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‘Don’t worry’: NSO banks on Bibi

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One scoop to start: Credit Suisse has cut a deal with the owner of the First Boston trademark to enable the Swiss lender to use the historic brand on its spun-out investment bank. It will no longer use the name CS First Boston as previously planned.

And another thing: Our Alphaville colleagues have revealed the balance sheet of Sam Bankman-Fried’s trading firm Alameda Research. It turns out that it had quite the venture capital portfolio.

Welcome to Due Diligence, your briefing on dealmaking, private equity and corporate finance. This article is an on-site version of the newsletter. Sign up here to get the newsletter sent to your inbox every Tuesday to Friday. Get in touch with us anytime: Due.Diligence@ft.com

In today’s newsletter:

  • Netanyahu: the key to an NSO comeback?

  • The Bulb battle intensifies

  • Silvergate under scrutiny

NSO Group’s comeback kid

It has been a tough year and a half for Israel’s NSO Group, the manufacturer of the infamous Pegasus spyware. But with Benjamin Netanyahu heading back to the Israeli premier’s office, co-founder Shalev Hulio is betting on more favourable political winds.

Under Netanyahu’s 12-year second act as premier, NSO grew to a $1bn unicorn, selling its coveted spyware Pegasus — which surreptitiously mirrors the contents of smartphones — to governments Netanyahu himself was wooing into a closer embrace of the Jewish State.

But Netanyahu was in opposition during NSO’s toughest years, when the abuse of its spyware by many of these countries led to international condemnation of the company’s sales and “ethics reviews” practices, leaving Hulio to deal with the fallout.

The repercussions were severe — following a series of investigations documenting widespread abuse of Pegasus in July 2021, it went months without closing any new sales.

Hanging over all this is the US Department of Commerce’s decision to blacklist NSO from November 2021, around the time that it became clear that an NSO client had hacked the phones of US embassy employees in Uganda.

NSO’s majority shareholders — a constellation of pension funds and state-backed investors whose interest is now being managed by US-based consultancy BRG — are barred from having any operational knowledge into NSO’s inner workings. The company has deferred interest payments to its creditors over more than $400mn in debt it has struggled to service, according to people familiar with the matter. BRG has written the value of NSO’s equity down to zero.

“Don’t worry,” Hulio told guests at a Tel Aviv dinner party this summer, over concerns NSO was failing. “Netanyahu is coming back.”

Netanyahu’s return raises the prospect of NSO again being used as a diplomatic card for Israel’s clandestine, anti-Iran security co-operation, the FT’s Mehul Srivastava and DD’s Kaye Wiggins report, especially with the biggest prize of all: Saudi Arabia.

The kingdom was one of the most avid users of Pegasus, including, a lawsuit in Israel alleges, on associates of Jamal Khashoggi before he was murdered. That trial is being held behind closed doors, so it’s still unclear how NSO has responded.

While the prospect may seem appalling to BRG, which manages some 70 per cent of NSO and has told creditors that it won’t approve new high-risk clients, the chance of a financial windfall remains for NSO. A 2017 deal with Saudi Arabia had been one of NSO’s largest revenue streams, but was cancelled — at least for a few months — after Khashoggi’s murder.

NSO said “politically motivated sources based on hearsay” had given the FT false information regarding “alleged customers, conversations that never occurred, and the company’s financial condition”.

A revival of that deal could raise questions about NSO’s ethics reviews processes. But for Netanyahu it would simply be a continuation of a covert diplomacy strategy that has served Israel’s interests.

Untangling the biggest UK bailout since the financial crisis

British energy supplier Bulb’s spectacular collapse last year was in part due to its failure to hedge out commodity price risk.

So what did the UK government do, when tasked with cleaning up the mess? It failed to hedge out commodity price risk.

Lawmakers’ decision to bar nationalised retailer Bulb from hedging energy purchases for its customers has resulted in the biggest public bailout that the UK has seen since Royal Bank of Scotland and Lloyds Banking Group.

“The issue with hedging is that it is very risky because, essentially, you are taking a bet or trying to insure yourself against price movements,” then-business secretary Kwasi Kwarteng explained in May, defending its strategy.

That logic has failed to hold up now that the UK’s Office for Budget Responsibility has placed a £6.5bn price tag on the total cost of Bulb’s bailout.

Kwasi Kwarteng walks outside a hotel in Birmingham

The kerfuffle kicked off a race to acquire Bulb’s 1.5mn customers — a deal that would be in part funded by the government — from which the failed company’s rival Octopus emerged as the winner.

Or so it thought. The takeover battle has spilled into the courts, where prospective buyers ScottishPower, British Gas and Eon were told on Tuesday that a judicial review they had brought to challenge the sale would be heard early next year. That means the planned transfer of Bulb to Octopus on December 20 will be overshadowed by the threat of legal action.

