M&A IN 2021 RESILIENT, AGILE AND COMING OFF MUTE - Herbert ...
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M&A IN 2021 RESILIENT, AGILE AND COMING OFF MUTE
04 Covid-19 – dealing with a crisis
06 M&A litigation – what we have learned
08 ESG – front and centre, with a new emphasis on social factors
10 FDI – the pandemic adds a new dimension
12 Public M&A – fortune favours the bold
14 Stressed and distressed M&A – portfolio management and
opportunities
16 Merger control – no wavering of regulatory resolve
18 Navigating the energy transition to net-zero – the course is set
20 Regional perspectives
M&A REPORT 2021 HERBERT SMITH FREEHILLS
2020 started off with significant economic and
geopolitical uncertainties, and then the pandemic
upended everything, for everyone. Many unknowns
remain, not least as to the true extent of the
long-term economic damage, and as to who will be
the winners and losers when the world properly
emerges from lockdown. And, heading into 2021, we
still face the same global issues that we did 12
months ago, albeit some now take different forms as
situations play out: the impact of the presidential
election in the US, China's role and relationships
across the world, and what Brexit actually means for Our report considers the most important legal
the UK and Europe. issues in M&A against this backdrop. We consider
what lessons we have learnt from the impact of
But the second half of 2020 was a story of agility, resilience and the pandemic that we are building into deal
opportunism in the M&A markets. Strategic focus shifted to portfolio process and documentation, in particular
management, and to emerging stronger into opportunities beyond around termination rights, for whatever black
lockdown. There was a recognition that 2020 has catalysed swan event next comes along. We look at the
fundamental shifts in the way that the world lives, works and plays, not continued rise of FDI regimes (latterly in the
least the importance of technology in all of our lives. And there is a UK's significant new legislation) and their
recognition that, for the best placed, M&A can be a tool of choice for deployment by governments in the pandemic.
effecting a rapid transformation of businesses to address that shift. We reflect on the significance of shifts taking
place in ESG, and the energy transition agenda
While the strong levels of activity in some key markets has not made up in particular as a driver of M&A. We consider
for the shortfall in the overall year, if continued into 2021 it would show the rebound in activity in the public markets as
a very different and much swifter recovery than from previous crises. bidders seek to take advantage of lower valuations.
And we look to the distressed deals that we
2020 showed us that even the most complex deals could be done in
might expect to see in 2021, when governmental
lockdown conditions, indeed sometimes more efficiently. We also faced
support necessarily runs out and the true
challenges: a need to find other ways of connecting online at a personal
impact is felt in the most damaged sectors.
level and managing training for younger team members; and the sometimes
unsustainable nature of working conditions on deals from home. After a year when the three most popular
phrases have been resilience, agility, and "you're
on mute", M&A seems to be emerging in 2021
on the right side of each of those trends.
GAVIN DAVIES
HEAD OF GLOBAL M&A PRACTICE
HERBERT SMITH FREEHILLS M&A REPORT 2021 Covid-19 — dealing with a crisis Global M&A was knocked off balance by the coronavirus outbreak but quickly adjusted to address the impact on risk allocation and execution. The disruption of the Covid-19 pandemic and competing priorities for capital led to creativity and innovation in deal structures, including an increase in private investments into public companies (PIPEs) and companies partnering with other investors to de-risk M&A transactions.
M&A REPORT 2021 HERBERT SMITH FREEHILLS
Understand the impact on the target
Buyers need to understand the impact of the pandemic on target businesses. In
particular a buyer will wish to establish, as part of its due diligence, what government
support a target may have had, whether it has taken advantage of regulatory relaxations
that may give rise to future liabilities (such as deferring filings or payment of tax), what
steps it may have taken in relation to employees, and how resilient the target’s supply
chain and customer base has proven to be.
As well as compliance with any legal requirements (for example in relation to
redundancies), it will be important to understand any possible reputational or
industrial relations issues, and any impact on the future conduct of the business, such
as government-imposed restrictions on distributions to shareholders or mandated
“greening” of activities, so that they become more environmentally friendly.
Buyers should also consider whether to seek information about, and warranties in
relation to, other areas of the target business that may have been tested as a result of
the pandemic, for example employee health measures, the ability and adequacy of
systems for business to be conducted remotely and insurance.
