HSBC's Investment Banking Exit

Hello and welcome back to The Deal Room, and we've got a couple of interesting stories for you. And one of those was quite a big headline last week you might have seen, which was HSBC to exit parts of its investment banking business. And when you read that, you're like, wow, what's going on? It's one of the biggest names in banking, but this is specifically talking about the UK, US, and Europe. So great to have Stephen with us to unpick the strategy of why they have made that decision. Lots been going on at that bank, of course, over the last few months. Then we're going to talk about Venture Global. You've probably never heard of them because they're a liquefied natural gas exporter. Unless you're in that game, it's probably not a name you're familiar with. But they've come out and them and a few other names have had a pretty shaky IPOs. And everyone was feeling pretty pumped about the market going into 2025 in terms of deals and listings. However, you know, do we need to rein that in a little bit? And Stephen's going to explain. And then if you're in America and I mentioned WH Smith, I think it's travel divisions and things you might think, but in the UK, and certainly if you're Stephen and I's age, you know, you have childhood memories of going to WH Smith. But, you know, I go there now, Stephen, I don't know about you, and I think, wow, this place really hasn't moved on since I was about 12 years old, but we'll explain while, why WHSmith shares have actually popped quite a considerable amount about a potential high street sell-off. And then finally, you've got to stay around to the end because we're going to talk, uh, superyachts, Prosecco, uh, vineyards, and we're going to talk aircraft, uh, rentals as well because there's an interesting story as well I know that's come up, um, regarding Carlisle of all names. All right, but Stephen, let's, let's kick it off with, uh, HSBC.

Yeah, thank you so much, Anne. And it's always good to talk about HSBC, a, because everyone knows it, it's a high street bank and it's one of the biggest, well, it's, it's got one of the biggest balance sheets out of any bank. I think it's number 3 or number 4 behind a couple of Chinese banks. Uh, so it's always worth talking about headlines as they come up. And I thought I'd start this little piece by just giving you a, a bit of a trip through memory lane, my own personal memory lane. So when I joined HSBC, uh, a year out of graduating from university, I was on a rotation scheme. I was on what was called the International Management Rotation Scheme, which was extremely exciting, and they promised to post me to far-flung places, and it was all, it was all very good. My first posting was, uh, and bearing in mind I'm from the UK, as you might, as you might know, my first posting was the second floor of HSBC Canary Wharf. Not only that, as an unexotic location, but inside a glass box within the floor, within the second floor. It was a, it was a physical kind of Chinese wall because we were doing things that the rest of the floor weren't allowed to know about. So, we were this weird goldfish bowl in the middle of the second floor when I thought that I was going to be shipped off to somewhere very nice and exotic to do the good work of HSBC.

I've got visions of the Cube going on here.

It is exactly like that. And the reason why I bring it up was because we were a mid-market M&A team. I joined as an analyst, and again, we were trying to do M&A in the UK mid-market. So £100 million revenue to about £1 billion. Within 6 months of me joining HSBC, that team had been disbanded because it was not core to the strategy and it wasn't really making enough money. So within 6 months I was out of the cube and I was trying to fish around for my next job. Uh, and my next job just so happened to be integrating into global markets and integrating into the investment bank proper. But this is why this headline rings so true to me, and I think it's important for any young person to realise that these things happen. Right? You are not going to, you're not going to get away with a career where your team doesn't face a bunch of layoffs. It's just not going to happen. And this is the sorry tone that we have to set for the M&A global bankers at HSBC operating, operating out of the UK, Europe, and the US. So this headline is that HSBC is cutting It's winding down its M&A and equity capital markets franchises in Europe, the US, and the UK. This was a little bit of a shock move. There was a leaked memo. Bankers were quite blindsided and the, the move is happening really, really quickly. They're trying to wind this down over the next 3 to 6 months, only completing deals that are live. At the moment, and a load of bankers will be out of a job. Bearing in mind that this is only the US, the UK, and Europe, and bearing in mind it is only M&A and equity capital markets. So they will retain their M&A and ECM in Asia-Pac and in the Middle East, two areas of growth and real market share for HSBC, and they will also retain their leverage finance, debt capital markets, and infrastructure finance elements of the investment bank in the UK, Europe, and America. Now, this is super interesting. Again, thinking strategically and maybe stepping back to the episode that hopefully you guys tuned into last week, which talked about the corporate bank. HSBC is a corporate bank. And unlike maybe a JP Morgan where the balance sheet is a bit of a the lending function is a bit of a loss leader for the very, very high revenue investment bank. It's kind of the opposite for HSBC. The corporate bank is the focus, and then all of the other stuff supplements the corporate bank. And what basically the strategy was, was equity capital markets and M&A was just not a big enough, it was subscale. It wasn't, there wasn't enough synergies between the core banking operations of HSBC and those two little outliers. HSBC keep LevFin, DCM, and infrastructure finance because they do have really good synergies with the core lending function of HSBC's corporate bank. So you can see how this works internally within a bank.

