July 13, 2018

THE VOICE OF THE MARKETS SOUTHPAW RBC raises corporate finance ambitions after Melrose victory

RBC Capital Markets is rightly proud of a transformative mandate on Melrose's GKN acquisition, but its ambition shows no sign of waning as it shrugs off senior departures, writes David Rothnie.

he £8bn hostile takeover of UK engineering group GKN by Melrose earlier this year had Tall the elements of a traditional M&A scrap, save for one unfamiliar element — the presence of Royal of Capital Markets (RBCCM) as co-lead adviser and financier to the successful bidder. The deal was the biggest hostile takeover of a UK public company since US confectionery company Kraft took over Cadbury eight years ago. It also marked a milestone in RBCCM’s The GKN bid: a chance for RBC to show its skills journey from niche bit-part player in European to of 2008, RBC seemed like a good place Because Melrose was plotting an mainstream adviser, and serves as a for a banker of Preston’s vintage and unsolicited bid it wanted to maintain case study in how a relatively unknown connections to land next. confidentiality, and kept its corporate bank patiently built a reputation with a While at JP Morgan, Preston was a brokers and JP Morgan in the client which ultimately trusted it with its regular M&A adviser to Melrose, and dark. But there was another reason to be biggest-ever deal. on joining RBC he set about bringing discreet. Financing and advisory fees from it in as a client. RBC adopts what it JP Morgan was also corporate broker to deal helped power RBCCM’s European calls a “holistic” approach to blue-chip GKN, with which it had a long-standing investment banking business to record client relationships and Melrose was no relationship. Melrose reasoned JP revenues in the three months to April different. RBC became a top tier lender Morgan would stand by and defend its 30, CFO Rod Bolger told analysts on the to the company, as well as trading its client, which proved to be the case. bank’s earnings call on May 24. stock and covering it in its research. In Melrose wanted Preston, its trusted The story began eight years ago when 2013 it acted as one of three underwriters adviser, at its side and also availed Mark Preston, a specialist UK M&A on an equity issue to help finance its itself of the specialist aerospace sector banker who started out at Lynch, acquisition of Elster. knowledge of his colleague Chris Squire, joined RBC from JP Morgan Cazenove, who joined from Bank of America Merrill where he was head of UK investment Keeping secrets Lynch a year ago. But there was another banking. Then last autumn, after GKN issued two reason the Canadian bank was top of Preston opted to leave JP Morgan after profit warnings in quick succession, Melrose’s call sheet. the US bank exercised its option to buy Melrose moved into overdrive. It picked If it was going to launch the biggest out the rest of its UK investment banking up the phone to its longstanding M&A M&A deal in its history, it would need a joint venture with Cazenove. With its adviser Rothschild, and then, before bank to help finance it. With JP Morgan desire to create an advisory-led corporate deciding to push ahead with a bid, called out of the picture, Melrose approached finance division built on a big balance Preston, RBCCM’s head of industrials for RBC, along with its long-standing lender sheet untainted by the financial crisis Europe. Lloyds and the two quickly agreed GlobalCapital, July 13, 2018 2 OPINION SOUTHPAW

