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Can The City tap into Wall Street’s hottest trend?

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Welcome to the Due Diligence briefing from the Financial Times. Not a subscriber? Sign up here. Drop us a line and join the conversation: Due.Diligence@ft.com.

Spacs: London Calling

At a time when it seems like everyone and their mother is launching special purpose acquisition companies in the US, it might come as a surprise to DD readers that the running total for Spac launches across the Atlantic is zilch. 

That’s not for lack of interest. European dealmakers have been looking at their US counterparts with envy. Famous faces from Silicon Valley to Wall Street to Washington seem to be churning out Spacs at lighting speed. 

Take former Facebook executive Chamath Palihapitiya, who has listed a total of six investment vehicles. On Tuesday he announced that his third blank cheque company, Social Capital Hedosophia III agreed to merge with Google-backed healthcare insurer Clover Health in a $3.7bn deal

Clover will be the latest in a series of private companies to list on a US exchange through a Spac. Meanwhile, the London Stock Exchange and other European bourses remain Spac-shy. 

For DD readers who have yet to hear of this year’s biggest financial fad: Spacs are shell companies that raise money by listing on the stock market with the sole purpose of finding a target and taking it public through a so-called reverse merger. 

Executives who launch Spacs like them because they often get a generous reward for finding a target. For private companies, it’s a quick way to boost the balance sheet and go public while avoiding the scrutiny that typically comes with traditional IPOs. 

Investors who back Spacs see it as a win-win. If they like the deal, they own shares in a new public company and if they don’t, they can just vote the deal down and get their money back. At least, in the US. 

In the UK, things work a little differently. As the FT’s Camilla Hodgson explains, when a UK-listed Spac buys a company, the transaction is classed as a reverse takeover and the Spac’s shares are suspended. Trading cannot resume until a deal prospectus is published and that can take a long time. Several Spacs that listed in 2017 remain suspended.

As a shareholder, you’re not given the usual “get me out of here” clause that you would get in a US-listed Spac. Those who don’t support the takeover can end up having their money locked in the investment for a long time. The graphic below beautifully explains the effect of this divergent approach between the US and UK system. 

Line chart of Value per year, $bn showing UK Spac market lags far behind booming US counterpart

Adding to that, there is also a broader cultural difference. Investors in the UK tend to be more risk averse than those in the US and London’s IPO market is notoriously sluggish compared to New York, the city that never sleeps (at least before Covid-19). 

But that isn’t going to stop the LSE from trying to figure out how to kickstart the UK industry for lucky-dip deals, especially if it faces losing out to US rivals, NYSE and Nasdaq

Two US-based bankers told DD that they were working on a number of European Spacs that want to list in the US with the aim of acquiring businesses at home. 

That might explain the real desire behind LSE’s attempt to build a more friendly Spac environment in London. 

Fighting dirty: making sense of huge French M&A mess

One French water and waste group, Veolia, wants to buy fellow French water and waste giant, Suez.

Which would’ve been fine, if Suez actually wanted to be bought by Veolia. And if the whole mess hadn’t become politically toxic. 

To understand why, we have to start with another huge French company: energy group Engie, as the FT’s David Keohane explains in a DD dispatch from Paris.

Engie used to be part of GDF-Suez and for years struggled about what to do with its 32 per cent legacy stake in Suez. Come July of this year, it decided to sell it. 

Line chart of Share prices rebased showing Veolia has outperformed its rivals

Veolia threw in a bid of €15.50 per share at the end of August for 29.9 per cent, just below the mandatory tender level, saying it would snap up the rest of Suez in due course.

Suez set out to defend itself, quickly dividing Parisian advisers between the sides. Political forces were mobilised by Suez hoping that the state, Engie’s largest shareholder, would balk at the idea of a hostile takeover.

To gain leverage, Suez also set a poison pill defence in place — shielding the French water assets, which Veolia had planned to sell to a French fund, in a Dutch foundation to starve off the competition. 

But on Monday, with still no other offers on the table, Engie agreed to sell its stake to Veolia for an improved €18 a share, or €3.4bn. The move contradicted the will of the state, which voted against the deal — a dramatic move considering that the state-shareholder still wields massive power in France.

French finance minister Bruno Le Maire (pictured below) insisted on a friendly deal on Tuesday, saying that “hostile takeovers belonged to an outdated form of capitalism”.

Amid all the pressure, Veolia has promised that any public offer, at the same price of €18 a share, would only take place once Suez’s board gives its approval. But not many people are optimistic.

On Tuesday, Suez said that it would “use all the means at its disposal to . . . avoid a creeping takeover or de facto control”. And it still has that poison pill. 

Veolia’s luck might change for the better if they can find a way to convince the board to undo the foundation. But the implicit threat is that Veolia could kick out the current board by calling a shareholder’s meeting or eventually challenge it in court. 

Either way, the government is unlikely to look on quietly.