Could you just give me some context in terms of numbers? Because I think, as you just rightly explained, you know, I think a lot of people who aren't familiar with all this will just think that the epicenter of a lot of these financial institutions is M&A and trading, and can you just put some numbers around just to explain how small a lot of these divisions were for HSBC in comparison to the bigger, broader picture?

Yeah, absolutely. So global banking and markets for HSBC takes up, sorry, global banking alone, markets is slightly different. Global banking, uh, only earns $544 million of revenue in the 6 months up to June 30th, uh, which is only 6.2% of HSBC's of Citi's total revenue. So a fraction. If you split that down, and I'm now looking to the 9 months to 30th of September this year, banking, global banking revenue, $6.4 billion. So that's, I mean, that's pretty chunky, but within that $6.4 billion, only $819 million, uh, sorry, dollars of that was investment banking. So the rest, global payments, $3.6, uh, $3.364 million, credit and lending, $1.354 billion. So this investment banking, $819 million out of not only a $6.5 billion banking division, but also a much, much larger overall company size. So it really is a minnow. And let's put this into context, into the context of banks in general. 2020, 2021, 2022, boom years for banks, interest rates low, um, really, really good, you know, and then as interest rates went higher, they benefited from the spread, the increased spread between deposits and lending, interest rates coming back down a little bit into 2025. And these banks are starting to think about cost-saving measures. So this is part of HSBC's $3 billion cost-cutting drive, bracing for this lower interest rate environment. And obviously, who do you, in terms of the highest earners in the organisation, who do you get rid of? Well, it's the M&A bankers and the ECM bankers if they're not core to the franchise.

But I'm not going to spare too many tears for the MD bankers at HSBC because surely And correct me if I'm wrong, a lot of those will have very strong relationships with certain clients. They'll have their, their book, so to speak. And surely then that's a pretty attractive proposal for them to just hop across the street and go to somewhere else and go, look, you're not just hiring me, you're hiring this revenue that I can immediately bring to your table.

Yeah, it's a really good point. And I think just from an equity capital markets perspective, HSBC acts as the broker for 25 listed companies in the UK alone. EasyJet, Boohoo, et cetera. So there's some significant names and there will be an empty space to be filled. We spoke on the podcast a few months ago about the likes of the elite boutiques, the likes of Jeffreys and Evercore and Raine and things like that, taking the rainmakers from the big play— the big banks that were trying to scale back a little bit and really, really having that land grab, which has seen their share prices increase really significantly. So if there are any real top ECM and M&A bankers that are at HSBC that are thinking about their next step, I am sure there will be, there'll be a few, a few banks sniffing around, especially those banks that may want to, you know, have a little bit more of an insight into cross-border M&A, especially with Asia Pacific. So one of the main things that HSBC does and one of One of the things it was good at from an M&A perspective was cross-border because they had such a strong presence in Asia. So maybe you could find an M&A banker that is being fired from London that you could get to act as that kind of bridge to APAC. So that's probably the strategy for the elite boutiques sniffing around some of these bankers.

