TheChek News Flow

The Competition and Markets Authority (CMA) is today providing an early opportunity for the parties and interested third parties to comment on whether the partnership between Microsoft and OpenAI, including recent developments, has resulted in a relevant merger situation and, if so, the impact that the merger could have on competition in the UK.

The Invitation to Comment (ITC) is the first part of the CMA's information gathering process and comes in advance of any launch of a formal phase 1 investigation.

The speed at which artificial intelligence (AI) is scaling across use cases and markets is unrivalled in economic history, while advances in powerful foundation models (FMs) mean that this is a pivotal moment in the development of this transformative technology. The CMA's recent report into the rapidly evolving market for FMs noted both opportunities and risks for competition and consumer protection, which were captured in a set of proposed principles to guide the development of the market toward positive outcomes for people and businesses. Critical among these is the need for sustained competition between AI developers which will help to deliver innovation, growth and responsible practices across the sector, as well as the need for open and effective competition in the deployment of FMs across a range of downstream activities.

As part of its ongoing work in this area, the CMA has been closely monitoring the impact of partnerships and strategic agreements which could result in a weakening of competition in the development or use of FMs. The partnership between Microsoft and OpenAI (including a multi-year, multi-billion dollar investment, collaboration in technology development and exclusive provision of cloud services by Microsoft to OpenAI) represents a close, multi-faceted relationship between two firms with significant activities in FMs and related markets.

There have recently been a number of developments in the governance of OpenAI, some of which involved Microsoft. In light of these developments, the CMA is now issuing an ITC to determine whether the Microsoft / OpenAI partnership, including recent developments, has resulted in a relevant merger situation and, if so, the potential impact on competition.

The CMA will review whether the partnership has resulted in an acquisition of control - that is, where it results in one party having material influence, de facto control or more than 50% of the voting rights over another entity - or change in the nature of control by one entity over another.

Combination would consolidate almost all of Australia’s liquefied natural gas sector

A potential A$80bn ($52bn) merger of two of Australia’s largest oil and gas companies to create a national champion in liquefied natural gas reflects a harsh reality in the sector: without global scale, it is hard to remain relevant.

Woodside Energy and Santos said on Thursday they had opened talks over a potential deal. If completed, it would consolidate nearly all of Australia’s LNG sector into a single entity.

Talks are at a very early stage, according to multiple people with direct knowledge of the situation. They said the discussions were triggered by the need for both companies to increase their size as the market looks to consolidate and the risk of developing new projects increases due to cost, regulation and opposition to the industry.

James Byrne, an analyst with Citi, said a deal could be justified as “Woodside fixing its stagnating portfolio and Santos fixing its balance sheet”. He said a combination would create a globally relevant company listed in the US and Australia that could spread the higher risk and declining value of some projects.

However, the combined entity will still pale in size compared with major global LNG players. Woodside sold about 11.2mn tonnes of the super-chilled fuel in 2022 and Santos 5.8mn tonnes. By contrast, Shell and Total Energies, the two largest private LNG suppliers, sold 66mn tonnes and 48.1mn tonnes, respectively. A combined entity would be comparable to BP, which sold 19mn tonnes last year.

“LNG is increasingly about scale and having a large portfolio,” said Frank Harris, head of global LNG consulting at Wood Mackenzie. “People who have aspirations to be top players need scale and Woodside will be aware of that. As the industry gets bigger, to keep up, one could contend that they need more scale.”

Santos has been under pressure from investors, notably fund manager L1 Capital, to review its strategy due to the company’s poor returns compared with the global average. The company has been urged to consider a break-up of the business or a sale. Woodside has long been seen as a potential partner in the Australian industry.

Santos shares rose 6 per cent to A$7.24 on Friday, while Woodside’s fell slightly, by 0.7 per cent, to A$29.78.

A deal could come with substantial risks, including how to value flagship projects that have hit problems. Woodside’s giant Scarborough project off the coast of the Pilbara region in Western Australia has been delayed by opposition from indigenous communities, as has Santos’s Barossa gas project near the remote Tiwi Islands in the Timor Sea.

Regulators could also demand disposals of domestic Australian assets given the potentially dominant position of the combined entity in its home market. Both companies count LNG as their main product but also produce crude oil and pipeline gas from their operations.

