PJT Partners stands to lose an estimated $20 million if Comcast’s (CMCSA) takeover of Time Warner Cable (TWC) falls through, but that potential loss might be just the beginning of the boutique investment bank’s troubles, the FOX Business Network has learned.
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Last October, Blackstone (BX)agreed to spin off its investment-banking arm to PJT, a mergers and acquisitions firm started by former Morgan Stanley (MS) star Paul Taubman, in part because Taubman had been selected as an adviser to Comcast on its $45 billion takeover of Time Warner.
The Comcast-Time Warner deal was plum assignment for PJT not just because of the millions of dollars in fees that would flow into the new outfit, but because Taubman’s new enterprise would also receive credit in the important “league tables,” which ranks firms by deals completed and is used by bankers to capture other plum assignments.
As a result, Taubman has been busy hiring bankers, planning for a public offering of the Blackstone-PJT venture in September, while his team began pursuing new M&A deals particularly in the telecom sector that are expected when the Comcast acquisition would get the nod from regulators.
But with the Justice Department’s anti-trust division now threatening to veto the Comcast/Time Warner Cable deal, a wave of uncertainty has engulfed Wall Street’s M&A outfits. If the deal falls through, tens of millions of dollars in fees would be lost since the bankers receive little, if any, compensation unless a transaction is completed. Other mergers, particularly in telecommunications, will be halted since many were contingent on a regulatory framework that allowed Comcast to buy Time Warner.
Taubman’s PJT will be hit particularly hard both in terms of money and prestige if the deal doesn’t happen, as many on Wall Street now expect. Bankers say he has already booked credit for the Comcast deal in the league table race, and that would have to be reversed. Even more, he will be out as much as $20 million in fees and receive no compensation for more than a year of work since, unlike other firms on the transaction like JPM Morgan (JPM), PJT received no “opinion fee” for making sure the terms of the proposed combination were fair.
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Even worse, some bankers speculate that in losing credit for the acquisition PJT would have to alter its own deal with Blackstone, which as it stands now is slated to receive a 65% equity in the new public company.
“The Comcast Time Warner deal was part of Taubman’s case to make to Blackstone in getting them to spinoff their investment banking business to him,” one banker at a major Wall Street firm with direct knowledge of the matter said. “He has such a long track record I don’t think it’s a major blemish, but it could be an interesting footnote as he moves to establish his new firm.”
A spokesman for Blackstone didn’t return repeated telephone calls for comment on the status of the spin off if the Comcast-Time Warner deal is killed by federal regulators.
A spokesman for Taubman said the potential loss of the Comcast deal will have no effect on the terms reached with Blackstone for the new banking outfit, or the September timing of the spinoff. He declined to comment further.
Hang-Up in Deal Approval
Taubman is considered one of Wall Street’s top bankers, and even after he left Morgan Stanley as investment banking chief in 2012 he was able to snare plum assignments basically as a one-man show, including advising Verizon on its $130 million buyout of Vodafone from a joint venture. The Comcast – Time Warner merger announced more than a year ago pending regulatory approval was considered his latest success since its regulatory approval was treated as a forgone conclusion by Taubman and most of the bevy of Wall Street bankers advising both companies.
After all, Comcast hired a virtual army of lobbyists to persuade staffers at Justice Department and the Federal Communications Commission that the combined company would not violate anti-trust laws and put consumers at a disadvantage, according to people with direct knowledge of the matter.
But in recent months, Justice Department lawyers began to raise doubts about how well the transaction benefitted consumers. Officials from Comcast and Time Warner on Wednesday will meet with officials from the Justice Department to discuss concerns government lawyers have with the merger, and according to bankers, a reluctance by some DOJ officials to approve the deal without major concessions. The overriding concern among government regulators is that the combined entity would wield too much competitive power both in terms of pay television and with regards to broadband.
Bankers with direct knowledge of the matter say Comcast and Time Warner officials underestimated how much overlap there is with the two cable operators on a geographic basis, which contradicts their central argument that the deal isn’t anti-competitive because consumers in these markets can chose between various cable operators. They also underestimated the skepticism of the Obama Administration’s anti-trust regulators on whether such large deals are good for consumers.
As a result, many Wall Street bankers believe Comcast will ultimately walk away from the deal since the government will demand concessions that would be so onerous that the transaction would not make economic sense.
With that, roughly $150 million in fees to bankers would wither away, and while some banks like JP Morgan can take the economic hit, startups like PJT would immediately be feeling the pain.
“This is a tough business,” one person with knowledge of the matter said. “Bankers make a lot of money—that is if the deal goes through and many never see the light of day.”