Focus Europe 2013 (Dave Cutler)
Transactional lawyers across Europe are breathing a tentative sigh of relief over increasing signs that the gears of corporate dealmaking may finally be starting to turn.
Growing economic stability and a loosening of the credit markets has seen M&A activity in Europe, which in 2009 had slumped to its lowest level in more than a decade, start to recover in earnest. Buoyed by some bumper deals—such as U.K. telecom giant Vodafone Group Plc’s $130 billion sale of its 45 percent stake in Verizon Wireless to Verizon Communications Inc.—the aggregate value of announced M&A transactions involving Eurozone-based companies rose more than 30 percent to $284.5 billion in the first three quarters of 2013, according to the latest data from Mergermarket Ltd. European M&A totaled $156.3 billion in the third quarter of 2013—a 42 percent increase over the same period the previous year—with cross-border activity hitting a 15-month high of $101.1 billion.
The restarting of corporate dealmaking will be welcome news to Europe’s top law firms, given that the malaise plaguing the region’s transactional markets had caused revenues to flatline. In the U.K., Allen & Overy and Linklaters both saw their revenue inch up by less than 1 percent in the most recent fiscal year, while fellow Magic Circle firm Clifford Chance suffered a 2.5 percent dip to its top line.
“The last few years have been very depressed [in terms of M&A activity], but there’s now a sense of real optimism,” says Roger Barron, Linklaters corporate partner and technology, media and telecommunications (TMT) cohead. “The core fundamentals are back—a number of companies are sitting on cash and are looking to use it; the debt markets are much better, with traditional and alternative finance providers looking to place funds; and the general economic outlook is more stable, which is crucial as it’s uncertainty that really causes problems for the M&A market. The outlook is much more positive.”
But while the increased volume and value of M&A deals within Europe are giving lawyers cause for renewed optimism, the figures were skewed quite substantially by a relatively small number of megadeals. At $130 billion, Vodafone-Verizon is the biggest M&A deal in more than a decade and the third-largest in history, after Vodafone’s $203 billion takeover of Germany’s Mannesmann AG in 1999 and America Online Inc.’s $181 billion acquisition of Time Warner Inc. the following year. Without such colossal transactions, the marketwide figures don’t look quite so positive. (Vodafone-Verizon also has had a profound impact on the law firm league tables: The firms acting on that deal make up the top eight places of Mergermarket’s European M&A advisor rankings by aggregate deal value [see chart, page 22]. The list is headed by 345-lawyer Dutch firm De Brauw Blackstone Westbroek, which leapt from 44th last year thanks to an increase of more than 1,000 percent in its total M&A deal value.)
It’s not time to break out the champagne yet.
THE FAST-EVOLVING TMT sector dominated the landscape for large scale M&A in 2013. The total value of TMT deals involving European-based targets rose 123 percent to $121.9 billion in the first three quarters of the year, accounting for almost 26 percent of all M&A deals in the region during that period—including six of the 10-largest deals of the year so far. (This was mirrored at a global level, with eight of the world’s top 10 M&A deals falling in the TMT sector.)
The telecom market has been home to some particularly frenzied transactional activity. Global telecoms M&A topped $303 billion in the first nine months of 2013, according to investment banking services provider Dealogic—the highest level for more than a decade—and much of this consolidation has centered on Europe.
Hogan Lovells, Ropes & Gray and Shearman & Sterling scored lead roles on the top European TMT acquisition of the year (as of press time), advising U.S. cable company Liberty Global Inc. on its $25 billion purchase of U.K. cable-TV and Internet provider Virgin Media Inc, which was represented by Fried, Frank, Harris, Shriver & Jacobson and Milbank, Tweed, Hadley & McCloy.
A&O, which advised the banks on the Liberty-Virgin transaction, was the only firm to act on more than one of the top four M&A deals in the sector with European targets during that period, advising Dutch telecoms company Koninklijke KPN NV on the $11.2 billion sale of its German cellular business E-Plus Mobilfunk GmbH & Co KG to Telefonica Deutschland Holding AG in July; and on the company’s $22.6 billion sale to Carlos Slim’s wireless services provider América Móvil SAB de CV in August. (Telefonica Deutschland was advised on that deal by European firm CMS; Dutch firm De Brauw; McDermott Will & Emery; and Milbank. América Móvil was represented by Cleary Gottlieb Steen & Hamilton, Clifford Chance and Mexican firm Robles Miaja Abogados.)
