One thing to start: Tiffany’s broken engagement to LVMH is getting uglier. Once eyed by LVMH’s billionaire boss Bernard Arnault as a prized gem, the French luxury conglomerate has countersued the US jeweller, arguing it has displayed ‘catastrophic’ performance throughout the coronavirus crisis. More here.

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Caesars’ hot hand

Early in 2020, it was like déjà vu all over again for Caesars Entertainment. The company behind Las Vegas’s Caesars Palace, Harrah’s and Planet Hollywood was about to close a $17bn, debt-laden sale to Eldorado Resorts.

Then the pandemic struck, forcing casino closures across America, and seemingly threatening the closing of the deal. Even if the transaction was completed, the debt load that came with it could prove crushing, forcing Caesars into an eventual bankruptcy.

© Caesars Palace

This scenario played itself out more than a decade ago. The private equity firms Apollo Global Management and TPG acquired what was then known as Harrah’s Entertainment for more than $30bn (the business model and operations are somewhat different so the transaction sizes are not quite comparable). 

Between signing that deal in 2006 and closing it in 2008, the financial crisis unfolded and the two firms had to get their lending banks to buck up in order to fund the bridge loans. 

Eventually, in 2015, Caesars would file for bankruptcy leading to perhaps the ugliest corporate restructuring fight in history. 

Caesars’ luck seems to be different today, however. Even as casino traffic has plummeted by at least a quarter this year in Las Vegas, investors could not be more excited about the gambling business. Eldorado got the Caesars acquisition across the finish line in July. And since its shares bottomed in March, they have climbed almost tenfold to almost $60.

The reason: whether it is TikTok or Robinhood, people want to spend time on their phones and sports betting and online casinos are the next big thing. Caesars now is close to clinching a deal for the UK wagering group William Hill for almost $3.5bn in a move to quickly grab a piece of the market. Caesars is planning to sell equity at its juicy valuation to fund the takeover.

© FT montage

Caesars already has a sports betting joint venture with William Hill in the US, making it a natural fit. 

The rise of DraftKings, the partnership between Penn National Gaming and Barstool Sports, and the Spac mergers of Rush Street Gaming and Golden Nugget Online Gaming underscore the investor enthusiasm. 

Caesars emerged from bankruptcy three years ago wondering what its next move would be. 

After it faltered in 2018, billionaire investor Carl Icahn helped to engineer the Eldorado deal on the belief that it could slash almost $1bn of annual operating costs.

Yet out of seemingly nowhere, the digital opportunity has exploded as the pandemic has forced people around the world into virtual rooms. 

Ironically enough, Apollo was also chasing William Hill against its one-time portfolio company, Caesars. Apollo would’ve only dreamt that it had such an ace up its sleeve a decade ago.

Private equity, public help 

Back in May we told you how Hawksmoor, the British steakhouse frequented by City of London traders, was turned down for a government-backed loan to help it through the pandemic even after being forced to shut its doors. 

The reason: a complicated financial structure put in place by its private equity owners left the restaurant group — whose London Seven Dials branch is pictured below — on the wrong side of EU state aid rules. 

© Paul Winch-Furness

The same problem affected legions of other UK companies that are also owned by buyout groups. 

The leveraged buyout model, with its hefty use of debt, had left their balance sheets looking distressed, even if their operations were generating cash — and the EU rules were designed to stop governments from bailing out already-troubled companies. 

Dig into the back-story here. Now it’s time for Shaky Pete’s Ginger Brews all round in the world of private equity (Hawksmoor’s best cocktail, in case you didn’t know). 

The UK government has changed the rules to make it easier for private equity-owned businesses to access bailout loans, which are worth up to £200m and come with an 80 per cent taxpayer-backed guarantee for lenders. Catch up with the story from DD’s Kaye Wiggins and the FT’s Daniel Thomas here

But some people are thinking twice before raising their glasses. “A lot of these guys are really worried about the PR angle,” an adviser to private equity groups tells DD. 

There are other complications to worry about too, like the impact of a state-backed loan on existing lenders, and the restructuring of a company’s balance sheet that would be needed to access the funds. Plenty of details still need to be ironed out.

