_{DEAL OF THE MONTH}

T-Mobile and KKR Bet Big on Metronet

T-Mobile and KKR have announced a joint venture to acquire Metronet.

T-Mobile is expected to invest $4.9 billion in the JV to acquire a 50% stake in the JV and 100% of Metronet’s residential fiber retail operations.

Now this may seem like an interesting pairing, KKR has more money than some countries - no seriously, it manages over $61 billion in infrastructure funds alone, that is almost 3x the 2022 GDP of Iceland - so it certainly does not need T-Mobile for this deal.

T-Mobile on the other hand, does need KKR for this. First off, a check of $4.9 billion is a lot for T-Mobile, which is projecting a net income of around $17 billion for the year.

Additionally, KKR is one of the world leaders in fiber-to-the-home infrastructure - the services which Metronet provides to over 2 million homes in the US - and has operations covering over 25 million homes across the world.

The combined forces of KKR and T-Mobile should bring Metronet to even more homes across the US, allowing them to expand beyond their existing footprint in 17 states, potentially reaching 6.5 million homes by the end of 2030.

While it is unclear what the future holds for this JV, it is always interesting seeing PE funds and strategics work together on transactions. As you may recall, Carlyle and McDonalds had a very successful JV in China that we covered when Carlyle was bought out, so this is not an unprecedented move.

Hopefully, KKR’s first move will be bringing Metronet to Manhattan, so I can finally replace the disastrous Spectrum internet with some quality fiber internet in my apartment.

_{PRESENTED BY PERCENT}

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_{STRATEGIC DEAL OF THE MONTH}

Cliffs Takes a Hard Run at Stelco

Cleveland-Cliffs is likely not a household name to most people; however, to anyone who works in finance it should be. Not because it is a huge company (it is) or because of its recent acquisition streak, but because the CEO Lourenco Goncalves has one of the most iconic earnings transcript quotes of all time.

If you don’t believe me, this is a direct quote from the Q3’18 earnings call:

Despite everything, Lourenco continues to lead Cliffs—if you're reading this, Lourenco, I'm long your stock—and the company has been on an acquisition spree. In recent years, Cliffs has acquired AK Steel, ArcelorMittal’s U.S. steel mills, and is now eyeing Canada's Stelco, with an enterprise value of US$2.5 billion.

Cliffs is structuring the deal as a cash and stock deal, representing a valuation of C$70.00/share. The split is C$60.00/share in cash and C$10.00/share in Cliffs stock. 

The full breakdown of the transaction is below, but it is worth noting as I say with every deal: investors care a lot about leverage since that cash gets pulled out ahead of theirs. Cliffs has to add debt to facilitate this transaction but is using pre-payable debt so that it can repay the notes quickly with the accretion generated by the transaction.

The combined footprint will result in a massive integrated steel producer, with both traditional blast furnaces and more environmentally-friendly electric arc furnace production across the US and Canada.

With great scale comes great production (and economies of scale) - that’s what Uncle Ben says right? Pro forma for the deal, Cliffs will be the second largest steel producer in North America, right behind Nucor, and will see margin expansions of ~$2.5/ton (which on 19 million tons is a lot of money). 

Onto the balance sheet point, Cliffs has had to raise debt for the prior two acquisitions that it did as well, but now is in the position to significantly deleverage down ~2.4x LTM EBITDA, with this transaction representing the lowest starting leverage of its past 3 largest acquisitions.

Of course, we have to briefly touch on the share price performance of both target and acquiror in any M&A deal: Stelco has traded up to ~C$67/share, indicating that investors are optimistic about the deal but are leaving some room for error in case the deal doesn’t close.

Cliffs has not been so lucky, with its price trending downwards following the announcement of the acquisition (down ~10% in a month). Cliffs has a history of converting on its acquisitions, recognizing impressive synergies with both the AK Steel and ArcelorMittal deals, so it likely will do the same here, though as every good investor knows - past performance is not indicative of future results (until it is).

_{EXIT OF THE MONTH}

Essilor Luxottica Strikes a Supreme Bargain

You know those memes uninformed people post about how BlackRock and Vanguard control the world because they have stakes in every company through their ETFs? There is a similar - but this time actually true - meme about two companies controlling all of eyewear.

Essilor Luxottica (I will just call it Luxottica or else I will spell it wrong eventually) controls 60% of the eyewear sales in the US through almost every major brand.

Recently Luxottica decided to diversify a bit and acquired Supreme for $1.5 billion in cash from VF Corp. VF Corp is another brand house that controls a lot of the brands you know and love, including Vans, North Face, Timberlands and others.

While this deal falls under Exit of the Month because VF Corp is exiting its investment in Supreme, this deal was NOT a home run for them. In fact, they didn’t even get on base.

VF Corp has been facing mounting pressure to deleverage its balance sheet, so it began looking for assets to sell to generate some cash to paydown debt. Supreme has the least amount of synergies with the rest of VF’s portfolio, so it was the logical choice for sale.

The only problem with that approach is that Luxottica was able to strike a supremely good deal for Supreme. See VF Corp paid $2.1 billion for Supreme, which means that they sold it at a $600 million loss to Luxottica. Said differently, VF Corp made ~0.7x on Supreme, which in most private equity settings could spell your last deal.

It is not all bad news though and shareholders were thankful to see the deleveraging that could occur with a fresh $1.5 billion injected into VF Corp, and its stock price has ripped in the past month up 25%.

Now I am not hip enough to rock Supreme clothing but I sincerely hope Luxottica is able to keep the brand value of Supreme intact, so the people who are cooler than me can keep wearing it.

_{NEWS ROUNDUP}

Top Reads

• KKR to acquire Instructure for $4.8 billion

• BHP and Lundin Mining to acquire Filo Corp for C$4.1 billion

• Bosch to acquire R&LC for $8.1 billion

• Sixth Street to acquire Enstar for $5.1 billion

• R1 RCM to be acquired by TowerBrook and CD&R for ~$9 billion