AI Impact on Modern Dealmaking

Pushkin The AI boom runs on two things Money and electricity And as it turns out, Electricity runs on money too Today on the show. The huge next era dominion deal Deal making and AI Electricity and money and everything else. I'm Rob Armstrong and this is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I am joined On the show today by two fan favorites and show regulars James Fontanella Kon and Oliver Bad newews, Barnes. Gentlemen, welcome back to the show. now is the part of the show where I get your titles wrong. G Oliver, you are the US Dals Impressario, I believe is our cororrect. Okay, yeah And you are Grand High priest JFK deals of all finance. Is that right? Yan Actually, you should say your real titles. US' really serious. US finance Editor. And I am the US Steels correspondent. The atmosphere in here is electric. Yeah Let's start by just there's been this big deal in utilities And it's always a bit of a big ask for a financial journalist to make the utility industry interesting. How dare you say that? Tell us about what this deal is and why it is interesting. I'll let you start all of It's interesting first in its scale. It's the biggest deal of the year It's an all stock acquisition. It kind of framed as a combinational or merger, but really it's an acquisition. It's next erra the world's largest listed utility group by Market Cap buying dominion the deal is It values dominion about sixty seven billion dollars equity value around one hundred twenty billion dollars enterprise value. Okay placeace these for me geographically, where are these monsters located? Sure. So next era, their kind of home base is in Florida. They own a subsidiary called Florida Power and Light. and that serves around ten million customers in Florida. And this is the grid. powerower generation or both bothoth Their home toughf is Florida and Florida Pare andight. And then dominion basically has a real foothold in theirginia in Virginia and the Carolinas. But they don't touch. In other words, the footprints, the geographic footprints don't tou But they're nearby, but not overlapping. But now they don't overlap, but they will now be contiguous. So like now if this deal closes, you know Nexttera will will control half of the easastern seaboard of the US. I mean if to frame it in a proper empire building way.. But in essence, right? like There are two elements to these businesses right. In their core, they're regulated utilities, providing power to know everyday Americans, businesses up and down Florida, up and down the Carolinas in Virginia. But then there's another part to the business, which is the power generation element of it. So if you look what's grow next eror so much. It's not just this core regulated utility part, it's the fact that they operate in almost every U S. state as a power generator. And they're a huge renewable energy generator. They benefited a lot from Biden's inflation Reduction Act. agenda and green push And now obviously that's fallen by the wayside somewhat They have to pivot towards this other huge opportunity outside regulated utilities, which is data centers. Of course, we're going to focus a lot on the data centers here. I want to just make sure I have the kind of regulated unregulated distinction correct My understanding is The government allows you to have a monopoly supplying power in a certain area and in return Y profits are limited to a certain amount Crect. Right Broadly speaking, whereas unregulated You're just a company that makes energy and selling it to whoever's out there buying it. And there's also rules and don't get me too into specifics here, but there's also rules about How much of a company's revenue streams can come from regulated versus unregulated. So in a way it can't get too lopsided. So part of actually the logic of this deal for Nxttera is also they kind of rewrite That maths of like the balance of regulated versus unregulated. James, we have to do something now to make Oliver stop talking. so let me ask you a question I love herear only Bys. It's like every day for him. Every hour. I think it's the whole office really. What's the logic of this deal? It's scale. We're going through an AI Revolution, particularly in America. and and by the way, particularly in Virginia. Absolutely. Right You know what I mean? that's where a lot of these sheds are with the big computers in them. Absolutely. kind of Is a data center alley? what's it called? Data center ally. Yeah. I think that's right What is fascinating here is that they need a ton of power. Yes. And they'll do the companies, the data centers, the hyers skales will do whatever they can to get this power. Yeah. And so coming by Eair sees this as a hell of an opportunity to supply that power and dominion who they're effectively buying there're in Data Center Alley. So they're that's where the' got the location. Let's let's go let's go there. Right. And obviously when they announced the deal, which was I should say was we broke. Mie and I broke before everybody else. Tiny little victory laap. Yeah, thank you very much. In the press