Gap controls and walk rights
The Covid-19 pandemic, and the potential for further "waves" of infection and
consequential disruption, has caused parties to focus more closely than ever on
pre-closing covenants (gap controls) in transaction documents. A balance has to be
struck between a seller wishing to reserve sufficient flexibility to react nimbly to
changes in the operating environment, and a buyer wishing to ensure that the target
business is not unnecessarily adversely affected by how it is run during the period
between signing and closing.
Buyers may also seek a right to "walk away" in the event of a further wave of infection
and associated business interruption, but sellers are likely to resist any such rights
– market practice in relation to so called MAC (material adverse change) clauses
varies around the world but in any event the allocation of MAC risk between parties
is likely to entail detailed negotiation.
Deal execution
The fall in M&A activity when the pandemic first hit was in part due to the logistical
difficulties of doing deals. However, as time has gone by, market participants have
adapted and deals are now being done entirely virtually, even without the
face-to-face management discussions that were previously regarded as essential to a
successful transaction. As well as virtual management meetings, technologies for
virtual site visits are also being used, including even by means of drones. Transactions
may take a little longer to execute because, for example, financing takes longer to
obtain, but those keen to pursue deals are doing so successfully and at scale.
Kam Jamshidi Gavin Williams
Melbourne London
Antonia Kirkby
London
//05
HERBERT SMITH FREEHILLS M&A REPORT 2021
M&A litigation — what we
have learned
Purchase agreement terms have been tested more than ever before.
Which terms are being tested?
As with the rest of corporate life, the disputes landscape has been dominated by
Covid-19 related issues and, given the lag between deal issues arising and
determination of resultant disputes via litigation or arbitration, that will likely
continue to be the case for the foreseeable future. Buyers’ attempts to reprice
have tested price adjustment mechanisms, while buyers wishing to avoid deals
altogether have sought to engage material adverse change clauses or to suggest
that completion conditions have not been satisfied (for example where
divestiture for merger clearance is required).
More creative arguments from remorseful buyers have included a suggestion that
completion had been frustrated because the purchase agreement contemplated
an in-person completion meeting which was impossible under lockdown. Courts
have demonstrated their willingness to assist transaction parties urgently where
appropriate, such as by determining targeted preliminary issues within the
transactional timeline imposed by a longstop date for completion.
All around the world, buyers have
been looking to rely on contractual
get-outs and frustration to walk
away from previously announced
transactions. Others have sought
to use other contractual
provisions to re-open the
commercial terms of a transaction.
M&A REPORT 2021 HERBERT SMITH FREEHILLS
Litigation has also been the tool for some date for completion set for H2 2020. When
sellers to exert pressure on buyers and to the pandemic hit, LVMH sought to walk away
compel closing, with governing law and from the deal, claiming that there had been a
jurisdiction clauses sending some parties’ material adverse effect, and that Tiffany had
claims out of the jurisdiction. breached its covenants to operate the
business in the ordinary course. It also cited a
One of the most high profile examples where a request by the French government to delay the
buyer sought to walk away from an agreed deal. Legal proceedings were commenced but
deal was the dispute between LVMH and ultimately a settlement was reached, with
Tiffany in the US. LVMH agreed to acquire LVMH paying over US$400 million less.
Tiffany in November 2019, with a longstop
Looking ahead
As the economic effects of Covid-19 continue,
future disputes may arise out of the effect of
the second and third waves on transactions, in
particular whether those waves were
foreseeable risks for which the parties catered
in their agreements. Meanwhile, buyers who
completed on transactions that now look to
have been overpriced will be examining the
information provided to them in due diligence
to determine whether warranties given by the
seller, particularly as to the future business plan
or finances of the target business, were true.
Raji Azzam Maura McIntosh
Melbourne London
Neil Blake Mathias Wittinghofer
London Frankfurt
//07
HERBERT SMITH FREEHILLS M&A REPORT 2021
ESG – front and centre, with a
new emphasis on social factors
Initial expectations that the pandemic may undermine progress on environmental
and social issues proved to be unfounded.
