The M&A deal that almost nobody wants

One thing to start: Jason Kilar, chief executive of WarnerMedia, is leaving the company along with most of his senior leadership team on the eve of its takeover by rival Discovery.

Jason Kilar is leaving WarnerMedia after purportedly being left in the dark during negotiations over its merger with Discovery © Reuters

Channel 4: when politicians are on the sellside 

The funny thing about the British government’s plan to privatise Channel 4 is that it’s very hard to find anyone in the private sector who thinks it’s a good idea.

Culture secretary Nadine Dorries has fired the starting gun on a sales process for the public service broadcaster launched by Margaret Thatcher almost 40 years ago. Government insiders hope it could bring in over £1bn, the FT’s Patricia Nilsson, Alex Barker and Jasmine Cameron-Chileshe report.

The decision announced by Nadine Dorries was described by Damian Green, the former deputy prime minister who started his career as a Channel 4 journalist, as ‘very unconservative’ © AFP via Getty Images

For cash-rich private equity groups, the rationale isn’t obvious. Lex estimates an annualised return of 13 per cent, “barely worth the effort”, on a leveraged buyout.

And domestic rivals such as Sky or ITV could face regulatory scrutiny into their advertising market share if they were to swoop in.

Because it doesn’t keep the underlying rights to its hit shows like It’s a Sin and Black Mirror, Channel 4 never built its own in-house production arm or accumulated a library of rights — the type of assets prized by would-be buyers in the streaming age.

It would in effect be selling its brand, its headquarters, and its public service remit — whatever shape that might ultimately take — one banker said.

Presenters of Channel 4’s ‘The Great British Bake Off’ (left to right): Paul Hollywood, Noel Fielding, Prue Leith, Matt Lucas © Mark Bourdillon/Love Productions

“Nobody really wants to buy Channel 4,” a media executive told the FT. “But nobody wants any of their rivals to own it either.”

There’s opposition from the board of Channel 4 and from senior Conservative MPs. The broadcaster itself said the plans are “disappointing”. 

And the House of Lords, which has strongly opposed past attempts at privatisation, could thwart the process of getting parliament’s approval for a sale. The privatisation process would be a lengthy one, with important details on Channel 4’s public service remit yet to be decided. Bids are expected in 2023 at the earliest.

Channel 4 and the Conservatives famously drifted into a cold war in late 2019, when Prime Minister Boris Johnson was replaced by a melting ice-sculpture on live TV after he refused to take part in a Channel 4 election debate.

Conservative MP Julian Knight has pointed to the “elephant in the room” and asked whether the government’s decision was “revenge” for the channel’s perceived “biased coverage” on issues including Brexit.

Dorries says “government ownership is holding Channel 4 back from competing against streaming giants like Netflix and Amazon”. 

But changing Channel 4’s ownership is unlikely to unleash such a competitor, writes the FT’s Cat Rutter Pooley, since Channel 4’s roughly £500mn budget for original content is dwarfed by the $100bn-plus that is due to be spent by the top eight US media groups this year.

The airline deal on a collision course with regulators

When JetBlue swooped in with an offer to buy Floridian ultra low-cost carrier Spirit Airlines on Tuesday, analysts had the same thought as Spirit passengers boarding a $26 one-way flight from Columbus to Fort Lauderdale: it’s not adding up.

America’s sixth-largest airline has crashed Spirit’s plans to merge with rival Frontier Airlines with a $33 per share all-cash bid with debt financing led by Goldman Sachs.

That’s more than 40 per cent greater than the implied Frontier transaction, Lex points out.

But that premium only matters if JetBlue can get the deal off the ground. And DD doubts the Federal Trade Commission and its anti-monopolistic head Lina Khan will be rushing to clear it.

Frontier agreed to buy rival Spirit for $6.6bn in February, signalling what would be the first large airline merger since the industry was grounded in 2020 by pandemic-induced lockdowns and travel bans.

© Bloomberg

The tie-up makes sense. For our European readers lucky enough to have flown on neither, Spirit and Frontier are essentially the US versions of Ryanair and easyJet. Think rock-bottom fairs, and hidden fees on luggage and seat selection. By joining forces, the two could better compete with America’s “Big Four” airlines — American, United, Delta and Southwest — which together control 77 per cent of the domestic market.

