The Deal Room: Manchester United And The Lure of Trophy Assets

Hello and welcome back to the latest episode of The Deal Room, where I'm joined by our Director of Corporate Finance, Stephen Barnett, where we dive into some of the biggest deals that are ongoing at the moment. And one of the main objectives here is to bring these stories to life a little bit. And in terms of just giving you a heads up of what we're going to cover, going to talk about Manchester United— that might make— turn people off very early, or turn people on, I'm not sure— when I say Manchester United, the football club, uh, LSE London IPO market. I know it's something Piers and I have talked about, but definitely interested to get your take, Stephen. And then also JP Morgan and the First Republic transaction that happens soon after the collapse of SVB just a few weeks ago. So just given these topics then, they're not breaking news per se, but why are we going to discuss these ones today with you, Stephen?

Yeah, yeah, it's a really good question, uh, and thanks for having me on again. These aren't breaking news stories, but they are ongoing stories, and they're indicative of some of the trends that we are seeing across both the IPO market, which is the second story that we're going to cover, and also the M&A market as well. So the Manchester United saga has been something that's been dragging on for quite a few months, and we're not yet at the end of the saga. Actually, quite frankly, by the time you listen to this, podcast listener, there may have been a preferred bidder. So this is kind of as live as it gets, although the news has been rumbling on for a few months. And what we're going to do with the Manchester United story, you know, even if you're not a sports fan, is we're going to break down the deal. We're going to try and figure out the financials, trying to work out whether it was a good deal for the Glazers back in 2005, and whether it might be a good deal for the potential buyers. So definitely taking off the pitch angle as opposed to the on the pitch angle, which I don't think I'm able to discuss.

Okay, cool. So maybe you could set the scene for us then. Just give us a bit of a short history of time of Man United.

Yeah, this is a brilliant story. Researching this story, I've absolutely loved it. You could almost create a Succession I know that we're quite into that TV program at the moment, but you could almost create a Succession story out of this. So maybe they will, who knows? So Manchester United, I think we all know, one of the largest football clubs in Europe, in the world. In the 1990s, if you can remember that far back, it was all powerful in the UK. It won the treble in 1999. It was considered to be one of the premier sporting brands. Globally, just in the time that the Premier League was starting to kind of get its tentacles out in the US, cable television, Sky, all of this kind of stuff. In fact, by the late 1990s, Man United had already received quite a few offers to buy it, including from Rupert Murdoch, BskyB, again, another succession link. But in the, but in the early 2000s, Manchester United were looking for new sources of capital. The Glazer family, a US family that already owned sports franchises over in the US, so kind of knew the business model, started building up their stake. They took their first stake in 2003, small percentage, built it up, built it up, built it up, and by 2005 they built their stake in the company up to over 75%. These are secondary market transactions, buying off existing shareholders within Manchester United. Manchester United were listed at the time. So by the time they got to 98% ownership, you have to make an enforced takeover of the whole company. So that's what they did in 2005. So far, so vanilla. This is a takeover. This is a transaction. We all know, you know, we all know what it's all about. The issue came— remember, this is a football club with a very loyal fan base. The issue came when it came to funding this deal in 2005. Man United, Man United never had any debt, never had any debt on its balance sheet, ran relatively frugally, relatively sensibly. The Glazers coming in and buying the company for about £800 million saddled the company with about £660 million of new debt. They invested themselves about £270 million, and they refinanced some of the existing liabilities of the company. So the fans were really upset at this. You're buying our company and you're effectively saddling, you know, our club that we love with debt in order to potentially get rich yourself. Bearing in mind some of this debt was extremely expensive. So it ranged— the £660 million of debt ranged from about 8-9% notes to 16.25% payment in kind notes, paying 16.25% interest. That is a lot. That is really, really punchy, and it's— and it puts a massive weight on any business when you've got those amounts of interest payments to pay every single year. The deal was also structured on the sharp end of leveraged transactions with kind of very Glazer family-friendly provisions. So 50% of net income could be paid out as dividends. The, there was a provision to buy the Carrington training ground of the Glazer family for £95 million. There was a management fee that they were paid, that was paid to the Glazer family every single year. This feels pretty good for the Glazers, pretty bad for the fans. Fast forward on 10 years, or maybe even 15 years, and from 2013 to 2023, Man United hadn't won a Premier League title, which I think for fans was pretty shocking. A little bit of analysis from the blogger Swiss, uh, Swiss Ramble, very kind of good football business blogger, said that by August 2022, £1.1 billion had been taken out of Man United in the form of interest payments, dividends, management fees, etc. At the same time, is where the other half of Manchester starts smiling. At the same time, their rival Man City, the owners of Man City, had actually invested an additional £684 million in the club. Who's won all the trophies? Manchester City, right? So in short, Glazers buy in 2005, extract quite a lot of money out of the business. The business itself starts going backwards. Performances on the pitch are poor. Performances off the pitch are also very poor. Their revenue had dropped from 2019 to 2022, and their earnings before interest, tax, depreciation, and amortization, their EBITDA, has dropped from $186 million in 2019 to just $81 million in 2022. So from all perspectives that you look at it, I haven't been to Old Trafford recently, but supposedly it's, it's looking pretty tired, hadn't had a lot of investments. From all perspectives that you look at it, the Glazers have come in, bought a company, saddled it with debt, extracted a lot of value, and the asset has actually got less valuable from an earnings perspective, from an infrastructure perspective. Et cetera. So why do, so why do people want to buy it?

