Aug 11, 2019

The financiers' hour

Felix Salmon, author of Edge

Photo: Interim Archives/Getty Images

This was a big week for financiers looking to make enormous profits from the empire-building ambitions of businesses with dubious business models.

Exhibit 1: WeWork is planning to go public next month, raising some $3.5 billion. But this is a world where Uber can lose $5.2 billion in a single quarter, and potential shareholders are worried that $3.5 billion still won't be enough. So WeWork is raising $6 billion in debt, too.

  • Leading both deals: JPMorgan Chase, whose CEO, Jamie Dimon, has been buttering up WeWork executives for years.
  • Be smart: WeWork (or just We, as it now wants to be known) is generally considered an office-rental company, even if its CEO likes to say that it's more about energy, spirituality and elevating the world's consciousness. In reality, WeWork is a creature of the international capital markets, upon which it is reliant and without which it could never have been born in the first place. As a vehicle for funneling fees to Wall Street, it has few equals. Hence the personal attention from Dimon.

Exhibit 2: The huge media merger of the week is the acquisition of newspaper chain Gannett by its smaller rival GateHouse. In order to get the deal done, GateHouse parent New Media Investment Group is borrowing $1.8 billion from Apollo at an eye-popping interest rate of 11.5%.

  • Between the lines: The interest rate worries GateHouse shareholders: It clearly reflects an extremely high probability of default, in which case their equity would go to zero and Apollo would end up owning the combined company.
  • It's possible Apollo wants GateHouse to default on its loan. The private-equity giant has already quietly accumulated a very large position in local TV and local radio; local newspapers could fill out the portfolio nicely.

The bottom line: Whether WeWork and GateHouse succeed or fail, JPMorgan and Apollo are likely to come out ahead. It's a nice position to be in.

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