Simpson Thacher & Bartlett, which topped Mergermarket’s rankings for U.K. M&A by aggregate deal value, up from seventh last year, also got in on the action, advising Microsoft Corporation on its $7.2 billion purchase of Nokia Oyj’s phone business. (Skadden, Arps, Slate, Meagher & Flom acted for Nokia in the deal.)
Linklaters’ Barron says that more telecoms deals are set to follow. Indeed, in early November, press reports claimed that AT&T Inc.—a key client of Sullivan & Cromwell—was considering a more than $100 billion move for the European business of Vodafone, which Linklaters recently advised on its $13.6 billion acquisition of Germany’s largest cable company, Kabel Deutschland Holding AG. (Linklaters and Sullivan did not respond to requests for comment on whether they have been retained on any possible deal.)
ANOTHER TREND IN European M&A last year was the continued emergence of inbound investors from Asia—and China and Japan in particular. There were 70 announced European M&A deals with Asian buyers during the third quarter of 2013, according to Mergermarket—the highest quarterly volume of such deals the company has on record.
Clifford Chance—which has offices in Beijing, Shanghai, Hong Kong and Tokyo—led the way with roles on two of the largest Asian deals in Europe last year. The firm advised Japan’s Suntory Beverage & Food Ltd. on its $2.1 billion acquisition of the Lucozade and Ribena drinks brands from U.K. health care company GlaxoSmithKline Plc in September, and the following month teamed up with Weil, Gotshal & Manges to represent German toilet-maker Grohe AG on its $2.5 billion sale of an 88 percent stake to bathroom fittings company LIXIL Co. Ltd., the largest-ever Japanese investment in Germany. (GSK was advised on the sale by A&O. Linklaters acted for LIXIL.)
In the U.K., a number of British law firms have benefited from the recent announcement by the government of two major inbound Chinese investment deals, which followed an October trade visit to the country by Chancellor of the Exchequer George Osborne and Boris Johnson, London’s mayor.
Herbert Smith Freehills won the lead mandate to advise French energy giant EDF on the construction of a £14 billion ($23 billion) nuclear power station at Hinkley Point in Somerset—the U.K.’s first new nuclear plant in two decades. EDF is heading a consortium that also includes two Chinese companies: China National Nuclear Corporation and China General Nuclear Power Corporation, which are being represented by Eversheds and Ashurst, respectively.Eversheds, which according to Mergermarket acted on 49 European M&A deals in the first nine months of 2013—second only to DLA Piper and Linklaters, with 62 and 51 transactions, respectively—also bagged a major role in the second Sino–U.K. transaction, advising Manchester Airport Group on its £800 million “Airport City” project to create the U.K.’s first airport business district. Airport City is being developed by a consortium that includes the Beijing Construction Engineering Group, which retained Berwin Leighton Paisner in a first-time mandate for the firm.
“It’s a stated aim of the Chinese government to increase the level of overseas investment,” says Charles Meek, corporate head at London-based Macfarlanes, which placed eighth in the Mergermarket rankings for European M&A by aggregate deal value, up from 151st last year. “The [state-owned enterprises], in particular, have a lot of money behind them and they’re intent on using it.”
But Edward Braham, global corporate head at Freshfields Bruckhaus Deringer, says that, as has been the case in previous years, Chinese investment in Europe has been more hype than substance. “In the past, there has been a lot of noise but not a lot of deals, and that’s still largely true,” he says. “We are starting to see some action—particularly from China and Japan—but the U.S. buying in Europe is a much more significant feature.”
Indeed, in what has been a boon for corporate practices at major American law firms, U.S. investors piled into Europe in record numbers in 2013. Thirteen of the 20 highest-ranked firms for European M&A by aggregate deal value in the first three quarters of the year were American, according to Mergermarket, including four of the top five: Jones Day; Davis Polk; Simpson Thacher; and Wachtell, Lipton, Rosen & Katz. U.K.-based firms, by comparison, accounted for just six of the top 20, with Slaughter and May the highest-placed British firm, at sixth.