Yeah, I just, just thinking that they're trying to milk the best of this situation. They've come in, done what they've done, extracted that cash as you say, and then given the somewhat euphoria on the back of what the Chelsea deal, they're just looking to move as fast as possible at this moment in time. But there comes one of my questions. So, so the kind of their exit out of this trade or investment, so to speak. I always get a little bit surprised by when, you know, this isn't like executing a trade in markets where you can just click a button, let's say. Here kind of like reminds me of like the IPO of Deliveroo. It was like you had all the US delivery companies go very fast during the height of the pandemic. They, they signaled they were going to do it. They were so slow in executing that. Almost feels similar as Man— Manchester United. They couldn't keep pace of how quickly the transaction of Chelsea happened. They kind of lost the moment now. So now what?

And it's a really interesting point. And I think Chelsea— I don't know whether you would say this is a benefit, but they were very time-bound. Roman Abramovich, uh, previous owner, had to sell by a certain date. Raine Bank, which is the company that's— which is the financial advisor— Raine Group, sorry, the financial advisor running the deal for Chelsea and actually for Man United as well. They actually got 200 longlist bidders for Chelsea within 7 days. It was a really quick process. Narrowed it down to 6 or 7, narrowed it down to 1. That deal was done for a total of £4.25 billion. That's a really, really big deal. Convert that into dollars, you're thinking about $5.5 billion, which is one of the most expensive sports franchises ever. If I'm Man United, or if I'm the Glazer family, I'm thinking to myself, well, we're a bigger club than Chelsea. Yeah, look at our history. Look at all the titles we've won. Look at the global following that Manchester United has. So if they're selling at $5.5 billion, one of the things that we like to do in the world of M&A we like to do comps, comparable company and comparable transaction analysis. So if I'm at Raytheon Group and I'm advising the Glazers, I'm saying, look, you know, Chelsea was a, was a, uh, a desperation sale. There was a very, you know, there was urgency to it. Maybe they didn't even extract the most value out of it. It was a competitive process. But Man United, you should be able to get, you know, a 20 to 30% premium on Chelsea. So why don't you Glazers start looking at selling for $7 to $8 billion, you know, £6+ billion. This feels more like it for a company of your size. So it was in November 2022, 3 months after the Chelsea deal, that the Glazers announced that, look, you know, we're putting this asset up for sale.

So then how, like you were talking about from a financial perspective, revenues are declining from 2019 to 2022. There's kind of degradation in the physical assets that they own as well. So as the banker, I understand you try to engineer the focus on the competitive kind of sale process being run and the price that was executed at. But how do you manage the other financials then that are black and white figures? Because the other stuff's kind of the gray matter almost, it feels like.

