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Seven years later, Vodafone and Elliott give up the fight

For seven years, European telecoms operator Vodafone and activist hedge fund Elliott Management have duelled in Germany over the terms of a 2013 takeover. On Tuesday, the two sides finally settled hostilities. 

Was this seven-year war worth it?

First, the background. The stand-off centred on Vodafone’s €7.7bn acquisition of Kabel Deutschland, a deal that would help the mobile-focused group move into broader telecoms services and compete with the likes of Deutsche Telekom and Telefónica.

© AFP via Getty Images

Minority shareholders, including Elliott, which amassed about a 14 per cent stake, argued that the €87 per share offer for Kabel Deutschland undervalued the company. The US fund refused to accept the offer. 

Vodafone was still able to take effective control of Kabel Deutschland by securing 76.8 per cent of shares, thanks to the peculiarities of German takeover law. But it failed to cross the 90 per cent threshold that would have allowed it to squeeze out investors who didn’t back the offer. 

The same German rules also protect minority investors who don’t accept the offer, which Elliott and the other holdouts seized upon. And so began a multiyear lawsuit between Vodafone and Kabel Deutschland investors over whether the acquisition was fairly priced. 

Finally, a German court ruled last year that the Vodafone offer was adequate, but minority shareholders appealed against the decision, triggering a new round of court cases that was set to last for years to come. 

That was until Tuesday. Vodafone has made an offer to pay remaining investors €103 per share, or up to €2.1bn in total. In return, it has received undertakings from investors, including Elliott, which will take Vodafone’s stake in Kabel Deutschland up to 93.8 per cent. 

Vodafone explained the logic of settling with the minorities by saying that, among other things, it reduces the group’s exposure to ongoing legal proceedings. It will also be able to stop paying the holdouts annual dividends of €3.17, something it has done for six years.

That means holdouts accepting the latest Vodafone offer will receive €103 in addition to the €19 they have already received in dividends over the years. That compares favourably to the initial €87 per share offer, even accounting for the duration of the investment. Reuters Breakingviews had a crack at crunching the numbers on the trade. 

The length of the battle does mean that Franck Tuil, an Elliott portfolio manager who was best known for putting on these sorts of trades in Germany, wasn’t around to see the payday arrive for his group. Tuil left the company earlier this year after almost two decades.

US corporate debt: in too deep

When the coronavirus pandemic struck the US in early March and unleashed turmoil on global markets, the Federal Reserve quickly stepped in to support the economy.

Its historic decision to buy corporate debt, including investment-grade bonds and exchange traded funds that own riskier junk credit, gave struggling companies a lifeline. But with businesses borrowing a total of $2.5tn from the bond market in 2020, the question now is whether the Fed’s help has turned into life support.

The debt binge has seen leverage — aka the ratio that measures debt compared with earnings — skyrocket to its highest level for investment grade-rated companies, according to data from Bank of America.

Line chart of Ratio of gross debt to Ebitda showing Bond binge drives rise in corporate leverage

The problem is that some of these companies may not be able to pay back what they owe. So-called zombie companies — meaning their interest payments have topped profits for three years running — are nearing a historic peak, data from Leuthold Group show.

While the red-hot debt market has helped them keep the lights on, there is concern that future profits may not fully cover the new financial burden. Nevertheless, market players are betting on a rally in debt prices next year because they expect continued support from the Fed.

Line chart of % of US small-cap groups with interest greater than profits for at least three years showing Attack of the zombie corporation

The Fed backstop has naturally raised the issue of moral hazard, similar to how the central bank’s intervention in the past has. It’s a point policymakers will have to contend with in the years after the crisis: have they conditioned investors to expect the Fed to step in any time there is turmoil?

Hedge fund billionaire Daniel Loeb briefly addressed the issue in his first-quarter letter to investors, where he criticised the Fed for its willingness to buy riskier assets, arguing that investors such as private equity groups, which are notorious for piling debt on companies, would ultimately be the beneficiaries.

Line chart of Yield on ICE Bank of America corporate bond indices (%) showing US corporate borrowing costs tumble

“The Fed has created an expectation of a bailout,” said Alex Veroude, chief investment officer at Insight Investment, adding that it, “almost doesn’t matter” what other indicators of debt or leverage show. 

