 Hello and welcome back to the deal room and we have three hot topics for you this week for Steven and I to discuss the first one up on the docket is city who said on Monday agreed to sell 3.6 billion dollars China consumer wealth portfolio to HSBC. So be really interested to dive into a little bit about the strategy on both sides of those two parties why cities looking to come out and HSBC is looking to double down so to speak. And then for ex on mobile. That's probably the big one, the deal of the week. So to speak, certainly from a size perspective they're going to acquire pioneer natural resources you might not have heard of those. Because certainly if you're a UK based student, but it's a $56 billion deal. And in fact, you'd have to go back to when Exxon mobile was Exxon. So talking about when the company's largest deal back in 1999 with its merger with mobile as to the last time a deal of this magnitude was conducted by that that business but really interesting about actually strategically what they're going after particularly in the Permian Basin which I know might be an area where not a lot of people are familiar with so I'm sure Steven will provide some some much needed color and then we'll finish on a little bit of a celebrity hang out in London but global where everyone likes to hang out with these cronies. But yeah well, there's a really interesting story about a very much a hotspot Italian restaurant that I thought was just London but apparently it's all over the globe, but it's got some interesting points about how they're trying to aggressively expand and obviously so I'm sure we can discuss that as well but yeah, Steven, maybe we could kick it off with this city HSBC story. Yeah, thank you and this is a this is an interesting story. And I think it's interesting from a strategic perspective, especially with regards to HSBC. HSBC, I think every listener will know what HSBC is it's often in the news because it's the biggest bank in the UK and it's this weird beast, this weird beast that straddles the east and the west. And that's been its, you know, unique selling point or its unique sales proposition to its clients, you know, back in the, in the late 90s into early 90s I'm sure, and you remember this their slogan was the world's local bank. They sponsored all of the airline to run where all of the airline walkways and HSBC was everywhere and it connected. It was a real beneficiary of globalization. But it's always had one foot in Asia and one foot in the West ever since it was founded back in I think 1865. It's the Hong Kong Shanghai Banking Corporation. Its headquarters is in London. It's actually in Canary Wharf, but it's about to move out of that big tower that you might see dominating the skyline of Canary Wharf because not enough people are going into the office anymore. And there's been a lot of discussion around whether HSBC should move their headquarters to Hong Kong, or somewhere maybe even Singapore. We know what difficulties there are with Hong Kong at the moment, whether even the Asia part of the business, which is actually the most profitable part of the business, should be spun off. There was an activist investor campaign led by the company's biggest investor, Ping An, that said, look, I don't really get this structure. You're making all your money in Asia, and yet you're still operational in 62 countries. This doesn't feel like good sensible strategy. So why don't you spin off Asia and list that in Asia and then you've got your Western business. That got turned down. And I think that background to this whole, are we an Asian bank? Are we a European bank? What is unique to us is the kind of hinterland to the buying of these assets. So HSBC went through this quite remarkable acquisition spree, between, again, 1985 and about 2000, where it wanted to basically have a bank in every single country around the world, it seemed. And then we realized that that didn't make sense. This economies of scale from an economics perspective, and it's been pulling back, pulling back, pulling back. It's now in 62 countries. And it's just starting to kind of get on the front foot, having been on the back foot for quite a long time. And having defeated this activist campaign, earlier on this year, in May of this year, it's gone on the front foot and said, look, no, no, no. This makes sense for us. We are big in Asia. We want to be even bigger in Asia. We want to be the leading bank that straddles these two continents or these two areas. And we're really going to double that to deal to buy cities retail asset portfolio. So this is $3.6 billion of retail and wealth management deposits. It's not a $3.6 billion acquisition. It's a slight different thing. If you're buying, you know, if you're buying financial assets as opposed to you're buying a company, this isn't a particularly big deal. You know, it's, it's 400 staff, it's I think 11 cities across China. But it's symbolic of a company that may be regaining a little bit of confidence strategically and going into, as we well know, and as we've discussed on the before previously, a kind of geopolitically very difficult area. The HSBC is like, all right, it's difficult. But we like difficult because difficult is sticky and difficult has barriers to entry and things like that. Yeah, I mean, I was looking at some stats on a post that I did earlier this week, and it was saying that in terms of the growth in the region that HSBC had had, and they recorded $27 billion in net new invested asset inflows in Asia in the first six months of this year. And that to give some context was up over 20% year on year. It's not bad going. It's not. I mean, it's fantastic. You know, that's growth rate, that startup rate growth for one of the stodgiest, not to use that in a horrible way. One of the slowest moving