Yeah, it's a really tough one. I mean, this is not like a sports franchise, is not— in some ways it's like a normal business, but in some ways it's absolutely not. So Manchester United brand value of the club, it's considered, depending on how you value brand, upwards of £2 billion. So that's what you put on that intangible assets. So even if their physical assets have degraded their intangible assets have grown. Its revenue stream, although it's been decreasing partly because they haven't got into the Champions League, is still very, very high quality revenue. And there are 3 times as many— demand for season tickets is still 3 times higher than what can be supplied. You know, you're restricted to 75,000 people in a stadium. So the quality of revenue and the quality of brand is still quite high. I was listening to a podcast yesterday about where do billionaires park their money. Great. Not particularly relevant for you or me, but a sports franchise is not the worst place to put your money. The returns seem— the value of these franchises keep going up. The value of the television deals keep going up. The value of the sponsorship deals keep going up. So if I am a billionaire, and we're talking billionaire stakes here, you know, we'll talk about the runners and riders in a second. If I am a billionaire, you know, there aren't that many places to park my money where I can have the kind of psychic benefits of owning a sports brand, you know, of owning something quite sexy and fun. And also, I'm probably likely not to lose too much money because Man United, you know, touch wood, are not going to get relegated, you know, they're a pretty robust sports team. So maybe, you know, there's a brand trophy asset quality of revenue premium that we're actually putting on, you know, what is a pretty averagely run company, right?

So in my mind then, you just said trophy asset. When I hear those words, I just think, right, I'm going to go to my Rolodex and I'm going to go straight to the, the Perth, the golf the, the Middle East. And that's, that's where I'm going to concentrate my focus because, what, presumably Russian buyers are out the question now, just given the situation geopolitically. So Saudi's willing and open to get the checkbook out, particularly with that Vision 2030 they have with trying to have a broad appeal on a kind of more globalized level of diversifying their appearance as well as their economy. Is that the go-to place to go look at the Qataris, look at the Saudis, that type of market for this type of deal?

Yeah, I think, I think you've got two places to go hunting. You've got, you've got the Middle Eastern money, you know, and it's been, it's been put to good use, uh, in the likes of Manchester City and recently with the acquisition of Newcastle, uh, by Saudi-backed consortium. So you've got that, you've got the Middle East pool of capital. And that's actually where one of the, one of the two main bidders has come from. But I would always— I, I would also go hunting in the States because, you know, there's a few reasons behind it. You know, billionaire— there's plenty of billionaires in the States. They are very used to owning sports franchises. They know what it's all about. That's why you have U.S. interests coming into Liverpool, into Arsenal, and obviously into Manchester United. We see very favorable exchange rates at the moment. So your dollar is going a lot— when the Glazers bought Manchester United in 2005, they bought it for £800 million, which is $1.5 billion. Boom, 2 to 1. So now it's 1.2 to 1. You're getting a lot more pound for your dollar, and suddenly assets which we think are quite expensive suddenly look quite well priced over in the States. And then you've got the third class, you know, which is where the other, you know, the other idda has come from, which is your homegrown billionaire that is ostensibly or purportedly a Manchester United fan. And this is Jim Ratcliffe, the owner and founder of the INEOS Group, who's a die— again, he says he's a diehard Man United fan, but he also put a bid in to own Chelsea a few months ago. So I don't know whether he bleeds blue or red, I'm not sure, but He bleeds money.

That's what he believes.

He bleeds money. Yeah, exactly.

But, um, okay, so let's look at the actual— if the Glazers managed to get this deal away, let's say, has this been a good investment for them? What do they come out with? What does that look like?