Focus of ESG concerns in 2021
Environmental, social and governance (ESG) issues Even while lockdowns and travel restrictions reduced
continued to rise up the agenda for corporates, emissions this year, concerns around climate change
regulators and investors in 2020, with a particular and its wider impact have continued to increase. This
focus on social ("S") factors, given the pandemic’s has led to greater investor demands for environmental
impact on workers and vulnerable groups. and climate risk disclosure, scenario planning and
portfolio analysis. It has also led to more strident views
2020 also saw employees becoming a more vocal regarding the need for companies to transition to a
constituency on ESG issues. Physical and virtual lower carbon future in a way that is just and inclusive,
walk-outs and other protests were launched in advancing “S” factors as well as “E” and “G” factors.
response to concerns around working conditions,
freedom of association, moderation of online content,
diversity and equality, and climate, to name just a few.
In response to a 2019 survey conducted by
IHS Markit and Mergermarket:
53% 83%
of respondents noted that they had cited investor pressure as a major
walked away from a deal due to a driver for taking ESG considerations
negative assessment of ESG into account in the M&A process
considerations relating to a target
M&A REPORT 2021 HERBERT SMITH FREEHILLS
ESG due diligence
The law is changing rapidly around ESG and there is a
growing need for buyers to examine carefully whether a
target is exposed to ESG risks, understand whether it will Increasing stakeholder
meet stakeholder expectations and regulatory expectations have
requirements in the future and, particularly with respect
to private equity or opportunistic buyers, ensure that the
underscored the importance
value of the investment is preserved and a clean and of carrying out ESG due
responsible exit in due course is possible. diligence as part of the M&A
Fulsome ESG due diligence can also contribute to process.
successful deal-making by helping acquirers to identify
potential difficulties that may increase the cost of
integration and challenge performance in the long term. By
taking a more forward-looking approach at the due
diligence stage, buyers can reduce the risk of acquiring
assets or businesses that become stranded owing to
ESG-related changes in regulation, public opinion or
consumer demand.
Beyond risk identification, ESG due diligence can also help
buyers identify opportunities for value creation, including
through improving employee engagement, incubating
more sustainable processes or products, and gaining
access to technologies that support a transition to a low
carbon economy.
Antony Crockett Rebecca Perlman
Hong Kong London
Silke Goldberg Timothy Stutt
London Sydney
//09
HERBERT SMITH FREEHILLS M&A REPORT 2021
FDI — the pandemic adds a
new dimension
Global protectionism has taken on a new dimension
in light of the pandemic.
Foreign direct investment (FDI) regulation has become an increasingly
important consideration for cross-border M&A, against a backdrop of amplified
protectionist rhetoric. Even before the Covid-19 pandemic, a number of countries
traditionally seen as being open to foreign investment (such as the UK, USA and
Australia) were moving towards stricter public interest and FDI scrutiny of
transactions. The focus of FDI regimes is increasingly being stretched well
beyond acquisitions by certain Chinese companies, and the concept of “national
security” continues to be extended, to include critical infrastructure,
communications assets, advanced technology and data.
Since the outbreak of the pandemic, these trends have been accelerated as
governments have sought to move quickly to protect businesses affected by the
economic fall-out, in light of concerns surrounding opportunistic acquisitions by
foreign buyers. Whilst some of the changes directly related to the pandemic may
ultimately prove to be temporary, the overall picture is likely to be one of
structural change, rather than cyclical.
Against this backdrop, we saw a raft of significant amendments to existing FDI
regimes taking effect in 2020. Some of these pre-dated the pandemic, including
notable expansion of the jurisdiction of CFIUS in the US, and a tightening of
notification thresholds in Japan. Others are more directly tied to the impact of
the pandemic, for example the express inclusion of healthcare as a sector
covered by FDI regulation in many jurisdictions (including Spain, Italy and
Germany), and the reduction of financial thresholds (including notably to zero in
Australia, so as to effectively make all foreign direct investment reviewable for
the duration of the pandemic).
The pandemic has clearly
accelerated existing trends
towards greater political
intervention in transactions.