RBC’s industrial strength M&A mandate << FROM FRONT PAGE Lynch and Goldman Sachs, joined as by deal value in the region at $25.6bn of to underwrite the £4.5bn head of European investment banking closed deals. financing jointly between with the mandate to build a full-service Determined to maintain momentum them. investment bank. following a blow to such a core business, “I thought we would need a bigger Critchley began by playing to the bank’s RBC has rejigged the team, effectively group of banks but they stepped up and strengths in metals and mining and splitting Clement’s role between Ed underwrote the whole thing. It felt pretty infrastructure and tapped into its strong Golder, who has added renewables to seamless,” said one source at Melrose. relationships with Canadian pension his role running power and utilities, As the deal played out, with claim and funds, advising and funding them as they and Philip Turville, who is head of counter-claim and intervention from became increasingly prominent investors transportation. the UK government, it became a case of in European infrastructure assets. In March, RBC added to the team with holding nerve. Over the past 18 months RBC has the appointment of Ralph Ibendahl from become more expansive, creating a Barclays as a managing director offering broader product suite and industry senior coverage of renewables clients. This transaction coverage effort as it seeks to go head to The team has also continued the “represents RBC’s head with more established European momentum, with eight advisory rivals. mandates since the start of the year, largest ever The bank has appointed heads of including advising Ontario Teachers’ industrials advisory consumer and retail, is bolstering its Pension Plan and Caisse de dépôt et European financial sponsors team, while placement du Québec this month on the role in Europe on the product side it has expanded its €4.6bn acquisition of German metering corporate broking and ECM presence business Techem from Macquarie Every Friday, the Melrose bid team under Darrell Uden. Infrastructure and Real Assets. of RBCCM and Rothschild would hold” This expansion is gaining traction, a call to discuss tactics. The deal went particularly in specialist finance and The blow from Blair down to the wire and at one point the challenger banks, a niche it has made its But the bank’s international ambitions cause looked lost when Threadneedle own. suffered another blow last month when Asset Management, one of the GKN That’s translating into plum roles on Blair Fleming head of US investment shareholders that had initially suggested IPOs — last month it was joint global banking and lynchpin of its international Melrose make a bid, appeared to co-ordinator and joint bookrunner to expansion, was fired after an improper withdraw its support. The bid went to UK guarantor lender Amigo Loans on relationship with an employee, according the final day, March 29 before Melrose its £359.5m IPO, RBC’s largest European to the bank. prevailed. gloco role to date. Fleming, a 30 year veteran of RBCCM For Preston, the relationship has played Meanwhile under Uden it has attracted was the architect of the US expansion, out in the way every banker would dream a roster of around 30 corporate broking helping establish it as a top tier US of when they join a new firm — bringing clients, adding 14 since the start of 2017. investment bank by corporate finance across a blue-chip client, which then It also continues to use its balance fees as he led an aggressive drive, hired it for the biggest deal in its history. sheet to grab a bigger share of event- drawing star recruits from Wall Street These large hostile mandates come driven financings. In April it was joint rivals, and pushing into the top 10 in both along infrequently and even rarer is lead arranger and joint bookrunner on debt and equity capital markets in the the chance for a bank to provide advice T-Mobile’s $38bn financing to support its US. and financing. RBC was able to reap merger with US rival Sprint. Fleming built the US team in his own maximum benefit here because its status image and his departure presents RBCCM as a relative newcomer to European Big name defections with a conundrum of whether to go for a investment banking means it does not As the business has flourished, rivals big name hire to replace him — and risk suffer the same complex web of conflicts have taken note. In January, RBCCM losing talent. as some of its more established rivals, suffered its highest-profile defection As with Clement, RBC has responded by which would be unable to fund an since launching its European expansion looking internally, promoting Jim Wolfe unsolicited deal. when Dai Clement, head of European and Matthew Stopnik to replace Fleming RBC’s CFO Bolger sees the GKN deal as infrastructure investment banking and as co-heads of US investment banking. a staging post to further growth, rather his deputy Lorna Shearin, who ran the While Wolfe has headed US leveraged than the Himalayan peak of a post-crisis renewables practice, quit to join Jefferies, finance since 2008, Stopnik has been climb. later taking along two junior members co-head of US financial sponsors for “This transaction represents RBC’s of the team, Tom Forrow and Sophie three years, along with Mark Goldstein. largest ever industrials advisory role Lindsay. These appointments suggest the bank has in Europe, and demonstrates our full- Clement’s infrastructure remit thought about its succession planning, service offering across all products to comprised utilities, power renewables but could equally be a stop-gap to a more support clients on their highest profile and transportation, and sources say that high-profile appointment. transactions,” Bolger told analysts. in a good year Clement’s team would RBCC has been on a stable path It’s a bold ambition and Bolger should account for roughly half of RBCCM’s throughout its international expansion, be reminded that deals like Melrose-GKN European revenues, an achievement so the loss of senior talent is an are extremely rare. But it provides the he was only too pleased to point out to unfamiliar challenge. international business with momentum Critchley at bonus time. RBC’s strategy remains on track and as it rolls out the third phase of its “Dai argued that his group pulled the approach worked to perfection on European corporate finance build while such a huge chunk of revenues that it Melrose’s bid for GKN. But if it wants to navigating some unwanted upheaval. was entitled to a bit more of the pie. He replicate that it will need to keep its best RBCCM’s European push began in 2010, had a point but it made him and Lorna performers while continuing to make when at the same time as Preston arrived, unpopular,” said one former banker. RBC investments — something RBC seems Josh Critchley, a former research analyst advised on 21 European infrastructure willing to commit to. turned corporate broker with Merrill transactions in 2017, and ranked second The growth story is far from over. GC

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