Yeah, so let's talk about this. So just maybe stepping back, there are two bidders in the race at the moment. You know, we've spoken about— we've already spoken very briefly about Jim Ratcliffe, he has put in a, it's been a very protracted process. It started in November 2022. Glazers are playing it. They went from first round to second round to third round offers, trying to play a little bit of competitive tension, trying to play Jim Ratcliffe off against Sheikh Jassim, who's the Qatari bidder. And they're trying to, basically, from what I understand, they are trying to get as much out of this as possible. So they wanted $7 to $8 billion. It's likely the bids that are in at the moment and the structure of the two bids from Radcliffe and Jassim are slightly different in terms of Radcliffe is just offering to buy out the 69% stake that the Glazers own. Jassim wants to take the whole thing off the table, kill the debt, and pump some money into the club. So I think the fans tend to prefer the Jassim bet, uh, the Jassim bid. But anyway, so we're now circling around, instead of the 7 to 8 billion, which is what the Glazers wanted, we're now circling around the 6 to 6.5 billion. Bearing in mind that this is an enterprise value of 6 to 6.5 billion, which means that includes the equity value plus all of the debt that is on the balance sheet of the company. Bearing in mind the company is trading at a market cap of about $3 billion at the moment, it's a pretty hefty premium. So let's see how, yeah, let's see whether this is a good deal for the Glazers. And I'm, I did a little bit of work on this and I'm kind of viewing this as a private equity transaction because it shares quite a lot of the similarities of a typical PE deal. Organisation come in, they put a lot of debt into the, into the company, and they hold it for a period of time, and then they sell. Now, obviously, many private equity transactions involve a lot more hard work to improve and turn around the company. This doesn't really, it doesn't really map in this scenario, but let's have a look at it from a financial perspective. So the Glazers put in $500 million, about £270 million back in 2005. So that is 18 years ago. You've got to think about the amount of time that they've had this money in this particular asset. During the course of 18 years, and I'm just looking at my little spreadsheet that I've done, looking at the money that has been taken out, they took out $170 million from IPO proceeds. Uh, back in 2012 when the company listed on the New York Stock Exchange. Their own share sales throughout the course of the last 10 years have totaled $570 million. That means that they did own 100% of the company. Now they now own 69% of the company. The dividends that they've taken out has totaled about $200 million, and management fees has totaled just under $100 million. So, and also, if they sell for $6.5 billion, they're going to get about $3.5 billion out of their— the sale of their 69%. Add that all together. Let's see if I can do the math here. Their net proceeds after, you know, taking away the initial $500 million, their net proceeds are almost $4 billion. So $4 billion made off of Manchester United over 80 years. The two metrics that we're going to look at here, bring it back down maybe a little bit more to the textbook, are money on money and internal rate of return. Money on money is basically how much have you got out over how much have you put in, your money-on-money multiple. Typical 5 to 7 year private equity transaction, you would hope for your money-on-money or money-on-invested capital multiple to be around 2 or 3 times. You put in 100, you get 250 out. That feels like a good deal over 5, 6 years. Over a much longer period, the money-on-money multiple in this instance, again, this is very rough, calculations is about 7.7 times. That's pretty nuts, right? Yeah, they have made 7.7 times their money.

Wow.

But they've held it for 18 years. You know, time is money, time has a value. And therefore the second calculation that we do is the internal rate of return, basically looking at the annualised returns spread over the 18 years. It's all well and good making a lot of money, but if you make it over 100 years, it's less powerful than making it over 5 years. You're not recycling your capital. So the IRR for this deal— internal rate of return, average annual return over 18 years— about 15%. Again, not bad. You know, private equity would, would be pretty happy with this type of return. So the Glazers, let's think about this, they're not well liked by the fans at Manchester United. I think at the end of every match there's a chant saying that the Glazers should leave, and lots of banners on the stands and things like that. But they're pretty happy. They've made a cool 7.7 times money on money and a 15% IRR. And they get to go back to their sports cars and their sports franchises in the US. Job done.

Yeah. And with as much sympathy for the fans, that period, I guess, like you briefly mentioned at the beginning, the shift we saw with, let's say, the Premier League as that specific sport and the transition of that new premiership model, if you like, which took football to the next kind of level and international, isn't it? Isn't the market only going to become more business-oriented because now the reach is so globalized? You're getting more affluency and abilities through technological means for people in China, India to get connected as new customers to bring in to this, particularly, I'm talking long term. New advents and more access through Web3 and things like that, different means to interact with sport. So as much as I could sympathize with the fans, I guess what I'm saying is this doesn't surprise me at all, this type of, uh, process. And am I right in thinking that this is probably going to happen for every big sports club in pretty much every major mainstream sport? Yes, it feels inevitable.