Okay, cool. Well, let's move on to the second story and the kind of headline on Bloomberg this week was much anticipated boom in US IPOs has started off not with a bang, but with a whimper. So what are they referring to here?

Yeah, so this is the LNG exporter Venture Global. I love these company names where you couldn't, you couldn't have guessed that Venture Global was a liquefied natural gas exporter. You could have been guessing all day to figure out what it actually did. But this is a bit of a shocker. So let me just find the names of the, I'm just going to call out the investment bankers here. Uh, so investment bankers, JP Morgan, uh, Bank of America, Goldman Sachs. There you go. A pretty, pretty illustrious group of banks that slated this IPO. So the story of Venture Global is everyone thought 2025 was going to be a, or is going to be a kind of a rebound year for IPOs. So, the original price range that the bankers went out during this roadshow, remember the roadshow process where you go with a company and the banks meet all of the investors and try to gin up some support and raise some investments at the right price range. The original price range from the bullish bankers at JPMorgan, Bank of America, and Goldman Sachs was a $110 billion market cap for this company, Venture Global, which is pretty punchy from a price earnings perspective. And from an EV EBITDA perspective, it was going out at about 70 times EV EBITDA, which is a massive multiple even for a tech company, let alone an LNG exporter. But such was the hope that this IPO would come off successfully. Now, what happened, the reality was during this roadshow, investors who are a pretty sober bunch were like, look, this is not worth $110 billion market capitalization. You guys are batting it in entirely the wrong ballpark. Your publicly traded liquefied natural gas comps are trading at a third of that. Where's the premium coming from? I know that we want the market to rebound, 'But you guys are drinking the wrong Kool-Aid.' So during the roadshow process, the IPO price range was slashed by 40%. Pretty big haircut. So $110 billion becomes about $65 billion on, uh, on opening. Now that is a little bit of a tough pill to swallow if you're, uh, the shareholders of the company that's being sold this $110 billion market cap dream. But it only gets worse. So on entry, the IPO priced, and within a day it had dropped 17%, lost another $12 billion. So now, as I look at it this morning, I, the market capitalization of this once $110 billion market capitalization slated company is now at $50 billion. Right? That suggests in my mind, not necessarily a weakening of demand for IPOs because the EV, EBITDA, and the price earnings multiples even now are much higher than their listed comparables. So it's still quite well priced. It's just an error of pricing in the first instance by the banks. Like $110 billion, I just think they were just totally in the wrong ballpark.

Is it one of those where you mentioned there was 3 banks? So let's just say there's JP, GS, BAML. And how much of it is you see what others are doing, you know, and it becomes this like, okay, that's the new norm. And then they're bumping up, then we bump it up and you kind of lose sight of things a little bit. I don't really get that process of how much collaboration there is with the price setting kind of mechanism.

Yeah, the way that, the way that I like to think about it and I, and I use a slightly oblique example. Is when you're— if you are bidding for a public contract, right? Let's say you're bidding to do a bunch of infrastructure work on the British rail system, which I really hope they do at some point. Your goal is to present the lowest possible, you know, the cheapest possible offer to the government. And it is basically a way of justifying coming in at the cheapest offer. Once you've got the deal, you can go way over budget. You know, you've got the deal, right? It's a little bit like that when it comes to winning an IPO mandate. We can, you know, imagine the meetings between Venture Global and the banks. Goldman Sachs and BofA and JP Morgan come in and say, we think we could get you an IPO at $110 billion. You're going to be rubbing your hands together and going, all right, I'm going to go with you. The reality is you get the IPO away at $60 billion and it all looks a little bit less impressive. but the bankers will still get paid. Not as much as they would've got paid at a $110 billion valuation, but they still get paid. So it's all about making the pitch to get your foot in the door. And then what happens once your foot is in the door is, you know, it's not by the by, but it's slightly less consequential. You still get a payday.

