TheChek News Flow

From Dr Denis MacShane, London, UK — Monday’s most read letter

Your two correspondents (Mark Burges Watson, April 25 and C Hayward, April 27) on Swiss border controls miss the point. All main roads into Switzerland from EU neighbours have physical border and customs control buildings. These do not exist in Ireland following the Good Friday Agreement.

If they return they will be targets for a new generation of Irish nationalists who regard Sinn Fein as having sold out on age-old ambitions for a united Ireland. That is a realistic fear given the long history of physical attacks on UK-Ireland border posts in most decades since Ireland won independence in 1920.

The former Swiss foreign minister, Micheline Calmy-Rey, was in London recently talking about Swiss border and customs arrangements with the latter being strictly enforced as it is illegal to take into Switzerland more than 1kg of meat — four good steaks — and five litres of wine.

I asked her if Switzerland was thinking of abolishing border posts in a manner similar to Northern Ireland since 1998. “Mais non,” she replied as if the idea was bizarre.

The more cash that builds up in a business, the more likely it is to go down the drain. French hotel group Accor is putting this principle — dubbed the bladder theory of corporate finance by a celebrated fund manager — to the test. After a recent €4.4bn property sale, Accor’s ambitious ex-banker boss can afford to spend heftily. But his latest acquisition should calm any fears about reckless dealmaking.

The acquisition of Mövenpick Hotels & Resorts from Saudi Arabia’s Kingdom Holding Company for €482m in cash is a sensible deal. It is another step in Accor’s move away from its roots as budget hotel operator. After previous swanky acquisitions such as London’s Savoy, luxury hotels will account for about 45 per cent of revenues, an increase of about 4 points.

Mövenpick — improbably named by its Swiss founder after a seagull on Lake Zurich — is in good shape. It has tripled in size in the two decades it was owned by the investment vehicle of tycoon Prince Alwaleed bin Talal, sometimes known as the “Warren Buffett of Arabia”.

Even so, Accor should be able to improve Mövenpick’s operations. Better distribution and loyalty schemes should boost profits. Cost savings will come from cutting overheads and improving procurement. The deal values Mövenpick at about 15 times estimated 2019 operating profits before usual deductions. That is in line with industry norms. Taking account of annual synergies expected to total €18m of these adjusted operating profits, the cost of the transaction would drop to 10 times.

Sébastien Bazin has made €7bn of deals since taking over as chief executive. He plans to concentrate on smaller, bolt-on deals, while strengthening the balance sheet and buying back shares. Accor’s shares have risen 10 per cent in the past year, while the Stoxx travel and leisure index has fallen by a similar amount. If he can go on making good use of cash, investors will continue to check in, not out.

Marriott Vacations has agreed to a $5.1bn deal to purchase timeshare operator ILG in a cash-and-stock transaction that will create one of the largest luxury holiday operators.

ILG shareholders will receive $14.75 in cash and 0.165 shares of Marriott Vacations for each share in the company, worth $4.7bn. The deal values ILG at roughly $5.1bn including the company’s net debt.

Marriott Vacations said the combined group — which will operate vacation clubs under the Marriott, Ritz-Carlton, Sheraton and Westin brand names — would have revenues of $2.9bn and hoped to find cost savings of $75m a year within two years of the deal completing.

“This transaction will combine two of the premier global vacation ownership companies to create a more diversified company with significantly enhanced marketing potential and scale to drive sales growth and value for both Marriott Vacations and ILG shareholders,” said Stephen Weisz, chief executive of the buyer.

Shares in ILG rose more than 5 per cent in pre-market trading in New York. Marriott Vacations’ shares slipped marginally.

S/TMUS – S = 0.10256*TMUS (or TMUS=9.75*S). $25.6B all stock merger; shareholder votes will be required from both parties; S trades approx. 15,485,077 shares per day and has a short interest of approx. 20.1%; TMUS trades approx. 4,115,913 shares per day and has short interest of approx. 2.8%; we will use $4.85 – a recent low – as S initial break price and assume TMUS trades flat on a break; after close TMUS parent Deutsche Telecom AG will control 42%, S parent SoftBank Group will control 27%, and the public will control the remaining 31% of the combined company; SoftBank will give a proxy to Deutsche Telecom to vote its new T-Mobile shares (giving Deutsche Telecom 69% control of the new company); the combined company will be called T-Mobile; parties expect more than $6B annual run rate synergies (with an approx. NPV of $43B); the combined company is expected to have leverage of approx. 2.9x Net Debt/LTM Adjusted EBITDA at close (and the secured debt is expected to have an investment grade rating) which the parties expect to bring down over the next several years; there are no regulatory break fees; TMUS will provide S a roaming agreement for 4 years which agreement will survive the termination of the deal; the parties will not be paying dividends (neither pays dividends currently) or doing share buybacks during the pendency of the deal.

Initial deal view. OG Risk Arb will initially use an estimated close date (or here initial break date) of 6/30/2019 in line with the Parties’ closing guidance of no later than the first half of 2019. We note that the DOJ might preemptively sue or threaten to sue like they did in TMUS/T raising the possibility the deal breaks more quickly. We will initially use an over 80% probability of a 2nd request by the DOJ (our highest rating) as this deal represents the type 4 to 3 horizontal merger in a highly concentrated industry which almost always receives an elongated review by the DOJ and in which the DOJ ordinarily seeks enforcement in the form of litigation or a consent decree based on a strong structural fix. Unless the parties can offer a credible fix (also very difficult here) such as perhaps divesting large parts of S and/or TMUS to a credible buyer like DISH (effectively creating a new

number 4 national mobile player by combining DISH’s spectrum with everything else it needs (e.g., access to towers, retail stores, contracts with device manufactures, etc.) to start competing with the other large mobile providers now) it is hard to see how this deal can receive DOJ approval. Although DISH needs to put its spectrum to use soon and may be interested in facilitated entry there is no mention of DISH or any other proposed fix in the deal press release and on the deal conference call the parties said divestiture is not how they see this deal getting done. The parties’ regulatory strategy appears to be based on attempting the convince the DOJ and the FCC that the deal is pro-competitive because the deal will result in a stronger competitor to T and VZ who will do a better job of rolling out a high quality 5G network than either party would have done on its own. Although this argument has some facial appeal, we believe the parties will have a difficult time convincing the DOJ that this deal will not result in price increases to consumers. We also do not believe it is likely the White House will order the DOJ to allow the deal. We note that even if the DOJ loses in the TWX vertical merger litigation (as it appears is likely) this probably will not affect how the DOJ approaches this horizontal deal. If this deal is litigated, we would have to initially assume the DOJ would likely win, the DOJ could easily establish a prima facia case with these market shares and the burden would be on the defendants to show the deal is not anti-competitive. The lack of antitrust break fee shows the parties realize their chances of success in litigation are low. Although a FCC approval may in theory be easier to obtain from Chairman Pai than Chairman Wheeler, we do not see the FCC materially influencing the DOJ’s competition analysis. The parties will also need CFUIS approval. We note that although they are likely to obtain such approval there is more risk surrounding such an approval now than there was when Softbank obtained approval to acquire its controlling stake in S. OG Risk Arb will initially use a 30% chance of deal close.