M&A Explained Part 3: ESG Deals & Why Bankers Love Joe & The Juice

Welcome back to episode 3 of our 4-part M&A series. Just to recap, you can always go back on your preferred podcast provider and listen to part 1, Economies of Scale and Reacting to Competition, part 2, 3 Reasons for Making Acquisitions, and today we're going to talk about buying to boost ESG. And I know it's a particularly An area of specialism of Stephen, perhaps you can introduce in a moment, Stephen, your background in some of that area as well to give some context. And we're also going to talk about cashing in from underperforming companies. So to give you a flavor, ESG through the lens of the latest Glencore deal to buy the coal division of Canada Tech. We're going to grab a Joe and the Juice together with our private equity buddies to talk about that latest deal, which was valued that company at $600 million. And then we're going to explore why Germany are looking to acquire Dutch-owned Tenet to shore up national security. What is that about? So hopefully you can explain. So, um, perhaps, yeah, Stephen, a bit of context now. I know you've, you've been around the ESG space.

Yeah, yeah, thank you. And this is good, this is going to be a good podcast because we've got three very different themes, 3 different reasons why a company might acquire another company, or even a government, a government might acquire another company. So my background in ESG, I actually started a company that used machine learning and artificial intelligence before it was cool, uh, to help provide sustainability data to asset managers. And as I think we all know, ESG, environment, social governance, is, is increasingly a hot topic amongst investors, amongst institutional investors, pension funds, and their big asset managers and things like that. So companies are positioning themselves to receive the inflow of asset management dollars that is associated with positive ESG ratings and positive ESG performance. So, you know, this is something that's relatively close to my heart, and I kind of shivered when I started introducing this story to you. Putting Glencore and ESG and coal mining all in the same sentence, yeah, sent a shiver down my spine.

Yeah, I mean, I, I was going to say, I think that's probably where we need to start, is just make a little bit of sense about how does that all then as a consequence fit into ESG? Because I think most people will think that that's just not the case, but I know that there's a pathway that Glencore wants to go on for the future.

Yeah, so this is a bit of a strategic deal, and, you know, the headline is that Glencore buys coal mining business indirectly to boost its ESG rating. And you think to yourself, there's not— there's nothing really worse than coal, is there? Surely from an ESG, the environment part of the ESG perspective. But let's delve a little bit deeper. So the acquisition itself is the biggest acquisition that's come out over the last week, so it's definitely worth talking about. This is Glencore buying Teck, P-E-C-K, the Canadian mining and metals business, buying the coal division of Teck for an enterprise value, a total valuation of around $9 billion. They're not actually buying it just themselves. They're paying about $6.9 billion for 77% of the company with Nippon Steel, steel being the operative word. We're going to talk about that in a minute, and POSCO, taking 20% and 3% respectively. Now, this is really interesting because Glencore historically has made the majority of its profits, and it is a profit engine in the FTSE 100. It's made the majority of its profits from coal. Coal has been a massive part of its business. In fact, I remember back in 2013 when it bought the company, the coal miner Xstrata, for $90 billion. Again, slightly before ESG was quite as central as it is today. But coal has been one part of Glencore's business, thermal coal, which is used to generate electricity, and then coking coal for steel production. And then the other side of its business has been the slightly greener, quote unquote, um, copper mining and metals mining, actually the types of metals that you probably need for a green energy future. The problem that Glencore's had over the last few years, from a valuation perspective, and from an ESG ratings perspective, they have been lumped in— to excuse a pun— they've been lumped in with the coal manufacturers and the coal miners, whereas they want to be seen as a metals miner that is more ESG-friendly. So why do they buy a coal— why do they buy a coal division? Um, so what their plan is, is they're planning on buying this coal division, linking it up with their existing coal mining business, packaging that massive coal entity, coal mining entity, together, and then listing that separately, effectively washing Glencore's hands of the coal business whilst also creating a business that is big enough with Teck's mining division, uh, added on, big enough to float independently on the New York Stock Exchange and in Johannesburg and in Toronto within 2 or 3 years' time. So what's that going to do from a shareholder's perspective? Well, as a Glencore shareholder, I will receive shares in this new entity, but it's a separate entity, so it shouldn't necessarily affect my ESG rating. I could sell those shares if I wanted to. The coal mining company is a pure play cash generation coal company that's not even trying to do anything from an ESG perspective. And then Glencore gets to be a smaller but more ESG-friendly company that is focused on its core metals mining operations and therefore should receive the valuations that its peers BHP and Rio Tinto and the Anglo American are receiving because they're not weighed down by the coal mining business, which no one really wants to invest in.

