MoneyFitt

13 December 2022

🇭🇷🇦🇷  ⚽️  🇲🇦🇫🇷

Happy Tuesday🎄!

US large-cap S&P 500 closed 1.43% UP ▲ Tech-heavy Nasdaq Composite closed 1.26% UP ▲ Pan European STOXX Europe 600 closed 0.49% DOWN 🔻 HK’s Hang Seng Index closed 2.2% DOWN 🔻🔻Japan’s Nikkei 225 closed 0.21% DOWN 🔻

📊 IN THE MARKETS

Softish landing, CPI, 1212 Deals, Serbian Terra

📝 FOCUS

1212 Deals galore! Data! Grills! Flavour! Drugs! SaaS!

📖   MoneyFitt EXPLAINS

🎓 Private Equity (PE)

📊 IN THE MARKETS

US markets rallied into the close ahead of inflation numbers today and then some key central bank meetings starting with the Fed tomorrow, followed by the ECB (the European Central Bank), the Bank of England and the Swiss National Bank on Thursday. All are forecast to raise interest rates at a slower pace, despite inflation that remains stubbornly high. That said, recent data, on balance, seem to show that inflation is moderating, leading some insightful, highly-paid investment bank strategists to foresee that a soft landing (in which labour markets cool but the economy does not enter a recession) is possible. After, of course, hearing this:

Consumer inflation (represented by the consumer price index, or “CPI”) data later today is expected to show prices gained 7.3% in November compared to November last year, down from a 7.7% rise in October, while the core rate (excluding food and energy prices, which can be volatile) should decline to 6.1%, after 6.3% in October.

A bunch of deals saw companies coupling up on 12-December, helping markets close firmer overnight, too. See FOCUS below.

Meanwhile, South Korean prosecutors say Do Kwon, the crypto fugitive co-founder and CEO of Terraform Labs, is hiding out in Serbia via Dubai. His company was behind the then-$18-billion algorithmic “stablecoin” terraUSD (UST) that was deppeged from the US Dollar in May, quickly sending luna (LUNA), the token that was supposed to stabilise UST, on a downward spiral, initiating, some say, the “crypto winter.” (USTC TerraClassicUSD is US$ 0.0261 today, from about US$1.00 before May.)

Perhaps he should follow the example of Caroline Ellison, the ex-Alameda Research CEO, who has hired a former top crypto regulator with the US Securities and Exchange Commission (and who, as a director at the Enforcement Division, brought cases against Robinhood and Ripple) to represent her in the ongoing federal probe.

📝 FOCUS

1212 Deals galore! Data! Grills! Flavour! Drugs! SaaS!

Microsoft traded up 2.9% (adding US$53 billion to its market capitalisation, the number of shares times its share price) on its GBP1.5 billion investment in the London Stock Exchange Group (LSEG, pronounced “ell-segg” – yeah) for a 4% stake. This secures a 10-year deal to improve LSEG’s data and analytics, including using Microsoft’s Azure cloud platform. Despite the name, LSEG is primarily a data company, with key businesses providing market and financial data (Refinitiv) and indices (FTSE, Frank Russell).

LSEG claims it’s “far, far different to simply lifting and shifting assets to the cloud… a significant strategic partnership where we’re building products together and accessing markets together”… well, OK then. Anyway, it’s an investment-for-partnership deal that’s similar to Google Cloud’s with the CME and Amazon Web Services’ with Nasdaq, which shows how competitive the cloud infrastructure business has become, particularly with data-heavy companies such as exchanges. Worldwide spending on public cloud services is forecast by Gartner to grow 20.7% to total US$592 billion in 2023, up from US$413bn and US$490bn in 2021 and 2022, and hit US$1 trillion by 2026.

Weber (the grill company) was on fire, rallying 23% on being taken private by BDT Capital Partners for US$4 billion, while Danish flavouring company Novozymes (down 15%) is buying smaller rival Chr. Hansen (up 18%) for an all-share deal at around US$11 billion. Irish biotech firm Horizon Therapeutics surged 16% following a US$26 billion buyout offer from US-based Amgen to get access to Horizon’s pipeline of drugs for rare autoimmune and inflammatory diseases, including its blockbuster treatment Tepezza. 

And then cloud-based Business Spend Management platform Coupa Software traded up 27% after agreeing to sell itself to private equity 🎓 firm Thoma Bravo in a leveraged buyout (LBO).

Though a comparatively small deal at US$6.2 billion, Coupa is interesting because, unlike the others, it is not profitable. Compared to other listed SaaS (“Software as a Service”) companies, Coupa’s revenue growth is slower (22% vs 31%) and its gross margins (total sales less cost of goods sold as a percentage of revenue) are lower. And yet Thoma Bravo, which invests only in software companies, paid 77% over the “Unaffected Stock Price” (meaning before talk of the deal was in the market price) after a bidding war with rival PE 🎓 firm Vista Equity. This price comes to 8.4 times the revenue forecast for the next twelve months, or NTM, compared to 6.0x for its peers. 

But because it’s a leveraged buyout (in which the buyer uses a company that takes on a load of debt to buy out the target company that it then merges with, debt and all) the key metric is operating cashflow as a percent of revenue because those dollars pay off the heavy interest burden for the leveraged buyout’s debt. On this metric, Coupa’s 22% is more than double that of its peers at 10%. (Strong cash flows often indicate a healthy underlying business.)

See MFM’s Explainer on LBOs from November

Thank you for spending a few minutes of your time with us. Remember to take time for yourself and be thankful for what you have.

📖 MoneyFitt EXPLAINS

🎓 Private Equity (PE) 

Private Equity (PE) firms operate in a very lucrative part of the financial world, buying and selling companies whether listed on an exchange or not, and full of financial engineering, strategic management, big fees and even bigger egos. Morals are optional.The super-rich and institutions invest in PE funds as limited partners (LPs) in a fund run by general partners (GPs) from the PE firm. The LPs pay the GPs an annual fee (usually 2%) based on what is invested during the life of the fund (eg 7 years) as well as a share of gross profits (usually 20%, known as “carried interest”.) These fees can make GPs billionaires.The fund invests in an undervalued company and using connections, management skills and financial engineering, makes it more valuable to sell off at a profit. The fund can give guidance and advice, replace management, change the amount of debt and workers it has or transform the business in any other way. The company may be listed but then get taken over by the PE using loans in a leveraged buyout or LBO. The sale may be to another company or listed in an IPO. (In “Asset stripping” by corporate raiders, the company can cease to exist as it gets loaded with debt, axes workers and has its assets sold off at a profit.)Blackstone, Carlyle, Texas Pacific (TPG), KKR, Thoma Bravo, Apollo and CVC are among the largest players.

Please do your own research – we create educational and entertaining content so you can start the day understanding the financial and business worlds a little better. However, this is NOT financial advice.

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