M&A Deal of the Year

This year was riddled with M&A activity. While final year stats have yet to be released as we are still a few days away from year end, it is safe to say that 2023 was a solid year for dealmakers. So, we had our work cut out for us when identifying what deal could earn the first ever Buysiders M&A Deal of the Year award.

It is important to note that for this award size wasn’t everything - some deals had great personalities - we had to consider what the long-term strategic outcome of the deal could be, rather than giving into the winner’s curse (he who wins pays the most).

Without further ado, this year’s M&A deal of the year goes to Chevron’s acquisition of Hess.

For quick context, before I dive into my rationale, Chevron agreed to acquire Hess for ~$53Bn via an all stock deal. At the time of the deal, this was a <5% premium over the close price prior to announcement. Chevron and Hess are both US oil & gas producers, and Chevron is now poised to take on Exxon, which also completed a large acquisition this year.

Now, onto the rationale:

1. Premium paid: Chevron paid a <5% premium to the unaffected stock price for Hess. This is very atypical in the market as premiums are generally significantly higher (we saw a few deals this year with premiums north of 40%). A great deal for Chevron.

2. Significant cost synergies: Chevron expects the pro forma company to realize ~$1Bn of cost synergies from the deal almost immediately. On a pre-tax basis, that is ~$0.46/share straight to the Exxon bottom line (adjusted for the shares issued to Hess). Also not terrible.

3. Significant portfolio synergies: The assets of Chevron and Hess are complimentary, particularly on the shale side. Chevron’s shale production will boost 40%, making it a serious competitor to Exxon. Ignoring the short-term cost savings, more oil = more dollars. This should continue to drive returns to Chevron shareholders in the future.

4. Potential capital returns to shareholders: Chevron cited that following the deal, it will sell $15-$20Bn of assets, continue its dividend program and increase its share buyback program by $2.5Bn. Additional assets through this acquisition can allow Chevron to refocus its portfolio on key assets, use those proceeds to cover any major project expenditures, and then allocate the rest to shareholders via buybacks and dividends. If that isn’t a great outcome for the shareholders of Chevron, I am not sure what is.

TL/DR: Chevron paid a low premium to acquire strategic assets that will provide long-term value to its shareholders through upfront cost savings, strategically located assets that put Chevron in a more competitive position, and refocusing its portfolio, allowing for robust capital returns to shareholders.

Well done to the Chevron and Hess teams on this one. It was a monster deal that should yield a great outcome for all parties.

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Buyout of the Year

This year there were 87 LBOs over $1Bn, which is pretty substantial, but one deal stood out to us.

Roark Capital’s $9.6Bn acquisition of Subway wins this year’s PE deal of the year. This deal came in as the 5th largest of the year, so while it wasn’t the flashiest price, there were several reasons why it became deal of the year:

1) Synergies: Roark already owns a significant number of fast food chains and franchised businesses, including Jimmy John’s, which positions it well to capitalize on the integration of Subway into its portfolio.

2) Deal Structure / Pricing: Subway’s owners initially wanted a $10Bn buyout, which Roark was able to negotiate down. While you may argue that $400M off of a $10Bn acquisition isn’t that impressive, Roark’s structure was pretty clever.

While all of the terms were not disclosed, the deal did include a hefty earn out, which limits the upfront capital to Subway’s owners. This is the best of both worlds, Roark can limit capital draw downs initially and have an effective higher MOIC depending on business performance, Subway’s owners can report a higher price (all-in price), and incentives are aligned in terms of business performance. Additionally, Roark played the game well and was able to negotiate well to drive down price citing the increased borrowing costs.

3) Limited regulatory scrutiny: While there tends to be limited regulatory scrutiny on PE deals anyways, it’s not like sandwiches are vital to national security, so there is likely to be limited government oversight here. While there may be some antitrust murmurs given the ownership of Jimmy Johns, it’s mostly just hot air it seems.