Hmm. Well, question with ESG, do the goalposts move and is there a close association with the political environment of the time? And so if you're trying to execute these more medium-long-term plans. Is there any, like, tail risk here of all of a sudden the benchmarking or the requirement changes and your strategy is kind of diverted?

Yeah, I, I think, I mean, ESG ratings do change. They are a, a kind of moving feast, but they, they change around the edges. And I think it's a relatively straightforward play from the management of Glencore, and they've been talking about this for quite some time, to to acknowledge that coal is not going to boost their ESG ratings. And if anything, coal is going to be an ever further worsening of their ESG ratings. So I don't think strategically the benchmark is going to move such that this doesn't make sense. And actually, we talk about this quite a lot on the pod, the, the market's reaction to this announcement TEC, the Canadian mining company, rose 2.7%, and Glencore actually rose over 4%. So the market kind of figured that this was a sensible potential win-win, and they can see the light at the end of the tunnel. And just to give you an idea, Glencore currently trades at just over 7 times on a price-earnings multiple basis— not very high— whereas its peers as I said before, BHP and Rio Tinto trade between 12 and 15 times. So that is a huge multiple expansion if Glencore can get itself out of the really dirty stuff. Investors probably are not touching Glencore because of the coal mining operations and move themselves more into a copper and nickel and cobalt company, which actually you can make the argument about electrification of batteries and things like that.

That's fascinating and definitely given your perspective in particular. But let's move on then and let's talk a little about two private equity firms. And I like this story because it's something that I think most people have encountered as a brand or as a product in terms of Joe and the Juice. Certainly if you live in a major city in the UK, but, well, they're global these days. Um, but I like it because people will know that, but they wouldn't have heard of these two private equity funds, I'm assuming, because they're not the ones that you normally hear of. So yeah, what exactly is going on here with Joe and the Juice?

Yeah, Joe and the Juice, this was our, this was our deal of the week. And I've just been thinking about this, I've got a question for you, Anna. How much do you reckon The Office the Amplify team spends on Joe and the Juice every week? Can we extrapolate a valuation based on our expenditure? What do you reckon?

I'm gonna say no comment because I don't want to appear that I'm some, uh, I'm a person who flutters away money on coffees, uh, Joe and the Juice. Uh, I hand ground them in the office and I distribute accordingly the coffee for everyone. So yeah.

Yeah, exactly. Judging by the amount of Joe and the Juice, uh, kind of, uh, coffee cups that I see around, I reckon we probably prop up the bank branch pretty, pretty nicely. But anyway, so Joe and the Juice. So this is a Danish company, uh, that is— that's obviously expanded into Europe and it's expanded into the US and, and, and also into London. So they have been, uh, they've had a a 30% ownership stake from a US private equity firm called General Atlantic. Now, General Atlantic, they're actually relatively well known in the tech private equity space and in the tech investing space. They have over $70 billion of assets under management, and they're quite well known for making big bets on the likes of ByteDance, another big tech company. So this may well be a slight divergence for them. But Joe and the Juice, the high street coffee, juice, lunch, kind of like a slightly more upmarket Pret. So they've just been bought, or a majority ownership from General Atlantic, from the Swedish company Valerdo Partners, which I had never heard of. This is quite interesting, and I just want, and I want to link it back to one of the reasons why a company would acquire another company. Now, often one company will buy another company because it just makes financial sense. And so much of deal flow and so much of deal volume and value, uh, involves a private equity firm. And remember, private equity, unlike a strategic buyer, which is what we call another corporate, private equity is all about making a return on their investment, making a return on the capital that they've invested. So General Atlantic has clearly identified Joe and the Juice as an opportunity to increase its return on investment. So how does the private equity firm do this? Well, they probably got two tactics in this, in this example. So the first is Well, let's expand the top line, right? So let's get Joe and the Juice out to as many countries as possible. Let's increase its online presence. I think 30% of the business is now online and delivery and collection.

