Buffett does a Buffett


One scoop to start: US law firm Skadden Arps has poached senior M&A lawyer Bruce Embley from rival Freshfields, the latest example of a deep-pocketed American practice luring a star performer from the top ranks of London’s legal profession.

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Classic Buffett

To those who aren’t familiar with The Warren Buffett Method, his latest investment in a $2.65bn broadcast deal might come as a surprise. 

TV networks aren’t exactly hot right now. Streaming services like Netflix and Hulu have changed the way we consume media and competition is going to ramp up as telecoms and cable groups also enter the fold. 

Still, Buffett’s Berkshire Hathaway has committed $600m in exchange for preferred equity to media group EW Scripps to acquire ION Media, the network known for its crime dramas. The bet on old media comes with vintage Buffett terms. 

The Ohio-based company will pay Berkshire a yearly 8 per cent cash dividend and Buffett has the option to buy 23.1m additional shares in Scripps at a price of $13 a share. 

It’s reminiscent of Buffett’s deal with Occidental Petroleum last year when Berkshire provided the energy group’s boss Vicki Hollub with a $10bn loan to buy rival Anadarko Petroleum without needing a shareholder vote (more on that in our next item).

In exchange, Occidental agreed to issue Berkshire preferred shares paying interest of $800m a year for at least the next decade — another financing deal with an 8 per cent yearly return, which is no joke in the yield-starved world we live in. 

Of course, as DD readers can see below, things haven’t turned out quite as planned for Occidental. The company is paying Buffett’s hefty dividend in stock instead of cash to help shore up its balance sheet. But other investors are not taking the share dilution well and its stock price has been hammered. 

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This is classic Buffett behaviour. Back in the financial crisis when companies couldn’t raise cash for love nor money, the investor stepped in at a hefty price. Berkshire bought $5bn of preferred equity in Goldman Sachs during the height of the financial crisis that paid a 10 per cent annual dividend. 

Line chart of Year-to-date performance (%) showing Berkshire Hathaway has lagged the broad market this year

Unlike the 2008 financial crisis, Buffett was eerily quiet during the first few months of the economic downturn brought on by the coronavirus pandemic despite Berkshire’s enormous cash pile. 

More recently, the Oracle of Omaha has made some moves. He has made a $6bn contrarian bet on Japan’s five biggest trading houses as well as investing in the cloud database software company Snowflake.

Video: a look back at how Occidental swallowed its own poison pill

They say keep your friends close and your enemies closer.

Perhaps that’s how Occidental Petroleum chief Vicki Hollub (pictured) was able to slip feared activist investor Carl Icahn a poison pill in an effort to thwart a hostile takeover of her struggling oil company.

But the effects weren’t as strong as Hollub hoped.

The pair’s transition from friends to foes began last year when Icahn, who owned roughly 10 per cent of Occidental, took issue with the company’s $55bn takeover of rival Anadarko Petroleum.

The deal was a huge feat for Hollub, beating Chevron to the punch by joining forces with Warren Buffett’s Berkshire Hathaway. 

But the pandemic and a Russia-Saudi Arabia oil price war would soon send her success, and Occidental shares, tumbling down. Icahn prepared to storm the castle.

Hollub issued the poison pill in an attempt to keep Icahn at bay, allowing the company to issue new shares and dilute the activist invader’s majority stake. 

In this video, DD’s James Fontanella-Khan explains how it takes a lot more than a pill to ward off activists in the coronavirus climate.

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Private equity’s portability playbook

Private equity loves a good shortcut. The entire industry is built on the premise of sidestepping the humdrum public markets for faster, better returns.

It’s the financial equivalent of cutting the velvet-roped queue at your local watering hole, or, in the age of the coronavirus, helicoptering in a lobster lunch to your summer home rather than waiting in a six-feet-apart line at the fish market. 

And the life of a private equity banker is getting even easier, thanks to something called “portability”. The concept has been around for years in European bond markets, but it’s new to the US and putting debt investors’ noses seriously out of joint.

Allow DD to cut through the jargon. Portability is a clause beginning to pop up a lot more often in contracts between private equity groups and their creditors, stipulating that they don’t have to pay a loan back if they manage to hand off their debt-laden company to someone else. 

By employing portability, private equity removes a key obstacle to M&A deals — it’s a lot easier to sell your debt-ridden company when the new buyer doesn’t have to orchestrate a financing arrangement of their own. 

The original creditor is still stuck with the bill, even if the acquisition resulted in a new set of risks that would typically require higher interest payments or other changes to the fine print.

“Portability makes a company a much more attractive opportunity for buyers because they can be assured that financing is in place already,” Charles Tricomi, head of leveraged loan research at Xtract Research, told the Financial Times. “It also makes them attractive because it decreases the time for the transaction, and as a result, it also reduces the cost of the transaction.”

But not everyone feels that way. Especially the creditors feeling the latest knock in a period of ultra-low interest rates as their power is continually chipped away at.

“We don’t like it at all,” said Columbia Threadneedle portfolio manager Ron Launsbach. “The standard for decades has been that we get our money back when a company we lent to is sold. Now that language is getting looser.”

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Job moves 

  • Law firm Freshfields named Georgia Dawson (pictured below) as its first-ever female senior partner, replacing Edward Braham after an election process that was delayed by the pandemic. More here.

  • Law firm Goodwin has brought a five-partner team from Sidley Austin to its London office: Erik Dahl, Christian Iwasko, Sava Savov, Michelle Tong, and John Van De North. Dahl co-led Sidley Austin’s private equity practice and Iwasko was co-head of the firm’s European corporate and private equity group.

Smart reads 

Politicon Valley LinkedIn founder Reid Hoffman is attempting to use his billions to bankroll Donald Trump straight out of the White House. So why have Democratic party insiders denied his networking requests? (Vox)

Reality bites Magic Leap’s virtual reality headsets were meant to propel techies into the next dimension. But the company’s eclectic founder Rony Abovitz liked to spend money on a fantastical scale. (BBG)

Trumponomics It pays to be president. At least, it used to. When you factor in interest, taxes, depreciation and amortisation, Trump’s hotels look to be anything but an artful deal. (Forbes)

News round-up

Japanese bank says it miscounted investor votes at 1,000 companies (FT)

Spotify founder Daniel Ek to invest €1bn in European tech (FT)

Deliveroo is said to start talks for IPO after delivery spike (BBG) 

ChargePoint to go public in $2.4bn reverse merger (FT)

Allianz-led consortium in advanced talks to take on Aviva’s French arm (Reuters)

Fragrance maker Givaudan primes itself for spectacular growth (FT)

Alec Gores Spac deal turns $25,000 into $80 million in months (BBG)

Crédit Agricole insurance unit stops offering H2O funds (FT)

GoodRx IPO: drugstore disrupter (Lex)

Former Cambridge Analytica chief banned from holding company directorships (FT)

Bottled water billionaire becomes China’s richest person (FT)



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