It’s important to remember that the Fed was widely applauded for moving quickly, arguably averting an even greater crisis. But the concern now is whether its assistance has left businesses comatose on the central bank’s life support.

Any tips for warding off the corporate undead?

Bertelsmann: read ’em and weep

At the start of The Great Gatsby, the novel’s narrator Nick Carraway answers the call of a roaring 1920s Wall Street to take up a career in bond trading.

Had its author F Scott Fitzgerald known his publisher Simon & Schuster would later become the subject of a competitive bidding war in the publishing industry, perhaps his protagonist would have pursued a path in dealmaking.

Bertelsmann, the German media conglomerate which owns Penguin Random House, agreed to buy Simon & Schuster for almost $2.2bn at the end of last month, insisting it was “very confident” antitrust regulators would be comfortable with its towering position in the US books market as the “Big Five” publishers whittle down to four.

Thomas Rabe, chief executive of Bertelsmann © Bloomberg

But not everyone is pleased with the deal. Rupert Murdoch and the folks at News Corp, which owns HarperCollins, and Vivendi, the French media group that owns Hachette, who were significantly outbid by Bertelsmann, have opposed the transaction.

A tie-up between Bertelsmann and Simon & Schuster would create an anti-competitive “behemoth of books”, controlling a third of the US market, warned former FT journalist and News Corp chief executive Robert Thomson.

Thomas Rabe, Bertelsmann’s chief executive, has played down such fears. “Simon & Schuster is a relatively small player in a fragmented market place,” he told the FT, noting the combined group would have a smaller market share than at the time of the Penguin merger with Random House. 

Job moves

Saudi Arabia’s $360bn Public Investment Fund has reshuffled several senior roles:

  • Yazeed Al Humied, chief of staff, is taking over as the head of its local holdings investments. 

  • He replaces Rashed Sharif who will become chief executive of the bank formed by the merger of NCB Capital and Samba Capital

  • Alireza Zaimi, a former Bank of America financier who joined the PIF in 2017 to run corporate finance, will take on a new role as special adviser to the fund’s governor Yasir al-Rumayyan.

Rosemary Vrablic, Donald Trump’s longtime banker at Deutsche Bank, has resigned

Japan’s Mitsubishi UFJ Financial Group is set to name Junichi Hanzawa, a managing executive officer at MUFG Bank, to president of the banking subsidiary, according to Nikkei Asia.

Susan Kilsby will step down as BHP Group’s senior independent director effective immediately and chair of the mining company’s remuneration committee in March. The move comes after the former Credit Suisse banker was named chair of Fortune Brands Home & Security. Gary Goldberg and Christine O’Reilly will replace her in the roles at BHP, respectively.

Latham & Watkins has hired Paul Dolman, Alison Haggerty, and Matthew Goulding as partners in its corporate department. Dolman joins the London office from Travers Smith, Haggerty joins in New York from Cooley and Goulding joins in Boston from Weil, Gotshal & Manges.

Baker McKenzie has hired private equity lawyer Nick Rainsford from Ashurst. He will join the firm’s financial sponsor team as a partner in London in 2021.

Smart reads

Escape route Europe’s ailing banks are looking to cross-border M&A to break out of a years-long slump, and narrow the growing chasm between them and their US rivals. How quickly will they act? (Bloomberg)

False advertising Tuscany’s pristine white sand beaches happen to be situated near a triple-A rated chemicals plant. But all is not what it seems, and it’s a stark symbol of the ratings industry’s shortcomings. (FT)

Without a captain America’s largest pension fund is a revolving door of chief investment officers. After the departure of its most recent among other high-ranking executives, Calpers is looking for someone to weather the storm. (WSJ)

News round-up

Thailand’s competition chief criticises $10.6bn CP-Tesco deal (FT)

Investors pour $1bn into buying up small merchants on Amazon (FT)

Lululemon plans overseas expansion as yogawear booms (FT)

Fortnum & Mason boss blasts ‘see-saw’ lockdowns for adding to stress (FT)

ByteDance in talks to buy stake in mobile games firm CMGE (Reuters) 

Tesla’s German gigafactory held up by sand lizards (FT)

US sues Walmart alleging role in country’s opioid crisis (FT)

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, Mark Vandevelde and Francesca Friday in New York and Miles Kruppa in San Francisco. Please send feedback to due.diligence@ft.com

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