Pro-active consideration of FDI
filing requirements – and
co-ordinating a global approach -
is now more important than ever
for cross-border M&A.M&A REPORT 2021 HERBERT SMITH FREEHILLS
on new UK national
security regime
The UK government has also published transactions. This makes it more
details of its long-awaited standalone important than ever to adopt a UK National Security and Investment Bill
national security regime in the UK (see consistent global approach to FDI filings. tabled in Parliament on 11 November
our "Spotlight" column). The EU 2020; expected to enter into force in
Regulation on FDI screening In terms of addressing potential
Spring 2021
mechanisms (fully operational since 11 concerns associated with foreign
October 2020) is also likely to investment, the possibility of offering up
encourage those EU Member States remedies to ease the FDI process
that do not currently have their own remains an important consideration:
regime (just under half of them) to many cases that raise initial concerns
are still being resolved with, for Will introduce a mandatory filing obligation
introduce one.
example, undertakings to ringfence for acquisitions of 15% or more of a
Whilst FDI regimes tend to be less sensitive information and maintain company carrying on activities in one of 17
transparent than merger control certain business activities in the specified sectors in the UK – for UK and
processes, FDI authorities are jurisdiction. In such cases, effective and non-UK investors alike
increasingly sharing information behind sensitive communication with
the scenes and liaising with each other stakeholders to explore potential
during the course of reviewing options will be critical.
Voluntary notifications encouraged for
acquisitions of assets/IP in any sector and
Market perception any qualifying acquisition outside the 17
sectors that could give rise to national
In April 2020, participants in a webinar hosted by security concerns – including an acquisition
Herbert Smith Freehills and Global Counsel on of “material influence” (which could
navigating foreign investment and merger control sometimes be deemed to exist in relation to
regimes during the Covid-19 pandemic were asked a shareholding even lower than 15%)
what they thought the impact of recent changes in FDI
regulation would be:
FDI regulation will deter foreign investment
significantly
No materiality (e.g. turnover) thresholds
35.7%
We are more likely to see foreign acquirers agreeing
to remedies to get their deal through
Regime could apply even where an
64.3% acquirer does not have a direct link to the
UK e.g. if a Japanese company buys a
target based in France but selling goods
or services into the UK
Extensive retrospective call-in powers for
non-notified transactions – can apply to
Marius Boewe Nanda Lau any qualifying deal completed on or after
Düsseldorf Shanghai 12 November 2020
Joseph Falcone Veronica Roberts Significant sanctions for non-compliance;
New York London non-notified transactions caught by the
mandatory filing obligation will be void
//11HERBERT SMITH FREEHILLS M&A REPORT 2021
Public M&A – fortune
favours the bold
Public M&A is back, after a temporary pause,
with a vengeance.
The buyers’ perspective
Expecting companies to hunker down in the pandemic
and put their strategies on hold until more certain times?
We are in fact seeing the very opposite. As buyers look
beyond business as usual and onto their strategic
objectives, we are seeing bolder, longer term bets and
trade consortia making ambitious break-up plays. The
winners emerging from the pandemic with balance sheet
strength and liquidity are finding the Covid-disrupted
markets the ideal forum to press “go” on their
long-coveted “wish-list” transactions. Private capital has
also been very active in the public markets, overcoming
any previous reluctance to go public, or even to go hostile.
There is a sense of urgency for bidders, not
wanting to miss the potential window of
opportunity to get their dream deals done before
the sense of disruption dissipates and the
increasing value of the public equity capital
markets gets away from them.M&A REPORT 2021 HERBERT SMITH FREEHILLS
The targets of their ambition
The activity is strongest in sectors and number of opportunistic approaches by
sub-sectors seen as impacted by the global private equity over the last six months, with
pandemic (due to lower asset values) but sponsors more willing than previously to go
robust in the longer term (greater value public and “bear hug” – as seen for example in
attributed to growth and potential). Investors the four approaches made to the UK roadside
are being asked to back the “winners” as recovery services business, the AA plc,
businesses emerge from the crisis and debt is (previously taken private by Permira and CVC
made available for the right combinations. and IPO’d in 2014), culminating in a
Common factors are a target with pandemic or recommended consortium deal between
other setbacks – and bidders with cash, prepared Towerbrook and Warburg Pincus.
to test whether shareholders view cash as king
in a market where liquidity is scarce. In France, the market has been quite agitated
with the attempt by Veolia to bid for Suez after
In the US the biggest deals of the year have Veolia acquired from Engie a 29.9% stake,
focused on tech and data such as Softbank’s valuing Suez at US$13 billion.