“We’ve had a lot of interest from U.S. acquirers that are looking at U.K. or European targets,” says corporate partner Will Pearce, who joined Davis Polk’s London office from Herbert Smith Freehills last May. “The U.S. market has bounced back [more strongly than Europe] and companies have slightly better valuations, which makes Europe an attractive place for U.S. purchasers as they get more for their money.”
MUCH OF THE U.S. interest in Europe has been focused on the Irish pharmaceuticals sector. (The U.K. and Ireland represented the region’s biggest M&A market in the first three quarters of 2013, Mergermarket data reveals, with an aggregate deal value of $108.2 billion accounting for just over 22 percent of all transactions within the region.)Seeking to take advantage of Ireland’s generous tax credits for research and development activities, and the country’s traditionally low corporation tax of 12.5 percent, several U.S. companies have carried out so-called inversion transactions, turning themselves into Irish incorporated entities through acquisitions.
Last October, Latham & Watkins, Skadden, and Irish firm Matheson acted for U.S. drugmaker Actavis plc on its acquisition of Warner Chilcott PLC, which was represented by Davis Polk & Wardwell, White & Case and Ireland’s Arthur Cox, in an all-stock deal valued at $8.5 billion. Actavis chief executive Paul Bisaro has said that the company will now reincorporate itself in Ireland, where Nasdaq-listed pharma company Warner Chilcott is headquartered, and will thus lower its effective tax rate from 28 percent to just 17 percent.
Earlier in the year, Sullivan & Cromwell and Irish firm Dillon Eustace teamed up to advise U.S. drug manufacturer Perrigo in a fiercely contested bidding war to secure an $8.5 billion deal for Irish drug development company Elan Corporation, which was advised by Cadwalader, Wickersham & Taft and Dublin-based A&L Goodbody. Perrigo also reincorporated in Ireland following the deal, with the country now home to eight of the 10 largest pharmaceutical companies in the world, according to IDA Ireland, a government agency responsible for foreign direct investment.
A similar trend is occurring in the Netherlands, says Paul Cronheim, a corporate partner at leading Dutch law firm De Brauw.
“When you have a merger of equals—or a transaction to be presented as such—between companies from two countries, they often want a new head office in a neutral country,” he explains. “You don’t want to move in with your mother-in-law—it would be a loss of face. We’re seeing a lot of international mergers using Dutch top holdings—there is strong political and cultural acceptability toward business, high standards of corporate governance, a beneficial tax environment, flexible corporate laws, a stable regulatory system, good logistics, and everyone speaks English. We’re the Delaware of Europe.”
De Brauw acted on two of the largest deals that involved two non-Dutch companies incorporating in the country following a merger. In September, the firm worked alongside Weil and Japanese firm Mori Hamada & Matsumoto in advising U.S. chipmaking-equipment supplier Applied Materials Inc. on its $8.7 billion merger with Japan’s Tokyo Electron Limited—the largest U.S.–Japanese transaction in six years—with the combined company now domiciled in Amsterdam. (Tokyo Electron was represented by Jones Day, and Japan’s Nishimura & Asahi.) De Brauw was again involved when advertising giants Omnicom Group Inc. and Publicis Groupe SA chose to domicile in the Dutch capital following their $19.3 billion merger, which created additional roles for Latham, Wachtell, France’s Darrois Villey Maillot Brochier, and Dutch firm NautaDutilh.
THE PAST 12 MONTHS have been a blessed relief for deal-starved lawyers throughout Europe. But many M&A partners warn that it is too early to party like it’s 2005. For while the general economic outlook within Europe is currently more positive than it has been for years, the recent downgrade of France’s credit rating due to concerns over its faltering reforms program was a timely reminder that market conditions remain unpredictable. Any optimism remains tinged with a note of caution.
“The worry is that something falls out of bed—this is a very connected world these days,” Freshfields’ Braham adds. “We saw that this summer: [U.S. Federal Reserve chairman Ben] Bernanke made comments about tapering quantitative easing and that basically killed the IPO market in China stone dead. I am relatively optimistic [about future prospects for European M&A], but I wouldn’t go mortgage the house on it.”