Old Economy Flexes Deal Muscles

These are dark days. We wait for the clocks at the end of the month to re-set but sadly geopolitics and the history of the Middle-East never gets a re-set; just a replay. The horrific terror of last weekend marked, almost to the day, the 50th anniversary of the last major attack on Israel’s borders. Back then, the oil price rocketed 300%. This week… Brent crude oil is up just 2%. The human crisis is not over as 550,000 children face a 24 hour evacuation order from Gaza City but the global economy and oil prices are sending more subdued signals of alarm. Or does it reflect the diminishing influence of hydrocarbon fuels, or even the “old” economy? No, and no. Despite the climate crisis, we will still be using lots of hydrocarbon fuels over the coming decades. Arguably, oil usage has peaked but it is not going away. As for the old economy and its asset-heavy activities in construction, extraction and manufacturing we need to pay attention to corporate activity and investment flows.

First, start with oil itself. Energy exploration and production (E&P) was once the dominant stock market sector before tech took over, but it flexed its corporate muscles this week. US oil giant, Exxon Mobil, announced a $60 billion acquisition of Pioneer Natural, the largest player in the low-cost Permian oilfield. That doesn’t smack of climate crisis capitulation but reflects the reality, like tobacco before it, that consolidation is the corporate survival strategy when regulators want to curtail your business. At the other end of the corporate scale, startups, there were interesting data points this week too.

The European Investment Fund (EIF) surveyed 500 European VC funds and found sentiment at a record low. Two thirds of respondents say valuations have fallen and 28% of firms have reduced their investment activity. But, here’s the old economy kicker. The research firm, CB Insights, has just released its Q3 report on VC deal activity and a whole Exxon-Pioneer deal has been generated in the startup world, or slightly more. Global VC funding in Q3 hit $64 billion, up 11% on the previous quarter. The deal sizes were bigger as deal count fell to the lowest seen since 2016. However, in these larger deals the old economy came roaring back with half of the 10 largest deals going to the automobile industry. More specifically, electrical vehicles (EVs). And two of the other top 10 deals were in clean energy and sustainable manufacturing.

Readers should get used to the manufacturing re-set story as decarbonisation investment hits its $275 trillion stride to 2050(Source: McKinsey). Despite the gloomy ‘higher rates for longer’ and geopolitical anxiety, it feels like manufacturing sector confidence is growing. Check out Smurfit Kappa’s $11 billion deal with WestRock to create the world’s biggest paper and packaging company. Of course, manufacturing in its energy transition and storage journey will become more dependent on other elements in the earth. So, the vote by Newcrest Mining shareholders this month to accept the $17 billion offer from gold producer rival, Newmont Corporation, should be a reminder that the mining sector will be very busy on the deal front in the coming years as the EV battery revolution drives demand for nickel, cobalt, manganese, graphite and lithium. And don’t presume all the old economy deal activity needs to have a green angle. Two little snippets this week caught my eye.

The first snippet or nibble in the old old economy was hospitality. Private equity giant, Apollo Global, has just bought Wagamama owner, The Restaurant Group, for an enterprise value of almost $850 million. This continues the ‘UK on sale” theme in the UK hospitality sector as then-Chancellor Rishi Sunak’s “Eat Out to Help Out” Covid-19 population cull has morphed into “Eat Out and Sell Out”. Big Mamma Group sold out to McWin in September and this follows other private equity purchases of Bourne Leisure, Boxpark and Punch Pubs in recent years. However, it’s not just the grizzled private equity sharks snapping up businesses. A recent Bloomberg article was highlighting the surprising trend of MBA graduates shunning consulting positions with McKinsey, Accenture et al and acquiring entire companies in the SME space. It has its own M&A category now – ETA or “entrepreneurship through acquisition”. Always learning, eh. Now, let’s turn to a sector which is often accused of never learning.

The banking sector is unloved despite monster interest rate-fueled profits. The problem is that the financial markets think bank customers(and loans) could be facing tougher times. Indeed, Goldman Sachs has published data showing the tightest financial conditions (access to funding) in Europe for 15 years. For context that’s when the great financial crisis (GFC) was raging, and Lehman Bros. had collapsed a month earlier. For an even more stark illustration of investor ‘fear’ the KBW Bank index which tracks US banks is trailing the broader S&P 500 market index by 37% year to date. That’s the worst spread in history surpassing the nadir of the 2008 credit freeze period. As a final old economy, and possibly old fashioned thought, that’s a helluva lot of bad stuff priced into the banking sector and its future. And frankly, if the future is that bad for banking then the pricing of everything else is delusional. I’m not in the Armageddon camp so I’m wondering will the last big pillar of the old economy follow form with a shock banking deal? Let’s see. Anyway, we could do with a positive shock.


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