Intel's Chip Buyout & Pershing Square’s Big Bet on Universal Music

Hello and welcome back to the Market Maker podcast. And in this week's episode of M&A deals, we're going to

talk a little bit about things like technology, energy, biotech, and also a high-stakes bet on music's future with

Pershing Square making a premium bid for Universal Music Group. So, to start with though, let me run

through some of the deals of the week starting with the first one, which is Intel has agreed to acquire Apollo

Management's 49% stake in the company's Fab 34 joint venture chip manufacturing facility in Ireland for 14.2 billion.

I wonder where in Ireland that is. It's a 13.2 billion is worth. I mean, it must be It's a good question. Uh well, I

wonder where in I like while I read the rest of this out, have a quick little Yeah. little gander. I'd be interested

to know where that is. Maybe there's listeners out there who work at the factory or indeed town. Um but that

transaction will be funded through cash on hand and roughly 6.5 billion of new debt issuance.

Fab 34, they manufacture semiconductors for products using Intel 4 and Intel 3 process technologies.

Can I get a location stat check? >> Check, please. I'm going to pronounce this wrong, but

it's Leixlip, which is in County Kildare. County Kildare.

>> Intel campus is just outside Dublin. But Intel have a They have an Irish subsidiary, so an

actual business they've listed in Ireland. Obviously, lots of companies Lots of mega international businesses do

this cuz of the preferential tax treatment that you get in Dublin. All big tech

have an Irish subsidiary. Anyway, this is Intel's part of that subsidiary is this Fab 34

um thing. Yeah, it's kind of It's interesting this cuz like you hear the

headlines, it's like Intel agree to acquire. And it's like when you read the

headline, it's like, "Oh, yeah, this is like a a straight-up, you know, proper acquisition." Except it's far from that.

I mean, they're acquiring the 49% stake. They're acquiring in inverted commas. I'll explain that in a second, but

they're acquiring uh Apollo's 49% stake. This is a joint venture. The 51%, which is the other part of it, Intel already

owned. And this isn't a normal just, "Ooh, let's go into business and uh team up

and do a joint venture." Um But basically, this was fully agreed up front. This isn't a joint venture. This

is actually more like a structured financing arrangement wrapped up in a some kind of

joint venture situation. But basically, Apollo's stake right from the beginning behaved much more like a an

infrastructure, which basically a private credit arrangement, um rather than it being a kind of traditional sort

of private equity thing. So, the the arrangement was that the Fab 34 output all the 100% of the output of that

factory was sold back to Intel at a cost-plus basis. So, retail price plus a little bit of a

premium. Intel committed to a minimum purchase volume for the lifetime of the joint venture.

And then Apollo for that uh basically had virtually no operational influence at all. Um and so,

basically, if you break it all down, Apollo got predictable bond-like cash flow upsides

with no control over the business whatsoever. And actually, the mechanics underneath was that Intel had a call

option to buy all of Apollo's stake after a certain period of time. On the opposite

side of the fence, um if Apollo didn't exercise that option, then Apollo Sorry, if Intel didn't

exercise that option, Apollo had a a conversion option to basically swap out their ownership of this joint venture

into Intel equity. So, this is how it's kind of all arranged. But actually, so here we are,

the time has elapsed and Intel are now stumping up the cash and buying Apollo out. But actually, if you just break it

down, in 2024, Intel sold 49% of this business for 11 billion in cash. Right? So, it

was a financing deal. Intel got 11 billion in cash. Obviously, they're in an AI race and they're needing to spend

a fortune to try and keep up with the kind of the the big boys. They're buying it back for 14.2 billion.

So, they sold it for 11 billion cash and they're buying it back for 14.2. So, for Apollo, that's a 27% return in less

than 2 years. Thank you very much. That's the story. It's a story as old as time. Yeah.

>> You know, he who has the money Indeed. Takes money to make money, brother. Cash is king.

>> [laughter] >> Oh, yeah. I mean, that's that's the world of private equity,

folks. So, >> [laughter] >> um

on that deal, Goldman Sachs acted as the exclusive financial advisor to Intel. that

companies get when they're listed on European stock exchanges versus the valuations they get if they're listed on

a US stock exchange. Why is there a difference? It's basically a function of uh

deeper, more liquid US financial markets. It's a function of just generally speaking a much higher level

of risk appetite in the US than we typically see in Europe. And so, what you tend to get is like-for-like

companies, so companies similar sizes, you know, uh in similar sectors, you know, will have a val- they'll be a

valuation gap. And so, they'll be trading at a cheaper level if they're listed in Europe versus other similar

companies in the US. So, this listing's arbitrage is this process of delisting a business from their European

location and relisting them in the US. Um there's there's precedent for this and we won't go into any of

these in detail, but if listeners want to dive into some other examples, then CRH

uh was a big one that happened, I think, one or maybe even 2 years ago now. I think we even talked about it on the

podcast, actually. So, this moved their primary listing from London over to uh the New York Stock Exchange. Um it

remained Irish domiciled as a business, um but the US became, you know, the main

trading venue. Um the rationale for that company, 75% of its earnings were in North America. Anyway, long long short

of it is CRH followed, you know, it got an earnings bump and that was a a good example of shifting it and and

benefiting from that listing's arbitrage. We've had other companies like Fergus, PLC, 2022, again shifted

from the London Stock Exchange to the New York Stock Exchange, Flutter Entertainment.

