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Barclays Will Have To Hire A Helper Next Time It Plans To Maybe Hose A Sell-Side Client

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A while back Del Monte Foods agreed to be bought by KKR, with Barclays advising Del Monte on the merger. After the deal was announced, Barclays ran a go-shop period for Del Monte, which found no better bidders. The thing about that was that Barclays was providing KKR's financing for the deal - and that KKR was paying Barclays more than Del Monte was. Some people thought that was kind of shitty, they sued, a Delaware court agreed, it enjoined the deal, a boutique bank (Perella Weinberg) had to run a second go-shop, there was a lot of weeping and wailing and judges saying things like:

Barclays secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buy-side financing fees. On multiple occasions, Barclays protected its own interests by withholding information from the Board that could have led Del Monte to retain a different bank, pursue a different alternative, or deny Barclays a buy-side role. Barclays did not disclose the behind-the-scenes efforts of its Del Monte coverage officer to put Del Monte into play. Barclays did not disclose its explicit goal, harbored from the outset, of providing buy-side financing to the acquirer.

It was a thing.

Now it's going to be less of a thing:

Barclays Plc (BARC) is leading investment banks in a retreat from a form of leveraged buyout financing that has made the firms and their clients vulnerable to allegations of a conflict of interest. ...

Since the Del Monte opinion, no firm has offered sell-side financing for a U.S. public company buyout valued at more than $1 billion, according to data compiled by Bloomberg. In the previous 2 1/2 years, it was offered about 40 percent of the time for deals of that size. At least nine major investment banks, including Barclays, have reviewed their lending practices, said people familiar with the matter, who declined to be identified because the discussions are internal.

Changed practices range from "add[ing] a new layer of review when providing sell-side financing that requires senior bankers to sign off on any such funding" to telling "bankers that sell-side financing should only be pursued if the client insists on it or the financing is difficult to find in the market." Adding a boutique adviser who is not in line to get the buyer financing mandate is also required by most/all of the policies.

Which has to be kind of a bummer for the big banks. Barclays in particular is building its M&A business in part on the back of ability to lend to everyone. Financing fees are often a multiple of M&A fees, and bankers being what they are no one will feel good about a $20 million sell-side M&A fee if it means that you're conflicted out of $40 million in financing fees.

So policies like "have a senior committee review whether we'd like more fees or less fees" are probably just formality - "our conflict committee approved it, so it must not have been a conflict!" On the other hand, policies like "don't provide buyer financing if you represent the seller" will make a lot of bankers really sad and slightly less rich, which means that they're unlikely to last.

Which is why I suspect that this will devolve into a pretty standard contact management mechanism for banks who (1) provide everything (advisory/financing/lending/derivatives/lap dances) that their client might need and (2) do it on a counterparty model. That is, informed consent with an independent adviser. The SEC has proposed rules that allow banks not to act in the best interests of their muni derivatives clients, so long as those clients have an independent adviser with adequate brains to point out the most obvious scams.

And the banks' sell-side financing policies are likely to shake out the same way: "you can provide financing to buyers so long as the seller has also hired a boutique who just wants to do the deal and isn't in it for the financing fees." Some of the policies already mention this, and after all it has the explicit approval of the Delaware court in Del Monte, which ordered a second, supposedly fairer go-shop period managed by Perella Weinberg.

Which is all sort of a nice balancing of the ecosystem. The financial world has been moving to a model where giant universal banks like JPMorgan and, yes, Barclays can lock up M&A business by lending, lock up financing business via M&A, and generally squeeze out smaller competitors by providing one-stop shopping for all of a client's financey needs. When courts, banks and clients start to question whether that's always in the client's best interests, that may be good for clients - though Del Monte never did get a bid to top KKR's, and though buyers get financing may get the seller a better price - but it's definitely good for keeping boutiques and smaller banks relevant. Which, if you worry about too-big-to-fail, or if you just like having Perella Weinbergs and Qatalysts in the world to go with your JPMorganChases and Bank of Amerrilwides, is probably a good thing.

Barclays Leads LBO Financing Retreat After Del Monte Criticism [Bloomberg]


Delaware Judge Driven To Possibly Obscene Energy Industry Euphemism By Kinder-El Paso Merger

Delaware Chancellor Leo Strine has a bright future in blogging if chancelling doesn't work out for him. Here's how he describes Kinder Morgan's negotiations to buy El Paso, specifically KMI CEO Rich Kinder's price retrade with EP CEO Doug Foshee: Kinder said “oops, we made a mistake. We relied on a bullish set of analyst projections in order to make our bid. Our bad. Although we were tough enough to threaten going hostile, we just can’t stand by our bid.” Instead of telling Kinder where to put his drilling equipment, Foshee backed down. I umm ... I'm pretty sure that that quote from Kinder is approximate. Anyway, this is from Strine's opinion refusing to block the KMI-EP merger from proceeding even though he is pretty pissed about some of the apparent conflicts of interest in the deal, including that Goldman Sachs owns almost 20% of KMI while also advising EP, that the lead GS banker owned some KMI stock that he didn't disclose, and that Foshee negotiated the merger single-handed while also maybe thinking about possibly LBOing EP's E&P business for his own self. Lucrative though my current pseudoprofession is, I suspect that if Strine ever leaves the chancelling racket he'd probably prefer to try his hand at merging and/or acquiring. Certainly he is fond of dispensing tactical advice:

Goldman Surprised To Find Carl Icahn Being Kind Of A Dick

Sell-side M&A work is mostly a pretty good and lucrative business model but it has a few flaws. Try to spot a key one here: (1) you represent a target; (2) you spend your days fighting tooth and nail with the buyer to try to make them pay more and give up optionality, and generally to get more of the benefits of the deal for the target than for the buyer; (3) then the buyer acquires the target, fires all the directors and officers, changes the locks, and replaces the stationery; (4) then you get paid. Did you spot the problem? Carl Icahn did: