WHARTON PRIVATE EQUITY & VENTURE CAPITAL Volume 1 / Issue 14 ASSALA ENERGY ACQUIRES SHELL’S GABON ASSETS
IN THIS ISSUE: 1. Assala Energy Acquires Assets 2. Airbnb: Public or Private? 3. Pandora Considers Turning to PE 4. PPG Bids to Takeover Akzo Nobel
Author Michael Springer Class of 2020 msprin@sas.upenn.edu
Carlyle Group backed Assala Energy announced March 24th they would be acquiring Royal Dutch Shell’s onshore assets in Gabon, Africa for $587 million. Shell has recently sold its North Sea assets to private equitybacked Chrysaor for $3.8 billion. These sell offs have been steps in Shell’s $30 billion disposal program, which was started after the $54 billion merger with BG Group. Private equity firms have taken advantage of smaller oil exploration and production assets that are sold off by larger companies as the firms are able to cut costs and run the assets outside of a larger bureaucratic institution, which results in greater realized profits. Marcel van Poecke, head of Carlyle International Energy Partners (CIEP) has stated that "All these acquisitions are small compared with the majors. So you create much smaller entities, but very focused entities which helps with capital allocation and costs." This focus on smaller entities that are often put aside by large oil companies will lead to increased profitability that would be unrealized if the assets remained under the control of a bigger player such as Shell. Private equity firms have been increasingly interested in expanding their presence in international oil exploration and production since the collapse in oil prices in 2014. Firms have been acquiring smaller assets from large oil companies hoping to reduce their debt and focus on a smaller number of operations in the natural resource sector. However, American private equity funds such as Carlyle, Blackstone and CVC Partners have begun hiring management teams with local experience to run operations in countries with less transparency and financial framework than in Western economies. Carlyle invested in Assala Energy, which is led by former Tullow executive David Roux, to run operations in Gabon, where members of their team have previously worked at oil and gas producer Perenco. In addition to focusing on cost cutting and increased productivity within the newly acquired assets in Gabon, Van Poecke added that Carlyle plans to increase production in Gabon and possibly other areas of subSaharan Africa moving forward. More specifically, Van Poecke sated Carlyle will "allocate more capital for infill drilling in Gabon itself and there is room to grow." The assets in Gabon are currently producing 60,000 bopd, but Carlyle believes they can improve this number in the future. Due to this acquisition’s overlap between Carlyle’s $2.5 billion CIEP fund and the $698 million Carlyle Sub-Saharan Africa Fund (SSA), both funds will provide funds to carry out the deal. With the deal, about 430 local Shell employees will become Assala Energy workers, and Assala will take on $285 million of debt under the deal. The transaction is expected to close sometime in the summer of 2017.
AIRBNB: PUBLIC OR PRIVATE? Airbnb, the tech start-up we all know for its impressive growth, is now valued at $31 billion. From the small platform that provided a service for people with/ looking for a place to stay, Airbnb has established itself as an international presence in offering hospitality services. After its Series F financing round that closed on March 9th, Airbnb reported that it had received more than $1 billion from investors such as Google Capital and Technology Crossover Ventures. As the fourth most valuable startup and the second most valuable hospitality provider, we are all wondering: When will Airbnb cash out and go public?
