Apollo merges with Athene in a $29bn deal

Also Goldman Sachs, Stripe, BNP Paribas and Walmart

The B&I Journal

Mar 14, 2021

The Week’s Briefing

M&A

Apollo announced it will merge with Athene
BNP Paribas explores buying the remaining 50% stake in investment banking partner Exane that it doesn’t already own

Banking, Insurance and Regulation

Stripe’s valuation rockets to $95bn in latest fundraising round
California says car insurers overcharged during the pandemic; gives them until April 30 to return the money
JPMorgan shuts down Chase Pay digital wallet, one year after discontinuing the app
Citi blocks firms that did not return accidental Revlon payment
MetLife’s private debt investment portfolio grows to $102bn
Apollo ends talks with Greensill Capital to buy parts of their assets

Economics and Markets

ECB says they will speed up bond purchases to counter bond sell-off
US inflation data shows no inflation

Janet Yellen said inflation risks remain small:

“Is there a risk of inflation? I think there’s a small risk and I think it’s manageable, that’s a temporary movement in prices,

UK exports to the EU plunged 40.7% in January, and imports fell 28.8%
UK economy contracted a less-than-expected 2.9% MoM in January

Biggest Stories of the Week

Apollo merges with Athene

Private equity giant Apollo Global Management and life-insurer Athene Holding announced a merger this week, ending a long, complicated relationship between them.

Athene Holding was created by Apollo in 2009 during the financial crisis, as a way to use the insurance business to put clients’ money to work buying corporate and distressed credit at low prices. The plan worked out well, and Apollo’s biggest client soon became Athene, managing most of their balance sheet.

In 2016, Apollo took Athene public, and the stock traded sideways for years, and the stock fell by more than 60% in March last year, vastly more than the industry.

The problem was that Athene’s investors had a problem with Apollo’s relationship with them, and in 2019 a lawsuit accused Apollo of overcharging Athene by hundreds of millions of dollars for their services. The lawsuits ended after a court in Bermuda ordered US shareholders to drop their action.

Apollo then tried to sweeten their arrangement for the other shareholders, offering to cut its voting stake and invest another $1.6bn into the company.

So now, they decided to just eliminate the “perceived misalignment” between them all together by buying the rest of the company.

The deal terms:

Athene class-A shareholders will receive 1.149 shares of Apollo shares for each share they own
Apollo investors will get 76% of the combined company, and Athene shareholders will own the remaining 24%
The combined conglomerate is valued at $29bn.

Stripe’s valuation rockets to $95bn in latest fundraising round

Stripe recently raised $600 million in equity at a $95 billion valuation, making it the most valuable private company in Silicon Valley.

Fintechs are the hottest new thing in Silicon Valley, with some like Affirm and SoFi going public at very demanding valuations.

Stripe previously raised money in September 2019 at a $35bn.

At $95bn, it is valued nearly as much as traditional banking giant Goldman Sachs ($120bn) - though different business, it shows how investors view traditional financial services companies vs. traditional ones.

Stripe also overtook SpaceX in valuation, which raised money last month at $74bn.

Early Stripe investors include Elon Musk and Peter Thiel.

California says car insurers overcharged during the pandemic; gives them until April 30 to return the money

California regulators ordered car insurers to refund more money to their customers after accusing them of overcharging customers last year.

Auto insurers had already returned $14bn as of June to customers around the country as driving all but came to a halt during the pandemic.

California Insurance Commissioner Ricardo Lara said that insurers should have refunded double the premiums they returned last year from March through September. She said:

“If the data shows that insurance companies overcharged our businesses, I am going to be mandating them to return premium, especially to small businesses that have borne the brunt of pandemic closures,”

Auto insurers said they are cautious about more refunds because of uncertainties about customer driving patterns ahead, including the fact that traffic fatalities rose last year, and said that the data suggested that driver behavior deteriorated rapidly and significantly during the pandemic” - Loretta Worters, spokeswoman for the Insurance Information Institute.

BNP Paribas explores buying the remaining 50% stake in investment banking partner Exane that it doesn’t already own

BNP Paribas is looking to become aw big player in the investment banking, specifically equities trading, space in Europe, and acquiring Exane will help push them in that direction.

Two years ago they acquired Deutsche Bank’s electronic equities and prime brokerage businesses as part of a broader strategy to become a top player in IB.

Last year, BNP generated 5x more revenue from its fixed income, commodities and currencies business than from equities and prime services. They are looking to improve the latter part, as they are already a strong player in fixed income.

Under this deal, BNP would buy out the remaining 50% in Exane, and hopes to receive approval from regulators in Q2.

BNP and Exane’s relationship goes back 17 years, where BNP outsourced its equities research/cash equities business to Exane, as well as working on equity capital market transactions.

By acquiring Exane, BNP would bring the cash equities business under their roof, and acquire Exane’s derivatives and asset management divisions.

Last year, BNP laid out ambitious plans to become one of the top 3 global prime brokers and displace Barclays and Goldman Sachs who are currently dominant in the space.