JetBlue, on the other hand, has invested heavily in more premium amenities such as lie-flat business class seats and wireless internet. Raymond James analysts dubbed its bid for Spirit an “indecent proposal”— factoring in labour costs (particularly pilot pay) and retrofitting Spirit aircraft to meet JetBlue standards.

However a JetBlue-Spirit tie-up would be “more beneficial to the industry as a whole”, they added, and make Frontier the only carrier with an ultra low-cost model.

Neither suitor is expected to easily charm regulators. US lawmakers including senator Elizabeth Warren already warned that a Spirit-Frontier merger could hurt consumers and increase ticket prices.

JetBlue also finds itself in the crosshairs of the Department of Justice, which filed an antitrust suit last year against it and American Airlines, the US’s largest carrier, over their “north-east Alliance”, a partnership in New York and Boston that provides reciprocal frequent flyer benefits.

‘The timing was definitely driven by the [Frontier] announcement,’ says JetBlue chief executive Robin Hayes © Bloomberg

JetBlue made a failed bid for Virgin America, which was ultimately bought by Alaska Airlines for $4bn in 2016 — the last airline merger greenlit by the DoJ.

The New York-based carrier said it was “highly confident” the deal wouldn’t be blocked and promised to pay a big break-up fee if proven wrong. DD hopes it has some more cash set aside just in case.

KPMG and the revolving door that kept spinning

DD readers are by now well-informed on the “revolving door” that rotates between prestigious policy jobs and the world’s top banks, corporate law firms, auditors and advisers.

That door has swung too fast before — take Alex Oh, the ex-Paul Weiss lawyer whose history defending ExxonMobil led to her resignation as US Securities and Exchange Commission’s new enforcer after just six days.

One of the most egregious examples of a leap between public and private sectors gone awry, however, comes from a regulator you may have never even heard of.

Enter the Public Company Accounting Oversight Board, a US watchdog set up within the SEC in the post-Enron disarray in the early 2000s. On Tuesday, the regulator hit KPMG’s former head of audit Scott Marcello with a $100,000 fine for failing to supervise employees who received illegal tip-offs from — get this — the PCAOB itself.

The scandal dates back to 2017, when KPMG fired Marcello and five others for their alleged roles in the Big Four firm’s use of stolen PCAOB data, which helped it identify which of its audits would be scrutinised by the watchdog.

Among them were former PCAOB staffers-turned KPMG employees Brian Sweet and Cynthia Holder. Jeffrey Wada, a former PCAOB inspector, was sentenced to nine months in prison in 2019 for his role in the affair. He had been accused of providing Holder with inspections data in the hope of also getting a job at KPMG.

“God this place sucks. Please let me know what else you need from me,” he wrote to her in one email.

It’s common for former watchdogs to join industries they once oversaw. Take former SEC chair Jay Clayton, who sits on the boards of a crypto asset manager and serves as Apollo Global Management’s lead independent director.

But if the PCAOB/KPMG saga teaches us anything, it’s the danger of keeping one foot inside the revolving door.

Job moves

  • Evan Russo, Lazard’s chief financial officer, has been named chief executive of the investment bank’s asset management business. He succeeds Ashish Bhutani, who is retiring as chief executive of Lazard’s asset management business.

  • Craig Russell, vice-chair of Goldman Sachs’ asset management unit, is leaving to join Blackstone, per Bloomberg. His departure marks one of at least three moves by Goldman bankers to the private equity group in the past month.

  • Communications agency TB Cardew has named Will Tanner as head of public affairs. He was most recently director of corporate affairs for the UK and Ireland at Alstom, and before that led public affairs at Finsbury.

  • Paul Hastings has hired 18 financial restructuring partners in New York and Los Angeles.

  • Linklaters has hired 41 new partners globally.

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News round-up

​Blackstone weighs takeover bid for Italian infrastructure group Atlantia (FT)

Former Credit Suisse investment bank chief was probed over misconduct (FT)

VTB Capital seeks to enter administration after ‘paralysing’ sanctions (FT)

Dubai lures clutch of big crypto firms with tailored regulations (FT)

HSBC buys bigger stake in its China securities venture (Reuters)

‘Singaporeans must benefit’: expats fleeing Hong Kong meet rising resentment (FT)

Asset managers: higher rates will not put brakes on M&A (Lex)

SEC is investigating how Amazon disclosed business practices (FT)

Makers of Axie Infinity game raise $150mn after massive crypto hack (FT)

Facebook owner Meta targets virtual currency market with ‘Zuck Bucks’ (FT)

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