It's a bit—

it's such a good business.

It kind of is inevitable, and you see this at the lower levels and at the higher levels, you know. So there's, you know, the Rugby Union is private equity backed, the, the, the Premiership concept is private equity backed. There are plenty of clubs in lower leagues that are bought by smaller private equity firms or maybe slightly less wealthy individuals with the intention of taking advantage of this corporatization of the business model of sport. And it's been happening for years. And, you know, the US has always been relatively franchised and corporatized in its sporting model. Interestingly enough, the only way that I could push back on that from a UK perspective, maybe from a European football perspective, is the blocking of the European Super League. Happened last year. For the European Super League, the intention there was to guarantee revenue streams for these major football clubs. At the moment, Manchester United aren't going to get relegated, but there's a big difference between getting into the Champions League and not. It's a big difference between coming third and coming seventh in terms of the share of the TV subscription, the TV licensing wallet that you get. So the Glazers, being used to the franchise model in the US, you know, really wanted stable, guaranteed, you know, next 20-year income streams. This got high-boshed partly due to fan pressure. You know, it became a government issue. You know, these are our cultural heritage, this is our these are our cultural assets. And the whole thing got blocked. So maybe there is a limit that we are willing to reach. You know, the Saudis can buy Newcastle, the Qataris can buy Manchester United, but we're maybe not quite at the stage that the whole model of football becomes truly corporatized.

Fascinating. Yeah, yeah. Great to get the breakdown. And I'm just conscious of the time. I know we've got two other subjects. So let's let's try and, um, whip through these other two quite interesting areas. And in particular, it's something that Piers and I had talked about before because there's lots of headlines where companies recently have favored going to New York over London, listing on the LSE. And so yeah, just wanted to get where you're coming at this, this story from.

Yeah, so the reason why I picked upon this story was I was reading brilliant article in the FT over the weekend. And again, for any student looking to, to kind of turbocharge their skills, the FT is still a very good place to go. They did a brilliant piece of analysis on the 50 European companies that are most at threat or the most likely to list in the US. Stepping back a little bit, what does this mean? So we've got stock exchanges across Europe. The London Stock Exchange is still, I think, just about the biggest stock exchange in Europe. You've got stock exchanges in Paris and Amsterdam and Germany, etc. And that's where companies go to list their shares, become publicly traded, raise money, have a market capitalization, and do business, right? Pretty standard fare across, across Europe and across the US. What's been happening recently is a lot of companies that are domiciled in the UK, domiciled in Europe, have realized that the US list— that getting a US listing on the New York Stock Exchange, on the NASDAQ, is actually much more attractive for their long-term growth plans. So this FT article looked at the 50 companies that are most likely to flee to the US, looked at 3 different metrics. I thought this was super fascinating. So the first metric that they looked at is how much of a discount do their— do these companies' shares trade at on their domestic exchange relative to their peers in the US market. So if I'm a company in the UK listed on the FTSE 100 and I trade at a, you know, 10 times price earnings or 12 times EV/EBITDA multiple, and I see my peers, exactly the same types of companies, trade at a 15, 18, 20 times multiple, what am I doing? You know, I'm missing out on masses, masses of value here. You know, masses of shareholder returns. Why am I listed here instead of listed over there?

So just, just, just on that point before we go into this, the, the next one, so why is that? Why is there more value perceived in that? Why is it 18, not 10 in America?

Such a good question. And it's all about the size of the market and the liquidity of the market. So The New York Stock Exchange and the NASDAQ are both super liquid, super liquid exchanges. So much money from so many sources floods into these exchanges, as you well know, every single day, creating really, really high-quality pricing, you know, price discovery and pricing. Now, in the UK for example, the liquidity is just not there. And what tends to happen, meaning that there just aren't enough— there's not the volume of buyers and sellers at the right, you know, the right number, the right kind of ticket size in order to create a really good price for it. So looking at the analysis that we've just done, it seems that the majority of the people that are frustrated with the London Stock Exchange Frustrated that, you know, you IPO, volumes normalize at pretty low levels, and it doesn't really move off of a pretty low valuation. Just one stat just to back this up, and I know that this falls more on the Friday side, but you guys maybe can talk about it on Friday as well. The average daily trading volume in London and elsewhere in Europe averages around 0.2% of overall free float. While in the US that figure is closer to 1%. So just much more action going on over in the States, much more liquidity, much more options to boost share prices if good news comes out. Um, it's just, it's just a better price discovery mechanism. And if I am— especially if I'm a growth stock— what I mean by growth stock is, you know, a lot of my price, a lot of my value is future growth dependent as opposed to existing or previous growth, then I'm much more likely to want to go over to the US where they tend to price future growth slightly higher than they do in the UK. And that's obviously what we've seen a number of times and most evidently with ARM Holdings as well.