Author Brandon Li Class of 2020 brali@wharton.upenn.edu
To answer that question, let’s take a look at Airbnb’s past rounds of financing. Starting in early 2009 when it first received $20k in seed capital, Airbnb has progressively increased the amount of capital it has raised in each round up to a maximum of $1.5 billion in its Series E. Although the startup did require $1 billion in debt financing from J.P. Morgan in 2016, since then the startup has become profitable and has had little issue acquiring capital. With its recent rounds of acquired funds, Airbnb has ventured into new product areas. For example, Airbnb launched a service in 2016 that allowed “users to experience a city like a local.” Airbnb also moved into targeting specific groups of customers by acquiring Tilt funding platform and Luxury Retreats. Airbnb seems to be at the peak of performance right now, and an IPO may generate an influx of capital. On the flip hand, Airbnb has also faced increasing scrutiny from federal regulators. Currently battling with San Francisco regulators about the legality, safety, and impact of Airbnb’s business, Airbnb has found itself embroiled in lawsuits, holding rallies, and implementing lobbying campaigns. Furthermore, international regulators have also begun to take notice of the expanding startup. In Barcelona, the city council essentially banned Airbnb when it asked for reporting of illegal rentals. With the current legal issues plaguing Airbnb, an IPO may also have the contrary effect and hurt Airbnb’s business. Regardless, Airbnb’s early stage investors and employees are pushing for the company to go public. With their liquidity having decreased substantially after waiting on Airbnb for so long, the earliest investors and employees have succeeded in receiving a stock buyback program that totals around $200 million. Therefore, it seems that Airbnb may go public soon. However, the company has stated that it has no intentions to soon. Access to capital is not an issue for Airbnb, as evidence in the latest financing rounds. Furthermore, private equity funds were at around $750 billion and venture capital funds were around $121 billion. Private funding is still a good option for Airbnb, and with its current legal troubles, there is no rush for the startup to go public. With its growth prospects and plan for expansion, Airbnb has no plans to go public soon, and it shouldn’t. Figure 1: Major Players
PANDORA CONSIDERS TURNING TOWARD PE
Author Jason Cohen Class of 2020 cohenjas@wharton.upenn.edu
Believe it or not, your $9.99 Spotify subscription puts you significantly in the minority when it comes to music subscription services. As of last year, only 18% of Americans surveyed use Spotify at all (7% premium), as compared to the 30% who use Pandora and 27% who use YouTube. And yet, with the streaming industry paying so much of their revenue to artists, it is worth questioning how much longer these companies can survive without a profit. This inability to make money while taking over market share is a likely explanation for Pandora’s recent hiring of Centerview Partners, an IB/PE firm, to explore all strategic options going forward. Pandora wants to take their service to the next level and ultimately make it profitable, and in today’s money-burning race for market share, there is perhaps no better place to turn than private equity. In the past ten years, the music industry has evolved more than the preceding 50 years in terms of accessibility. While people used to save up their allowance for physical albums for their CD players or $0.99 iTunes songs for their iPod Shuffles, now there seems to be an infinite number of options for getting music on-demand. Spotify, which came over from Europe in 2011, has become the number one destination for a fully on demand subscription model. Pandora Media, which IPO’d in 2011 and had been in the business for over a decade prior, leads the way in terms of total usage because of their freemium, ad-based revenue model. Pandora is also not fully on demand as it only allows the user to play a radio station, but it is highly customizable for the user. Apple’s iTunes and Google’s Google Play have been losing and gaining ground respectively, and ultimately have difficulty selling music when it can be found for free in so many places. They have also adopted the customized, free radio feature. Finally, there is a collection of smaller services such as iHeartRadio and Tidal Music that are competing for the hundreds of millions of users in the U.S. alone. On top of this all, YouTube offers most songs and recently adopted features that make listening easier, while illegal websites offering free music downloads are too widespread to regulate. In short, this market is crowded and difficult. Pandora wants to remain on top, and to do this, they need money. CEO Tim Westergren is in talks with Providence Equity Partners, Silver Lake, KKR, and others because he wants capital to expand his service beyond just North America and Australia, where the company is based. This is a risky move, as turning to PE often is, but the dividends it can pay off are huge. The streaming market is at $2.9 billion as of 2015 and still growing rapidly. On the PE side, there is $820 billion not being invested at the moment. Companies like Pandora Media will have countless options because of the upside involved in a successful investment, and because of the amount of capital that PE funds have to work with when making expensive investments. It is worth noting, however, that Pandora’s stock, traded publicly on the New York Stock Exchange, has dipped in the past few weeks. In fact, the stock has gone from its highest point of $37 in February, 2014, to its current value of less than $11 in (market cap $2.42B) in just over three years. Oddly enough, Pandora reportedly turned down a buyout offer from Sirius XM Radio, meaning they are confident in their ability to make a deal via PE. Sirius XM was actually in a similar situation to Pandora just 8 years ago, handing over 40% of their equity in exchange for simply the ability to remain afloat. However, considering that even they look at Pandora as a daunting
task, a money-churning machine facing a plethora of competition and showing no recent growth, this may be the most important business decision of Pandora’s young
life. This is the point where they have to decide whether to sink or swim, and unfortunately for Pandora, they might be too bogged down at this point to get out.
