Jaguar's Bold Rebrand & Fallout of a Failed Take-Private Deal

Hello and welcome to The Deal Room and fresh week ahead. So 3 stories to dive into and one I've requested Stephen to explain was one that probably dominated your newsfeed irrespective of whether you are into finance or not. It was everywhere and I'm sure a lot of you have seen it and that was the Jaguar rebrand, the quote, copy nothing rebrand and the huge online backlash that that had. However, reason why I kind of sent it over to Stephen to get his thoughts is that Stephen is the master tactician with all things strategy. And so I wanted to understand, like, why are they doing this? And is there beyond the marketing, you know, what's happening at Jaguar Land Rover? And is there more than meets the eye in that story? And then the second one is looking at potentially a bit of a missed bonus Christmas season for some bankers because the likes of MSGS and so on are on a hook a little bit for the collapse of a take-private deal. So we're going to talk a little bit about the structure of leveraged buyouts and so forth. And then finally, all I'm going to say is PIKS dividend recaps and toggles. What exactly that is, you're going to find out because I don't know what that is. Stephen's going to explain it to both you and I. So Stephen, how are you?

Yeah, I'm pretty good. I don't know whether talking about PIKS dividend recaps and toggles is enough to hold our listeners' interest to the end, but I'll try and make it worth your while. Maybe we should have inverted it and saved the Jaguar story for the end, but, but never mind. I'm sure you, the audience, will get a lot out of this episode. Let's, let's start with Jaguar. I'm, I'm so intrigued by this story. Obviously, I watched the 30-second advert and was probably as confused as anyone. I'm not someone that tends to jump onto X or onto various social medias and vent my fury at this extraordinary advert that disassociates Jaguar with the, the, the roaring Jaguar logo and the cars and the, and the, uh, the petrolheads and the purists and all this kind of stuff. It was about as far away as you can possibly get. But I guess the question that me and Ant have been asking ourselves is, Is this totally bonkers or is this genius or is it a little bit of both? And, and you've got a, you've got a view on this. What do you think? This is a bit of a masterstroke or do you think it's a total miss?

Yeah, I was trying to kind of build my thoughts around this because I just thought, wow, it's just generated so much interest. I wonder how much you'd have to pay if any brand to have that type of global recognition of your, your firm. And it does always make me think that when there's something like that materializes, what is it that's coming down the pipe? Because normally it's some kind of marketing strategy and it's part of a sequencing of events. Uh, and I'm sure we'll go on to talk about that's very much the case here. And, you know, another little insider fact that I had is I do have, let's call it a friend of a friend. Who actually works for a very large American advertising agency who might have been involved with the actual campaign in itself. And so they were telling me that, you know, the reception and the eyeballs have been well beyond what they could have hoped in their best case scenario. So they're feeling pretty smug. And I was like, okay, it kind of rang true of how I think broadly, but also in finance. I think people were quite kind of sidetracked when Kim Kardashian came out with her investment fund, and you're kind of thinking, wow, what, what's that about? And so I was doing a bit of digging on things like controversy marketing strategies, polarization marketing strategies, this tactic of deliberately provoking strong opinions. And we live in a very divisive, polarized world right now, certainly the last several years. For me, I just thought this really tapped into that and it just started to set off that curiosity kind of feeling of, well, I don't know a lot about this company and so there must be some rationale behind why they're doing this. I get it from a marketeer's perspective and so I'm hoping what you can shed some light on is what's actually happening at this company because Jaguar, I don't see anyone You know, I think Piers has a Jag. So that's how uncool Jaguar is. So what is happening at Jaguar Land Rover?