Santos, which has also invested in carbon capture and storage assets including the Moomba gas plant in South Australia, derived more than half of its production from LNG in 2022. Woodside, which has invested in the US oil sector and has become a growing presence there, previously said it anticipated 45 per cent of its production this year would be from LNG.

There could also be an objection from the South Australia government, which could fight against any attempt to consolidate the business away from Adelaide. Santos — which stands for South Australia Northern Territory Oil Search — has been headquartered there since the 1950s, but Woodside is based in Perth.

A combination would bring together assets on both of Australia’s coasts but also grow the international presence, with the new group having assets in Alaska, Senegal and Papua New Guinea.

Russia’s invasion of Ukraine has made LNG trading extremely complex, with the slashing of pipelines leaving Europe to look elsewhere for gas supplies to meet its needs. Europe and Asia now increasingly compete for the same supply, with traders and suppliers constantly having to figure out where to send their cargo to make the best returns.

A large portfolio allows LNG companies to “find efficiencies and swap vessels around internally for [cost] savings without even having to find a partner to trade with”, said Alex Froley, LNG analyst at consultancy ICIS.

The potential deal “is a significant consolidation play in the Australian oil and gas industry”, said Felix Booth, head of LNG at energy analytics firm Vortexa. Santos’s LNG project in Papua New Guinea “will be a notable addition” to Woodside’s LNG portfolio and the mooted merger would bring improved scale and efficiency to their operations, he said.

In recent years, Woodside has also tried to expand its global footprint by signing LNG deals in North America. It has agreements with US LNG producers for long-term supplies and this week announced a 20-year LNG deal with a project in Mexico.

Woodside is “focused” on the growth of its LNG portfolio, Mark Abbotsford, executive vice-president of marketing and trading, said in a LinkedIn post after Woodside announced the Mexico deal.

“We see scale, geographical diversity and cost-competitive LNG as being critical to our future and also essential to meet continued growth in gas/LNG demand through the energy transition,” he said.

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Commodities broker eyes valuation of up to $2.8bn with it having cancelled UK IPO in 2021

UK commodities brokerage Marex has filed confidential paperwork to list in the US, snubbing London after pulling a plan two years ago to list on its home stock market.

The group is aiming to go public next year after submitting the filing to the US Securities and Exchange Commission, according to people with knowledge of the matter.

The targeted valuation is set to be between $2.2bn and $2.8bn, approximately three to four times more than its previous goal when Marex attempted to list on the London Stock Exchange in 2021, the people said.

Its move is likely to be an early test of investor appetite for new listings in the US after a tepid 2023, when falling valuations and rising market volatility deterred companies from going public. Bankers hope the market will more favourable in the first quarter of next year.

Marex’s decision to go to New York is also a blow to London after the financial services group ran an assessment of both markets for a reboot of its initial public offering. The group, which is an intermediary for deals in energy, agriculture and securities markets, blamed poor market conditions for pulling its 2021 IPO.

It also adds to numerous disappointments this year for the London stock market, which has suffered low trading volumes and struggled to attract and maintain listings.

Some companies, including Irish duo CRH and Smurfit Kappa, have quit the LSE and turned to New York because the US economy is a significant contributor to revenues and stock market valuations tend to be higher. This week Tui, the German tour operator, said it might leave London to concentrate on its main listing in Frankfurt.

Marex has been majority owned by private equity group JRJ, along with partners Trilantic Europe and BXR Group for more than a decade, which will be seeking to cash in via the listing.

The group, which puts on trades and derivatives hedges for big commodity producers and consumers, has grown in part through acquisitions since it was bought by JRJ in 2010.

It has expanded into clearing and risk and pricing technology and bought rival broker ED&F Man Capital Markets last year. The acquisition has helped its US business come to rival the size of its European business, which has traditionally provided the bulk of its revenues.

Marex more than doubled pre-tax profit in the first half of 2023 to $120mn on $1.2bn of revenues, with it citing “significant growth in our operations in North America”.

It employs about 1,800 people and is one of only eight brokers with rights to trade on the historic trading floor of the London Metal Exchange.