Um ARM was a slightly different one. The UK government were trying to desperately

get ARM to IPO in in London, but in the end SoftBank, their main backer, said, uh, "No, thanks. We're going to list in

the US." So, look, this is this is not a this is not the first rodeo of people trying to do this. Ackman's trying to

been to pull this with UMG for a few years, and really it's looking at the valuation gap between UMG and Spotify.

So, UMG is trading at 27 times earnings, listed in the Netherlands, so it's on the Amsterdam Stock Exchange, whereas

Spotify is trading at 40 times. And Ackman's saying, essentially, his thesis is that these businesses aren't

very different. There aren't any structural problems with UMG. He's not looking from an activist investor point

of view, he's actually not looking to try and change the way that the business is being

operated or the growth strategy for the business. He's actually not That's normally what an activist investor would

be doing, getting a building up a large stake, getting a seat on the board, then from that board seat beginning to

influence company strategy and so on, um, and structurally change how the business is being run, and then benefit

from, um, you know, improved performance in the future. That's the kind of normal

playbook. But here Ackman's saying, "Actually, the company's great. Let's just move it from

the Netherlands, um, to the US." So, it's an interesting one. They've bid,

uh, the bid price here is 30 euros and 40 cents. What's interesting about that is, well, before this was

announced, it was trading at about 16 euros. Uh-huh. But also, if you look at the kind of

since it's IPO back in 2021, um, the highest it's ever traded is 28 just above 28 euros. So, this bid at 30

euros 40 is in excess of any price it's ever traded in its history.

Um, but we did get a bump higher, so from about 16 it's trading up to about It's trading at 19 euros 60 cents at the

moment. Um, so on that basis, it's basically a 78% premium on current share price. So, that would total

That that that would create a total deal value of about 55.75 billion euros,

or 64 billion dollars equivalent. Um, so obviously a big, huge, uh, deal here.

Um, yeah, I mean, other interesting stuff, I guess. It's kind of You know, yeah, I said the stock went up

sharply. So, it's What's interesting So, the UMG stock popped 13 10 to 13%, but as I said, it's

only gone to 19 and a half euros when the bid price is 30. So, there's obviously still, uh, a large

differential there between current share price and the deal price that's been mooted. But what was interesting is it

wasn't just the UMG share price that got a bump. It was actually the current large shareholders of UMG, their share

prices also went up. So, you've got Bolloré Group, um, they were 5% higher off the back of this. Vivendi, who's,

uh, these are the top two shareholders, by the way. Uh, Bolloré Group and Vivendi.

Um, Vivendi popped 10% off the back of this, um, news. So, pretty interesting. But yeah, the backstory, as I said,

Ackman's been sniffing about this since 2021. He actually first tried to use, um, a different part of Pershing Square,

so Pershing Square Tontine, uh, to buy a 10% stake in UMG off Vivendi.

Um, and that was ahead of the Amsterdam IPO in 2021, right? I think the idea there was Ackman wanted to buy a stake

pre-IPO, and then get them to shift the IPO location, like, don't do it in Amsterdam, do it in New York. Um, but

that kind of collapsed, and it and it and it failed. Basically, Ackman failed to convince regulators, um, that the

structure of the deal that he had compiled it was just too complex, basically.

Um, and so, you know, rules around governance and There there were just governance

concerns around the the complexity of the structure, and so in the end the regulators didn't go for it, and so But

rather than walk away, um, he kind of reworked the structure and had Pershing Square's hedge fund

directly acquire a stake instead, like, in the IPO, right? So, he's He He owned 10% of this since 2021. Um

And like, ever since then they've been pushing for, right, let's re-list it in the US.

Um, and interestingly, what's happened is in order to try and facilitate that, and here's a pretty

uh, I mean, I like it as a as a move. So, 10% stake, right? But the problem with re-listing it in the US is there

hasn't been enough free float. So, this is, right, a free float is sort of the volume of shares that's like

freely trading out there in the broader secondary market, you know, on a day-to-day, week-to-week basis. It's

like the liquidity of this stock. And when you have really large shareholders that own the majority of

the business, even though it is on the stock exchange and it's in the secondary market, if you've got most of the block

of shares held by investors that aren't budging, they're in for the long run,

then you tend to get a really small free float, which means the liquidity of the stock on the stock on the stock exchange

is really low, which just makes the volatility of that share price really extreme, right?

And so, in order to try and kind of meet these free float requirements, Pershing Square have been

selling down their 10% stake out into the broader market. They're not selling because they don't

believe in this thing going up. They're selling to force

the Or not to force, to enable this listing arbitrage to happen. So, they've sold down their stake from 10% all the

way down to just 4.7% now. At a loss. Cuz, you know, we're trading well below

the IPO price. So, it's a pretty ballsy move, and I and I think just shows just how big of an uplift that Pershing

Square reckon you can get from just re-listing in the US. They're prepared to dilute themselves

ahead of the deal to kind of make it happen. So, so in summary then, if I'm reading

this right, you're saying then that going back to the the comparison with Spotify. I was just looking at Spotify's

chart, actually. That is That as my wife will often tell me, this

is one of her stock-picking highlights over the last recent years. I think she She was in in like 2018, and it was

really not doing a great deal. And then I think it was 2022, it hit a low of around $70, I think.