I couldn't believe that when I saw that figure. I was like, what online? No, but then I had a quick peek and I was like, are they talking about the mugs and the t-shirts and all that sort of stuff? Like, what is this digital? Business. I wasn't even aware of it.

Yeah, it's pretty amazing. And, and actually, it's a reason why this feels more attractive and feels maybe more tech-focused than maybe we first thought. So it's got the online presence, and it's also got the franchise business. You know, the, the likes of Subway and McDonald's and Burger King, they're all franchises. You own the core intellectual property, and then you franchise your name and your process out to individual buyers of that franchise. It's actually a much lower risk way of expanding. So reason number 1 why General Atlantic might want to get involved and buy this company: top line growth. Reason number 2: bottom line growth. And obviously with top line hopefully comes bottom line, but what private equity firms tend to like to do, especially in these types of companies, is really rigorously address cost bases. There is— so mid-tier restaurant chains in the UK, whether it's Prezzo or Pizza Hut or Pizza Express, uh, or Byron Burgers, they've all been, uh, they've all been bought at one point or another by private equity because private equity tends to see these organizations, these restaurant chains, as having quite a lot of fat, quite a lot of cost that can be trimmed. So this is another great example of private equity firm that just wants to get a return on capital, looking at a company like Joe and the Juice and thinking, I can increase the top line by expanding and by nailing that online. And then I could also increase the bottom line because we know that there's probably some efficiencies to be made. There are certain restaurants or certain areas that can probably be improved. Classic private equity playbook.

Yeah, I was just looking at an article and it was talking about the different types of businesses. So you mentioned kind of some of them that like Pizza Express, Byron. I remember the explosion of Byron Burger because I used to live on Hoxton Square and I remember the first one and it was like, this is amazing. And all of a sudden they were everywhere and then they were nowhere because it seemed like they got juiced. And got big and then just blew up like so many of them, I guess, do.

Yeah. So, so the, the problem here, and this is a, this is a trap that everything from Jamie's Italian to, to Prezzo to Byron Burgers has fallen into, you get, you, you find a, a slightly winning formula and you launch your first Pizza Express, then you launch your second, then your fifth, then your tenth. And it's likely that those first 10 Pizza Expresses are going to be in the highest footfall, best areas. And then a private equity firm comes along, goes, I really like your model, let's take it across the country or across Europe. We're going to buy you, we're going to pump you full of debt, and we're going to bring you to 500 places, right? And it is likely that the 500th restaurant is going to be less profitable than the first or second, the flagship restaurants. And now the problem with these types of businesses is they are on the very bleeding edge of of living, of inflation, of economic downturns. So as a, as a bellwether, just check out your local Pizza Express to see how busy it is. And if the company's trying to service a lot of debt because it's owned by private equity that's been funding this expansion, then very, very quickly these companies can run into trouble repaying their debt and servicing their debt. Now, the reason why I think Joe and the Juice might be different just to kind of paint a bit of an optimistic picture, is because firstly, the cost structure of a Joe and the Juice is very different from a Pizza Express. You don't have table staff, you don't have the size of venue, the heating bills and the business rates and things like that. And you also have this online presence, uh, delivery, and taking advantage of Deliveroo and things like that, and the franchise model. So maybe there's a little bit more sustainability here in terms of business model for a private equity to get there, to get their teeth into, as it were.