All in all, rates were high, funds had dry powder to deploy, and deals were available, so it was an interesting year in the PE world. Now that rates are coming down it is likely that 2024 will be a hot year for PE, so let’s see what happens in 2024.

If we missed a good deal from your fund or a competing fund that you think was the best deal of the year, then let us know by responding to this email.

IPO of the Year

2022 and 2023 were pretty weak IPO markets, there is a decent backlog, but things remain muted.

Offerings were pretty even across the two years, but there were significantly higher volume of deals (~$20Bn in 2023 vs. ~$8Bn in 2022). Overall, the aftermarket performance of IPOs has been pretty weak, well underperforming the S&P 500 this year.

With that backdrop, there are some questions as to what the best IPO of the year was. In this case, size does matter and so does aftermarket performance.

This year’s winner of IPO of the Year is Cava.

Cava went public June 15th at ~$22/share and is currently at ~$44/share. For those of you who don’t want to do the math, that is basically a 100% return.

Cava was the 13th largest IPO of the year, so while it wasn’t the biggest one, it is one of the best performing ones of the year.

The only IPO of scale that outperformed Cava this year was Nextracker, which is up to ~103% return.

Overall, Cava won the day here over Nextracker and the larger IPOs like Birkenstocks because of (1) the trading performance, and (2) the long-term potential for shareholders.

Cava popped way up to close to $50/share already, which may have been overhyped here, but there was clearly some rationale there. Nextracker is linked to the energy markets - be it renewable - which probably will underperform consumer in the long-run.

Here’s to hoping that there are more IPOs in 2024, but well done to all of the Cava shareholders so far, hopefully some of them have sold out by now.

Credit Deal of the Year

As we have said time and time again, we are in the golden age of private credit now. Funds are raising absurd amounts of money to go and deploy in the private credit space, and we have seen basically every PE fund get into the private credit space as of late.

In terms of picking the best deal, this one really does come down to size more than anything else. The largest private credit deal of 2023 sits with Finastra, which clocked in at a cool $5.3Bn of funding.

There is less hard hitting analysis that can come from this one, but in short the deal was a $4.8Bn unitranche deal comprised of a blend of senior secured and unsecured notes plus a $500M revolver. The capital was provided by Oakhill, Blue Owl and HPS, among others.

Now why this deal was so fascinating is because it really signifies the era of private credit that we are in. This was a refinancing, not an LBO. That’s right, we saw a $5.3Bn refinancing done entirely by private credit funds not by banks or other traditional lenders.

While this was indicative of the slump in M&A activity earlier this year, it is clear that private credit markets aren’t going anywhere. Private credit has continued to push higher, with this deal finally topping the $5Bn raised last year for Zendesk. 

We have to see where private credit goes, but a couple of things are clear (1) it is here to stay and (2) banks will have a hard time competing with it.

Honorable Mentions

There were too many deals to highlight in this article, but here is a summary of deals that we thought were important enough to warrant valuable column space in our newsletter throughout the year. As we transition to a weekly format, this list will be more expansive in 2024, but here is a look back at what we thought was important in 2023!

Buyouts:

• Broadcast Music Inc. acquired by New Mountain Capital for an undisclosed amount

• Blackstone acquired Rover for $2.3Bn

• Ares acquired a 10% stake in the Texas Rangers

• Alteryx acquired by Clear Lake Capital and Insight Partners for $4.4Bn

Mergers:

• Hostess acquired by J.M. Smucker for ~$4.6Bn

• Loom acquired by Altassian for $975M

• Teck Resources’ coal business acquired by Glencore for $9.0Bn

• McDonalds acquired a 28% stake in McDonalds China from Carlyle for ~$1.8Bn

• Australian oil giants Santos and Woodside announced a potential merger

• Chobani acquires La Colombe for $900 million

• Nippon Steel acquires US Steel for $15Bn

IPOs:

• HPS confidentially filing to go public at an ~$8Bn valuation