M&A Adviser and Capital Markets Adviser: Rothschild

During a busy year for major cross-border M&A deals, Rothschild shone as a flexible adviser on both the buy and sell sides. It also grew its capital markets advisory effort from an already dominant position by focusing on every variable in a challenging market. Rothschild is both IFR’s M&A Adviser and Capital Markets Adviser of the Year.

“This was an end-of-cycle year,” said Adam Young, co-head of equity advisory at Rothschild.

The Anglo-French firm and its clients were poised to take advantage before rate rises signalled the end of 10 years of extremely cheap money, while the longevity of its advisers meant they had a wealth of experience to call on as markets became trickier.

On the M&A side, Rothschild carried out two deals for long-term clients that seemed like the final act in their corporate dramas.

Australian megamall operator Westfield, for which the firm had previously acted in the demerger of its Australian and New Zealand assets in 2014, hired Rothschild again in its landmark combination with Dutch-French acquirer Unibail-Rodamco to create a global group with €61bn of assets.

Rothschild’s unique talent to advise clients on strategic M&A as well as equity raisings and listings was to the fore in this deal.

In addition to the headline merger, the transaction also involved the subsequent demerger of retail technology provider OneMarket onto the Australian Stock Exchange. The whole deal closed in June within six months of its announcement, some feat in a bear market for retail property.

“We have had a very long relationship with the Lowy family, who founded Westfield,” said Philippe Le Bourgeois, group CEO at Rothschild. “Smaller operators are struggling in the sector but larger destination malls are more resilient.”

The firm was on the other side when acting for Melrose in its hostile £7.4bn approach for larger engineer GKN. This ambitious reverse takeover was the culmination of 13 years’ work for the acquisitive company, the latest of 230 purchases since it floated as a cash shell on AIM in 2005.

The bid for the FTSE 100 company was the largest truly hostile transaction in the UK since Kraft/Cadbury in 2009.

The takeover of the UK confectioner had led to tougher takeover rules forcing bidders to make full offers quickly or withdraw. That ensured the saga was conducted over less than three months, with Melrose persuading 52.4% of GKN shareholders, including activist Elliott, to accept its twice-enhanced offer on March 29, having made its first approach early in the new year.

The contest happened against a political backdrop where the UK government had indicated a desire to toughen up takeover procedures further to protect assets deemed vital for national security. As a defence contractor, GKN might have qualified.

Rothschild was able to bring its expertise in government relations to ensure this potential stumbling block was overcome.

GOVERNMENT’S CHOICE

On the debt advisory side Rothschild continued to be active with government clients.

It acted for Greece on its successful debt exchange targeting €29.6bn of bonds with maturities from 2023 to 2042, issued as part of the country’s 2012 debt restructuring. The proposal to amalgamate these into five more liquid benchmark bonds had an 86% take-up.

The firm remains pre-eminent in debt advisory. “We have the advantage of scale,” said Helier Drage-Smith, a managing director in the debt advisory team. “We see more flow and momentum, giving us a deep level of insight.”

This enabled the firm to pick the right moment to launch the first-ever UK inflation-linked bonds using CPI as a measure rather than RPI, when it advised the University of Cambridge on a £300m 50-year issue in June. This came alongside a more conventional 2.35% fixed coupon 60-year that also raised £300m.

“We have advised a number of colleges on their finances, including issuing bonds privately. This was the first CPI-linked issue,” said Drage-Smith, noting that the UK government might follow this precedent and use that measure in the future too.

It was a complex trade, not least because by going ahead of the UK government there is no CPI-linked Gilt, so pricing was based off RPI-linked Gilts with an estimate for the long-term difference between the two measures. It is IFR’s Europe Investment-Grade Corporate Bond of the Year.

Another debt advisory highlight was acting for petrol station retailer EG Group on a €3.5bn refinancing of various debt facilities, alongside an acquisition of 2,182 Esso sites in Italy and Germany for €1.2bn. This led to the largest Single B rated loan syndication since 2008.

Debt advisory is a fast-growing practice with 265 mandates, up 38% by number on the previous 12 months, while volume of US$168bn was up 22%.

Rothschild had also advised M&A clients on the financing aspects of their transactions, for example acting for Melrose on arranging a new £4.5bn debt facility in connection with its GKN takeover.

