Weekly Banking Insight: Macroeconomics, deal activity and carbon trading

Greetings and welcome back to this weekly global investment banking update where we talk about the top transactions, themes, and narratives in the investment banking world.

This week we dive into the macroeconomics, deal activity and carbon trading concepts to decode what’s happening around the world.

Global macroeconomic dynamic

The recent shocks to the global economy, from COVID-19 to the cost of living crisis, have compelled businesses to adapt to a new norm characterized by a high interest rate regime. While businesses are considering a possible rate cut later this year due to easing inflation and improving GDP in major economies, they are also preparing for the worst-case scenario of a consistently high interest rate environment.

On the other hand, the global debt-to-GDP ratio is worsening, with global debt reaching $313tn in 2024, approximately 333% of global GDP. The US appears to be the worst-hit developed economy. Despite issuing more fixed-income instruments to fund its endeavours, both domestic and international, the increased supply has not significantly reduced the cost of these instruments. This may indicate that the market is anticipating rate cuts.

High leverage has posed challenges for companies and investors, while those with strong or balanced balance sheets remain relatively unaffected by rate hikes. In fact, businesses and investors with significant cash reserves are benefiting from high interest rates. Amid these dynamics, an interesting trend in M&A is emerging. Businesses are no longer waiting for rates to drop; shareholders seeking to cash out are doing so, sometimes at favourable valuations if they can demonstrate resilience, sustainability, strong management, and clear future goals.

Large businesses, conglomerates, and investors are becoming active again, targeting quality businesses while generally avoiding debt. Some private equity investors are reluctantly accepting trade exits, but their new investments show strong growth potential, helping them secure returns. Large businesses see this as an opportunity to acquire assets at lower premiums. IPOs remain a prospect for the near future, but restructuring and special situations are in demand. Bankers are reshuffling their strategies, and business recovery seems to be on track.

Despite geopolitical tensions affecting oil prices, optimism and adaptability are on the rise.

Deals activity

Uber to acquire Foodpanda

Uber has agreed to acquire Delivery Hero’s Foodpanda business in Taiwan for $950m in cash and a 3% stake in Delivery Hero for $300m. The deal, announced on Tuesday, values newly issued Delivery Hero shares at a 30% premium, boosting its stock by nearly 20%. Uber aims to expand its food delivery reach in Taiwan, leveraging Foodpanda’s presence in smaller cities. This move aligns with Uber’s strategy to enhance profitability and market share, following its first full year of operating profitability in 2023. The transaction, subject to regulatory approval, is expected to close in 2025.

Michael Flacks to invest in Teesside International Airport

British investor Michael Flacks is in talks to acquire a 49% stake in Teesside International Airport, valuing it at £40m. The airport, nationalized in 2019 by Tees Valley mayor Lord Ben Houchen, has been loss-making and reliant on public bailouts. Flacks plans to pivot the airport from passenger flights to a cargo, repair, and maintenance hub. He aims to finalise the deal by August, with local councils retaining a 51% “silent partner” stake. Flacks intends to develop the airport and invest in renewable energy projects on adjacent land. Houchen, however, emphasises maintaining public ownership of the airport.

GSK plc is selling its remaining stake to Haleon plc

GSK Plc will sell its remaining 4.2% stake in Haleon Plc for £1.25 billion ($1.6 billion), completing its separation from the consumer health company. The sale of approximately 385m shares at 324p each is through an institutional placing. This follows GSK’s phased sell-down from an initial 13% holding after Haleon’s 2022 demerger and listing. The move aims to strengthen GSK’s balance sheet and focus on its pharma and vaccine businesses. GSK has raised nearly £4bn from these sales. Haleon shares fell 1.3% to 328p, while GSK shares edged lower. Pfizer Inc. is also reducing its stake in Haleon.

Snowflake to acquire Reka AI

Snowflake Inc. is negotiating to acquire Reka AI, a startup specialising in large language models, for over $1bn. Founded in 2022 by ex-Google and Meta researchers, Reka AI was valued at $300m in a 2023 funding round, which included investment from Snowflake’s venture arm. This acquisition would enhance Snowflake’s generative AI capabilities, complementing its own AI model, Arctic. Snowflake’s CEO, Sridhar Ramaswamy, formerly its AI senior VP, aims to integrate Reka’s models to boost business amid slowed revenue growth. Snowflake shares have declined 17% this year, reflecting broader industry cost optimisations.