Gosh, Piers has a Jag. I wonder what he thinks about this advert. There you go. I don't have a Jag, but this is super interesting. And this kind of controversy advertising is such a fascinating area. And I know we stray a little bit away from the deal room, the IBD, but it's worth taking a look at. And I'll start with a quote from Oscar Wilde, long-time listener, fan of the pod. Uh, there's only one thing in life worse than being talked about, and that is not being talked about. And that holds true unless you are being talked about for something that could eventually result in a major boycott, a major fine, a major regulatory breach, or something that is likely to hit the bottom line. Right? So, Kanye West and Adidas, that did not end well. That's not good publicity. That's extremely bad publicity. And it led to a boycott and it led to millions of pairs of trainers being recalled. But this, I think, is kind of genius because one thing we need to make absolutely clear is that Jaguar is not selling a car. It is not selling another unit. It's not selling anything until 2026. It has shut down its production of its cars in the UK specifically, but globally as well, as of November 2024, in order to transition its whole fleet to electric and to bring out this whole revamped Jaguar roster of cars in 2026. So, yeah, I read a couple of articles going, oh, I wonder if there's going to be a boycott. What are you going to boycott? And no one's buying any cars. So, so this is the perfect time to create a little bit of controversy. Point 2, this advert has had 160 million views online, right? It's far beyond your normal boring car adverts. Elon Musk replies, obviously he replies, saying, Jaguar, do you even sell cars? To which Jaguar responded going, this is just a statement of intent. We are actually going to launch our car. Our kind of flagship 2026 car on the 2nd of December. So what they've done is they've built an on-ramp to the big event. And the car, by the way, the car is going to have to look something pretty special, right? For this to— it can't be a kind of pretty boxy old-school looking car, it's got to look the part. So this is genius, getting us all excited about the launch, right? And it might upset some old-school Jaguar followers, but because they're not selling another car for a year and a half, it doesn't really matter. The hype or the controversy will die down. And then the third point that I want to reference, and this is why it's kind of genius, is that Jaguar Land Rover is a Coventry-based company, albeit, uh, listed in the UK, albeit with significant, uh, Indian ownership. It has been flying over the last couple of years, and it's not been flying because of Jaguar. It's been flying because of Land Rover, the Defender, the Discovery, and the Range Rover. So just to give you a couple of numbers, and it's a really, really interesting case study. So Range Rover full year '23 to '24 sales, 204,000. That's up 21%. Defender full year 2023, '24 sales, 115,000. That's up 53%. Discovery 46,000, up only 4% because it's a relatively old model. But the whole of Jaguar, they only sold 67,000 cars last year, 7% increase year on year. So the value driver, the real anchor to this business's recovery is not Jaguar, it's Range Rover and it's the Defender. So much so that their revenue from '23 to '24 grew from $23 billion to $29 billion. That is a significant revenue increase. Their EBITDA is now at £4 billion. So this is a company that is really, really flying. And the thing, the other thing that I want to mention before we loop it back to this advert is that they pulled a complete jiu-jitsu move on their Range Rover and their Defender. In 2019, the average sale price of one of their fleet of cars you know, Range Rover, Jaguar, et cetera, was $44K. They were actually losing money on a per-car basis. By early 2023, it was $71K, and they dropped from selling 700,000 units to 400,000 units, but they now make $25K of profit per car. So they, this is a brilliant example of moving up in terms of your price brackets, your audience type, your market, accepting that your volume's going to be lower. But if you're making 25K a car and you're turning a business around from being loss-making, I'm actually looking at the moment, this company JLR made a loss in 2022 of £500 million. So it's turned the story around. So quite frankly, whatever it does with Jaguar, and I think that this is a killer move, whatever it does with Jaguar, the business is going just fine. And this is, it's not a hail Mary. It's, it's, It's, you know, there's a lot of potential upside here. The downside is not going to be business critical. And this is why, regardless of whether you like the advert or not, that doesn't really matter. It's all part of the strategy and the marketing, and I think it's great.

Yeah. And I love that. I think the brand association as well with Britain and British people is particularly poignant with Jaguar, isn't it? And it's like, as you mentioned, Indian-owned and within a larger conglomerate of companies, it's just one other string to the bow when you have all these other brands within it. I think a lot of people just think Jaguar's gonna go bust. Well, it's not Jaguar in itself is what, uh, you know, a point to make clear.

Yeah. And I'm just, you know, I'm now looking forward to the launch on the, on December 2nd. Was I looking forward to the launch of Jaguar's new electric cars a few weeks ago? Absolutely not. Of course, I didn't even know it was happening. So I think that probably says enough. Will I buy a Jag in 2026? Well, we'll find out. It might be really cool.

All right. Well, look, let's move on to story number 2 then. So we've got Morgan Stanley and Goldman Sachs. So the 2 big names, but I'm sure there was many other names on the book as well. So what's this story and how were they involved?

Yeah, we're going to, we're going to take, you know, we're going to switch gears a little bit and go back to the good old world of private equity and banks and things like this. So the headline that I read earlier on last week was that major banks miss out on €220 million of fees from the collapse of one of the largest take privates in 2024. So this is the story of the Spanish pharmaceutical and healthcare firm, Grifols. And it was touted for a significant, a massive take private by Brookfield Asset Management. And this was all going through financed with €11 billion of leveraged loan and bond financing, all of which, all of which need to be underwritten by major banks. This is the way that these deals get put together. They are there is a syndicate of banks that agreed to underwrite the $11 billion and will be syndicating that out to their debt investors, um, or to their investor roster after that. And they get paid handsomely. This is $220 billion, uh, uh, $220 million of underwriting fees, about 2% of the debt package, which was going to go through. And I can imagine that a lot of banks, Goldman Sachs, Morgan Stanley, and a lot of others that were on this deal, probably if you've got your CRM, your customer relationship management tool, and you're looking at likelihood of success for that cash landing, they're probably at, they were probably at the 80%, right? They're probably thinking, okay, we'll discount this a little bit, but it's probably going to happen. Unfortunately, Brookfield Asset Management pulled out. Well, actually, Griffells pulled out basically saying they couldn't agree on a price. Brookfield Asset Management were not meeting the valuation that the Griffells family, who own a third of the business, wanted for this particular company. So I don't want to, I don't want to have any kind of schadenfreude for the big banks. I don't want deals not to be done, but I do have a little wry smile on my face when I think about those bankers already locking in €220 million worth of fees, thinking that Christmas is going to be great, and then unfortunately getting that rug pulled out from underneath them.

