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US + UK M&A: the march of the national security reviews

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One scoop to start: Deutsche Bank faces the threat of a European Central Bank investigation after buying and selling its own debt for more than three years without regulatory approval. More here

Now to today’s main topic . . .

If you needed further proof that dealmaking was going to get more complicated look no further than recent national security developments in Washington and London. 

The US government is on the verge of giving the inter-agency Committee on Foreign Investment in the United States further powers to review deals in tech, infrastructure, data and even real estate. 

Meanwhile, the UK government has intervened in the £4bn takeover of aerospace and defence group Cobham by a US private equity firm, to assess whether there are national security concerns. 

What does it all mean? These are clear signs from two of the world’s largest economies that cross-border dealmaking may become even harder to complete. Good news for lawyers, bad news for bankers. 

In Washington, officials at the Treasury department have finally made public their plans to implement legislation passed by Congress last year. Hot take: Cfius is getting a shot in the arm. 

That’s clear from their inclusion of minority stakes and property deals, both of which were previously outside its scope. 

It will come as no surprise to DD readers that the Trump administration is taking a more protectionist approach to dealmaking. We’ve been talking for a while about the drop-off in cross-border deals in an otherwise booming M&A market — at least in the US. 

Other countries are also following suit. Even Britain, where government intervention in dealmaking is unusual, has conferred more power to UK regulators to block deals on public interest grounds under the Enterprise Act 2002. 

Of the nine probes into national security concerns, eight have been cleared. Nevertheless, in recent years new rules for takeovers have been introduced in response to concerns that sensitive technology was being snapped up by foreign buyers, particularly Chinese companies. 

The same (predominantly anti-Chinese buyers trend) is spreading across Europe. Germany and France launched an initiative last year to introduce more rigorous screening of foreign takeovers of EU companies, especially those with suspected state backing (ie. Beijing supported companies). 

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Despite all this, the US and UK insist they are still open for business, perhaps with some more than others. 

Check out this animated video produced by DD’s Arash Massoudi and James Fontanella-Khan on the topic. 

If you want to continue the conversation on how national security has risen on the M&A agenda, register your interest to attend DD’s forthcoming event in New York on October 2 with Mark Plotkin of Covington & Burling and Ivan Schlager of Skadden Arps, Slate, Meagher & Flom, two of the top experts on the subject. 

Hong Kong broker is forced to take sides 

Swire Group can’t catch a break. 

The company — which was founded in Hong Kong in the 19th century and is one of the last remaining hongs, or British trading houses, in the territory — drew the ire of Beijing in July, after a pilot for Cathay Pacific, one of its subsidiaries, was arrested at a pro-democracy protest.

Contagion is now threatening to spread to other parts of Swire, which controls, among other things, a substantial property portfolio and a beverages division with the licence to bottle Coca-Cola

The FT revealed on Wednesday that Citic Securities, China’s largest investment bank, had ordered its subsidiary CLSA to review its tenancy with Swire. The directive came from senior management at the state-owned bank, multiple people with direct knowledge of the situation said. 

CLSA said it isn’t moving.

As China’s dominant investment bank, Citic knows where its loyalties lie but CLSA could end up becoming a political liability for the firm, writes the FT’s Lex. 

Swire’s predicament makes apparent the bind that companies in Hong Kong are in.

The political environment is increasingly febrile, every act is under scrutiny, and a mis-step risks alienating the few million pro-democracy protesters who have taken to the streets over the past three months, or singeing relations with the world’s second-largest economy.

BNP Paribas was the latest multinational to find itself in the crosshairs, after one of its employees was singled out by Chinese state-run paper The Global Times for having allegedly offended pro-China groups.

In that context, companies are keeping their heads down and are quick to assert that it is “business as usual” in Hong Kong. Swire, which has seen its shares slide by 20 per cent since the arrest of the Cathay pilot two months ago, might be wishing for a return to business as before.

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Will Oyo be SoftBank’s saviour? 