Brookfield acquires majority stake in Leap Green Energy

Brookfield Asset Management Ltd. plans to invest around $500m for a majority stake in India’s Leap Green Energy Ltd., boosting its wind energy capacity. Toronto-based Brookfield will likely acquire the stake via its global transition fund, with the founding family and The Rohatyn Group retaining the remainder. Leap Green, based in Tamil Nadu, currently operates over 750 megawatts and aims to exceed seven gigawatts by 2029. This investment aligns with Brookfield’s $10bn fund focused on clean energy. Interest in India’s clean energy sector is rising, exemplified by KKR’s recent acquisition of Healthium Medtech Ltd.

Other key insights:

1. BBVA-Sabadel deal seeks favourable nod from ECB
2. Increased UK takeovers make UK stocks look cheaper
3. Mubadala Investment pushes for AI and private credit

Education series: Carbon Trading

What is Carbon Trading?

Carbon trading is a market-based system designed to reduce greenhouse gas emissions. It allows countries, companies, and other entities to buy and sell carbon credits, which represent the right to emit a specific amount of carbon dioxide or other greenhouse gases.

What are Carbon Credits?

Carbon credits are permits that allow the holder to emit one ton of carbon dioxide or an equivalent amount of another greenhouse gas. There are two main types of carbon credits:

1. Compliance Credits: Used by companies and governments to meet regulatory requirements.
2. Voluntary Credits: Bought by individuals or organizations to voluntarily offset their carbon emissions.

How Carbon Trading Works Globally

1. Setting a Cap: A government or regulatory body sets a cap on the total amount of greenhouse gases that can be emitted by all participating entities.
2. Issuing Credits: Carbon credits are issued equal to the cap and distributed to companies. These credits can be allocated for free or sold at auction.
3. Trading: Companies that reduce their emissions below their allotted credits can sell their excess credits to companies that exceed their emissions limits, creating a financial incentive to reduce emissions.
4. Monitoring and Enforcement: Emissions are monitored, and companies must surrender enough credits to cover their emissions. Penalties are imposed for non-compliance.

Case studies on how It Is Abused Globally

A scandal involving Verra, the world’s premier certifier of carbon credits, highlights significant abuses in the carbon trading system. Investigative reports by the Guardian and SourceMaterial accused Verra of grossly overstating emissions reductions from its “avoided deforestation” credits, with only six percent representing real reductions. This controversy undermines the legitimacy of carbon offsetting used by major companies like Gucci, Shell, and Disney. The implications are severe, affecting development in the Global South and indigenous communities facing exploitation. Verra’s defense focuses on technical methodologies, but the scandal reveals systemic issues in the incentive structures of carbon credit markets, leading to questionable environmental integrity and financial incentives to hide deforestation.

Another case of abuse involves six individuals accused of evading over €200 million in taxes in the European carbon market. These individuals exploited VAT rules by importing carbon permits without paying tax and then selling them in another country, pocketing the tax difference. This type of fraud, known as VAT carousel fraud, has plagued the EU carbon market and led to significant financial losses and legal actions. The trial in Frankfurt underscores the vulnerability of carbon trading systems to financial crimes, emphasizing the need for robust oversight and regulation.

Stay tuned for the summary next week to stay upbeat in this fast-paced sector!

Sources: Bloomberg, Financial Times, Desktop Research, LSE Blogs, Reuters

Disclaimer: This weekly global investment banking update provides insights into recent transactions and market trends for informational purposes only. It does not constitute financial advice, and readers are encouraged to verify information independently before making investment decisions. The content reflects the views of the respective sources mentioned, and while efforts are made to ensure accuracy, completeness, and reliability, we do not guarantee it. Investing involves risks, and past performance is not indicative of future results. The mention of specific companies or transactions does not imply endorsement. Stay informed about regulatory changes and market conditions, and consider seeking advice from qualified financial professionals for personalized guidance.