release, I don't think they ever use the word data center. That's very interesting. Which is very interesting. and they In fact, you use another word, which is affordability, a gazillion times, which is now one of Trump's favorite words as well. Yeah, and this touches on the kind of political aspect of this deal, which is pretty significant. You know, how it's presented is extremely important. one hundred percent, because I think the logic is quite clear. You need scale to kind of help feed all this demand for power. So they're going to have to build a lot of stuff And if they're a bigger company, they can build it for cheaper Capic is another kind of buzzword this year So everybody needs to invest a ton of money And in some way, that's great forag. It creates a lot of jobs in Industries which were previously maybe less sexy, you know Yeah We always love writing about tech. now it's all about industrials, it's all about Power, utilities. Heavy asset, low obbsolescence. Exactly. Halo companies, they call them, yeah , so I think the logic basically is quite obvious to everybody. But so why then do they say affordability, affordability, affordability? What Well, because in the past it's never been that straightforward to get two large utility companies to combine. Just that's simple to the point that we were making earlier about they generally run essentially regulated monopolies And the way that you can increase usually prices on kind of on consumers is has to be justified by that CapEx expenditure Yes The world is very different now. And so AI and we can go back to why I is so important to deal making today, but like For the U.S, winning the AI race versus China is of absolute importance from a geopolitical perspective And you need to balance that interest, that geopolitical kind of battle with the question affordability in an election year. We've got In November, we'll have midtermss. And a lot of people, especially in parts of Virginia are not very happy about Da centers I want to focus on controversial aspect of data center construction which I kind of sympathize with and maybe you could sum up like this The pitch from the tech industry is We're building these machines that are going to take away your job By the way, before they do that, they're going to drive up your electricity bill I don't think that's quite how they'd want to frame it, but there's a truth to it, right? And And why I think this deal is so interesting is because in a way it strikes at the heart of that kind of duality, right? Nexttera is both a regulated utility that has to serve its everyday customers, right? But then at the same time, it's seeing this huge potential opportunity in you know deand related power Exactly. demand from data centers, right? The combined company alone has the potential of adding, I think a one hundred and thirty gigawatts, which is the equivalent of like a hundred million homes worth of power, right?. So that's why you don't get the mention of data centers in the press release and you do get a lot of talk of affordability, right? Be In order to sell this, they have to do quite a delicate dance, which is basically say On the one hand, yes, we're going to serve these data center providers But then The scale and profits that we get from that we can give back to the consumer at least in the short term, right? So they are also offering bill credits, subsidizing the bills of some of the customers where dominion operates, right? And the really tricky thing about all of these utility deals and there have been Big ones in the past, but this is by quite a large measure the biggest And Nexterra knows this very well itself. Nexterra has tried on several occasions to do larger deals, some of which came undone in the negotiations, and some of which came undone when they went in front of regulators And it's not so much the regulators, in DC, it's not the FTC that they're necessarily worried about or the DOJ It's the public services commissions in the states in which dominion operates because their primary concern is always going to be how does this affect my electorate? Yes. So they they like that it's like an audience of one in a way It's whoever like local official is presiding over those committees. And particularly in Virginia, there's quite a thorny history of utilities deals and these kind of know the financial engineering within this industry getting past the Virginia Public Services Commission And that's really Dominion's heartland, right That's why they have to think so much about affordability. Then it plays into this much bigger debate that's unfolding in the U. I want to turn to JFK on that Can you kind of put this in the context of the national picture. Where's the Trump administration on this? Where's national politics on this? How does that stuff fit in Well, there's two things going on. On the one hand The U.S has been and Trump has been very clear about wanting America to be dominant in the AI space. This is a matter of national security. It's also a matter of like kind of succeeding econom economic. Yeah, yeah ye. And the rival very clearly is