Yeah. I'm just thinking about, it's kind of like in trading when you have, if someone gives you a mispriced quote and you can kind of take advantage of their error. I wonder whether within the liquefied natural gas space, you're like, right, I wouldn't suggest you work with these guys if you're thinking of IPOing over the next 12 months.

Well, this is it. Yeah. I think it's a bit of, again, it's a bit of a sobering moment. And we have spoken previously and on the podcast about Carver and Carver IPO'd, the US healthy fast food chain IPO'd a couple of years ago and it popped over 100% on day one. And we are thinking to ourselves, ooh, did the bankers do a terrible job pricing that because they left money on the table? So the inverse is also true. The fear of missing out on a bit of a post-Trump bull market IPO success was probably the rationale behind this. And I'm just going to give you a little bit more context just so that we understand what's going on in the beginning of the year in the IPO markets. There was another pretty badly executed IPO that went out last week, Smithfield Foods. Which is the world's largest producer of pork. It was an IPO that was priced at $20 a share on launch, which was well below the marketed range. So again, going out to the investment community at $23 to $27 a share, and no, the appetite wasn't there. So the range was dropped. It launched at $20 a share, and it's trading just below that at the moment. That was Morgan Stanley, Goldman Sachs. And Bank of America again. But it's not all bad news. There has been some good, uh, good IPOs. Floco, which is an oilfield services company, which again, the name is slightly more representative of what it does, which I, which I quite respect, up 20%. And then ServiceTitan, which is a software business, is up 39% since IPOing earlier this month. So the conclusion, well, the right IPOs can launch, but investors are not mugs. This is not, you know, This is not a true bull market across the S&P 500, across the entire industry. It's been a bull market for tech for the last 12 to 18 months. That might be coming off. And it's been a bull market for things like crypto, but it doesn't mean that investors have lost their heads with regards to quote unquote normal businesses.

All right. Well, third story on the docket then. You said to me offline that you're feeling like we're neglecting the UK a little bit, because we tend to always go offshore to talk about these stories. So WH Smith, what's going on with that?

Yeah. So again, if you're listening, if you're tuning in from the US, I would say I find it hard to make a real accurate comparison.

Actually, I'd want— I want you to describe, Stephen, WH Smith experience to me. Talk me through that immersive experience when you walk through the doors of WH Smith.

Yeah. Okay. So, you walk— okay. You're on a slightly run-down British high street. It's grey. It's probably a bit damp. You know, there's a bit of litter lying around and you see a logo, a blue logo, a white name, blue background that hasn't been updated for about 25 years. And you think, gosh, I need to buy some pencils, a newspaper, a magazine, and maybe a lottery ticket and maybe some pick 'n' mix. So, maybe some sweets. Weets. So I go into Smiths. The lighting looks like it hasn't been updated since the 1970s. They've got that horrible kind of office, low-lit, low-ceilinged, white-tiled ceiling. Um, everyone that works there is pretty demoralised. Um, you get in and get out. The self-service checkouts don't work. Um, so you get angry. Um, and then you get out as quickly as you possibly can, having probably not found what you wanted.

It's just very quickly. A lot— I went to done a week ago. And the reason why is the shopping centre, the shopping mall where I live, uh, there's a kids' play zone at the bottom. Drop the kids off, they're like, Dad, I want a drink, I want a drink. Popped up to WH Smith, bought some juices, got back, went to open them, and there was mould all around the top of the one of the cans. So yeah.