US$40 billion sale of Arm to Nvidia and S&P
Global’s US$44 billion acquisition of IHS Markit. In Australia, the corporate targets range from
soft drinks, as Coca-Cola European Partners
In the UK too tech and healthcare are very takes the opportunity to seek to acquire all of
active sectors and more broadly there is a Coca-Cola Amatil, through to aged care where
growing trend towards North American Washington H. Soul Pattinson is bidding for
bidders and North American money, perhaps Regis Healthcare.
as US and Canadian backed businesses are
emerging more quickly from the crisis. Deals Private equity bidders Pacific Equity Partners
include the hostile bid for G4S by Garda World and Carlyle approached Link Administration
backed by BC Partners, followed by a with a bear hug, while BGH Capital was doing
recommended bid from Allied Universal the same to cinema player Village Roadshow
Security Services, and the £7.2 billion break up and Macquarie agricultural fund to the
bid for RSA Insurance by Canadian insurer Vitalharvest Freehold Trust, which had seen
Intact Financial Corporation and Scandinavian droughts and bushfires affecting farm output
insurer Tryg, as well as Caesar’s bid for and therefore variable lease rents.
William Hill and MGM’s proposed bid for
Entain (formerly GVC). There have also been a
Mark Bardell
London
Rebecca Maslen-Stannage
Sydney
Hubert Segain
Paris
//13HERBERT SMITH FREEHILLS M&A REPORT 2021
Stressed and distressed
M&A – portfolio management
and opportunities
Sellers may be looking to raise cash and refocus on their core business,
while buyers may be able to secure a good deal.
As the Covid-19 crisis hit, governments around the world put in place support packages and
protections to avert the worst effects on businesses, including protections for companies
against insolvencies. As these packages are withdrawn, we expect to see an uptick in both
distressed M&A, as companies that are on the verge of insolvency dispose of assets, and
stressed M&A, as companies that are in financial difficulties dispose of non-core assets to raise
cash and refocus on their priority business areas.
The key features of distressed M&A
Where a seller is contemplating a distressed or stressed sale, or a buyer is considering buying a
distressed business or assets, there are a number of features that both parties should be aware of.
First and foremost speed is likely to be critical. A deal which would normally take weeks or
months to complete may have to be executed in a matter of days. This has a number of
consequences, including a limited due diligence exercise and limited or no exclusivity for
the buyer. The timetable will be driven by the seller’s cash flow position and how quickly it
needs the sale proceeds.
Secondly a buyer is likely to have limited recourse against the seller post-transaction,
either because the seller will or may enter insolvency proceedings following the sale or
because the sale is conducted by an insolvency practitioner who will give only the
minimum warranties as to title and capacity.
The seller will be looking for maximum certainty, so will prefer a buyer requiring limited
conditionality to completion of the acquisition (so for example where no shareholder
approval or merger control clearance is required) and with cash already available or
available on a certain funds basis.
The purchase price will reflect the adverse conditions for the transaction but even so
some buyers may be unwilling to take on the level of risk the process may carry.
The directors of the seller must be cognisant of their directors' duties. They should consider
whether their duty continues to be to the company and its shareholders, or whether it flips
to needing to act in the interests of creditors. In any event, they need to be sure that the sale
is ultimately the better option for the company, although distressed M&A is likely to be only
one of a number of courses of action that a company in financial difficulties will be
considering. The directors of a seller will also need to be mindful of the increased risk of
review they may face if the company subsequently enters into an insolvency process.M&A REPORT 2021 HERBERT SMITH FREEHILLS
A buyer that is willing to move fast
may be able to secure a good deal
at a low price as more companies
are forced to turn to stressed or
distressed M&A in 2021.
If the seller is a publicly listed entity, there will be additional
issues to navigate, including compliance with the relevant
continuous disclosure regime, any significant transaction or
related party rules which may require shareholder approval
and how the relevant takeover regime will operate, especially
if a significant or cornerstone investor is being considered.
Often some degree of relaxation of the rules is possible but
this needs to be considered early. Likewise competition and
FDI regimes may provide some relaxation of the rules in
cases of distress but again these need to be looked at early.
% DECREASE IN INSOLVENCIES IN Q1 TO Q3 2020
COMPARED WITH THE SAME PERIOD IN 2019 DOWN
IN 2020
UK 27% Companies have
been afforded
some protection
against
insolvency in
AUSTRALIA 37% many
jurisdictions,
meaning we have
seen fewer
insolvencies, and
US 14% so fewer
companies being
forced into
distressed M&A
0% 5% 10% 15% 20% 25% 30% 35% 40% so far in this crisis
Nicolas Martin Philippa Stone
Madrid Sydney
Greg Mulley Christopher Theris
London Paris
//15HERBERT SMITH FREEHILLS M&A REPORT 2021
Merger control – no wavering
of regulatory resolve
Conditional clearances and fines for procedural breaches continue to increase.