organizations, I can say that I used to work there, one of the slowest moving organizations to get plus 20% growth in a part of their business is really quite impressive. And therefore to double down makes sense. I think the only caveat to that is, all right, where is a lot of the Chinese where is a lot of the wealth coming from and remember the valuable clients within a retail bank, other wealthy ones, the ones with bigger deposits, the ones that can do more interesting things with their money using their bank to support them and generate fee income and and spread income as well. The majority of this money has come from the real estate market and the booming real estate in China. You know, that's coming off quite significantly and we're seeing that as a massive threat to Chinese growth. So what's going on there? Is that going to be a counterbalance to HSBC strategy? There's also maybe a bit of, you know, there's been a crackdown on private enterprise in China, which has been well documented. So doubling down on this region is certainly a, you know, it's a bullish move. And we'll wait to see whether it comes off. Yeah, it almost feels like, I mean, they're taking what was already an external party from like non domestic Chinese business. So the state I imagine is okay with that because it was never the states controlled anyway. However, if they do start growing at that rapid rate, I'm sure then it will life will become increasingly more difficult to operate in and around China, particularly Hong Kong. One would one would imagine and the pressure will continue to come that you should your HSBC you generate 50% of your revenue from Asia, you should be headquarters, headquartered in Hong Kong. And because Hong Kong is obviously ever more increasingly under the control of the Chinese government, that would make the Chinese government feel a lot more comfortable with this rapid expansion within their borders. Which is a very quick point on city. We discussed city a couple of months ago, when we were looking at earnings releases across the major banks. We all know that cities had a pretty turbulent time ever since the financial crisis, and it has not been performing anywhere near the gangbusters of a JP Morgan or even a Morgan Stanley or Bank of America. And this seems like a further what we would call a rationalization of their portfolio or rationalization of their strategy. Let's get out of anything that doesn't make absolute sense to us. Maybe the USP the unique selling point proposition of HSBC is straddling multiple continents. But for us, that doesn't make sense for us anymore. So it feels like it makes sense from city's perspective. Get out of anything that's just too hard and too complex. Let's double down on our domestic market in the US, double down what we're really good at. And let's sort it out. Let's turn the bank around. Yeah, it's a brave decision for management to just do that. I'm sure that's not a simple decision to make. But yeah, it makes sense. Well, look, let's move on. Let's talk a little bit about Exxon because this is like the big deal. It's been a lot of talk about this and and about US shale. So maybe as well a little bit if you can, an explanation about what is shale and why is it so important specifically in North America. Yeah, this is this is really interesting. I mean, I'm certainly by no means an expert in US oil production and extraction. But from a from a strategic perspective and from a market perspective, the oil industry is about as interesting as you can possibly get. And linking it back to some of the things that we studied at university from a markets perspective and from a again from an economies of scale and barriers to entry, all of this kind of stuff is very well represented in the US oil and gas market. So stepping again, going back into a bit of history. There was, there was a company called standard oil, and many of you will have heard of standard oil, massive oil monopoly, JD Rockefeller, etc. They got split up into lots of quote unquote smaller companies. These smaller companies were the forebearers of the what we now call the super majors. So there are seven or eight, maybe nine or 10 oil and gas super majors around the world. So this is your Chevron, your Exxon mobiles, your BPs, your shells, etc. The big, the big beast in the industry. And these companies became super majors between the early 90s and the kind of early 90s and late 90s where there was a lot of consolidation. A lot of consolidation. Again, you reference Exxon buying mobile, big, big acquisitions, big transactions to achieve the massive, massive economies of scale that you can that you can achieve when you are such a large company. I think when Exxon merged with mobile, they fired about 6000 people. You know, that's the kind of what we're calling M&A speak that that's the cost synergy that you can achieve by becoming a bigger beast. Now, we've been used to having these big companies dominate Western oil markets until until the shale gas revolution that is really, really being focused around a couple of areas in the United States. Now, the shale gas revolution, it's a different way of drilling for oil and gas. And it was almost the Permian basin, by the way, is in Texas straddles a bit of New Mexico. The shale oil revolution felt to a lot of people very much like the Wild West of the original oil revolution. Right. It was a different form of drilling. There's a lot more horizontal drilling, a lot more prospecting, a lot more buying speculative acreage, and then hoping that there was something underneath to use very simplistic terms. They called it, they called it wild cutting. So lots, lots of smaller players going around trying to get quite nice reserves trying to understand the geology of this whole new region that was suddenly available for