Oh my gosh, great experience. So yeah, so look, WH Smith again, the UK— in the US you've got some pretty run-down stores in the US, the likes of Target and things like that. You think, gosh, that hasn't been updated for years and years. It's a bit like that. But what WHSmith is doing really well at is the concession stores within airports, railways, you know, especially in the UK, but increasingly across the world. And actually, I would say the experience is almost inverted. When you go to a, uh, when you go to an airport and you're thinking, all right, I need to find myself a book, or I need to get myself a magazine for the flight, or whatever it might be, it's actually not a bad experience. You know, the stores are a little bit more spruced up. It's a little bit nicer and you tend to get what you want. So the story here is that WHSmith is actually forecasting profit growth, which you think, gosh, the UK retail sector has been so maligned over the last few years. What's going on here? Shares are up almost 10% since the beginning of the year, but the engine for growth is the travel stores. It is 75% of the company's revenues. It's in, uh, station and in airport concessions and 85% of the profit. So what do you do strategically when you've got a listed company that's got two divisions? One is going great guns and the other is dragging the share price down. One of the things you tend to see in valuation or at least any investment banker worth their salt will tell you, is that the valuation of a company trends towards its lowest performing division. Hence why there is a lot of recommendations to get rid of that badly performing division and focus on the good division. And this is what's happening in the case of WHSmiths. So WHSmiths really well performing in one division, the 500 high street stores and 5,000 staff. They've tried to make it work. It's been a significant cost-cutting exercise, hence why you go into a WHSmiths and there's a mouldy, a mouldy can of juice and only about one member of staff for every store, but it hasn't really worked and profits are down. And let's just remember the context of the UK and especially high street retailers and high street and grocery stores. You've got this combination of inflation, which has really, really hit UK retailers hard, and also, uh, the employer National Health Tax increase, which again is, which has really hit any employer that employs a lot of people. It's a shocking, shocking tax on these types of companies. So you're just getting battered from all angles. And obviously you've got the ever-present Amazon and things like that. As well. So, what does WHSmiths plan to do? Well, they want to sell. They want to sell these 500 high street stores to a buyer. Now, the question is, who's going to buy this thing? Who wants to buy WHSmiths? I mean, I'm not going to be the first person to put my hand up. It sounds like a, sounds like a really, really hard turnaround story. The range of acquirers, by the way, there's a couple of strategics in there. So, there, there's a Canadian entrepreneur called Doug Putman who absolutely loves UK retail, wants to do more. He rescued HMV. Although when he says rescued HMV, I still don't see HMVs anywhere. It's a UK kind of CD and record store. I don't— have you seen an HMV anywhere?

There's one in that same shopping mall, Stephen. That's littered with all the zombies of the UK high street.

That's fantastic. Very, very retro, that, uh, that shopping mall that you go to. So it could be, it could be Doug Putman. This could be attractive, uh, to him. It could be the owner of The Range, which is another UK high street retailer that has done well, uh, this guy called Chris Dawson. And they recently acquired 70 Homebase, which is a DIY and garden store from Sainsbury's. So they're quite acquisitive and want to do more. But what might be more likely is a firm. So you have these distressed private equity groups, the likes of Alterra and Hilco, that love this kind of asset that are like, all right, we can get our financial engineering and cost-cutting chops into this portfolio and get rid of 200 of the worst performing ones, uh, refinance the other 300, possibly sell off the most attractive real estate. And really do a number on WHSmiths. And the fact, just as an aside, that the 5,000 staff are not unionised is a real blessing to a restructuring firm that really want to go in and tear what is a pretty drab and old-school name apart. So really, really interesting.

That restructuring, that sounds really interesting, but it sounds also like a lot of work. So how like what's the cost implication, like undertaking that, like debt restructuring, spinning off, keeping certain things, refinancing?

Yeah, I mean, look, the financial, the financial engineers within these organizations are obviously pretty sophisticated and you won't need a massive team to be able to put these different pieces of the pie together. I think the heavy lifting is operational. If I was faced with two options, with my week, what am I going to do with my weekend? One, try and figure out a bunch of clever ways to restructure WHSmiths from a financial perspective and package different things off and understand the valuation of different elements of their real estate versus owning the 500 high street stores and trying to turn them around and make the brand more attractive, redo the interiors of every store, retrain the staff, reposition within a crowded market, I think I'd rather do the former. So it is heavy lifting. The returns are there. It is still a profitable company. This is not a complete dog. But yeah, the likes of Alterra and Hilco like hard, messy, undervalued things, right? You've got to be thinking that they're going to be picking up these 500 stores on the cheap, turning them around and selling them for a little bit more. And that's, uh, and that's the goal.

