What comes next for Microsoft’s $75bn Activision Blizzard deal?

Two things to start: First, the EU has hit Illumina with a record fine after the world’s largest gene sequencing company completed an $8bn acquisition without the approval of Brussels, violating what regulators said was the “cornerstone” of their authority. 

Second, German financier Lars Windhorst has denied living a “billionaire lifestyle” while large debts to creditors remain outstanding, during a London high court hearing where he struggled to answer questions about his finances.

In today’s newsletter: 

• Microsoft and Activision reckon with the CMA

• The US insurer bullish on ailing UK utilities

• Corporate Japan scouts deals in the US

Deal or no deal? Microsoft and the CMA search for a compromise

After the initial shock of Tuesday’s news that Microsoft and the UK’s antitrust watchdog are back at the negotiating table on the software giant’s $75bn takeover of Activision Blizzard, everyone is trying to figure out what sort of deal they can reach.

Crucial will be an off-ramp for the UK’s Competition and Markets Authority to save face after it blocked the mega-deal in April, drawing the ire of Activision chief executive Bobby Kotick, who said the initial CMA decision meant the UK was “closed for business”.

There are no easy answers for what comes next as the clock ticks down on Microsoft’s attempt to push further into the gaming market.

On Wednesday, the CMA said that the companies could “choose to restructure” the takeover and it was “prepared to engage with them on this basis”, warning that any new deal could trigger an antitrust probe.

Time isn’t on Microsoft’s side. The tech group has until July 18 — the long stop date agreed by both parties a year and a half ago — to ink a deal. 

If the deadline passes, Microsoft would have to ask Activision for an extension or be forced to hand over a $3bn break-up fee. But Activision’s board could demand some sort of financial sweetener to extend the deal to allow for regulatory approval.

The CMA’s new posture — which came just hours after a judge in California rejected the US Federal Trade Commission’s request to block the deal — was seen by some critics as a way to save face.

“Competition lawyers were just astounded,” said one lawyer. “The fact that it followed so fast on the heels of the US [ruling] . . . feels like the CMA had the courage of its convictions until yesterday.” 

UK regulators may now be incentivised to take what they can get given that Brussels cleared the deal in May.

Microsoft president Brad Smith met with UK chancellor Jeremy Hunt to find ways to push the deal through, telling the FT in June the company was “in search of solutions”.

Doubts have arisen in the UK government over what the CMA’s stance might reflect on the investment landscape for smaller companies in the country.

Allies of UK prime minister Rishi Sunak and Hunt insisted that no pressure was applied on the CMA to shift its stance on Tuesday, according to people familiar with the matter. 

“The CMA needs to tread a very careful line here between seeming reasonable and seeming weak,” said Tom Smith, a former CMA lawyer now at Geradin Partners. 

The CMA isn’t alone in having to reconsider its hard line.

In Washington, FTC chair Lina Khan is fighting to maintain her own reputation as an opponent of anti-competitive deals after the California judge rejected the regulator’s request to block the Activision deal.

In February, a federal judge rebuffed the FTC’s request to block Meta’s acquisition of virtual reality games business Within. 

The FTC is planning to appeal the Microsoft/Activision ruling but it is fighting many M&A wars. 

It’s litigating an order for Illumina to divest cancer screening company Grail in a vertical merger case and has also sued to block Amgen’s $28bn takeover of Horizon Therapeutics.

The US insurer betting against the tide

The UK’s water companies are in a tough spot.

Three of the largest have secured commitments in recent weeks to receive additional funding from backers including Canadian pension giant Omers, Australian investor Macquarie and Singaporean sovereign wealth fund GIC. 

But concerns remain over their long-term viability as they tackle rising inflation and a more than £60bn debt pile.

Despite the headwinds, one US insurer remains bullish on the sector. Assured Guaranty, a New York-listed insurance company, has amassed more than $10bn of exposure to UK water utilities and recently struck more deals in the space.

“We feel the UK water company debt we have insured has a strong credit profile, as it provides an essential public service and is in a well-regulated industry where we guarantee the senior level debt, all of which has underlying investment grade ratings,” Nick Proud, a senior managing director at Assured Guaranty, told DD’s Will Louch and Robert Smith.