So we've done the first metric. What are the FT's other metrics they're looking at?

Yeah, good, good, good point. So the second one was the percentage of US revenues. So if you're, you know, if you've got 30, 40, 50% of your revenues in the US and you're listed in UK or Europe, you're going to be thinking pretty hard about jumping over to the end, you know, the New York Stock Exchange or to the NASDAQ. And the third metric is the percentage of North American investors. Combine these three together, the discount, the US revenue, and North American investors, And you've got a bunch of companies that are relatively likely, potentially, or would favor a potential US listing, either as their primary listing or as their secondary listing. It can be listed in two places at once. However, the top 3 companies that they had, Financial Times had on their list, first was a company called CRH, could be 100 companies. A company that actually announced in March that they were going to list in the US, which again got people, it got people slightly concerned.

Are they, are they construction builder?

Yeah, good point. Uh, they're building materials. They're actually, their headquarters are in Ireland, and, uh, their, their, their share price trades at a 47% discount to US peers. But if your share price trades at a 47% discount to your peers, you're kind of thinking, you know, and bearing in mind that CEOs tend to get paid, you know, in the majority in options, share options, kind of, it's a bit of a no-brainer. 58% of their revenues are in the US. It's a no-brainer. They made the jump, right? The next two highest placed on the list according to the FT analysis were British American Tobacco and GlaxoSmithKline.

Oh, there's no way. We, we can't let those jewels of the crown, of the realm, leave the London Stock Exchange.

Surely there's some fresh tobacco industry. Yeah, quite. Um, but you make a really good point. Although logic and pure cold-hearted financial common sense says, all right, GSK, get yourself over to New York, That's not going to happen. Even though it trades at a 30-35% discount to peers, the majority of its employees, the majority of its operations are still in the UK. Quite frankly, the UK government would block it anyway because they need to keep some industry and some, you know, some of our, some of our assets here in the UK. So there's a lot more at stake than just this piece of analysis. But it is a relatively good representation of just how far the US market is in terms of IPOs, in terms of the attractiveness of IPOing in the US market relative to the UK market. Certainly something to think about.

Yeah, another layer I was just thinking there as you were describing it. Uh, yes, definitely. I mean, the number of times I've driven through towns I've never heard of and seen massive Glaxo buildings in the middle of nowhere where there's, I guess, different, different divisions. But the other thing was, think about COVID and think about the lack of supply of vaccines and the battle that was on between where vaccines were coming from, from US-based to European-based to UK-based. So as an, um, a key asset to safeguard against future instances like we had, which was a lack of available supply of vaccine during what would have otherwise been very difficult to obtain that to, you know, reopen the economy and so forth. So yeah, there's, there's so many ways I could see that, um, that would be very challenging. But then, so let's say I'm the CEO of Glaxo, and given what we've discussed, then there's everything in the financial sense is telling me to leave. I know the UK government need me to stay So surely I can lobby some way to get lots of R&D benefits, lots of tax benefits. How can I improve my life then if I'm not getting value, as you said, from those comparables? Let's say, where can the government give me some upside?