Perhaps they’re right to think the biggest risk is reputational. An industry that uses offshore funds, and pays its executives millions of pounds in carried interest that’s taxed at lower rates than many workers’ salaries, was never going to have an easy time in turning to taxpayers for help. 

SocGen’s altitude sickness

Line chart of Share prices rebased showing Société Générale has fallen behind peers this year

“Everest was beautiful.” That’s how a Société Générale banker reminisced to our colleagues about one of the French lender’s signature structured products, which promises investors steady returns by derivatives to smooth out the market’s many ups and downs.

Products such as Everest fuelled SocGen’s fast-tracked climb to the top of the banking industry, surpassing its global competitors thanks to its unconventional detour into options and equity derivatives 30 years ago.

But nearing its peak meant there was a lot further for SocGen to fall.

Column chart of Revenues (€m) showing Equity trading revenues collapse at SocGen

Copycat products by French rivals BNP Paribas and Natixis soon flooded the market with competition, morphing SocGen’s once “plain vanilla” guaranteed return products into far more complicated, opaque instruments — correlation offerings based on baskets of stocks, for instance, or autocalls, which pay out a coupon similar to a bond as long as losses or gains are within a certain threshold. 

If you had to re-read those last few sentences, DD is with you. Retail investors couldn’t understand it either, which is why French regulators stepped in after the 2008 crash and asked banks to simplify their offerings. 

Column chart of Net income (€bn) showing Struggling equity trading unit weighs on group profitability

SocGen’s derivatives game clambered on, through recession and scandal, eventually reaching the perilous terrain paved by the coronavirus crisis.

The bank’s longstanding chief Frédéric Oudéa (pictured below) said it would scale back on structured products as a result.

© Benoit Tessier/Reuters

SocGen isn’t giving up that easily, however. The lender’s head of global markets Jean-François Grégoire is already plotting how the bank can accelerate an existing derivatives product, Evolution, poised to reduce volatility risk “in any kind of situation”.

As any seasoned climber will tell you, it’s survival of the fittest out there.

Job moves

  • Deutsche Bank’s head of German retail banking Manfred Knof will become the new chief of domestic rival Commerzbank. More here from the FT and our Lex column.

  • Yup Kim joined the $405.4bn California Public Employees’ Retirement System (Calpers) as its new private equity investment director, replacing Sarah Corr who was promoted to managing director of real assets. Kim was previously a senior portfolio manager at the Alaska Permanent Fund Corporation, a $66bn sovereign wealth fund. 

  • FrontWell Capital Partners has hired Aubrie De Sylva as vice-president of its deal originations team. The firm also added Kevin Freer and Andrew Isaac as vice-president and assistant vice-president of its underwriting division, respectively.

  • White & Case has appointed Aldrin De Zilva as a partner in Melbourne as part of its global tax practice. 

Smart reads 

Precarious metals Mike Nowak’s precious metals trading desk was a diamond fixture in JPMorgan’s crown, until one of his former employees turned on him and told US authorities about systemic cheating inside America’s biggest bank. (Bloomberg)

Trump’s taxes, explained Bloomberg opinion columnist David Fickling helps break down Trump’s convoluted tax avoidance tactics, which were revealed by a New York Times investigation. (Twitter)

Political foul NBA teams and owners have publicly aligned themselves with social justice and anti-police brutality movements including Black Lives Matter. But anti-racist rhetoric too often thinly veils the less-progressive agendas of basketball’s billionaire keepers. (The Ringer)

News round-up

Petrol station tycoons are preferred bidders for Asda (FT)

Devon agrees to buy rival shale producer WPX (FT + Lex)

ArcelorMittal to sell US steel assets for $1.4bn (FT + Lex)

HSBC shares rebound after China’s Ping An increases its stake (FT)

Nikola founder bought truck designs from third party (FT)

Judge blocks Trump’s app store ban on TikTok (FT)

Palantir expected to be valued at almost $22bn in trading debut (Wall Street Journal)

VW and Chinese partners pour €15bn into country’s electric car market (FT)

Oaktree invests £100m in British broadband (FT)

Musk plans IPO for SpaceX’s Starlink business (Reuters)

Roger Farah, the unflashy Tiffany chair digging in against the ‘wolf in cashmere’ (FT)

Hedge fund manager Crispin Odey denies indecent assault charge (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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