Figure 2: Profitability of Music Streaming
Figure 3: Weekly Streaming Share
EMAIL “BLOOPER” PAINTS MORE HOSTILE PICTURE Akzo Nobel N.V. is a Dutch multinational company that specializes in producing paints, performance coatings, specialty chemicals, and essential ingredients for industrial protection materials. Its U.S. Rival, PPG Industries is a Fortune 500 global supplier of paints, coatings, specialty materials, and fiberglass headquartered in Pittsburgh, Pennsylvania.
Author Jose Delgado Class of 2019 delgj@wharton.upenn.edu
Beginning in early March, PPG has offered two takeover bids to Akzo Nobel, the most recent one for $26 billion and which was rejected unanimously by the board. PPG’s aims are to create a powerful combination of the two to dominate the $130 billion global paints and coatings industry. PPG firmly believes that the acquisition would offer Akzo Nobel shareholders a substantial premium and a chance to benefit from the upside potential of a larger company that would be better positioned to drive value creation and inherent growth. While PPG has been using media tactics to pressure Akzo Nobel management into working out the deal, Akzo Nobel has been fighting Elliot Advisors, a hedge fund that owns 3.25% of the equity interest in Akzo Nobel via its U.K. division, over its decision to reject the two takeover bids from PPG. Since both bids were rejected, Elliot Advisors has been pushing shareholders and is now backed by investors holding more than 10 percent to hold an “extraordinary general meeting” to remove Akzo Nobel’s chairman Antony Burgmans. A significant portion of these shareholders have requested that the company hold the meeting to vote on the removal of the Chairman of the Supervisory Board. On Tuesday, April 11th, Gordon Singer, Co-Chief Investment Officer at Elliot Advisors sent an email to what should have been a private distribution list of Elliot Advisors representatives only. The email speculated on whether Akzo Nobel would make public the letter calling for Burgmans’ dismissal and said shareholders would withdraw their call for a meeting if Burgman instead agreed to sit down with PPG to discuss a potential deal. However, Singer “accidentally” carbon copied Lloyd Midwinter, Akzo Nobel’s director of investor relations. Whether this email blunder was truly an accident remains unclear. To add insult to injury, Singer had added a footnote directing an Elliot employee to inform PPG that it had sent the letter to Akzo Nobel about the possibility of holding the meeting, suggesting that now was an “opportune” time for PPG to attempt to engage with Akzo Nobel. Some speculate Singer could have purposefully revealed his tactics to force Akzo Nobel’s hand. In response to this major slip up, Akzo Nobel has accused Elliot of planning to share price-sensitive information with PPG and has rejected calls for the dismissal of Burgmans. Sharing potentially price-sensitive information could lead to fines or prosecution depending on the severity of the market abuse. In a company statement, Akzo Nobel said that it has “shared this information with the Dutch Authority for the Financial Markets and has called on Elliot Advisors and PPG to clarify their relationship and the history of the communications between these two companies.” As required by Dutch law, Akzo Nobel has agreed to consider the request to hold the extraordinary general meeting and will respond to Elliot Advisors
within 14 days. Due to its regulatory obligations, Akzo Nobel is expected to respect the will of the shareholders by convening the meeting to remove Burgmans. However, the company has also expressed that any attempt to dismiss its own chairman would be “irresponsible, disproportionate, damaging and not in the best interest of the Company, its shareholder and other stakeholders,” primarily due to antitrust reasons.
All in all, “the proposed agenda item to remove Mr. Burgmans will be rejected.” Akzo Nobel CEO Ton Buechner is now set to present to investors on April 19th, when he intends to outline his plans to counter the takeover by PPG. While he waits for Elliot Advisors to clarify on whose side they are, we will have to wait on the sidelines to see whether he can gain the support needed to remain independent.
Figure 4: Market Reaction to Rejection of Bid
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