a new type of drilling. Now, if you're one of the oil and gas super majors, do you want to be buying, you know, you know, mom and pop, they're not mom and pop shops, but you know, you know what I mean, smaller operations. It's a horrible consolidation play if you're trying to buy all of these fragmented companies that are suddenly trying to jump on a new industry. Think about it as going from an oligopoly in financial in economic terms, do more of a function in market when there are hundreds of players trying to try to get a bit of market share. But as shale gas has become more and more established, and as companies have got larger and bought more and more acreage, and there are more, there's more understanding of the deposits that are there. Suddenly, these companies become much more attractive to the oil and gas super majors. And this is where we are today. Exxon Mobile, who have about a 6% share of the market in the Permian Basin, which is the biggest oil producing area in the US and in about six and a half million barrels of oil a day, about 50% of the US production. So Exxon has 6%, Pioneer, this Pioneer Natural Resources, this listed US shale gas extractors for about 9%, combine the two together, and you've got 15% of this pretty strategically important asset, and obviously represent such a large position value for the company. So would there be a regulatory issue with this then, given there'd be so dominant within that sector? It's a really good question. From what I've read, we know from this podcast, we know that antitrust is pretty active at the moment. My hunch is that they are very much focused on taking down a big tech whale, probably in the form of Amazon, and that this represents not necessarily enough of a market share. Think about 15% market share, the threshold for a monopoly according to the competition of markets authority is 30%. It's a big acquisition, but I think that it would probably get through, albeit it won't be, it won't be any time soon. And by the way, this deal, Exxon buying Pioneer, we reported it in our deal of the week when it was just advanced talks. And this morning, it's turned into, well, we know some more of the terms. So this is moving towards a confirmed deal. And then obviously, as these things go, it will take a very long time to go through from deal announced to deal completed. And that's obviously where the antitrust and the competition authorities will definitely be taking a look. So from the visibility you have at the moment, you mentioned there the terms. Do you have any idea of whether Exxon are paying a fair value for this acquisition? Oh, this is super interesting. So think about what's been going on with all the gas companies. And we've referenced it with regards to Middle Eastern oil and gas companies and the amount of money that they have picking around. So Exxon actually has enjoyed probably two of the best years of its corporate life. Its market capitalization is up at about $440 billion. And it's been hitting new records over the last couple of months in terms of market capitalization. So between $440 and $460 billion, that is double what it was about five years ago. And this transaction is an all-stop deal. This is pretty common. And by the way, this means that the shareholders of Pioneer will be receiving Exxon shares as opposed to cash for their shares, albeit with a premium. This is pretty common when there is a company that's experienced significant share price growth because suddenly they can use their share price as liquidity as capital for acquisitions. And if you think about buying a, I think it's going to be $58 billion. That's what we're looking at at the moment, about buying a $58 billion asset on a market capitalization of about $450 billion. That's pretty high. What are that? 15%, 18%? It can't be the maths, but it's not five years ago, the market capitalization of $200 billion. So this would be far too big an acquisition, far too transformational, far too high risky in terms of dilution and all of that kind of stuff. So it feels like Exxon are in a bit of a position of strength. It's got $30 billion of cash on the balance sheets, share price reaching all-time highs. Let's make a move into an area that we previously thought was too fragmented, but now we need. And just a couple of bits on the terms. It's looking like this is going to be a 16% premium to the share price of Pioneer, which isn't a big premium. We've talked, I think the activation premium was 45%. It's about a three times trailing 12 month revenue multiple, six times trailing 12 month EBITDA multiple. So this is not a particularly high valuation, but we have to remember that Pioneer is not a tech company. It's a, we know what Pioneer owns and we know roughly the available reserves that you are buying. So it's much, you know, it's not a growth story. It's a cash story. And therefore we can be a lot more rational with regards to the multiples that we're offering. I wonder if, as well, if there's a sense of political timing here, just given the kind of the intersection of the macro environment being inflation, oil prices very sensitive. And so in order to, there's this big debate between America or the Middle East in terms of the source of oil from a domestic perception point of view in North America, whereas to consolidate, make a brand household name like Exxon, more independent of US resource. I'm sure that would go down as a pretty positive ticket, particularly if you're trying to counter at Republican who are probably more pro to licensing and drilling and these sorts of things. So if Biden can utilize this to kind of win over some positivity in that space and then some the optics of taking action to alleviate prices at the pump by looking to facilitate a way of which the US can become more independent. I think the