SoftBank, disenchanted with the performance of one of its most famous unicorns, WeWork, can find solace in another fast-growing property start-up — Oyo

The Japanese investment group has taken a big bet on the Indian hotel company, which has ambitious plans to become the world’s biggest hotel chain. At its current pace of growth, Oyo could also become one of SoftBank’s largest ventures. 

Founded by Ritesh Agarwal six years ago when he was 19-years-old, Oyo says it already has some 1m rooms, placing it third in the list of hotel chains. At $10bn, Oyo’s valuation is significantly lower than the likes of Uber or WeWork but investors are ploughing money into the company. 

DD can see why they’re drawn to it: charismatic founder, roaring growth, soaring value, and financial quirks . . . sound familiar? 

Much like WeWork, Oyo’s valuation has drawn scrutiny. We’ve already touched on this in an earlier DD newsletter but it’s important to point out that Agarwal led a $2bn investment round into his own company by borrowing money in order to buy shares from existing investors Lightspeed and Sequoia.

Even in the weird and wacky world of start-ups, that’s a rare move. It helps Agarwal consolidate his control over the business as it pushes ahead with an aggressive expansion plan in the US and Europe. That could come back to bite if WeWork is anything to go by. 

What’s more, people close to the deal told the FT that a consortium of Japanese financial groups including Nomura and Mizuho, which count SoftBank as one of its biggest clients, helped finance Agarwal’s purchase.

SoftBank and other investors say Oyo has tapped into a potentially revolutionary model by organising previously fractured budget-accommodation markets.

At the risk of belabouring the point, Oyo, like WeWork, is a property company with a business model that can be replicated by incumbents. 

So far Oyo has largely operated in a hospitable home market, but driving out larger companies like Marriott International could be more difficult. Still, Oyo’s backers are optimistic.

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Munish Varma, managing partner at SoftBank’s Vision Fund,said “it’s very hard to put a limit as to the kind of growth, return, the market share that these guys could achieve”. 

Read the full FT analysis from Benjamin Parkin and Kana Inagaki here.

Job moves

  • Investcorp has added Frances Fragos Townsend, the executive vice-president for worldwide government, legal and business affairs at MacAndrews and Forbes, to the group’s international advisory board. 

  • Orrick has hired corporate adviser Ed Lukins as a partner based in the law firm’s London office. He joins from Cooley, where he helped found the London office.

  • Ashurst has hired Betty Cerini from the law firm Dewey & LeBoeuf. She will join as co-chair of the law firm’s infrastructure team covering the America’s, alongside Andy Fraiser

  • Latham & Watkins has hired Chris Horton as a partner in the firm’s corporate department in London. He joins from Simmons & Simmons.

Smart reads

Rigged capitalism The FT’s Martin Wolf delivers a devastating indictment of rentier capitalism. (FT)

The WeWork worldview Who wants to live forever? Adam Neumann does. Take a look inside WeWork’s wild ride from modest start-up to one of the country’s most valuable companies. There are some incredible anecdotes about the company’s chief executive. (WSJ)

Netflix can’t chill Netflix successfully took on the Hollywood hierarchy and spearheaded a streaming revolution that changed the way the world watches TV and films. Now it’s facing wealthy rivals and mounting debt. How will the story end? (FT)

Nothing to see here After a drone attack that cut off 50 per cent of its oil supply, Saudi Arabian officials face the unenviable task of convincing the world that the national oil company can be protected from geopolitical risks. (FT)

News round-up

AT&T explores parting ways with DirecTV unit (WSJ)

Oaktree looks to China, private debt amid distressed drought (BBG)

Cisco offered $7bn-plus for DataDog as company prepares to IPO (BBG)

Cobham/Advent: royal air farce (Lex)

Los Angeles Dodgers complete minority stake sale (BBG)

SoftBank-backed Nemaska Lithium hits setback as bondholders walk away (FT)

Wall Street banks look to sell more research to companies (FT)


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