Starbucks’ new era of financial engineering?

One scoop to start: OpenAI’s annualised revenue is about $20bn less than the company has previously signalled·, according to financial documents shared with investors, a massive gap likely to damp optimism about the growth of AI demand.

In today’s newsletter:

• Starbucks explores a Chipotle deal

• Wall Street’s new cash cow

• LIV Golf’s second life?

The biggest restaurant merger ever? 

Late in his final tenure, former Starbucks chief executive Howard Schultz attempted to unveil the “Oleato” to the world, a coffee with a dollop of olive oil, which he had encountered in his travels to Italy. 

New Starbucks chief Brian Niccol, whom the company plucked from Chipotle, may try an even more ambitious mash-up . . . introducing the “Moleato”?

The FT scooped on Thursday that the world’s leading coffee shop chain has explored a takeover approach for Chipotle, which would be the biggest-ever merger in the restaurant sector if it were to happen.

Starbucks had worked with advisers in recent months on the proposal, people familiar with the matter told the FT. The status of Starbucks’ takeover plans and whether the company has submitted any formal offer to Chipotle could not be determined.

Combining the two well-known American brands could be transformative, though past attempts at restaurant chain engineering have yielded mixed results.

The investment group JAB Holdings, which owns a number of chains such as Panera Bread and Caribou Coffee, has struggled in recent years as shifting consumer tastes and inflationary pressure have decimated its coffee- and sandwich-heavy portfolio. It did mint a large gain last year on the sale of its stake in coffee group JDE Peet’s.

And the fast-food group Yum Brands sold Pizza Hut this summer after the brand dragged on Yum’s bottom line for years, deciding to double down on its faster-growing businesses in KFC and Taco Bell.

If Starbucks follows through, it would signify a push for scale as the latest megadeal in a booming M&A environment, with corporate America trying to take advantage of a light-touch approach to antitrust under US President Donald Trump. A takeover of Chipotle, which has a $41bn market value, would create a combined company with almost $50bn in sales last year. 

Even if combining restaurant brands has proven a difficult strategy, DD can see the temptation as individual fast-food stocks have struggled and the industry faces sluggish growth. 

Chipotle’s shares have fallen by almost 20 per cent in the past year, hit in part after the company last summer removed jalapeño peppers from a supplier that had been tied to a salmonella outbreak.

For its part, Starbucks is in the early stages of a turnaround, which is beginning to bear fruit with same-store sales and profits on the rise.

Both companies have also resisted the financial engineering such as refranchising and ultimately securitising stores that PE buyers including Blackstone and Roark Capital have brought to the sector. It offers the potential of some unplucked arbitrage, were Niccol to focus on inorganic growth. 

The astronomical rise of prime broking

This July the hedge fund run by wunderkind Leopold Aschenbrenner ran into trouble. Situational Awareness had made leveraged bets on AI companies and suddenly their stocks were tumbling.

Backing the hedge fund were several major Wall Street banks that were acting as its prime brokers, lending money to Situational Awareness to juice the returns the hedge fund made from its trades. For one of those banks, Goldman Sachs, the AI hedge fund had even become its biggest prime brokerage client.

DD readers will recall what happened next. A worst-case scenario for the hedge fund and its lenders was averted as Ken Griffin’s Citadel swooped in to buy a large portion of Situational Awareness’ $16bn public equity holdings.

Still, the situation drew attention to a new reality on Wall Street: banks generate huge revenues from trading even as they are no longer the ones placing the trades. Instead, they lend trillions of dollars to trading giants such as Citadel, Millennium and Jane Street. In return, banks collect a steady stream of recurring revenues.

When things are going well, it’s a symbiotic relationship and has expanded rapidly in recent years. Hedge funds’ borrowing from banks has tripled since 2020, the FT reports in a deep dive, and the revenues from financing have turned prime brokerage into one of Wall Street’s fastest-growing businesses.

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The shift dates back to the years after the financial crisis, when regulators moved to curtail banks’ riskier activities and speculative trading migrated to the hedge fund industry. 

But regulators have grown worried that the business is bringing new risks to bank balance sheets as the fates of the lenders become inextricably bound to their trading clients.

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“It has just grown and grown and grown,” said one regulator. Has it become too big? “When you see a chart that keeps going upwards, you do have to naturally ask yourself.”

LIV Golf 2.0

The front nine of the LIV Golf Chapter 11 case got off to a sluggish start in September. The pace is quickening now that the inward half is well under way.

On Monday, BC Partners agreed to put $4mn towards launching the LIV 2.0 successor league it has been pursuing for months, confirming an FT scoop.

The money frees up the fund to start signing players, even though no golfer has yet to publicly commit. In fact, at a court hearing on Wednesday, Jon Rahm, the Spanish superstar, had his lawyers tell the court that he was negotiating a settlement with LIV 1.0, which owes him tens of millions if not more than $100mn in guaranteed payouts.

As for those who may stay, the other marquee golfer, Bryson DeChambeau, has his lawyers at Weil, Gotshal & Manges trying to assemble a committee to cut a better deal for those who want to stick around, the FT exclusively reported on Thursday.

Expect a dramatic few weeks as BC needs to come up with a viable deal by the end of October. Players, unsecured creditors and Saudi Arabia’s Public Investment Fund, which spent $5.5bn on LIV 1.0, all have some big decisions to make, fast.

In sports, it is not always how you start, it’s how you finish.

Job moves

• Apple has named Steve Smith as its next mergers and acquisitions chief, Bloomberg reports.

• Dechert has hired Jason Gott as a restructuring partner in Chicago and Ben Burton as a finance partner in London. Gott joins from Latham & Watkins and Burton joins from Kirkland & Ellis.

Smart reads

Building boom China’s race to build data centres in Inner Mongolia and elsewhere is among the fastest and biggest AI infrastructure build-outs in the world, the FT writes.

Helping hand The race to develop AI agents has clearly commenced, but it’s not yet clear· what customers want from them, Richard Waters writes for the FT. A world of specialists, or one agent to rule them all?

Big bets As much as half of the trading on the leading prediction markets platforms is made up of long-shot bets, Bloomberg reports. That usually means losses for the bettors and profits for the firms on the other side of the trade.

News round-up

Goldman Sachs to pay top executives $500mn in special bonuses (FT)

EY challenges Deloitte in outsourcing as revenue growth accelerates (FT)

Tiger Global poised for $5bn windfall from OpenAI bet (BBG)

Carlyle says deal to buy Lukoil international assets has expired (BBG)