_{STRATEGIC DEAL OF THE MONTH}

Half Cash, Half Stock

I mean, do I really need to cover this one? I feel like Ryan Cohen kind of nailed it on CNBC. It’s half cash, half stock. I will take no further questions on the subject.

For those of you who somehow didn’t see the viral clip of GME CEO Ryan Cohen going on CNBC, I will attempt to explain a better understanding of the deal presented than the CEO of the acquiring company.

GameStop - you know the famous meme stock that ripped over COVID - made an offer to acquire eBay for $125 per share, or $55.5 billion, a lofty 46% premium to eBay’s unaffected share price.

Before we even get into whether this deal makes any sense or if Ryan Cohen is just trying to hit the EBITDA and market cap targets in his comp package, we have to take a look at the consideration.

As Cohen reminded us (and Andrew Sorkin) several times, it’s simple - the proposal is half cash, half stock.

Once you exit the C-Suite and come down to reality though, you have to check if that math maths. GME has lined up a $20 billion financing via a highly confident (but not binding) letter from TD and has $9.4 billion of cash on its balance sheet. The remaining ~$25.5 billion would have to come from an equity issuance, which for a company with a $10 billion market cap is…tough.

Taking the obvious financing hurdles aside, the deal is expected to be accretive in year 1 (says every banker ever), driven by $2 billion of cost synergies. Cohen wasn’t shy about the LinkedIn updates for eBay employees to generate these synergies, basically stating he could run the company from his garage.

GME actually already built a 5% stake in eBay as a beachhead and recently filed its 13D and HSR documentation to disclose the stake publicly, so the transaction isn’t totally out of nowhere even if it may seem to be at first glance.

Cohen may seem insane, but what is interesting is that he receives no cash comp at all. His entire compensation package with GME is in shares (and a lot of them) but they are tied to ambitious EBITDA and market cap metrics…which could come as a result of this transaction.

Could you make the argument that this comp package incentivizes empire building and doing bad deals to hit your targets? Sure, it absolutely does. That being said, Cohen does have a pretty solid track record at GME so far (even though that still doesn’t quite justify his run for eBay).

GME’s share price fell ~10% on announcement, and eBay’s share price popped to $109, which may be a far cry from the $125 being offered but was a welcome bump to eBay shareholders nonetheless.

This deal really puts into perspective the hard work you do as a banker or a private equity professional. You can spend hours over engineering a model to find the price that you can afford to pay to hit the required return threshold…and lose to a guy who can’t even explain his deal on TV but just has the guts to shoot his shot and figure it out later.

There is merit in both approaches and it’ll be interesting to see if cooler heads prevail for eBay or if Cohen’s crazy plan actually works. If it means anything for your internal analysis, Michael Burry has sold his GME shares as a result of the deal. And before you ask, yes - the guy who bet on the US economy blowing up in 2008 was really long GME until now.

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_{DEAL OF THE MONTH}

Shell Says Let’s Go Back to Canada, eh?

Shell CEO Wael Sawan has spent the better part of three years telling investors that Shell is a “capital discipline” company.

Value over volume. Organic growth. No big acquisitions. I think we found the limits of capital discipline the other week.

On April 27, Shell announced it would acquire ARC Resources, Canada’s largest pure-play Montney producer, in a $22 billion deal. That’s $32.80 per ARC share, split 75% Shell stock and 25% cash, representing a 27% premium to ARC’s closing price on April 24.

So why Canada?

ARC produces roughly 370,000 barrels of oil equivalent per day from the Montney shale formation in British Columbia and Alberta, think like Canadian Texas, one of the most economic shale basins in North America.

About 40% of ARC’s production is liquids, which drove 70% of its revenues last year. Somewhere someone at Deloitte is gearing up to charge Shell a few mill to tell them to do more of that production and reduce costs.

But the real story is LNG.

Shell is already the largest owner of LNG Canada. The country’s first LNG export terminal, which opened in Kitimat, BC last summer and ships liquefied gas across the Pacific to Asia.

ARC’s Sunrise production area has a direct pipeline connection to that terminal via Coastal GasLink. So what Shell is really buying is upstream gas supply to feed an LNG facility it already owns, in a country it spent the last decade divesting from, right as Qatar’s LNG exports are offline because of a war.

Sawan put it best on the investor call: “Don’t look at this as the acquisition of an E&P with a predominantly gas portfolio, look at it as a liquid-rich addition to Shell with an upside of LNG that we are uniquely positioned to be able to unlock.” That’s a very elegant way to say: we own the terminal, we need the gas, and here we are.

Shell guided ~$1.5 billion in incremental free cash flow per year from ARC once integrated, rising to ~$2 billion beyond 2030 if LNG Canada Phase 2 gets a final investment decision, which Sawan (obviously) described as increasingly likely.

Year one synergies are guided at $250 million and the deal bumps Shell’s production CAGR from 1% to 4%. I am sure those numbers looked great in the pitch deck but hopefully Shell can actually deliver them.

This deal also quietly kills the “Shell buys BP” conversation that has haunted every energy conference for two years. Hard to acquire a second major when you’re still issuing 228 million new shares to close the first deal.

ARC’s board approved it unanimously (shockingly). The deal requires Canadian regulatory approval, which Shell doesn’t see any showstoppers in but is not always straightforward. The Canadian government, and particularly British Columbia, is left leaning, which typically is not business friendly even before you add the pillaging the earth for resources bit.

All in all, Shell threw capital discipline out the window, reversed course on Canada, and did it at almost exactly the right time...maybe. If Trump decides the end the war tomorrow then Shell may be smashing the buy button at the peak. Either way, this deal is either very smart or very lucky.

_{NEWS ROUNDUP}

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