doors and speaking the right language when it comes to complexity and it comes to politics. And when it— and in these types of deals, not only will UniCredit— well, UniCredit is very close to the government in Rome as well, but UniCredit through its bankers will be again navigating the spaces in between the headlines that we read and the corridors of power, both in Commerzbank and in UniCredit. And one of the main purveyors of these skills is Andrea Orsell, who I've previously mentioned. And I think this is really important for people that may not be quite as old as me or you, Ant. A lot of people won't remember or maybe even be born by the time when Andrea Orsell was last in the headlines for being the head of the financial institutions group at Merrill Lynch, organising, facilitating that doomed transaction of ABN Amro by RBC, uh, RBS, sorry, in 2007. So this, I mean, there was loads and loads of stuff going on here. RBS, Scottish Bank, with massive, massive ideas above it, above its station, went hostile with this acquisition of ABN Amro, along with another, with two other banks that wanted different parts of ABN. And when you go hostile, you don't get to do due diligence. So it bought this company, it bought this bank, which it thought was going to add, I think it bought it for 3 times its book value, which is a very hefty premium. And when it actually started consolidating that bank, realised that this bank was a complete dog's dinner of speculative loans, bad loans. And as soon as the tide turned in 2008, RBS turned from being, well, actually the world's largest bank for a period of time into being a bank that needed immediate rescuing by the UK government. And in fact, this is probably in the top 10 of the worst ever M&A transactions. And Orsell was, was responsible for facilitating this transaction. So one of the headlines in the FT a few days ago is, is this Orsell's redemption play? 15 years ago, 17 years ago, he had an absolute shocker which contributed in part to the malaise of the European banking system. And now he's back trying to do something that seems a lot more logical, seems a lot more sensible, but still has risk, right? And still has the complexity that we've been talking about.

And then what's the kind of basis of the thesis then of what, why he's going after this apart from that to try and restore reputation or what's the more strategic rationale?

Yeah, there's a number of reasons. I think the wider investment community quite like this acquisition or quite like this idea. And in fact, some of the smaller Commerzbank shareholders are come out and said, yeah, give this, give this some airing because this, this could make sense. One of the strategic reasons is we don't have enough big banks in Europe to compete against the megabanks in the US. We've got UBS, uh, you know, Barclays has been struggling, Santander, not massive investment banks. So consolidation is not a bad shout when it comes to achieving again, economies of scale, achieving the size that you need to compete against the JP Morgans and the Bank of Americas of this world. So there's a strategic sense there. Also, by acquiring a German bank, you get access to cheaper funding, more expensive to borrow for as a bank, uh, in Italy because Italy's got a worse credit rating than Germany. So you're getting access to cheaper funds. So there's a couple of reasons Unicredit also has quite a big presence in Germany through one of its subsidiaries. So there's a lot of strategic rationale. And what I love about this story, and this is where we get a little bit M&A nerdy, is the way in which UniCredit has managed to build up a 21% stake in such a politically sensitive company. So shall we get into that?

Yeah. I mean, how— that just sounds like someone's taken their eye off the ball for letting that happen. So how does that happen?

Yeah, you are absolutely right. So UniCredit up until about 2 weeks ago had a 4.5% ownership stake in Commerzbank. Small, but not insignificant. And Orsell's been on the wires just saying, look, we'd love this company. We'd love to, we love this bank. We'd love to get a little bit more involved and maybe start thinking about a tie-up. German bank was very, you know, German government was very kind of anti that. So a few, a couple of weeks ago, the German government put up through their FFA, went to offload $700 million or 4.5% stake in Commerzbank. So this often happens again, this has happened with Deutsche Telekom and Deutsche Post in the last few months. Governments intervene in strategically sensitive and important companies. They buy ownership stakes. Then they work with investment banks at the right time to offload those stakes because governments don't really want to be owning these banks and these companies in the long term. So this was strategically sound from the German government, a €700 million offload. JP Morgan and Goldman Sachs won the mandate to sell these shares through what's called an accelerated book build. So this is stock sold quickly without a formal marketing process. It worked, it works a lot. You know, this is a standard thing to do. It happened with Deutsche Post and Deutsche Telekom. And usually due to the fact that there's not a roadshow, there's not really much due diligence, it's quite quick. Usually that offer, that block offer is under or slight discounts to the stable share price of Commerzbank. So it was offered to, oh wait, it was offered to JP Morgan and Goldman Sachs at a 1% discount. And their goal was to find a bunch of investors to take it off their hands. Accelerated book build. What happened then was that UniCredit sniffing around swept in and took the entire block for €13.20. So they were like, look, you're offering it at €12.48. We're going to buy the whole thing for €13.20. Here is an offer you cannot refuse. Because if you say no and go through the normal accelerated book builds, you're not going to get a good deal. You're not going to get €13.20 from normal investors. So, you know, Unicredit, bit of a jiu-jitsu move, like landing and taking this whole block for a premium to the offer price for the accelerated book build. But what Craig Coburn in the FT said, and this is super interesting about the mechanics of this kind of stuff, is that if you sell a stake to a strategic, you expect that the strategic is going to pay a significant premium. Think about the premiums offered for M&A deals, 20%, 30%, 40%, 50%. So actually what, what UniCredit got was an incredibly good deal to build up its stake from 4.5% to 9% by getting involved in this accelerated book build. So much so that the next day, because of this UniCredit acquisition speculation, Commerce Bank's share price rose to $15 a share. So $15 probably is the, the natural price that UniCredit should have been buying these shares at. But instead, due to the accelerated book build, due to them swooping in on this, uh, on this JPM and GS, uh, book building process, they probably got it for a lot cheaper than they would have done. And actually the German government missed out on, or if they'd just gone direct to UniCredit and said, we'll sell you these shares for €15 a share, then UniCredit probably would've said yes. And the German government would've got a lot more money. Really, really interesting mechanics that boosted the share, the UniCredit shareholding from 4.5% to 9%. JP Morgan and Goldman Sachs for a couple of weeks work pocketed $10 million. Not bad. And, uh, and then suddenly they were up to 9%.