Yeah, this is, this is a, this is a great point that happens across all industries. You know, we see this We're seeing this very, very clearly with electric— with car manufacturers deciding whether to put their electric vehicle manufacturing bases in the UK, whether Mini should stay in Oxford and Vauxhall should stay in Ellesmere Port and things like that. And they say, look, we would love to stay. The financials don't make sense. So, you know, if you're not going to give me anything, we're probably just going to go to Europe or we're probably just going to go to the US. So you've got to give us something. The rationale to the government is like, all right, so create 10,000 jobs and probably thousands of other associated jobs through indirect supply chains and things like that. 10,000 jobs equals X taxpayer revenue equals more consumption equals more GDP growth. How much can we afford to subsidize to pay for that boost? Right? So the SKU, you've got a pretty strong hand when you're one of the largest employers in the country. And you can put in plain English or in plain numbers, it makes more financial sense to go abroad. So what's in it for me?

Yeah, it almost feels like a game of chicken in a sense that I actually think that neither the company or the government can pull the trigger. And the reason why I think is the length to execute one of those plans, a plan to shift someone like Glaxo to the US, and then equally the way that politics is at the moment in the UK and just generally the global scene at the moment being quite divisive, quite split. And also governments I think would be quite unwilling to commit to something that's going to take time to play out. Then, you know, I think economically, logically, it makes sense as you described it. But I won't be Prime Minister anymore by the time that comes home to roost. So actually, there's other things on my agenda to get me reelected.

Exactly. Exactly. And as you say, these mega moves take a lot of time. I think, how long has HSBC been thinking about relocating its HQ back to Hong Kong? You know, 15, 20 years? Cool.

All right, well, look, I'm going to set you a challenge now for the final portion of the episode, uh, and let's see if we can do the rationale of the JP Morgan First Republic tie-up. But let's see if we can do it in the next 5 minutes.

Okay, yeah, let's do it. And we'll skip— yeah, we'll kind of— we'll, we'll blur over the backstory a little bit and we'll skip straight to rationale. So JP Morgan, a few weeks ago acquired the assets of a bank called First Republic.

Hey, Stephen, keep going. We can—

we can roll with that.

We can roll with that.

That was just a quick blank. So we've still got 5 minutes. So JPMorgan acquired the assets of a bank called First Republic. First Republic were the third bank in the recent US banking crisis to suffer, basically suffer from a bank run. They reasonably high quality assets that a little bit of contagion from Silicon Valley Bank and from Signature Bank led to a lot of depositors withdrawing, which led to a classic bank run. Which led to the bank effectively declaring bankruptcy and the FDIC, Federal Deposit Insurance Corporation, stepping in and taking— are we struggling from an internet perspective?

Yeah, I think it's actually on my side. It's okay.

Can we mash it together or—

The audio? For sure.

The video.

Yeah, if you're watching this on YouTube, on the video, um, for the speed— so the speed to market process, you're gonna have to just skip through the last couple of seconds and then we're gonna go again.

All right, let's try and go again. So the deal rationale for JP Morgan. JP Morgan is the biggest bank in the world, uh, it's the biggest bank in the US, and It is— there's a number of reasons why JP Morgan would like First Republic as an asset, even if it is a distressed asset, you know, declared bankruptcy. That's not necessarily always a position of strength to be buying a company. Firstly, product strategy. We're talking here about cold hard deal rationale. The First Republic tends to cater for well-off customers with millions of dollars in assets. So your kind of wealth management division. Now, JPM is a beast in terms of investment banking and retail banking and private banking, but it misses out on the wealth management bit of the total banking solution. So it's only got about 4,500 financial advisors at the moment catering to that kind of middle tier of wealth. Whereas Morgan Stanley has 16,000.

Yeah, I'm really surprised by that stat. I thought JPMorgan would be far more represented in that area.