No, you're absolutely right on that, on that last point. I guess you never really kind of think of that, but strategically, yeah, the, the running of that shop is so different, that café style. It's like if it wasn't, if the people weren't so cool and so calm, I reckon you could have 2 employees and run the entire café, even at the bank one. Whereas, yeah, because everyone just comes in, buys coffee, sits down, there's no other interaction, is there?

So yeah, yeah, and it makes sense. And you will see this, you know, during— and we're diverging from the M&A theme, but we're certainly talking strategy here. You can see this in other high street restaurant chains, you know, Nando's, don't think it does table service. There are going to be, uh, there are going to be restaurant chains that cut down the size of its menu, of their menu, because, you know, the cost of variable supplies and lots of different supply chains coming in, maybe they're going to slim down. I think Franco-Manca is already doing that. in the London chains. So you see, it's a really interesting industry and one that private equity tends to love, but then also tends to mess up quite a lot of the time as well.

Yeah, cool. Well, look, let's move on to the final one, which is national, national security, and this idea about governments coming in to acquire firms, I guess, in their national interest and I thought, yeah, this is completely different from, from what we'd normally talk about. So, so what's happening on this one?

Yeah, this is, this is straight from left field. I think the, the previous example was about as standard as you're going to get. We see private equity deals happening all the time, and the rationale seems pretty logical, you know, invest at X and make Y money, uh, whereas this is totally, totally different. So reason why one company might acquire another company. Well, this is actually a reason why one government or one country might acquire a strategically significant or a strategically important asset. Now, if we all remember back to our economics or, you know, maybe our politics A-level or, or equivalent, I think we remember great waves of privatisations across Europe, but especially in the UK, where nationally owned and nationally controlled businesses ended up being sold off to become private companies. You know, British Telecom, the Royal Mail, British Petroleum, etc., etc. So getting rid of nationalised assets and privatising them, the logic there being that with the profit motive and with a private structure, these companies will be bigger and more efficient than they would be under a nationalised government-run control. So to hear this story, Germany acquiring Dutch-owned Tennent power grid for up to €22 billion— Germany is not a company, and this is the opposite of a privatisation. This is a nationalisation. Now, the Dutch-owned Tennent grid is the largest power grid in Germany. And actually, the Tenet grid is owned by the Dutch government. So this struck me as slightly strange. And there's a lot going on here that we won't get into on this podcast. But it's slightly strange that you've got a Dutch state-owned company operating the largest power grid in Germany. That's strange. So what's Germany doing? And this is in response to, uh, energy insecurity, especially post-Russia and Ukraine. And we all know that in the months after the invasion, it was Germany that was probably right at the, you know, the sharp end of energy insecurity and reliance on Russian gas. So this is part of a move by the German government and by Germany to increase the energy security and rely on less external and foreign stakeholders to secure their grid in their country and actually give it the power to, uh, retrofit its grid for green energy and for wind power and for things like that. So it makes sense, but this is definitely you're not going to see a lot of these types of acquisitions or transactions.

So in this scenario, do the Dutch have a lot of leverage? So away from just pure cash, if it's on a state level, is there a lot of horse trading around trade more broadly between two nations that goes on perhaps behind closed doors? Aside from what the, the bankers are dealing with, with the numbers?

Yeah, this is, this is going to be one of the most complex negotiations that investment bankers have had to deal with because your incentives are not, as you mentioned, as you rightly mentioned, the incentives are not simply financial. So there's going to be a valuation that is a market valuation based on the cash flows of the company and based on comparable company data and all of that kind of stuff, but also you're going to add in the national security premium. And this deal's been rumbling along for quite some time, and it's been haggling over price that's done it. I was just looking at, uh, I was just looking at the state of German politics at the moment, and there is a three-party coalition. So we always like to spare a thought for the bankers. Spare a thought for the bankers that are used to dealing with a CEO and a company that kind of knows what they want. Suddenly you're dealing with the German government, and not just that, a three-party coalition that have all got their own agendas and incentives to get this deal done in a certain way or shape or form. So this, yeah, this has probably been years in the making, and, and that number has been well negotiated.

