Bill Ackman and John Paulson’s mortgage gamble | USAEMALL.com

One scoop to start: Elon Musk’s xAI is launching a $300mn share sale that values the group at $113bn, as the world’s richest man returns to his business empire and the race to develop artificial intelligence.

A second scoop: Merck has held talks over a more than $3bn acquisition of Swiss biotechnology group MoonLake Immunotherapeutics, as the US pharmaceutical company seeks to replenish its drug pipeline.

And PE’s trinity drifts apart: Blackstone, KKR and Apollo are pursuing sharply different models after decades in which the private equity titans generally moved in lockstep, writes DD’s Antoine Gara. More on that in tomorrow’s newsletter.

In today’s newsletter:

Hedge funds pray for a Trump windfall

More than a decade ago, a clutch of prescient hedge funds bet that two businesses synonymous with the 2008 financial crisis would one day make a comeback.

Bill Ackman invested nearly half a billion dollars in the shares of collapsed federally backed agencies Fannie Mae and Freddie Mac. John Paulson, fresh off making billions shorting subprime mortgages, bought their preferred shares.

Under President Donald Trump, those wagers seem nearer than ever to a potential multibillion-dollar payout.

Last month the president promised to relist shares in the two agencies in a push that would end the government’s 17-year long conservatorship after their 2008 bailouts.

The companies are essential cogs of the US mortgage industry. They buy up trillions in mortgages and repackage them as securities in order to sustain low rates for the 30-year mortgages that most homeowners rely on.

Originally, Fannie and Freddie were government agencies. But they were later taken public, creating what eventually became a financial Frankenstein.

The companies relied on an “implicit” government guarantee. Investors assumed (correctly) that if their finances soured, Uncle Sam would bail them out.

Fannie and Freddie blew up in 2008 and the government spent $189bn to rescue the companies, making them a ward of the state.

The rescue left Fannie and Freddie shares outstanding, in addition to $30bn of preferred stock, causing investors such as Ackman and Paulson to bet that ultimately the companies would repay the government and be returned to private hands — for a massive profit to them.

But the agencies are a politically charged topic with little upside — remember the words “moral hazard”? 

Presidents Barack Obama and Joe Biden preferred to leave the companies in conservatorship. Trump has shown an unusual interest in taking the companies public, breathing new life into what had been a tortured trade.

It’s all brilliant news for Ackman and Paulson, two of Trump’s most strident supporters, and anyone who has gambled on what DD last year said was a potent Trump trade.

But it all depends on how the privatisation works and whether the government chooses to wipe out speculators. The FT’s Lex column argues longtime holders such as Ackman expecting a payout are asking for what is in effect a free lunch.

Trump could also lose interest on an issue that even his Treasury secretary Scott Bessent seems hesitant to take up. 

Ackman has done well since election day, as his shares have gained hundreds of millions in value. On paper, his windfall is north of $1bn. Paulson’s preferred shares have also surged, trading above 50 cents on the dollar from just a few pennies when he built his stake.

“[Trump] was backed by people who care about government-sponsored enterprises as an investment, from Paulson on down, and he is responsive to those people,” said Charles Lemonides, another holder, who runs hedge fund ValueWorks. 

“That’s where his bread is buttered.”

BP’s oil change gets a mixed reception

BP has staked part of its strategy shift on the sale of its lubricants business Castrol.

Trouble is, the sale process so far has not exactly been greasy smooth. 

Marketed by bankers at Goldman Sachs, Castrol has to date attracted interest from a mix of private equity and industry groups.

Yet while analysts believe BP needs to sell the unit at a $12bn enterprise value in order to improve its free cash flow, some bidders are exploring valuations of less than $8bn, DD’s Ivan Levingston and the FT’s Malcolm Moore and Kana Inagaki revealed. 

That would be a blow to BP as it seeks to generate $20bn in asset sales by 2027 and fend off pressure from the activist hedge fund Elliott.

It’s part of a reset of operations that will see the energy major focus on oil and gas and back off a strategy around green energy.