Can you, can you just give me a bit of context, like €220 million in fees? Is that a lot? Is that a little significant?

Yeah, it's, it's an interesting one. 2%, uh, is probably about standard for a for an $11 billion leveraged loan and bond financing. If it is just a vanilla, normal, boring term loan that is refinanced, let's say, I don't know, let's say Sainsbury's want to refinance their £500 million term loan that they've arranged with Lloyds Bank and HSBC and Barclays. The fee to refinance that would probably be about 0.3%. Tiny, right? Because it's what is such a vanilla deal, maybe even less than 0.3%. When you start getting towards the, well, when you start talking about underwriting, bearing risk, having to put the money up front and then try and get investors interested in it on the other side, those fees start going up and up and up. 2% feels about right for a deal of this size. If it was smaller, the fees would actually be higher as a percentage just to make it worth the bank's while. And then if you think about IPOs, you know, again, that's an underwrite, that's risky. Those fees could be as high as 3 or 4%. So this is, you know, this is where banks make a lot of their money on debt issuance, on underwriting. This is, this is the stock and trade of banks, but I just want to kind of focus on one slightly technical point, uh, that some listeners may not have come across before. And this is what's known as the term grid. So you would have heard of a term sheet. A term sheet is the short-form document that outlines the key terms of a lending relationship between a lender and a borrower. And they will have the key terms, how much is being lent at what, uh, cost above the overnight borrowing rate, uh, interest payments, key, key terms, repayments, all of this kind of stuff, right? Now, in a deal that is this complex with this many banks, and there's going to be 15+ banks contributing to this $11 billion, uh, underwrite. When something's this complicated, each bank gets to submit the terms that they would be willing to lend at, and it gets put into what's called a term grid by the lead underwriter. Now, the term grid for this deal ended up stretching to what, over 100 terms. So because of the size of the deal, because of the complexity of the deal, because of the number of banks that were involved, what is usually a very simple document usually about 15 very high-level terms, intended uses, disbursement, drawdowns, margins, maturities, et cetera. This started to stretch out into a term grid that looked extremely unwieldy and very, very complex. So yes, €220 million is a lot of money to earn for a financing piece of work, but it's not without complexity, and it's also not without risk. So just bear in mind this concept of the term grid and the fact that different lenders, some European, some Asian, some American, will have different credit conditions and different lending conditions that can make these kind of deals just extremely complicated.

From a career's perspective then, I'm assuming given this complexity you described, this process would have taken several months in the making. If I'm an analyst or an associate doing a lot of the legwork, and I'm looking for like little notches on my belt so I can go off to bigger and better things. And then the whole thing falls down and you've invested the best part of a year of your life into it. Is that, how does that kind of wash out then for those people?

Yeah, I mean, it's really annoying, isn't it? You're going to be gutted. If you've worked on this massive deal and you were thinking to yourself that, that bullet point on my CV is going to start looking pretty nice as an analyst. I've worked on one of the largest leveraged underwrites, well, of the last couple of years. You can still say you've worked on it, by the way. Uh, you know, it's not going to be quite as good as you've worked on it and that it's completed. But the thing about a deal like this is, is that it's out in the open. It's a public, a publicly known set of facts. If you were working under strict confidentiality on a potential takeover that didn't work, you can't reference that. And that is where it gets really quite hard to take, because you can go, you can nudge and you can wink and you can go, I've worked on some pretty significant deals that fell through at the last minute, but you can't put it on your CV. So it's, yeah, I sense the frustration of an analyst, but this isn't the worst situation you can find yourself in.

Okay, so, you know, the sexy part of the show now. Picks, dividend recaps, and toggles. So don't let us down, Stephen. What have we got?

