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Shenanigans by the ‘wolf in cashmere’

His advisers are either out of the loop or have been told to keep their mouths shut. Investors and hedge funds are scrambling for hints of his tactics. And the target company he agreed to buy for $16.2bn late last year is convinced that he’s up to his usual tricks. 

We are, of course, talking about Bernard Arnault, Europe’s richest man, pictured below. For the second time this week, the shenanigans from a man nicknamed the “wolf in cashmere” are front and centre in the dealmaking business and the DD briefing. 

On Tuesday we covered the story of how a handful of French billionaires, including Arnault, rushed to the defence of debt-ladened Arnaud Lagardère and helped him fend off an activist investor at his media group Lagardère

Later on Tuesday attention shifted to LVMH’s planned takeover of Tiffany & Co, the US jewellery company that Arnault agreed to buy in November — before the outbreak of the coronavirus pandemic. 

Now the world looks far different. DD understands that Arnault may be harbouring specific frustrations: during the coronavirus crisis, Tiffany has continued to pay its dividend as well as pay its rents, examples of cash coming out of the business that Arnault would rather preserve. 

It’s only reasonable that a master dealmaker such as Arnault, who some thought had overpaid for Tiffany at the time, would look to reduce his $135-a-share purchase price.

There’s just one problem: Arnault is locked into an iron-tight merger agreement that doesn’t even give him the chance to walk away from the deal by paying a break-fee. 

LVMH’s only way out of the deal runs through the Delaware Chancery Court, where it would need to prove that the target has breached the merger agreement. 

Not only would that be a difficult thing to do, based on multiple sources who spoke to DD, it would also likely force Arnault to take the stand and be probed about his history. For a man whose career is built on crafty dealmaking, that’s probably not a position he’d like to find himself in.

© AFP via Getty Images

So what do you do when you don’t have much leverage in a negotiation, but you want to fight your corner? You create leverage. 

And that is what people following the transaction closely say Arnault and LVMH are doing. First with a very specific well-timed story in trade publication WWD about concerns over the deal among its board of directors and now with a completely hazy statement released by LVMH. 

Sources tell DD that the net effect of the drip, drip, drip is to sow doubts among Tiffany shareholders that the deal is looking wobbly. Those investors, including many hedge funds who are arbitraging the spread between Tiffany’s current share price and the $135 offer, would then apply pressure on the jeweller’s board to ensure a deal is done even if it means accepting a reduced price. 

If that is the strategy, it seems to be working. So far Tiffany shares have dropped about 10 per cent since Monday as they closed at $114 each on Thursday. LVMH could have used its statement on Thursday to restore confidence in Tiffany’s share price, but it chose not to. 

Most sophisticated hedge funds following this trade, however, have come to the same conclusions as DD about what is going on. The only problem is that those investors are a notoriously fickle bunch . . . and Arnault is a master of dealmaking mindgames. 

We expect the noise to pick up from here. The wolf is on the prowl and he doesn’t like to lose. “I always liked being number one,” he told the FT’s Harriet Agnew over lunch last year.

The rise and fall of shale’s star

Chesapeake Energy, the company that led the shale oil boom in the US, is looking down the barrel of a bankruptcy filing. Where did it all go wrong? 

That’s the subject of this deep dive by the FT’s Derek Brower who looks at Chesapeake’s rise from obscurity in the 1980s to become a $35bn company, and its recent troubles as an oil producer lumbered with an enormous amount of debt and a market value of just $130m. 

The coronavirus pandemic and brutal oil-price collapse have hastened Chesapeake’s decline but its troubles started long before. 

Its former chief executive and co-founder Aubrey McClendon, who at one point was the best-paid US chief executive with an annual package topping $100m, had amassed $23bn in debt when current chief executive Doug Lawler, pictured below, took over the company in 2013. 

Chesapeake’s insatiable appetite for shale rock made it one of the biggest leaseholders in the US as commodity prices soared in the years before 2008. It signed up pipeline partners with long-term contracts, paying them handsomely to install infrastructure that would open the shale patch and, McClendon insisted, make natural gas the dominant US fuel.

That all came at a cost. The huge land position came with commitments to keep drilling or surrender the acreage. Capital expenditure rocketed far above cash earnings. The debt pile bulged. Servicing that debt wasn’t too difficult when times were good but as prices in oil collapsed, the company struggled to generate cash.

Lawler has been battling for years to clean up Chesapeake’s balance sheet. In 2018 asset sales helped to cut debt below $11bn, but that also meant lower output. It became even more difficult to generate cash and pay interest on the company’s debt. In fact, it has had free cash flow in two quarters only since Lawler took over in 2013. 

Judging by executive compensation though, you’d think Chesapeake is doing just fine. A $25m payout has been agreed to keep Lawler and other executives onboard. It’s unclear what the new Chesapeake will look like post-restructuring but it will certainly be a far cry from the world-beating energy disrupter it once was.

A bridge to somewhere

The last time DD checked in on the tens of billions of dollars of buyout bridge loans stuck on the books of investment banks, things weren’t looking good.

Back in March, lenders faced the prospect of holding this debt for an uncomfortably long period, as the spread of Covid-19 ruptured credit markets. 

The biggest headache was the roughly €8bn of debt backing Advent International and Cinven’s €17bn acquisition of Thyssenkrupp’s elevator business, which banks such as Goldman Sachs and Deutsche Bank had inked just weeks before, when the world seemed a very different place.

Line chart of Cents on the euro showing European leveraged loan prices rebound from March plunge

But now, such is the strength of the snapback in demand for junk bonds and leveraged loans, banks have already started working through that backlog far quicker than they had thought possible. 

While they are taking losses on some of the deals, due to the discounts they’re having to shift them at, the prospect of even beginning to sell these loans at any price seemed unthinkable back in March.

The €8bn question now is whether Goldman and co will be able to get out of the Thyssenkrupp elevators deal unscathed. The lenders aim to launch the mega-deal as early as the end of this month, the FT’s newest corporate debt reporter Nikou Asgari and colleagues report in this dive into the financial plumbing being unblocked one loan at a time.

Job moves

  • Moelis & Company has hired Philippe Gallone as a managing director in the healthcare team in London. Gallone joins from Morgan Stanley where he was co-head of Emea healthcare banking. 

Smart reads

Airbus’ A-Team Tom Williams, Didier Evrard and Bernhard Gerwert, all respected veterans of Europe’s aerospace champion Airbus, have been called out of retirement to help save the industry’s fragile supply chain. (FT

Major mismatch Veteran strategist Jeremy Grantham, who is known for calling several of the biggest market turns of recent decades, thinks there is a huge mismatch between prices and the dire economic backdrop. (FT

Borrow at your own risk A decision by the Federal Reserve to shore up markets by buying corporate bonds could backfire once it decides to stop. Many companies could find themselves lumbered with a huge amount of debt and facing bankruptcy. (Bloomberg)

News round-up

Spain’s Puig buys make-up brand Charlotte Tilbury (FT) 

Amazon in talks to buy $2bn stake in Bharti Airtel (Reuters)

TCI pushes Safran to keep outgoing chief in place (FT)

UK government paid £1.7bn to private groups for coronavirus contracts (FT)

ASK and Zizzi owner weighs sale as Covid-19 bites (FT)

Norway oil fund expects lower property returns (FT)

Royal Caribbean makes quick return to bond market for more cash (BBG)

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Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt and Mark Vandevelde in New York, Miles Kruppa in San Francisco and Don Weinland in Beijing. Please send feedback to due.diligence@ft.com

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