Interview with the new head of Norway’s $1tn wealth fund

Appointing a rich hedge fund manager as chief executive of Norway’s conservative $1tn oil fund was always going to be fascinating.

Now — after months of drama around potential conflicts of interest, concerts from Sting and Gregory Porter, and private jet flights — we are getting the first signs of what Nicolai Tangen (pictured) actually wants to do with the world’s largest sovereign wealth fund.

On Tuesday, Tangen laid out his senior leadership team. All eight other members are drawn from the existing ranks of Norges Bank Investment Management, the oil fund’s manager. There’s a new focus on IT with a chief technology officer and chief operating officer sharing the task as well as a renewed push on responsible investment.

Tangen gave more insights into his thinking in an interview with the FT’s Richard Milne. His three priorities are as follows: boosting performance and excess returns; improving both external and internal communications; and improving talent development.

The new management team are heading into the Norwegian hills on Wednesday to flesh out the strategy at a mountain cabin. But the most concrete area that Tangen wants to take action on is selling out of companies that break ESG (environmental, social, and governance) standards.

The oil fund already does that to some extent but Tangen thinks he can boost its returns by divesting more ESG-unfriendly companies. “I do think we can use the risk in a more clever way,” he said in the interview. 

Norway may soon discover exactly what having an ex-hedgie in charge of its rainy day fund means.

Job moves

  • The Co-Operative Bank boss Andrew Bester has resigned just 18 months into a five-year turnround plan that enlisted his leadership, sending the lender on a search for its sixth chief executive in nine years. More here.

  • Alvarez & Marsal Taxand hired nine advisers in London to comprise its new executive compensation services team, including three managing directors who joined from Aon: David Tuch, Jeremy Orbell and Nic Stratford.

  • Eurazeo has appointed Christophe Bavière to senior managing partner and head of investment partners in Paris. He was previously chief executive and managing partner at Idinvest, which merged with Eurazeo in 2018. 

Smart reads

In the club The partnership at Goldman Sachs is one of the most elite clubs in finance, but chief executive David Solomon is trying to jazz up the perks and limit new entrants in a bid to make it more attractive to colleagues. (WSJ)

Call my agent The coronavirus crisis is delivering crushing losses across the football industry — for everyone, it seems, except agents like Jorge Mendes, who still enjoy healthy profits from the $7bn-a-year player transfer market. (NYT)

Sound the alarm Spotify’s plot to unseat Apple as the leading podcast platform has ignited a race among audio, as consumer tastes and advertising spend gravitate towards the next frontier in the streaming wars. (FT)

Dodgy dividends Sanjay Shah’s penchant for tax loopholes made him a fortune. Criminal probes in Denmark and Germany are questioning the legalities of his controversial Cum-Ex trades. (BBG)

News round-up

Chrysaor agrees reverse takeover of Premier Oil (FT + Lex)

Finablr agrees to take over offer from Prism (FT)

Bridgewater settles suit filed by former co-chief executive (FT)

GE faces SEC action over accounting practices (FT)

Telia sells off world’s biggest telecoms carrier business (FT)

Singapore’s GIC Plans to Invest More Than $1 Billion in Ant (BBG)

Macy’s takes stake in Klarna as part of payment partnership (FT)

K+S signs agreement for $3.2 billion sale of Morton Salt business (Reuters)

Northern Star and Saracen to merge in $4.1bn deal (FT)

GardaWorld steps up campaign against G4S in takeover battle (FT) 

Thomson Reuters is said to seek buyers for 3 Times Square stake (BBG)

Kering/Puma: clawback (Lex) 

LVMH executive to launch Asian private equity fund (FT)



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IPOs / FFOs

Rocket Lab/Spire Global: Spacs, the final frontier

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Life sometimes imitates emojis. Social media stock tipsters are fond of littering posts with rocket symbols. Rocket Lab, which is floating at a $4.1bn enterprise value, makes the real thing. It was one of two space-related businesses to join the market via special purpose acquisition companies (Spac) on Monday, as the surge in these listings continued.

Just two months into the new year and Wall Street has raised a staggering $58bn through 188 blank cheque vehicles, according to Refinitiv. With hot money appearing to outweigh the supply of merger candidates, sponsors are howling to the moon for deals.

Rocket Lab launches smaller satellites into space. Its celestial twin was Spire Global, a satellite data group that is combining with a Spac at a $1.6bn equity valuation.

Like many recent Spac companies, Rocket Lab and Spire are justifying their valuations with lofty sales and earnings growth projections. Rocket Lab, which generated $35m in revenues last year, said it expected to pull in more than $1.1bn in 2026 and become cash flow positive in 2024. Spire, with just $28m in sales in 2020, is forecasting $900m in revenue by 2025 and positive cash flow in three years’ time.

Tesla founder Elon Musk and his SpaceX rocket company have reignited investor interest in US space companies. Annual revenues from space-related business — at present worth $350bn — could almost triple in size by 2040, according to Morgan Stanley.