Strict enforcement
Despite the Covid-19 crisis, we continue to see strict
enforcement by the leading competition authorities and
substantive assessment has largely remained unchanged.
The impact of the pandemic will be factored into any
analysis, but an anticipated stream of ‘failing firm’ defences
(to allow deals that otherwise would be seen as problematic
from a competition perspective, on the basis that the target
would exit the market anyway) has not materialised and the
strict requirements for the defence remain even in times of a
global pandemic. The U-turn by the UK’s Competition and
Markets Authority (CMA) in the Amazon/Deliveroo case
(where it abandoned a provisional finding that the failing
firm defence would be met and in the end cleared the deal
on other grounds) is a clear example. Competition
Commissioner Vestager has stated that “any departure from
these criteria would mean falling into the trap of allowing the
crisis to lead us away from our objective, which is to
preserve open and competitive markets”.
At an EU level there has been an increasing trend of ‘pull and
refile’ cases to provide the parties with extra time for
discussion with the European Commission and iron out its
concerns, thereby avoiding the need for remedies or a Phase II
investigation.
Regulators are also focusing on compliance with procedural
requirements, with fines now routinely imposed for breach Regulators are increasingly willing
of initial enforcement orders, gun-jumping and the provision to block transactions, and a
of incomplete or incorrect information.
number of transactions have had
Procedurally we are seeing regulators work remotely and to be abandoned following
this seems to be causing some delays in the process. For
example at EU level it appears that pre-notification periods
adverse preliminary indications,
(where parties discuss informally with the regulator before so anticipating and planning for
submitting a formal notification) are getting longer. potential anti-trust issues is more
important than ever.M&A REPORT 2021 HERBERT SMITH FREEHILLS
Focus on digital mergers/killer Impact of Brexit
acquisitions From 1 January 2021 the EUMR and its
Tech deals and deals involving data remain a one-stop-shop regime no longer apply in the
key area of focus and are carefully scrutinised UK. Turnover of the parties in the UK will no
regardless of deal value. The CMA for example longer be relevant in assessing whether the
is increasingly creative with its approach to the EUMR thresholds are met and the Commission
share of supply test in order to take jurisdiction will have no jurisdiction to take into account
over such transactions, even if there is no clear the effects of a transaction it reviews on any
UK nexus. UK market. The EU and UK merger control
regimes will instead run in parallel and
The European Commission seems to have transactions may be subject to both regimes.
abandoned proposals for lower thresholds to
capture deals involving a target with low or no
turnover and is instead willing to rely on the
referral mechanism in the EU Merger
Regulation (EUMR) under which Member
States can refer a transaction below the EU
thresholds to the Commission. The
Commission has indicated that it will change
its policy and will be accepting referrals of
transactions that fall even below the national
jurisdictional thresholds. This creates some
uncertainty, as cases that would in principle be
completely outside any merger control
regimes in the EU may be referred to the
Commission for investigation. Companies
should factor this into their deals.
Kyriakos Fountoukakos
Brussels
Marcel Nuys
Düsseldorf
Stephen Wisking
London
//17HERBERT SMITH FREEHILLS M&A REPORT 2021
Navigating the energy transition
to net zero — the course is set
For decades, pressure has been building on the energy
sector to decarbonize. In 2020, we witnessed a paradigm
shift in the sector.
Pressure to decarbonize has been driven by growing evidence and awareness of
the link between burning hydrocarbons and climate change, and the prevalence
of hydrocarbons in our global energy system (80% of our global energy demand
is still provided by hydrocarbons). In 2020, we saw a major shift take place, with
the emission reduction commitments made in Paris by the international
community in 2015 finally finding their way into national commitments from the
world’s major emitting nations (including the US, China and Europe), and
becoming enshrined in the corporate visions of the major European hydrocarbon
producing companies (such as bp, Shell, Eni and Total). Confidence to make this
shift has been supplied by the remarkable cost-reductions in renewables in
recent years (particularly solar PV and wind) and improvements in technology,
reinforced by ESG concerns and pressure from financial institutions on energy
companies to divest from hydrocarbons.