Is there any risk though that the banks take with almost like a retaliatory measure from a government saying, okay, although this was all above board and taking advantage of a certain situation, couldn't regulators then within a jurisdiction make life a bit more complicated for an investment bank who's facilitated this happening even though it was the government's fault.

Yeah, that there was definitely a breakdown in the terms of the mandates such that if I was the German government and I could see that UniCredit was sniffing around, I would say, you take on this accelerated book build, we pay you generously, JP Morgan and Goldman Sachs. Here is a list of counterparties that you should not— you were— that cannot take part in this book building process. What actually ended up happening is there's speculation that JP Morgan invited UniCredit to the deal and actually wanted them to take the whole, the whole block. So yeah, there seems to be a bit of a breakdown and there will be, we all know what awkward wash-up meetings look like, but there probably will be a bit of an awkward wash-up because UniCredit have played an absolutely magnificent hand here.

All right, cool. Sounds like the beginnings of a Netflix documentary in the making here.

This is it. And this is why this is such an interesting deal. And this is part 2. We're up to 9% with Commerzbank, with UniCredit buying, getting up to 9% of Commerzbank. But how have they effectively got to 21%? And a warning here, the extent of my knowledge gets limited when we're talking about collar derivatives and lots of other different derivative products that maybe you know a little bit more about than I do. So the buildup of that additional 12% effectively is due to a derivatives position arranged by UniCredit's bankers, Barclays and Bank of America. And they built up these derivatives positions in Commerzbank using things like, uh, a share swap trades and collar derivatives. Again, not my area of expertise, but what is effective— what this effectively means is that if there is a physical settlement of the derivatives, i.e., you go from option to ownership, then, uh, UniCredit would effectively own 21% of Commerzbank. Now, any ownership stake over 10% of a European bank needs ECB approval. So there is a clause in all of these derivatives that say physical settlement can only be made when there has been approval from the ECB. So it's a kind of double-faceted option that if the ECB sign it off, they'll make these derivatives whole and they'll take physical settlement, and then suddenly they'll be up at 21%. And that then becomes extremely significant. At the moment, it's more of a kind of bargaining chip and a big position that gives them leverage in discussions. But these are the dark arts, and we talk very superficially about M&A quite a lot of the time, but this is where you're really getting— this is where the M&A bankers get paid, right? How do we gain leverage through different financial products such that we are in a position to go from minority stake to takeover offer? I don't know if you have anything anything to add? I know you're a little bit better on derivatives than I am.

Well, no, I was just thinking from a careers perspective. So for a large portion of our audience, you kind of think of M&A and you think of financial modeling, valuation techniques, things like this. It feels more like everything you're talking about is everything but that, where it's like being a very sophisticated operator, understanding people's positioning, their needs and wants, the powers that be. So is it, how do you, is it a case of, and again, playing naive here, but do you just have the people who are like the modeling brains of the engine and yet they can be experienced? Because I'm sure not every investment banker at the beginning has even the capability to be that smooth operator. So are you an operator from the get-go? And it's like you do your 2 years, you get your black belt, okay, you can do all the necessary technical side of this job, you actually are destined to be the leader on these things rather than the maths person?