Exactly. I thought so too. And therefore to acquire what they call a white glove service, so very high quality customer service. First Republic is a very high quality bank in terms of the way that it is perceived in the US. It just got caught with the contagion and caught with the, you know, the issues surrounding, you know, interest rates and things like that. So product strategy— here's an asset, it's on the cheap, it gives me access to a market that I'm not dominant in at the moment, which is pretty good. I would say financially it makes sense. So So they bought the— they bought— they effectively bought the company for $10.6 billion. It is deemed to be— well, from their announcements, they said that it's going to bring an incremental $500 million of net income. There's going to be a one-time $2.6 billion post-tax gain off the— of taking the assets from the FDIC. The FDIC are going to guarantee and underwrite some of the riskier assets that it's taking on board. And therefore you're thinking to yourself, all right, and it seems to be EPS accretive, a good transaction from a financial perspective, right? You've also got cost synergies, you know, if we're going through the list of deal rationale. So there was an article a couple of weeks ago that came out that said that JPM is going to axe 1,000 jobs at First Republic. It's because it probably doesn't need— you know, you can mash two organizations together and there are going to be duplications of jobs, right? So you're probably not going to need a few of the back office staff, etc. Save some money, you're going to increase your net income. But the real kicker is the timing. So JPMorgan being the biggest bank in the country is unable to buy a rival domestic bank because it already controls more than 10% of US deposits. Again, this is an anti-competition, a monopoly-type rule. But that rule only stands outside of an emergency rescue. So JPM can only acquire these types of deposit bases, these types of banks, in a distressed environment. But that's why it was so hungry to buy this asset, because it suddenly got scale that it wouldn't otherwise have been able to get. So complementary in terms of product, great timing, cost synergies, and actually, you know, EPS accretive if everything goes well. It feels like a good deal. And we said last week that when a big organization buys a small organization, the share price of the big organization tends to go down and the small organization goes up. Well, actually, JPMorgan's share price went up 2.5% after the deal was announced. So this feels like a good deal. This feels like diamond on top again.

It's— I was going to say that makes me sick, but it's interesting, isn't it? It's just the big get bigger. So in a moment of crisis, needs must, um, kind of ingenuity prevails. We'll find a way. And then we can't have a systemic crisis. It leads to consolidation. We had this during the kind of sovereign crisis, the financial crisis, uh, and it kind of reinforces that philosophy of too big to fail. It seems— I can see how people of a certain disposition will be looking at this thinking, right, this is, this is not, not healthy. But then at the same point, if you have these massive banking giants, to me it feels like the downside of being so big is it's very, very slow to maneuver. And we're going through what feels like the next technological evolution kind of shift. And so is there now optimal room, almost, is it even better for startup? I know not right now because of funding costs, things like that, environment, but to come in years to come, if they're so big, surely, well, plus the upside is you can come to market strategy quick with a product or service. You might then be acquired as they would look to just gobble you up to internalize your product or service, or you can just pursue that as a fast growth engine for investor appetite to, to go into.

Yeah, so it's a really good strategic point. I think that, I think that we can view— it makes sense to view very, very large banks as quasi-utilities. And I know that, you know, Arch Capitalists wouldn't be very happy with me saying that, But, you know, your too-big-to-fail banks provide a necessary, highly regulated, relatively stodgy, too, you know, too-big-to-fail solution that keeps the wheels of financial markets and of the economy going, right? And they, they should be classed in that kind of utilities type bucket. And obviously they have massive economies of scale, uh, in terms of their deposit base. That a small challenger wouldn't ever be able to reach. But what the small challenger can do is it can pick off, you know, it's like a little minnow kind of nipping at the heels. It can pick off little parts of the big bank, you know, in terms of being nimbler to do trade finance or doing nimbler to do peer-to-peer loans or whatever it might be, improving the states of product consumer. So actually, you've got these big beasts as utilities that kind of keep the thing stable. And then you've got this wave of minnow innovation underneath, actually isn't that bad for a consumer. So maybe we're not in too bad a state.

Cool. Well, let's wrap it up there. Quite a lot, I'm sure, for everyone to digest. One thing I did see is on Spotify specifically, there is now a Q&A option on all episodes. So actually, rather than drop us a line on LinkedIn or message us on email, you can actually just leave a question on the episode itself if you're listening on Spotify. So please do. I mean, obviously there's quite a few points of kind of terminology and things like that that Stephen was rolling out. As much as, uh, I feel like they were very eloquently explained, I'm sure there's a few that still might have a few questions, or a difference of opinion, always happy to take that, of course, uh, on the show. So yeah, drop us any questions that you have. But Stephen, thanks very much for your time, um, on The Deal Room, and we'll see you next week. And I hear there could be a little bit of a Succession theme for next week.

I think so. I'm gonna have to do my homework.

All right, take care. Thanks, Stephen.

Thanks, Anthony.