New Position: UBS (UBS, Financial)
Wefinitiatedfa position in the Op Co and Hold Co paper of Credit Suisse just prior to its takeover announcement by UBS. As one of the few funds remaining with the mandate to pick the “fulcrum security” across the capital structure, we determined that once the emergency rescue acquisition was announced, the equity of UBS presented the more compelling way to invest in this situation and rotated capital from CS bonds into UBS stock. We see the rescue of CS as a transformative deal for UBS at a highly compelling price and with downside-protected terms.
The pro forma UBS will be the second largest global wealth manager and third largest European asset manager, enhancing UBS’s competitive positioning and scale in its most attractive capital-light and high return-on-equity businesses. The deal is highly synergistic – hence, UBS’s early guidance that it can rationalize 50% of CS’s existing expense base – but also creates additive geographic and product diversification. Credit Suisse adds to UBS’s stronger footholds in Asia and Latin America and forges a more balanced asset management portfolio across traditional and alternative capabilities.
The deal came together over the course of a weekend, led by the Swiss government and regulators given the imminent risk of insolvency facing CS, and allowed UBS to acquire ~$35 billion of incremental tangible book value for ~$3.5 billion of stock. Credit Suisse’s historic issues have been concentrated in its poorly risk-managed, loss-making Investment Banking division. We believe the primary execution risk around the deal is in the right-sizing of this business. Alongside the highly accretive deal terms arising from the AT1 write-down and attractive purchase price, as added downside protection, the government is providing a ~$10 billion backstop for Non-Core Unit asset write-downs, following UBS’s first loss of ~$5.5 billion.
We believe that early guidance will prove to be conservative, and we see significant upside as UBS integrates CS, realizing the significant cost synergies and completing the wind-down of non-strategic divisions.
From Daniel Loeb (Trades, Portfolio)'s Third Point first-quarter 2023 letter.