The three companies argue that despite the government offering financial backing to Octopus and British Gas owner Centrica — which was also encouraged by the government to bid on Bulb — state support wasn’t officially on offer during the sales process.

The delay to the court hearing was needed to allow sufficient time for disclosure of key government documents on the terms of the sale, they reasoned.

It makes sense why they are fighting the takeover. A sale to Octopus would create one of the biggest retail energy suppliers in the UK and a formidable challenger to British Gas and Eon.

Even if the deal does close no one seems able to explain the projected £6.5bn hole that has to be funded by taxpayers. The special administrator said this month that Bulb had only used £1.1bn of the original £1.7bn allocated in working capital at the time of the bailout, leaving a large chunk of cash unaccounted for.

It’s also unclear how much Octopus would receive to fund the hedging of Bulb’s customer book should the deal close.

Hayden Wood, former chief executive of Bulb Energy, arrives for a hearing in London, last year

Bulb’s co-founders, former management consultant Hayden Wood and ex-Barclays energy trader Amit Gudka, have at least had a successful run.

The duo earned more than £8mn from a Bulb share sale in 2018, while Wood remained with the company for more than six months following the government bailout and continued to receive his £240,000 annual salary during that time.

Silvergate: nothing to see here

As Sam Bankman-Fried’s business empire imploded last month, many US banking executives shared the same thought: “Thank God we stayed out of crypto.” But not all.

Alameda Research, the trading firm, and other companies owned by Bankman-Fried held more than a dozen accounts at Silvergate, a California-based bank regulated by the US Federal Reserve and listed on the New York Stock Exchange.

Association with FTX and exposure to the crypto sector has put Silvergate’s chief executive Alan Lane in the hot seat. The bank’s shares have plunged 84 per cent this year, much worse than the 23 per cent fall for the KBW Bank index.

Line chart of Year-to-date % change showing Silvergate shares tumble

Lane hit out at “speculation — and misinformation — being spread by short sellers and other opportunists trying to capitalise on market uncertainty” in a public letter. He’s one of several finance executives who also had to defend the “extensive due diligence” his bank performed before signing up Bankman-Fried as a client.

A key reason Alameda’s banks are under scrutiny is Bankman-Fried’s explanation for how his empire collapsed: he claims that a failure to properly account for billions in FTX client funds sent to Alameda’s accounts left the exchange with a faulty picture of its financial position.

As a bipartisan group of US lawmakers including Democratic Senator Elizabeth Warren demand answers from Silvergate, further investigation will probably ensue. What’s clear is that the FTX contagion can’t be contained to the cryptosphere.

Job moves

  • Elliott Management senior portfolio manager Marc Steinberg has joined the board of Pinterest. The activist raised its stake in the social media group last month.

  • Law firm Clifford Chance has appointed London capital markets partner Adrian Cartwright as its senior partner for a four-year term. He’ll begin in January after beating out incumbent Jeroen Ouwehand and Dubai-based finance partner Edmund Boyo in a three-way election.

  • Italian fashion house Prada has named former Luxottica chief Andrea Guerra as its next chief executive, entering the role held by husband-and-wife team Patrizio Bertelli and Miuccia Prada. Guerra was most recently head of LVMH’s hospitality division.

  • Advisory firm Longacre Square has hired Rebecca Kral as a partner and Dallas office head. She previously led Brunswick Group’s activism defence practice.

Smart reads

Gilty pleasure The UK government could soon unleash a historic debt deluge over the next few years, leaving many asking who exactly is going to buy all the gilts — and at what price, the FT reports.

Partying through the pain Miami’s flashy crypto scene has had a rough year. That hasn’t stopped many of them from partying it up at Art Basel this year, Bloomberg writes.

And one smart listen: Last year, UK hedge fund manager Crispin Odey was cleared of indecent assault after a trial in March last year. Five women have come forward with new allegations of sexual assault over a period of 24 years. Odey says the allegations contain falsehoods and inaccuracies. (The Slow Newscast podcast)

News round-up

BlackRock chief Fink pressured to resign over ESG ‘hypocrisy’ (FT)

US bank executives wary on global economic outlook (FT)

KPMG staff cheated on professional tests, US regulator says (FT)

Trump Organization convicted of tax fraud in Manhattan trial (FT)

Signature says it is ‘not just a crypto bank’ as it sheds deposits (FT)

Goldman Sachs on hunt for bargain crypto firms after FTX fiasco (Reuters)

Spacs confess to accounting weaknesses as year-end audits loom (FT)

Citigroup, Revlon lenders say three lenders ready to settle, with end in sight (Reuters)

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