Yeah, it's, it's, I mean, it's a really good question. I think like, like with a lot of organizations, there's a, there's a very, very clear pyramid, and the pyramid, you rise through the pyramid if you show the maturity to be able to first go from all right, I'm just doing, I'm doing the grunt work, to I'm overseeing people that are doing the grunt work, to second overseeing people that are doing the grunt work, to helping run deals, third running deals on your own. This is when you get into director. And then probably the hardest jump from director to MD, or from MD to kind of to, to, to desk lead or whatever it might be. That is when you need to start gaining, if you haven't already done so, those political, those softer, those tactical negotiation negotiation skills and the books that should be adorning your, your, um, your shelves are not Modelling 101 or Valuation Principles. They are The Art of Strategy. They are How to Negotiate. They are complexity-related, uh, business books and things like that. So yes, and this is why you can get a senior politician, ex-politician going into a senior advisory level within an M&A house. Because they do have a lot of those executive skills, those MD+ skills to sit across the room from the German government and go, all right, our boffins have helped, you know, have helped build up a pretty significant position here. And this is giving us the leverage to come to the table and actually speak to you, you know, suit to suit. So yeah, it's, it's, it's super interesting. And, and a lot of people don't make it, right? A lot of people that are extremely good at the first few years, are probably not good at the dark arts or at the negotiation and maybe vice versa.

Hmm. Super interesting. All right. Well, look, conscious of time, so let's crack through some of these other stories. So we'll move on to the next one, which is these, these huge companies, these chipmakers and a potential merger. So what's happening here? Qualcomm and Intel.

So I'm going to go from hostile to friendly, and it's always nice to have a bit of a friendly moment. The previous transaction, as you can imagine, is very much hostile. right? German government don't want it. The board aren't particularly keen. UniCredit's doing everything it can to get a position of leverage. Whereas this announcement or this headline, the chipmaker Qualcomm explores the takeover of Intel. This is a friendly management to management discussion. No formal bid so far. But this is, you know, this is the management of Qualcomm, a $190 billion market cap US chipmaker, making advances, overtures towards the $100 billion market cap Intel. Now, why? Well, there's a number of different reasons. Firstly, the most logical reason, Qualcomm shares are up 50% this year. Intel shares are down 30%. So Intel is cheap. Qualcomm's got a lot of leverage because of its increased share price. Qualcomm's liked by the market. Its strategy is good. Intel is not liked by the market. Its strategy has been all over the place such that its revenues in 2024 were only 70% of its revenues in 2021. And we spent a little bit of time a few weeks ago talking about that divergence between Nvidia and Intel, one shooting for the moon and one going backwards. So there's, there's there's friendly conversations going on about what a potential tie-up might look like. And this is everything from Qualcomm cash plus share acquisition of the whole of Intel to different divisions to, yeah, different parts of Intel. Lots of speculation saying that actually Qualcomm probably couldn't afford this at a decent premium. Just because it's only got $13 billion worth of cash and a 30% premium to a $100 billion market cap doesn't make it that much smaller than the market cap of Qualcomm. So this starts to look more like a merger and it starts to look less attractive. But at the same time, and this is what makes it interesting, Intel's like now on, now in play. Gelsinger, the CEO, has announced this big turnaround plan. Which has boosted the share price. And there's been a couple of good bits of news, a tie-up with Amazon Web Services, which has been well received by the market. So much so that Apollo has come in and said, we're interested in a $5 billion equity investment into Intel. So not an acquisition, just an investment, almost as a vote of confidence for the CEO's turnaround plan saying, look, I think you're on the right track. This is obviously an extremely attractive industry. I think we, I think you're doing the right thing and we're going to give you $5 billion. We're going to invest $5 billion for you to stand on your own two feet and turn this company around. So suddenly Intel's got a few different options. And what I'm interested about, if I was an investment banker, taking a look at this and a technology team, uh, over in the US, what would I be thinking? I'll be getting on the phone to Broadcom. I'd be saying, Broadcom, let me come to your offices and pitch Intel to you next week. I'm going to come with a 60-slide pitch deck and say, what does Broadcom, Qualcomm's biggest competitor, what does Broadcom, and has got a higher market capitalization, what does Broadcom plus Intel tie-up look like And actually, can we circumnavigate the friendly conversations and say, actually, Broadcom is the most realistic acquirer of Intel? So again, think about it from an investment banker perspective. Are they getting on the phone to Nvidia? Probably not. Are they getting on the phone to SoftBank who are very interested in this space? Probably wouldn't fly from an antitrust and a competition and a, a US national security perspective. But this is, you know, Intel's now kind of in play, which is quite a remarkable thing to think about since it's a $100 billion market capitalization company.

Yeah. And you were, what was it, less than 6 weeks ago we were talking about Intel specifically and all the strategic missteps that they had done. And it's, yeah, quite remarkable actually how they, in just a space of 2 months, how much their fortunes have changed.