Assured Guaranty provides a niche type of insurance that pays out to lenders if a borrower defaults on its loans. Its largest exposures in the US include the state of New Jersey and the Port Authority of New York, public entities with different risk profiles to the UK’s largely privately held water companies.

The insurer’s confidence comes even as UK water utilities’ debt loads have attracted growing scrutiny. 

UK financial regulator Ofwat is closely monitoring the financial health of Thames Water and Southern Water, among others, while S&P Global has negative outlooks for two-thirds of the water companies it rates. 

Last week saw Southern Water downgraded by Fitch, citing challenges that included servicing its “high interest costs”.

This could leave Assured Guaranty on the hook if they run into further difficulties. But, as Proud noted, “to date, a UK water company has not defaulted on their debt”.

Japanese companies go shopping in the US

Even as M&A wavers across the globe, corporate Japan is increasingly hunting for deals in the US.

Recent deals include developer Mori Trust’s purchase last month of a 49 per cent stake in Manhattan’s 245 Park Avenue tower. Other large Japanese developers are also on the prowl, three M&A lawyers told the Financial Times’s Leo Lewis.

But it’s not just about planting flags in glitzy US neighbourhoods. Scouting for deals overseas has been propelled both by Japan’s shrinking population and domestic market.

“It’s not about trophies this time,” said Rochelle Kopp, managing principal at the M&A advisory boutique Japan Intercultural Consulting in Tokyo. “More and more Japanese companies are saying that they want a specific percentage of their revenues to come from overseas . . . it is front and centre of their strategy.”

The Bank of Japan’s continued policy of ultra-low interest rates means that Japanese companies have built up significant cash reserves. A lack of rival Chinese bidders during a tense time for Washington and Beijing has added to that window of opportunity.

Japan’s financial sector has wasted no time. Mizuho Financial Group swooped in to buy US investment boutique Greenhill & Co for $550mn in May, while Sumitomo Mitsui Financial Group said the prior month it would raise its stake in investment bank Jefferies and combine their M&A businesses.

Cash-rich Japanese buyers are no strangers to US markets. During the 1980s, low interest rates and a stock market bubble fuelled a Japanese buying spree of trophy US assets like the Pebble Beach golf course, Columbia Records, Firestone Tire and InterContinental Hotels Group.

The signature deal of that era was the purchase of New York’s Rockefeller Center by Mitsubishi Estate, which quickly soured and underscored that buyers had misread financial conditions and would absorb losses.

Buyers such as Mori Trust will be hoping for better results, though history isn’t on their side. Chinese buyer HNA has absorbed enormous losses on the 245 Park tower it’s invested in. 

Job moves

• Disney has extended the contract of its chief executive Bob Iger until the end of 2026, prolonging what was meant to be a short-term stay.

• Law firm Skadden has appointed Rich Youle, co-head of its private equity group, as head of its London office, replacing Pranav Trivedi.

• JPMorgan Chase is hiring dozens of bankers around the world who cater to start-ups and venture capital-backed companies as it tries to take advantage of the collapse of Silicon Valley Bank. 

• KKR’s UK and Ireland private equity boss Tim Franks is leaving the firm. Daan Knottenbelt, the head of the firm’s Benelux unit, has separately been named chair of its operations in the region. 

Smart reads

One man’s trash . . . As energy giants bow to pressure from climate activists, deal-savvy oilman Jeffery Hildebrand has become a multibillionaire by squeezing oil from cheap assets others left behind, The Wall Street Journal reports.

Fashion faux pas Ron DeSantis’ run for the Republican presidential nomination has failed to leave a resounding message with voters — and so have his outfits, writes the FT’s Robert Armstrong.

News round-up

Metals tycoon Gupta says Trafigura ‘devised’ $590mn nickel fraud scheme (FT)

Hipgnosis investors urge sale of music catalogues to shore up stock (FT)

Elon Musk launches xAI in challenge to dominance of ChatGPT owner (FT)

Wall Street is fighting New York’s ban on non-compete agreements (Bloomberg) 

Budding bond kings self-sabotage with their fees (Alphaville)