Yeah, I, I really scratched my head to try and figure out how to make this interesting, but for any corporate finance or banking nerd, this is super, super interesting. And it gets to that level, you know, we've talked about scratching below the surface and having that high-level knowledge, which is always important, those fundamental foundational bits of theory, but then just peeling that next layer and going down into the next layer. We talk a lot about private equity on this podcast because it's called The Deal Room. And the headline that I want to use today to introduce the concept of dividend recaps and payment-in-kind notes and things like that is the headline, Buyout Shops Use Trump Rally to Cut Borrowing Costs and Fund Dividends. This is actually an extremely, extremely important article in the context of what we've been talking about previously. You know, the, the, the, potential, um, tailwinds of M&A activity and IPO activity next year. So the likes of Blackstone, Elliott, and Vista have used strong demand for debt to cut borrowing costs and fund dividend payments. So a couple of years ago, if I was trying to raise money for a leveraged buyout, the amount of lenders willing to lend to me would be very few. And their premium on top of the overnight borrowing rate would be very, very high. So I will lend to you, but I'm not very confident and therefore I'm going to charge you an extremely high interest rate. A lot of private equity firms that had to put money to use, you know, held their nose, swallowed and said, yeah, okay, I will accept these very, very harsh, expensive payment terms because I want to get the deal done. But in the back of my mind, I'm really hoping in 2 or 3 years' time, come 2024 or 2025, the funding markets might have loosened a bit and I might be able to refinance some of this really, really expensive debt. And that is what's happening. The borrowing costs for things like leveraged loans and for leveraged buyouts have come down significantly. And I'm just going to give you a couple of examples. This is absolutely remarkable. So Copeland, which is a Blackstone-backed heating and air conditioning technology business. Here we go. Getting exciting now. Borrowed $675 million to pay a dividend to the buyout group. We'll discuss that in a second. The interest rate that they paid, this was very recently, was 2.5% over the secured overnight financing rate. This is the SOFR. which is the kind of base rate that you price loans at SOFR plus X%. So they secured at 2.5% over the base rate. The original deal that they refinanced a couple of years ago, the original deal that they made a couple of years ago, 6.75% over the secured overnight financing rate. So another example, Citrix, obviously a big company, a big buyout that got merged into the cloud software group. They refinanced very recently a $2.5 billion preferred equity instrument that ended— that cost 12% over the stand— the secured overnight financing rate. And they replaced it with a 3.5% instrument. So 12% interest down to 3.5% interest. And this is really, really— this is big news. And the volume of debt deals are going up. The cost of these debt deals, the premiums are going down. And therefore, what are private equity firms doing? Well, firstly, they are refinancing some super expensive debt, replacing debt with debt. That's pretty vanilla stuff. But secondly, they are doing what's called a dividend recap, a dividend recapitalisation. So a dividend recapitalisation is when a PE firm issuers issues new debt to raise money to pay a special dividend to investors that help fund the initial purchase of portfolio company. So the kind of first layer of thinking about private equity exits is, all right, you need to sell this to another company. You need to sell this to another private equity firm, or you need to IPO this portfolio company. The reality is much more complex. You might have many smaller opportunities to create a liquidity event or to return money to shareholders through things like dividend recapitalization. So effectively what a lot of these firms are doing is a debt for equity swap. They're taking on more debt in order to pay dividends to buyout groups, which is releasing that kind of pressure valve and maybe extending the time that that company can be held by the private equity firm, because at least some funds are returning to the private equity group. So dividend recaps tend to happen when the cost of borrowing starts decreasing quite precipitously, as we've seen with those two previous examples. So it's a really, really interesting space.

So I feel like you could get like this map and this kind of order, this natural flow or cycle. Then this tends to be quite typical then as you've described. And also it sounds quite like In layman's terms, the first part about refinancing debt, like your mortgage, and going through the mortgage shock that we had after the Liz Truss situation, and people were getting their mortgages for 6.5% or something ridiculous, and then now coming 2 years later and refinancing on large amounts of debt, personal debt.

Yeah, absolutely. And much like with a mortgage, if you're thinking, gosh, it's expensive at the moment, uh, but I think I could be able to refinance. What you want to do is you want to get a very, very short fixed deal, which has limited or zero refinancing costs, right? So you want to prepare yourself for that moment where you think you can get out of this horrible instrument without incurring too much cost. And that's exactly the way that private equity firms will approach their funding plan in times where debt is very expensive. I'm willing to do it at the moment. 'But I want to make sure that when things go well, I'm not going to be stuck with this extremely expensive instrument with massively punitive exit fees for refinancing.' So that's the way that I would be viewing it.

Okay. Insightful as ever, Stephen. And what I'm going to do is I'm going to put a poll on this episode and it's going to be about Jaguar, copy nothing, rebrand, genius, Or in the words of Nigel Farage, go woke, go broke. They're your two options. We'll put it up there. We want to know what you think. But Stephen, thanks as always, and, uh, have a good week ahead, everyone.

Thanks, Ant.