Just from a banker's point of view, then knowing upfront the complexity of this, does that change your fee structure or is the fee structure just fixed and it's a timeframe project-oriented in a sense of deal execution? The complexity of the nuance of the deal doesn't really come into it and therefore it's just tendering and the country of Germany will just go to someone else if you are not going to run it.

I think, I don't know enough about the way that this works just because it's so atypical, but my assumption would be the fees would be higher. And there will only be certain banks that have the expertise dealing with governments and dealing with government-backed assets that could probably charge a premium because they've got the expertise. And whether they go to— whether the German government feel comfortable only going to a German bank, going to a Deutsche or equivalent, maybe, maybe that's got something to play as well. But yeah, I can imagine this is probably a pretty hefty payday and also an awful lot of work for the bankers.

Yeah, yeah. You mentioned that the deadline's particularly tight, so you can only really whip a horse so much to run so fast. So what happens internally? Just give me an insight into a bank. Like, there's obviously no one sleeps, no one goes home, but there's only so much that so many people can do. So What, what happens in this scenario?

Yeah, so there is a deadline of the 22nd of November to get this deal agreed and across the line. The deadline is pretty hard because it's the Dutch general elections, and, and this deal has been working towards that deadline for quite some time. So to put it in a normal M&A context, there may be a deadline for, um, for the first round of bids if you're on the buy side and you've got to get in your best offer by the deadline that has been set by the counterpart bank working on behalf of the seller. And that is, as you said, there's only so much you can whip a horse, but my gosh, the bankers try. And, and it is a function of, we just need to get this done. It, this needs, this needs to happen. We need to follow the due process. We need to get the valuation in. We need to get all of our ducks in a row, but this just needs to happen. So we almost kind of bend time to hit those deadlines. And yes, you can bring in other people from other teams, but it is often a function of, you know, who can stay up the latest, who can last the longest. And we, as you know, at Amplify, we do these flagship 24-hour sprints where we where we set a challenge at 12 o'clock on, on one day, and then, and then we say the deadline is 12 o'clock the next day, and you've got to do all of this work. And it often involves a very late night, uh, for the participants. And that's what it feels like. The deadline is hard, and we just have to work towards it and get, get it done.

And, and just to, um, make those bankers feel better, I was reading yesterday there's a new US recruitment survey that came out where bankers' bonuses are gonna be down 25%. But before we start crying for the bankers, they did have an extraordinary 2021. So, one of the things I was trying to make clear, just to finish on that point, for young people thinking about careers was that it's, it is bumpy, but it's bumpy up and down. So actually, you know, a, a bonus isn't, a given, it's made almost. And so you kind of level it out, and if you just take a longer time sample, actually it's very healthy, let's say. It's just that it goes up and it goes down with the economic kind of climate. So I don't think people should get— because I know as a young person, if I read that headline, because obviously it got juiced by all the relevant media outlets as being very negative, and it could be perhaps quite off-putting, I think, for a young person. But I don't think they should read it that way is what I'm trying to say.

Yeah, I think that is easier said than done.

And once you get, once you've lived that lifestyle and then you can't come down, but yeah, you're going to have to, I'm afraid.

If you hang around the watering holes of Canary Wharf and Bank around bonus season and you try and do a kind of word cluster or a conversation cluster. The biggest conversation cluster will still be about bonuses, both leading up to, in anticipation, and then afterwards, in usually disgruntled in some way, shape, or form.

Well, my experience from dealing with, uh, people, it's never enough, and that's a problem. All right, well, look, let's wrap it up there. Um, as I said, this is episode 3 of 4. So there are two others. Go back and listen. They've been super interesting for me to just take part in, listen to Stephen's wisdom. So I'm sure you'll enjoy them. I'm also gonna add a poll to this. No disclosure yet of what it is, but you'll just have to look and take part. It's a new feature on the Spotify app particularly. So yeah, keep an eye on that and don't forget to give us a rating and follow the podcast. That'd be great. Thanks very much, Stephen. See you next time.

Thanks, Ant.