Levine on Wall Street: Breadstick Wars and Oil Hedges

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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The Great Breadsticks Battle of 2014 has been won.

On Friday, Starboard Value won its proxy fight at Darden Restaurants, replaced the entire board, and immediately got to work with a novelty oversized salt shaker fixing Olive Garden's pasta water. Here is Matt Yglesias echoing David Dayen in saying that the vote was not so much about pasta-water salting and unlimited-breadstick timing, but rather about whether Darden should spin out its real estate to make a quick buck for shareholders at the expense of employees. That's a reasonable interpretation, and I'm not close enough to the situation to know why shareholders actually voted the way they did, but I kind of like the third possibility. This is that Darden's old directors were voted out not for their culinary sins or their real-estate conservatism but rather because they made their disdain for shareholders clear by selling Red Lobster without a shareholder vote. (That, for instance, is why ISS and Glass Lewis recommended that shareholders vote against the incumbent board.) Perhaps this is not a story about the evils of capitalism, or about the evils of inauthentic deep-fried pseudo-Italian casual dining, but a story about shareholders who wanted their board to listen to them and who felt aggrieved and betrayed when the board ignored them. It's a story about feelings.

Possibly related, here are some materials from Ted Mirvis, a partner at Wachtell Lipton, about how activists are "short-term horizon shareholders" and how they shouldn't bother corporate boards in their important work. Wachtell Lipton -- where I used to work -- advised Darden's board. Its former board I mean.

Dutch pensions are good.

What rate should you use to discount pension obligations? Oh, I don't know, they're so far away, 8 percent seems like a reasonable number, and it means we don't have to put too much money into the pension today, let's go with that. That is roughly the American approach. The Dutch approach is apparently to use government bond rates, and then fund 105 percent of the number you get. So people feel good about Dutch pension funding. On the other hand:

American public pension funds have no such minimum requirement, and even if they did, there is no regulator to enforce it. Company pensions are bound by federal funding rules, but Congress has a tendency to soften them.

If you were starting from scratch and trying to figure out how to regulate Americans' financial lives, probably "use reasonable discount rates to fund defined-benefit pension obligations" would be pretty high on the list, right? Like way, way, way, way, way ahead of "go after people who trade options based on stuff their friends' roommates told them." But obviously the regulation of Americans' financial lives is not solely (primarily?) about making those financial lives better; there is a lot of convenience and symbolism and multiple sovereignties at issue. It would be mean to tell public pensions to fund themselves properly! So you do other things.

It's hard to hedge your hedging.

Here's sort of a sad story about Mexico's oil hedging. Mexico produces a lot of oil, and that oil funds one-third of the country's budget. The budget is based on $83 a barrel oil, and Mexico hedges the price by buying put options. But it basically just started this year's hedging program when the price of oil fell and volatility rose, meaning that Mexico has to either pay more for put options, hedge at a lower price, or stop hedging:

“They have a dilemma: do they recalculate their balances with a lower price, which is a highly politically charged move, or do they sit tight and hope for the better?” said Pierre Lacaze of LCM Commodities, an oil options broker.

It's going with "stop hedging" for now, taking the risk that it will be hedging at even worse levels later. This is a useful lesson that you can hedge your oil, but it's hard to hedge your hedging of your oil. If you want to lock in $83 a barrel oil, it helps if oil is above $83 a barrel. And how can you guarantee that in advance?

Will Blackstone set off a wave of boutique stuff?

The Epicurean Dealmaker says no, and I am generally in sympathy. TED, a pseudonymous blogger who is (probably) also a mergers and acquisitions banker, thinks of M&A banking in the sensible way, which is that it is a product that allows banks to get hired to arrange leveraged loans for acquirers, mostly private equity firms. That's where the money is. (Though, I mean, there's plenty of money in M&A too.) But it's a big problem for Blackstone, which doesn't have the underwriting capacity to get into the M&A financing business, and which also of course competes with other private equity firms for deals. Spinning off the advisory group solves the second problem, though not the first, but if you're just a free-floating advisory boutique you can still make a very good living on just M&A fees without doing financing. (Though you probably won't advise a lot of private equity firms, which tend to think that they're too good for advice.) But that's not a good enough reason for big banks to spin out their advisory businesses (which generate underwriting), or for anyone without an existing investment bank to roll up boutiques (which don't generate underwriting).

The value of the Berkshire Hathaway brand.

Here's a marketing consultant:

“Like Virgin reflects Sir Richard Branson’s rebelliousness and Apple reflects the genius of Steve Jobs, Berkshire Hathaway has brand equity around trust, stability and integrity,” said Oscar Yuan, partner at consultancy Millward Brown Vermeer.

Also making money though right? Like, Warren Buffett basically seems nice, but being nice or trustworthy or whatever is not what made the guy famous. Buffett is Berkshire, and Buffett is famous for picking stocks. But now Berkshire wants to be a consumer brand, putting its name on utilities, a real estate agency, and now on the car dealership it just bought. (This is a big change; really only finance geeks will see a Geico commercial, nod knowingly at the lizard, and be all "oh yeah, that's Buffett.") I guess this is a bet on the integrity, etc., stuff being true, or maybe it's subliminally "if I buy a car from Berkshire Hathaway I'll get rich!"

Punch Taverns has finished its restructuring.

Punch did a debt-for-equity swap last week, "bringing to a close a protracted, complex and often ill-tempered case study in how the restructuring of highly structured deals with multiple counterparties shouldn't be done," and how could you resist that? Also it's a chain of pubs. Even before the restructruing started, as Punch was looking to raise capital, it called up David Einhorn -- then its biggest shareholder -- and asked him to buy some more stock. He responded by selling his stock. This got him in trouble for quasi-insider-trading, and you'd have to say it was more Punch's fault than his. So, yeah, ill-tempered case study in how not to do stuff.

Things happen.

Bethany McLean on Microsoft. Jean Tirole won the Economics Nobel "for his analysis of market power and regulation." What It’s Like to Carry Your Nobel Prize through Airport Security. The Double Irish may be going away. Pershing Square's public fund dropped on its first day of trading. Corporate governance principles for banks. Money transfer via Twitter. Now you can pitch clients at terrible sports things. Or maybe at a zombie survival camp.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net