I know you won't have the perfect answer for this, but what you've described there, how long would that take to do like a full taking on this, this situation, uh, this distressed situation, and then being able to offload and finish that project as a PE firm, for example?

Yeah, it's a really good question. I think there are, there are multiple stages to it. The first is super, super quick. Right? You need to find the appropriate financing package and initial strategic, um, plan to be able to acquire this company or the, these 500 stores that makes sense from a bank's perspective or a lender's perspective. So a lender's only going to lend you money to acquire these stores if you have a really good turnaround story. So get your story straight. Get the lending from the bank. Day 1, you recapitalise that company, and that has a new capital structure, new debts, and a new strategy that you've kind of got signed off by the banks or by the lenders. So that happens immediately. It's a new structure by the time you've acquired the company. The next phase is part of the strategic action plan, which is, all right, we plan to divest, you know, 200 stores over the next 3 years. We plan to, sell off 50 of the most attractive real estate stores out of the whole lot. We plan to replace some of this costly debt that we've had to take out in year 0 with cheaper debt in year 3, as the company becomes a little bit more sustainable. So there's the kind of short-term restructuring and then the slightly longer-term financial plan.

Understood. Crystal clear. Let's go. W.H. Smith. Do you know the W.H. Smith in my town? Um, it got replaced by which fast food restaurant do you think on the site, on the location?

Oh, it's a good question. I would say I'm gonna go KFC or Subway. Oh, Greggs.

No, do you know what? Greggs is always booming. There's always a queue out of Greggs.

Greggs is an unbelievable story. It's absolutely remarkable.

Burger King.

Oof. Oh yeah, the lowest, the lowest below.

The Burger King is opposite Five Guys, and the Five Guys, uh, square foot on the real estate is probably 4x the size of the BK. And I'd say they, they do a fraction of the business. It's amazing.

Really?

That's good. That's not going to last long. Five Guys, Five Guys, for sure. Outside of London.

No, outside, exactly, outside of London. No, but, uh, but look, there you go. I don't know if that's an upgrade, Smith's for a Burger King. I would say we'll put a vote, we'll put a poll out, but it's probably not worth doing that.

All right, finally, just to quickly have some fun and wrap up, what's this, this Italian story with Carlyle?

Yeah, so this is, I mean, the headline is Italy firm got Carlyle cash and allegedly paid for yacht and winery. So I'm going to spend 30 seconds on this, but this is Um, this is Carlyle Group agreed to provide around €200 million of private bonds to a company, an Italian company called Progest S.p.A. It's a family-owned paper and packaging company based in Venice that was doing real great guns during COVID where everything needed to be shipped and delivered to your door. But digging into the use of proceeds and the way that this family-owned business have been spending that money. That's where the, that's where the yacht comes in. That's where I think it says that the auditing firm Deloitte has raised questions about more than €80 million of financial transactions by the owners and members of the Zago family, which is the family owners. They questioned payments for a yacht and cash used to fund a Prosecco winery. So, there you go. Carlyle, you are funding the great and the good. You are using your money wisely. And this Italian family are just nailing it. Just take €80 million of the €200 million bond and spend it on a Prosecco winery and a yacht.

Yeah, I mean—

How about that, Anthony?

I mean, if I was— if I wanted to do that, I would have been a little bit more controlling of the size of the— the €80 million. I might have gone for €8 million, but I guess once you get your first superyacht, you're a bit like, wow, you know what? And actually, they were dishing out zero interest rate loans to family members, aircraft rentals, yacht maintenance fees were half a million euros a pop. So yeah, classic.

In for a penny, in for a pound. That was the heady days of 2020.

All I need is a Burger King and some pencils from WH Smith, and I'm a happy man.

Yeah, simple taste, simple taste. Sounds great.

All right. Thank you very much as always, Stephen, and thanks everyone for listening and see you next week.

Thank you, Ant.