Some other stuff

The week ahead in economics:

On Wednesday, the BOE is expected to take a very similar to stance to the FED, tolerating slightly higher rates as an early sign of a recovery.
Japan is also expected to possibly cut rates further
The Federal Reserve will hold its policy meeting this week on Wednesday, about rate decisions - a rate hike is obviously not expected, but speculation is emerging that they may hint at a rate hike in 2023 - not expected to take any actions similar to those of the ECB on higher rates. Growth forecasts are also expected to be raised in the Summary of Economic Projections.
On Tuesday, the Conservative government will set out its “integrated review” of foreign and defence policy, and show the potential economic opportunities in Asia and potential threats from China.

Walmart, the unusual bank

A week or so ago, Walmart unusually started poaching top bankers from Goldman Sachs, such as Omer Ismail, the head of Goldman Sachs’ Marcus, a their fintech consumer banking business, as well as one of Goldman’s top deal makers David Stark.

Ismail will head Walmart’s fintech bank. Interestingly, no-one actually knows what Walmart’s bank will do, their press release just said “a new fintech start-up designed to develop and offer modern, innovative and affordable financial solutions”.

Poaching Omer and David show that this is no-doubt a serious ambition for them, even Jamie Dimon said they could be a serious potential competitor to them. They are clearly aiming to go big here, and offer services that cater to their millions of loyal customers, many of which are in lower income bands and unbanked. This gives them a clear competitive advantage over larger players such as JPMorgan’s Chase bank and Bank of America.

So, what could Walmart be looking to do?

Obviously, Walmart likely has no ambition to set up a prime brokerage and investment bank; underwriting IPOs and trading commodity futures - their ambitions are likely in the core banking business, offering checking accounts, online banking, maybe even credit cards and a low-cost debit card that could be used to take an advance on your next pay check.

Another benefit would be the lower costs of having customers use a Walmart bank card for purchases, than use another bank and have to pay fees for it.

Though, while it does look attractive, there are considerable risks. Large UK retailers such as Sainsbury’s and Tesco ventured into banking, only to fail miserably on it. Even Walmart failed at being a partner developing its own payments network, the Merchant Customer Exchange. Regulators may not even allow it, but Walmart is banking on regulators allowing it.

If it goes well, Walmart stands to make a lot in profits from it, but if it goes wrong, whether the business fails or credit risk becomes a big problem in an economic downturn - given the customers they are likely to target - it could be quite the opposite.

Goldman Sachs, a new, more modern business

Goldman Sachs is one of the most elite, traditional investment banks out there with a rich history - mostly not good, known for greed throughout its history, especially 2008, and even worse was the 1MDB Malaysia sandal.

Interestingly, I refused to invest in Goldman Sachs last year on moral grounds as a result of the 1MDB scandal, and I still wouldn’t unless there’s a clear regime change in the culture there, which looks as though it may be in the middle of with David Solomon at the helm. Though, had I invested in it when I wanted to, I would have made a lot of money, but anyway, I’d rather not dwell on the past.

Well, let’s start with what Goldman Sachs is mostly known for:

Their (double) contribution to the 2008 financial crisis, when they aggressively sold CDO and MBS products, that they knew were toxic, so they went and shorted those same MBS products after selling them - creating huge problems for AIG (this is a really interesting story with ABACUS bonds and stuff, but anyway).
1MDB - which took a 6 year battle of lawsuits and fines to overcome. This is a remarkable story of greed, and I highly recommend reading the book “Billion Dollar Whale” about it.

But has the culture changed?

Well we don’t know but traditional elements such as the elite Goldman Sachs ‘partnership’ structure - which is highly unusual in a public company, and they aren’t even actually ‘partners’, it was known for its tight-knit partnership culture, with big bonuses etc. - seem to be slowly going from the firm’s main business. The partnership’s top-down, hierarchical culture, where the institution is bigger than its people was not something reminiscent of a modern age public company.

A number of senior executives have left Goldman, including key heads of their businesses after David took over. He doesn’t seem concerned about this, as they’ll just be replaced.

David seems to have turned around Goldman, or at least the market thinks so, which Goldman’s stock notching new all time highs multiple times over the past few months, weeks and even days - they reported record revenues and profits last year, despite high litigation costs related to 1MDB.

David Solomon is not what you’d expect the CEO of Goldman Sachs to be, he’s certainly more modern than that, e.g., he loosened the dress code at Goldman and deejays & kitesurfs in his free time. But, he is still a very, very hard worker.

Whether people at Goldman like his regime change? That’s not easy to say, very senior executives have been leaving the firm in recent months, most notably three of their business unit heads.

It’s hard to say whether Goldman has fundamentally changed now, shifting from an elite, private loyal business to a more modern one, but the signs are there, and it’s showing in their financial performance as well. This recent Bloomberg article is a great read about Goldman’s possible culture change and some more.

What we’re reading:

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