And within 2 years, it was up knocking on the door of 800. Can we Can we get Mrs. Chung, uh, on the pod? [laughter]

I think that's the next step. Um, one So, reading this right then is that, uh, there's a gap is my point between what

you were saying with Spotify, which is like a phenomenal has come good success story. So,

the vision being the right structure, the listing venue, the capital framework could close that discount, and so the

mechanics look like a shoe-in. This kind of feels a little bit Warren Buffett-esque in a sense of he's sort of

saying there's a strong company here, the market's undervaluing it, using structure, capital allocation, let's

unlock some of that value, and then I'm out, basically. However, couple of couple of things though that

that come to mind reading about this is is that Universal's underperformance, is it

Is it actually company specific or not? Cuz the industry at large in music is under a bit of

pressure. So, I remember my best mate at uni, when we first got our jobs

leaving university in 2005, he got a job at Sony Music. Hm. And it was like the coolest thing ever. Like, I remember I

got to meet Usher through him. Back [laughter] in the day. I mean, this is 2005 Usher. All right, this is like peak

Usher. Um, but it was like big record labels were like massive, uh, even even back

then, cuz it was before a lot of the streamers really started to come about. Right. Um, whereas now, Sony, Warner

Music, I mean, there is massive competition concerns with the ever-present streaming platforms,

Spotify, Amazon, Apple, Deezer. They've all continuing to take big chunks of market share. And then the other thing,

my wife again, I mean, it puts me in uh, the her shadow more often than not, cuz she was at Google DeepMind last

night, actually. And, uh, I think it was more around, um,

them trying to push new new new Google products more than more than anything else. But one of the interesting things

there is they were talking about They were using this example of basically compute power and so forth.

And it was about how they were creating and they used an example of music. And essentially, they were like, right,

they gave it a really kind of thorough prompt, and not only did it generate the music, it gave it the up the

accompanying underlying like track with lyrics, with album cover, with and everything, and it just rendered it all

right there and then. And so, one of the things that I found was a survey that was conducted was

talking about how serious is the AI threat to the music industry at at large, and this being

um uh Gen AI creating songs and and related then to copyright disruption and so

forth. And this survey found that 97% of listeners

could not distinguish between an AI-generated or a human-composed song.

I mean, this is going to completely split the audience of I guess where do you put the value in

the creation of music in itself, in its form as art? But nearly 100% of people can't make the

difference. And I think that they they did this years ago, didn't they, with IBM with their initial

What was it? Deep Blue, whatever it was called, and whilst it was playing uh AlphaGo

many years ago, it was also creating uh composing classical music, and people couldn't tell whether it was one of the

original composers or not. So Yeah. I mean, we're in the face of that then, is this that Ackman he needs to

get this done and then close the gap and and Right.

>> And he's not really thinking about it from the mechanics of the bigger long-term investment. It's like there's

a clear arbitrage case here that I need to exploit and capitalize on. And the clock is

ticking. Mhm. As you quite rightly say. So, I think that's right. His window of opportunity

is narrowing. He's been at it trying to get this done since 2021. And so, I think this is maybe his kind

of last last-ditch effort to to make his play. We'll see.

All right. Well, look, I'm going to leave a poll but also drop a comment.

I want to know what you think about AI-generated music.

You get let's get a vibe check here. I mean, if you I mean, just if you just plugged in a certain artist's entire

back catalog and told it to generate new music. Yep.

>> I don't know. The problem is it's about shared experience. Like if every if every single human can just create their

own bespoke music that's great, but then I think there's a certain element to a

shared experience where your friends or your community are all listening to the same thing the same artist, you know,

your mate Usher. You know, everyone can then share their feelings around that shared experience,

right? But if everyone's just creating their own original songs, that that connection

with other people and and listening to how they're feeling about it, that kind of vanishes, right?

Well, there's two different things there. Like if you take Hunter X and the

success of even Hunters on Netflix >> Right. Yeah. Like you could take uh

you know, for example, an anime animation type Like what why does it need to be human

fronting it? It could be that there's a composer that's the AI engineer prompting of he's

creating the music in a centralized place that gets widely distributed to the mass audience, but

there is no performer as such. And then you go to Abba in London, and you have digital

global centers to broadcast live three-dimensional concerts. >> to say that's not art?

You know? The art form is is tapping the the the vibe of the

of the community in the nation, and it's kind of na- yeah, that I mean, that that that that Hunter

situation was a perfect example of that. The the exact right song at the exact right time

that just kind of went global. So, you know, that's not easy to kind of solve for that equation, right? So, that's the

artistry that's required. All right. Well, look

we'll leave it there. Thank you so much everyone for for listening, and have yourself a great week ahead. Take care.