Deutsche Bank has been mandated to advise Li Ka-shing in his bid for the UK electricity distribution assets of German power group E.ON, demonstrating once again why M&A is the most unpredictable of the investment banking businesses.
One of the most talked about M&A deals of 2010 was Li Ka-shing’s successful bid for Electricite de France's (EDF) distribution networks in the UK. A consortium led by Cheung Kong Infrastructure, which is controlled by Li, trumped the competition with a winning bid of £5.8 billion ($9.1 billion). Li was advised by the Royal Bank of Scotland. Goldman Sachs, which does a great deal of work for Li, was representing a competing bidder.
The bidder who Li pipped to the post was a consortium comprised of Macquarie, Canada Pension Plan Investment Board (CPPIB) and the Abu Dhabi Investment Authority (ADIA). The Macquarie-led consortium was advised by Goldman Sachs and Lexicon Partners.
Decisions on which clients to back in competitive M&A situations are always tricky. Different regions often have competing interests and decisions are made at the firm-wide level, rather than regionally, about which clients have the highest chance of success. There is also usually the consideration of wanting to build goodwill or a relationship with a client.
As for RBS, the CKI advisory mandate was the largest-ever sole M&A mandate executed by the bank. It gave RBS an opportunity to build an advisory dialogue with one of Asia’s savviest asset traders. Some specialists expected RBS would have an advantage in winning Li's next M&A buy-side mandate, especially if it was again in the UK where RBS has a strong franchise and has closed two deals for Li.
Roll forward to the end of last year when German power group E.ON embarked on its plan to rationalise its asset portfolio. J.P. Morgan is working on the sell-side with E.ON and among the first assets on the block are those in the UK, which make up the UK’s second-largest electricity network.
In December, E.ON reportedly granted exclusivity to a consortium that included ADIA and CPPIB. These bidders were again working with Goldman Sachs and Lexicon. A deal was expected to be struck within calendar 2010 or in January of this year.
But there is a reason investment banks do not attribute high successes of probability to M&A deals until they are closed (and nowadays, given regulatory uncertainties, approved). The ADIA-CPPIB consortium could not clinch the deal.
Media is now reporting that Li is close to a deal, as only he and one other bidder remain.
And, as noted earlier, on this bid, Li is working with Deutsche Bank, which has flipped to his side of the table after being on the sell-side, alongside Barclays Capital and BNP Paribas, on EDF's sale of its UK networks to the CKI consortium.
Some of Deutsche's competitors will no doubt suggest the German bank won this business by lending balance sheet. This was something we heard last year too about why RBS was appointed on the EDF mandate - and was incorrect as the subsequent EDF financing package showed. But, also, as we have been noting over the last few months, banks in the region are going to have to start using their balance sheets to support the cross-border M&A forays of their Asian clients. And few bankers would argue that Li, who is a repeat customer for investment banks, shells out large fees, and pulls off ambitious refinancings, might justify using the balance sheet, albeit judiciously.
Deutsche has started the year on a good note with Li. The bank, along with Goldman and DBS, is also working with the Hong Kong tycoon on his plans to spin off Hutchison Whampoa’s port assets in Hong Kong, Macau and the Guangdong province and list them as a business trust on the Singapore Exchange.
What is emerging from all this is that the contest for business from Li, as with most clients, is a reasonably open one. And investment banks that tell us at the end of the year that they were not present on a Li Ka-shing mandate because Goldman has sewn up the business are way off the mark.
Deutsche and RBS, which would presumably both cover Li out of Hong Kong on the relationship side, had no comment. Goldman Sachs and J.P. Morgan, which are both likely to be handling the E.ON deal out of Europe, also declined to comment.