SpaceX was reportedly valued at $74bn by its latest private funding. Shares in Virgin Galactic, Richard Branson’s space tourism company, have almost doubled since last September to give it a $9bn valuation, even as the group reported a $273m loss in 2020.

Space companies are a moonshot borne aloft by the rocket fuel of cheap money. That momentum trade has more to recommend than some others, such as fledgling electric vehicle companies. Both Rocket Lab and Spire have proven technologies to accomplish highly demanding tasks. This really is rocket science. But like space exploration itself, these investments are only for the brave.

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Coinbase’s offering docs have just dropped [Update]

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Just when you thought you’d seen it all in SEC filings, along comes the Coinbase prospectus. Which is really a direct listing. But who can tell during these days of ICOs and ITOs what a public offering even is.

The cryptocurrency platform which aims to “create an open financial system” is planning to go public via a Direct Listing on the Nasdaq in the near future. The docs dropped an hour ago.

While we dig through the paperwork, we thought we’d just share this gem from the “Definitions” page — the section of an IPO prospectus dedicated to those terms erstwhile investors might not have heard of.

Won’t you look at that:

Hodl: A term used in the crypto community for holding a crypto asset through ups and downs, rather than selling it.

There’s also an excellent use case (with our emphasis):

Borrow & Lend. We allow our U.S. retail users to borrow against and lend their crypto asset portfolios. Our first product is a portfolio-backed loan: a flexible, non-purpose 12-month term loan that allows retail users to borrow U.S. dollars using their crypto assets as collateral. Secured by their investment portfolio, customers can use the line of credit to access U.S. dollars while maintaining a “hodl” investing strategy. Over time, we plan to offer our retail users the ability to opt into lending their crypto assets to earn a passive return on their long term investments.

This is otherwise known in the real financial world as . . . a basis trade.

Meanwhile, Izzy has been pointing out some other curiosities on Twitter:

We’d also add this, which Preston Byrne on Twitter pointed out:

Satoshi as a risk factor, who’d have thought?

More tomorrow, we’ve not even got to the financials yet.





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Coinbase files to become first listed major US cryptocurrency exchange

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Coinbase, the largest US-based cryptocurrency exchange, revealed the scale of its business for the first time in paperwork for a long-awaited public listing that comes during a booming market for bitcoin and other digital coins.

Coinbase generated $1.3bn in revenue last year, up from $534m the year prior, enabling the company to turn a profit of $322m in 2020 after losing $30m in 2019, according to a filing with US securities regulators.

The company’s public debut, the first for a large US cryptocurrency exchange, is likely to rank as one of this year’s largest new tech listings and would mark a milestone for backers of the emerging sector. Coinbase is aiming to list in late March, said one person familiar with the company’s thinking.

Public investors have recently bought up shares in new market entrants such as Airbnb and DoorDash, fuelling a surge in public listings that has drawn comparisons to the 2000 dotcom bubble.

Coinbase filed for a direct listing rather than a traditional initial public offering, meaning it will not raise additional capital when it goes public.

Brian Armstrong, chief executive of Coinbase, warned that prospective investors should expect volatility in the company’s financials.

“We may earn a profit when revenues are high, and we may lose money when revenues are low, but our goal is to roughly operate the company at break even, smoothed out over time, for the time being,” Armstrong wrote in a letter attached to the filing.

Almost all of Coinbase’s revenue came from transaction fees last year, it said in the filing, underlining the company’s dependence on cryptocurrency trading fees.

Shares in the company have recently changed hands in private markets at prices that would give it a roughly $100bn valuation, according to people briefed on the trades, up from $8bn less than three years ago.

Coinbase could use those trades, in addition to input from public investors and its financial advisers, to determine its opening price on public markets.

Coinbase quickly grew into a favoured destination for cryptocurrency traders after it emerged from the Y Combinator start-up programme in 2012. It has recently touted services designed for large institutional investors and a series of acquisitions expanding its reach into software products for cryptocurrency developers.

The company said institutional activity made up almost two-thirds of its total trading volume in the fourth quarter, when transaction revenues jumped more than 70 per cent from the previous quarter to $476m. It said it had 2.8m monthly transacting users in 2020, almost tripling from the year prior.

Coinbase said it oversaw about $90bn in total assets stored on the platform, representing more than 11 per cent of the total market for cryptocurrencies at the end of last year. It has also made venture capital investments in more than 100 companies.

As trading volumes exploded this and last year, the cryptocurrency market has attracted increasing scrutiny from lawmakers and regulators, including over concerns about digital coins being used for money laundering.

In its filing, Coinbase noted the “extensive and highly evolving regulatory landscape” was a risk factor, and that its obligations to comply with various regulations would only increase as the exchange continued to expand internationally.

Among the company’s biggest investors, controlling more than 5 per cent of stock each, are Andreessen Horowitz, Paradigm, Ribbit Capital, Tiger Global Management, and Union Square Ventures.

Goldman Sachs, JPMorgan, Allen & Co and Citigroup are advising Coinbase on the direct listing.



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