politics could be quite interesting on the timing side. Yeah, and it's really interesting. I was reading a report this morning that was looking at the difference between the way that shale oil is extracted relative to your traditional big oil extraction operations. And the article is really was talking about agility. So by buying these assets, it is much easier or a lot cheaper to turn on and off these extraction assets, you know, we're talking millions of dollars as opposed to mothballing and then, you know, spending six months to turn something back online, and reacting to slowly to shift in supply constraints from the Middle East. So this feels a bit more like an agility play, whereby if there is a if there is a demand spike, there is the agility to react to that if there is a supply shortage, there's the ability on the agility to react to that. So there's certainly something there from a reacting to geopolitically induced oil and gas price movements that is definitely very interesting. And as you say, coming up to the 2024 election, is this going to get blocked? Probably not. All right, well, look, final one, the celebrity hotspot that is Cipriani. Why are we talking about an Italian restaurant, Stephen? I just wanted to talk about it to be honest. Cipriani, this is old school. This is I would be amazed and maybe please do write a comment in the LinkedIn if you've actually ever been to a Harry's bar or a Cipriani's in London or in New York or even in Venice or in Milan. So these are Cipriani is an old school celebrity haunt. It actually invented the Bellini drink cocktail and Carpaccio. I don't know if you knew that. And the celebrities way back when I opened in 1931, it was everything from Ernest Hemingway to Joe Di Maggio later on Woody Allen. So it's got this kind of old school Italian American prestige to it. But the reason why I really want to talk about it is they've just raised 500 million euros with the help of two basically fund raising banks to go for a global push. So they are a very expensive operator. They are operated very expensive restaurants and members clubs. The US members club generated $63 million of revenue last year. And this is interesting. I think just from a understanding of the way that global inequality is playing out. The demand for these types of assets and the demands for these types of experiences is at an all time high. We see this with LMVH and the blockbuster revenue that it keeps churning out. It just had its quarterlies out I think last night. We see that high end experiences are just not feeling any cost of living crisis. Any pinch whatsoever. And I just want to reference this by asking you. I like finishing off these podcasts with a couple of quick questions. So Casa Cipriani is the members club in New York. I can't say I've ever been. I think it turns itself as an eclectic community who share life's simple pleasures. Which I assume means... Simple pleasures. Oh yeah. I think it is having a lot of money. I read into that. How much do you reckon that... It's kind of a members club in Lower Manhattan. How much do you reckon that cost a year? To be a member of. Yearly. Yearly subs. Yearly sub. For New York Manhattan exclusive. You're talking a lot. So there's a balance here between costing a lot for the access for what it is. And the access to celebrities. But then there's the premium you would probably stick on it as a business. Because it's almost like the perceived exclusivity of having it at a stupid number. Because then it gets even more sought after. I mean a normal members club in London. You're talking 5K or something like that. Something that's a lot of money. But I think it's a lot higher than that. I'm going to go... Well it's got to be exclusive though. So we're talking multi-millionaire billionaire types. I'm going to say 150 grand. This is really interesting. If I had asked you the question. Amman. How much does that cost a year? So that's a private members club where membership is $200,000 upfront. And then 15K annually. And that's just the space in New York where you have a coffee. It's a little bit more than that. But it's paying for that exclusivity. Because it's a lot cheaper. $5,000 a year. Which actually isn't too bad. You don't get anything with that. You just get to walk in and pay for very expensive food. There's almost like getting a reservation. And these places are packed. And the queues, the membership waiting lists are years long. $200,000 and 15K annually. To get access to basically, as I said, a place that you can have a coffee and a cocktail. What was that? But however, what was that Netflix one of that real life story of that girl who was playing off to be like an artist or an art gallery and she wanted an exclusive townhouse for a similar sort of setup. So you could take a bank loan. Pay the 200K upfront. Pay your 15K. But then I can then, if I've got this pitch and I'm the right kind of person, like she was to pull off this high society vibe. And then you start getting backing of multiple millions or fleecing them along the way. But what I mean is it's like financing. I mean, who are you going to meet in these places? And what's up with money? Are they throwing around for like a little pet project? So, you know, he who dares Rodney. Well, look, I'm looking forward to seeing you going into your local bank branch, asking for a 200K loan to fleece a bunch of rich people. You know, maybe that can be on the next pod. Well, you know, just my roots. We're the dealer at heart basically. Cool. All right. Well, look, I think that's a good way to finish. And hopefully I can aspire to get entrance to that place one day. But yeah, I'm not sure. I'm not sure whether I'd want to, to be honest. But yeah, good stuff. And thanks as always, Stephen. And yeah, catch everyone next week. Thanks.