CROSSING OCEANS

The firm also advised Bayer on the issue of €4bn of mandatory convertibles, which was the first step in the €13bn equity financing following the announcement of the German chemical company’s US$66bn purchase of Monsanto in 2016.

That transatlantic deal, for which Rothschild also advised Bayer on M&A negotiations, finally closed in June this year after lengthy antitrust scrutiny, and was the largest transaction the firm completed over the past year.

Rothschild wants to build on such cross-border deals to do more work in the US. This is already starting to pay off as it is advising Walmart on the merger of its UK supermarket chain Asda with J Sainsbury and Coca-Cola on its purchase of Costa Coffee from UK-listed Whitbread.

A higher proportion of European participants were involved in the major deals this year and that has played to Rothschild’s traditional strength.

The total value of M&A completed deals, during the period under review, rose 7% to US$2.95trn. Rothschild outpaced the market, completing 330 deals – more than any other adviser – worth US$295bn, 65% higher than the previous year.

Goldman Sachs was the only other bank to complete over 300 transactions. However, in fees Rothschild has outstripped the US firm, seeing a 14% increase in advisory revenues year-on-year to a record €820m during the first nine months of the year, against Goldman’s 5% drop to US$2.3bn.

Unlike many rivals who predominantly stick to advising clients on their defence in the wake of approaches, Rothschild’s major deals show how it can be active on the buyside too, even without having a balance sheet to put to use for acquirers.

TRIPLE-TRACK PROCESS

The firm is also developing a strategic capital advisory business, which can help clients raise significant capital in one lump from sovereign wealth funds, major pension funds or family offices. It is a natural fit with its ECM work, expanding the dual-track of IPO or M&A to a triple-track with the potential to sell a stake to new investors privately.

One example was Compare the Market-owner BGL which dropped its IPO in late November 2017 and instead brought in Canada Pension Plan Investment Board as a 30% shareholder.

Rothschild’s deals fared better than most in 2018, something the team puts down to taking time to think about transactions and making fine adjustments to all the inputs that need to be correct to ensure success in a tough market.

“Quite a lot of the time an ECM professional is thinking of a solution that worked in the past when there was a different market and risk mentality,” said Young. “Tactics of marketing, messaging and allocations that worked in 2014 did not in 2018. You’ve got to have an end of cycle mentality – we have been here before.”

The success of SIG Combibloc’s Swiss IPO post-summer perhaps showed this best, with a relatively smooth path to pricing and positive aftermarket that was in stark contrast to the contemporaneous floats of Aston Martin and Funding Circle in the UK.

Equity advisory clocked up 52 mandates in the period with a total deal value of US$42bn. A sign of strength was shown in the UAE which provided its first major IPOs in years with Abu Dhabi National Oil Company and Dubai’s Emaar Development, both with Rothschild.

The trades stand out as there was no pattern of issuance that led to Rothschild being hired – advisers were not even firmly established as part of IPOs when those markets last provided notable activity.

It was also ground-breaking with the first use of bookbuilding for an international deal on the Abu Dhabi Securities Exchange, which hadn’t hosted an IPO since 2011. In the case of Emaar, the regulator allowed it to reduce the retail tranche to 5% from the 20% norm, and introduce fungibility between tranches.

The firm also worked with Cineworld on its rights issue to finance the acquisition of Regal Entertainment Group in the US – IFR’s EMEA Secondary Equity Issue of the Year.

And there were two potentially messy spin-offs that were in fact admirably muted affairs.

One came when Old Mutual floated Quilter through a tiny IPO and concurrent demerger, a structure that brings all manner of complications when it comes to estimating and managing flow-back.

The other came when holding company Kering’s decision to focus on luxury led to a similar situation that saw it distribute around 70% of sportswear company Puma to Kering shareholders. Those shares massively outweighed the 14% free-float and flow-back was unpredictable as Puma represented a different sector, listing location and market status.

Puma’s share price and trading volumes rose dramatically during roadshows ahead of the distribution but soon settled down with no signs of dislocation, as had been the case with Quilter.

Key to all of the above is the close relationship between client and adviser.

”Where we add the most value is when we are involved early, where the questions are strategic and not just execution,” said Drage-Smith.