On Thursday a consortium led by Li Ka-Shing’s company Cheung Kong Infrastructure emerged as the winning bidder in an auction for Electricite de France (EDF)’s electricity distribution networks in the United Kingdom. The networks service around 7.8 million customers and provide around a quarter of electricity power in the UK.
The auction for the assets was keenly contested and, to trump the competition, CKI agreed to pay £5.8 billion ($9.1 billion), making the deal the largest-ever Hong Kong investment into Europe and one of the largest recent deals from Asia into Europe.
But the deal also set a record for Li’s adviser, Royal Bank of Scotland. It is the largest-ever sole M&A mandate executed by RBS.
A deal of this size often has multiple advisers. Consider that representing EDF on the sell-side were Deutsche Bank, Barclays Capital and BNP Paribas. So, the fact that RBS won this business on a sole basis is even more noteworthy.
Some RBS competitors suggest the British bank won the business by agreeing to lend balance sheet. But a source close to the deal said such comments are just disgruntled competitors twisting the facts. And a closer look at how the deal is being financed corroborates the view that the allegation is unfounded. Term debt of £665 million is being raised at the operating company level. Seven banks are participating equally and the deal is structured as a club deal, that is it would have been pre-marketed to a group of lenders and each lender will get a cut of the fees. As lead arranger, RBS would have tested the banking world before forming the consortium, but terms and conditions are consistent with club deals and there are no unusual conditions, added the source.
Other bankers have suggested that Li is paying a miniscule advisory fee, not commensurate with the size of the deal. This could be the case, but for a deal of this size, fees are rarely paid as a percentage. And many banks would have agreed to some discount on their normal advisory fees to win business from Li, who is a repeat and regular user of investment banking services.
EDF appointed banks to sell its UK assets in the fourth quarter of 2009. Li held a beauty contest shortly thereafter in which eight banks were invited to participate. “The banks were a mix of lending banks and Wall Street investment banks,” said the source.
What is also interesting is that Goldman Sachs has no role on the deal. Goldman has historically enjoyed a monopoly on much of Li’s business to the extent that rival investment banks sometimes refer to Goldman as in-house banker for Li. Last year, Goldman started the year with highly-coveted sell-side mandates for Li’s telecommunications businesses in Israel and Australia, ensuring that the firm’s telecoms, media and technology practice was one of the highest revenue earners on the street at year-end. Earlier this year Goldman worked with Li on the privatisation of Hutchison Telecommunications International (HTIL).
Goldman did have a role on the EDF deal, albeit not working for Li. The US investment bank was adviser, alongside Macquarie’s investment banking team and Lexicon Partners, to another bidding consortium comprising Macquarie, Canada Pension Plan and the Abu Dhabi Investment Authority. A source confirmed that the Macquarie-led consortium was in the fray until the end and the bidding was highly competitive. It is possible that Goldman had already sewn up its role as adviser to the rival consortium when Li was making his selection. Or Goldman could have decided chances of success were higher for its client.
Whatever the case, RBS has clinched and closed a deal that many banks will no doubt cite as their big miss at the end of the year. This goes a long way to bolstering the RBS claim that it intends to build a solid and serious M&A practice.