Yeah. We would not be talking about this 3 or 4 years ago. We'd be talking about Intel acquiring other companies at, you know, $20, $30 billion sizes. So that is, again, if we're talking about preparing for interviews and having some good deals to talk about, I think number one, definitely the, the Commerce Bank story. Number two, this Qualcomm story. I think we should skip just in the interest of time. I think we should skip straight onto Rightmove and make this a, an M&A trifecta.

Okay. Yeah. Right. Rightmove. Pretty much every time I open up the ft.com, there's a, there's a new rebuttal on either side and it still seems to be getting quite exhausting now. So what is the status?

Yeah, it is quite exhausting. And there's, and again, the reason why I want to bring this up is A, we covered it a few weeks ago, but B, there's so much interesting M&A tactics and strategy involved in this deal that go well above and beyond some of the, yeah, some of the introductory stuff that we do talk about. So we covered the right move. Well, the potential acquisition by REA, the Australian listed Rupert Murdoch-controlled company making a bid for Rightmove. And remember, they said they announced that they are very interested in Rightmove. And according to the takeover code in the UK, you need to put a formal bid together within 30 days. In fact, they put 3 bids together for Rightmove over the last couple of weeks. And the last one, the latest one, has just been rejected. So the latest bid is 761 pence per share, which represents a 36, 37% premium to Rightmove's pre-acquisition speculation share price, giving it an acquisition price of just over £6 billion. So it was rejected by Rightmove. And you might think, phew, 37% premium, that's not bad. You know, they're getting towards that state that it starts to feel quite attractive. But it was rejected by Rightmove for a number of reasons. The first is your standard, we have got a new strategy and we think that we're going to double operating profit in the next 2 years, and we're really excited about the growth of the company. Everyone says that in rejecting an offer. But more interestingly from an M&A perspective is that this 761 pence per share deal is not all cash. It's majority REA shares. So you as a shareholder of Rightmove might be getting 20% of that offer price in cash and then the other 80% in REA stock. Now this is a shocker for UK investors, partly because REA is listed in Australia and a lot of UK investors have a mandate to invest in UK companies. And would have to sell that stock immediately, which would in turn depress REA share price. So, so if you think about it from that perspective, REA stock doesn't look like a really nice currency for, for Rightmove existing shareholders. In addition, when you look at a stock acquisition, you basically have to back the acquirer's strategy, its management, and have to believe that REA share price is kind of undervalued for you to get excited about transferring your exposure from Rightmove to REA. But REA is well valued. In fact, it trades at a significant premium to its peers in Australia, and the share price has come down 10% since embarking on the Rightmove acquisition. So when you dig a little bit below the surface of that 37% premium, you start to realise that this actually isn't particularly attractive for the investor base that the shareholders of Rightmove have. Now, what Rupert Murdoch can do, by the way, is this has been a— this has not been hostile so far. So this has been friendly. This has been management to management, but the board keep rejecting these deals. So Murdoch can now go hostile if he wants and take a maybe 800 pence per share, uh, bid to, uh, to the shareholders. 50% of the shareholders say yes, then off we go. Downside of that hostile transaction: can't do due diligence. Is that going to fly? Is that going to be sensible? So again, this is really interesting as a case study because it's live, it's changing, it's rumbling on. And we're going to provide more updates over the next few weeks, I am sure.

Just one last question then. For him to go hostile, is there a stop clock period between how many offers you can make with rejections and then a period of time before you can go hostile?

I don't know if there's a cooling off period between rejection and hostile. There is definitely a cooling off period after you have made a certain number of rejected, uh, friendly offers. I think there is a gap that you need to leave, otherwise you're just going to be spamming, spamming, spamming. Uh, yeah, so the, the UK takeover code has got very, very strict rules in all of this, but I think they can go hostile whenever they want.

And would it— like, going hostile seems like a realistic scenario. So how does Rightmove now protect itself and position itself so that can't materialize as a defensive play strategically?

Well, maybe we can link to our episode on the poison pill. If you remember the poison pill that we spoke about a couple of months ago, poison pill is a share, a management strategy that effectively makes it really, really unattractive for a hostile potential acquirer to take over a company. So maybe we can link to the poison pill episode, but if you want to learn more, yeah, just check out that episode.

Cool. All right. Thank you very much as always, Stephen, for imparting your, your knowledge on these matters. Hopefully everyone who's listening finds that super useful for this time of year and all the best if you're in the middle of your application season. And a shout out as well to a couple of people I met in Dublin, Ireland earlier this week who did mention the podcast as well. And unfortunately did also say that he likes the banking the deal room more than the trading floor. So he doesn't get his name shouted out. He knows who he is.

Unfortunately. Shout out to that unnamed person. Let's go to Dublin. I love it.

All right. Take care, everyone. Thanks, Stephen.

Thank you, Ant.