China. And so you see also kind of the kind of people in the administration are kind of doing everything to support that And so in that sense, this deal is helpful for that On the other hand, theres politics is a retail business as well. Yes. And we have an election where the pressure on inflation is rising despite Trump's promises of lowering it And a lot of it is driven by electricity cost. And there's another issue which is that AI is not that popular You know, you look how it's polling. Do you A you looking forward to the future of AI Or, you know, when I talk to my kids They don't they're not excited about AI. They're terrified about their futures. It's one of those things that there's a lot of consensus both on the right and on the left that like you don't like AI. We didn't vote for AI. with didn't ask for AI? Well, I think because it seems like a bit of a lose, lose, Right, doesn't it? It' like on the one hand AI isn't what it stacks up to be and then we're in a huge bubble and the market comes crashing down. On the other hand, AI does stack up to what it's meant to be And you' fred and you are gone. Yeah, exactly. None of us have a job left. And then meanwhile, like your beautiful pastoral view out your back window has turned into this like huge large worry shedutely. desktop computer. it's funny because before we broke this deal, like I didn't even know about Data center Aly There's this town in Northern Virginia called Ashburn, where there's like one hundred and fifty data centers. There's only fifty thousand residents. I mean, there's something so like kind of martian and soulless about the idea of living in a town full of divnd. mean if you have to live in that town, you should just get a dividend. It should be like living in Alaska and you just get Well that is min of what the bill credit is, right? Yeah, know what I mean. It impacts, if I'm not mistaken, mostly Republican states. And that's again, it's kind of It's one of those situations where well, Virginia' purple. It isly, right? It is, but it's kind of The Carolinas aren't sure. And there's a sense that people that have suffered the brunt of AI the most are not based in cities. They're more in rural areas which again tend to be more Republican than Democrat And so There's an irony there, And so Trump really finds himself in the position where It's not an easy thing to manage. Do you think the deal' going through Oliver? Yeah. Yeah, you think it's going to work. Yeah. I just think it is kind of your baby. You broke it. So basically doesn' go through That's a commentary on you we can be the objective on it. But I think that there is a degree of empire building here from from John Ketcham, who's the CEO of Next Eera And this is kind of quite an extraordinary pivot from a few years ago where really they were just being subsidized so much by the Biden administration and now they're pushing in to a whole new territory, right U The reason I think the reason I'm confident that it will they will go through is that I think nowadays when people go about doing big deals The first thought they have before they've even got together in the room and started negotiating is what is our Trump strategy? What is the strategy with the administration, right? And it's no coincidence that a company like Nexter was among the companies that donated to Trump's allroom Beautiful ballroom.. So that's just one little leg of I'm sure what is a much larger strategy to try and convince the Trump administration of the merits of that. And on this show before, we've discussed the railroad merger that happened. And that now is beginning to go through its regulatory process And it's maybe not quite as smooth as everyone imagined it would be, right? And I'm sure this won't be easy, but they will have a very detailed thought out strategy of how to convince the Trump administration and also how to convince the local regulators I want to widen the discussion now AI and deal making. It seems like as a markets columnist, all I get to write about now is AI. Everything that happens in markets is AI driven, et cetera, etcet Is that true in deal making world? JFK? is every time anybody calls you, anytime you talk to a source, is it AI all day long and twice on Sundays? Maybe not every conversation, but certainly a lot of the deals we look at are driven by AI in one way or the other We mentioned scale earlier. That's because again, you need to be bigger than ever to compete in this space But it's also What is interesting, a lot of industries which were slightly sleepier or like a little less sexy, frankly. Yes, have suddenly become the center of the attention They're being impacted by II. D give me some examples of that Well, I mean, in the power and is a perfect exam. But I talked about in the energy sector in kind of Iustrial industrial a lot of action, yeah. Exactly And the other thing is that the nature of deals has also changed because of AI. And that's, I think the biggest change fromom my perspective, I've been doing this now for over a decade And it was just like kind of Journey pretty vanilla A Bys B and you know You