BP acquired the engine lubricant business from its family owners in 2000 for £3bn. Some of the possible bidders now circling it include China’s state-owned investment company Citic, Saudi Aramco and Indian conglomerate Reliance, alongside US private equity firms Apollo and Lonestar.

The UK entrepreneur Zuber Issa, the co-founder of petrol station operator EG Group who recently paid £50mn for motor oil brand Duckhams, has also tossed his hat in the ring.

The auction is still in its early stages and higher bids could emerge, particularly if some of the potential industry bidders are able to generate more value by combining Castrol with their existing operations.

Investors will hope for a slicker sale process moving forwards.

BlackRock’s Canal saga winds on

For deals enthusiast Donald Trump, the $23bn sale of CK Hutchison’s non-Chinese ports to a BlackRock and MSC-backed consortium was a big foreign policy win.

But the mercurial president’s attention has since moved elsewhere, and a news vacuum has followed the deal announcement and Beijing’s subsequent objections.

It’s left many advisors in the dark as to what the next step is in the deal, which includes two ports on the Panama Canal.

One banker who was not involved in the deal told DD’s Arjun Neil Alim that it felt like a “reserve M&A process” in which the sale figure was announced and the due diligence and negotiations came after.

The FT’s Chan Ho-him, Cheng Leng and Ryan McMorrow along with Arjun can now reveal that the acquiring parties of BlackRock and MSC have met with Beijing’s antitrust regulator, in a sign that they are pushing for the deal to advance.

Simultaneously, there are other options swirling around. CK Hutchison has looked at a sale of its remaining China ports, according to sources, while some think the parties will be forced to bring in other investors to satisfy Beijing while also keeping Washington happy. CK denies it is considering a sale at this time and declined to comment on the other options.

CK Hutchison’s share price is still about 15 per cent higher than right before the deal was announced. It implies that some in the market still think a sale will take place, which would net the company $19bn in cash.

Whether this happens despite Beijing’s objections or with its blessing after an amendment is anyone’s guess.

Job moves

• Clearlake Capital has hired Tasha Pelio to lead the firm’s global marketing and communications. Pelio was previously the head of communications for JPMorgan Chase’s commercial and investment bank in the Americas.

• Uber has appointed Andrew Macdonald as its first chief operating officer since 2019. Macdonald, Uber’s head of mobility, will also take on the role of president.

• Royal Mail owner Daniel Křetínský has appointed former UK trade minister Greg Hands as an adviser, DD confirmed.

• Lazard Asset Management has hired Eric Van Nostrand as global head of markets and chief economist. He was most recently chief economist at the US Treasury department under Janet Yellen.

• Citigroup has named Wenjie Zhang as country officer and banking head for China. Zhang joins from Bank of America, where he is president of the China business.

• BP has appointed Dave Hager to its board as an independent non-executive director. Hager was executive chair of the Devon Energy Corporation until 2023.

Smart reads

A bank’s rebirth The Royal Bank of Scotland is returning to private ownership nearly two decades after its post-financial crisis bailout by the UK government. But it’s a shell of its former self, the FT writes.

Lost business Big corporations including Oracle and Morgan Stanley are shifting away from law firms that cut deals with the Trump administration, The Wall Street Journal writes.

Ratings machine Just 20 analysts based out of a single four-bedroom house last year rated more than 3,000 private credit investments, Bloomberg reports. Some of those scores are now looking rather rosy.

News round-up

Google to spend $500mn on compliance to settle shareholder antitrust suit (FT)

EU fines Delivery Hero and Glovo €329mn for takeaway ‘cartel’ (FT)

Trump tariffs cut off recovery in private equity dealmaking (FT)

UnitedHealth investors approve CEO’s $60mn pay (FT)

Bristol Myers Squibb signs $11bn cancer drug deal with BioNTech (FT)

Sanofi to buy US blood disorder drugmaker for up to $9.5bn (FT)

23andMe founder says Fortune 500 company backs new buyout offer (FT)

Fintech Chime readies IPO but faces drastically lower valuation (FT)

German asset manager divests Exxon shares over ‘insufficient’ climate commitment (FT)