move on Times to get boxed by regulator, you got to make some concessions. Now we're seeing For example, the tech companies were left out of the kind of the mega merger mania that we saw in the last ten years, and now they found ways of actually doing deals which are not traditional M andA. So starting even with like Microsoft not really owning open AI, but being in the foundation O Instead of you have Facebook instead of acquiring a company, it now kind of buys the ten best employees for fifteen billion dollars. Yes. So that's is that M andA? I mean it kind of is, but it isn't.'s and that kind of why are they doing that in the case of Facebook or Ma It's probably because it makes it easier not to go through the whole antitrust regulatory process, right It's an AquI hire Yeah, rather than an outright deal. In the same way we've been talking a lot about scale throughout this conversation. In tech in a way, the driving factor is speed is that the technology is evolving at such a rapid pace. You know, we went from kind of GPT four to GPT five and like now people are like we're going to get AGI at some point. you know, Artificial general intelligence. Exactly. about overlord. Let's not get into whether or not that's going to happen or not. But you know, so when if you're a tech company, right and if you're one of the you know, the big players in AI, you have to think about, okay, if I'm buying something, if I had a regulatory process that takes eighteen months what I'm buying might be irrelevant by the time I actually get to buy an owner, right? And that's what's driving a lot of these kind of aquaires or new structures around deals. But the thing that's so striking, I think that this deal made us think about, I think, for the first time is just how like AI. to us as the average consumer It's a digital phenomenon, right? You go on your phone, you go into ChatyBT or into Claude, or whatever, you know, and you ask it whatever W' should have breakfast this morning. But there's a huge physical infrastructure right in the background. And in a way that I don't think we've ever really seen because like you think about the internet And telecommunications, like, yes, we laid kind of subsea cables and the internet also needed data centers too But the level of demand for all this physical infrastructure is like it's reaching like constantly new heights And it's kind of fascinating how it like cascades from one industry to the next to the next. It's like First You have the data centers themselves. thenen there's the power companies serving the data centers. So it has effects on the oil and gas companies. Then it has effects on industrials companies because they're the ones doing the picks and shovels story for the energy companies, I like working on their pipelines and littleittle like generators and so much of this frothiness we're seeing in deal making at the moment. when you trace a lot of it back, it's kind of etymology, it starts with AI Listeners, if the three of us are not replaced by AI, in the next few minutes We will be right back long and short Listeners, welcome back. This is long And short The part of the show where we go long things we like and short things we don't like JFK What are you long or short today I'm long on Brazil winning the World Cup. Who you think's going to be Brazil? They've had a hard time the last couple. Given that I'm Italian and there's no Italian team, I need to pick a derivative. And youre not only do you think they're going to win, that's the team you're rooting for. Absolutely. And they're going to win. Okay, veryer good. Oliver I'm long the upcoming New York summer. Yeah, it's going to be a good one. I think after one of the most brutal winters ever. Yeah and with a potential N victory on the horizon J's going to be special. If Oliver has just jinxed to the Ns, I'm going be so happy. JFK is gonna be so mad I am long the gating of private capital funds. Everybody, we have a headline. Here in the FT Back Blackstone caps withdrawals from flagship private credit fund. I think the gating structure is totally fine. You saw when you went in, you may not be able to take your money out at will. Sometimes you can't take out your money at will. No problem. Pvents a bank run, Yeah, yeah yeah, it prevents a bank run. I don't think there's anything wrong with gating. I don't think it's a problem when funds have to gate I think this is we're all grown upps here We can have if we're going to have private asset funds, we're going to have Gates and Gates are fine JFK wants to say something, but I'm not going to let him say anything about this Listeners, we will be back in your feed next Tuesday and until then, stay cool out there. Unedged is produced by Jake Harper and edited by Briant Erstatt, our executive producer is Jacob Goldstein. We had additional help from Topher Fhez, spepecial thanks to Laura Clark, Greta Coone, and Natalie Sadler. FT preremium subscribers can get the Unhedged newsletter for free A thirty day free trial is available to everyone else. Just go to ft d. com slash unhedged offer I'm Rob Armstrong. Thanks for listening