These trends have been accelerated by the changes in our living and working
habits brought about by Covid-19, many of which are likely to stay. The European
integrated oil companies have started to prepare themselves for this “new
normal”: recording massive asset write-downs, slashing hydrocarbon CAPEX
and announcing multi-billion divestment programmes (over US$80 billion worth
of assets were on the block from the oil majors, at last count), whilst at the same
time pivoting towards new energy (hydrogen and carbon capture, utilisation and
storage (CCUS), renewables, EVs and emission reduction technologies. We’re
also seeing a rise in the fortunes of the pure-play renewable companies, such as
Orsted, Enel, Iberdrola and NextEra Energy Inc. These companies are attracting
record amounts of capital and growing quickly as they offer investors a clean bet
on a low carbon future.
Energy companies have taken decisive
action to reposition themselves for the
energy transition, as emission reduction
commitments find their way into the
corporate visions of the major European
hydrocarbon producing companies.M&A REPORT 2021 HERBERT SMITH FREEHILLS
Some of the biggest deals in the energy sector
involved pension and infra funds buying into
credit-backed structures linked to mid-stream
assets: ADNOC raised over $10 billion using
this method, and Shell is looking at a similar
method with its QCLNG assets in Australia.
Infrastructure funds, private equity funds and
pension funds are where much of the world’s
free capital is located and they are now regular
partners with oil & gas companies on bids.
Energy companies have taken decisive action
to reposition themselves for the energy
transition, with billion-dollar plus offshore
Oil & gas M&A deals proved difficult to close wind acquisitions being made by many of the
in 2020, as dealmakers struggled to agree on majors in 2020 (including bp, Total and Eni).
asset valuations due to the Covid-induced The oil majors are now competing with
lower oil price, leading many deals to be traditional renewable energy companies and
abandoned or put on hold (for example funds for assets, driving prices up and returns
Energean/Neptune in the UK North Sea). down. Early movers such as Orsted and
Creativity came to the fore, with Chevron Equinor are reaping the benefits. European
acquiring Noble in a US$13 billion share for utilities are rapidly unbundling and
share deal and Chrysaor reversing into Premier decarbonising, leading to an even greater
Oil’s London listing. Distress drove focus on wind and solar and on enhancing the
Chesapeake and numerous other higher-cost customer experience: Origin Energy’s strategic
US shale producers to the wall but intense partnership with Octopus of the UK is an
cash conservation saved many of the companies indicator of things to come.
outside of North America, leaving the oil
service companies to take the brunt. A wave of In 2021, we can expect to see more of the
consolidation is still expected to break in the same, with the major US oil companies
services sector, and the broader upstream (particularly Chevron and Exxon) likely to also
market, perhaps next year. The national oil enter the fray in some way, with their recently
companies were largely absent from auction clarified focus on lowest cost, lowest carbon.
processes in 2020, but are likely to return in 2021 is looking likely to be a block-buster year
2021 once stability and opportunism return to for energy sector M&A.
the market.
Rebecca Major Lorenzo Parola
Paris Milan
Lewis McDonald Ignacio Paz
London Madrid
//19HERBERT SMITH FREEHILLS M&A REPORT 2021
Regional
perspectives
Our colleagues from our offices around the
world describe their experiences of M&A in
2020, and their outlook for 2021.M&A REPORT 2021 HERBERT SMITH FREEHILLS
//21HERBERT SMITH FREEHILLS M&A REPORT 2021
A view from
Africa
Covid-19 has halted the African momentum of recent years.
Activity
Growth projections have been revised downward and FDI
flows are forecast to decrease by up to 40%. Although we
have not seen a massive exodus of investments, the
Covid-19 crisis has led many investors to postpone new
investments or search for safer havens.
Sectors
The travel and tourism industries have been hit particularly
hard, whereas several IT and communications companies
have prospered, coupled with a renewed interest in gold
mining projects.
Many African countries, international banks and
international investors have publicly announced plans to
shift away from fossil fuels and prioritise renewables and Outlook for 2021
other “green” projects. This is very much reflected in the As a result of Covid, some developing countries have
divestment and investment policies of our clients in Africa. announced that they will be cutting their foreign aid
budgets for 2021 which will affect some African countries.
Africa is one of the world's growth markets for smaller, This is slightly counterbalanced by the increased spending
start-up businesses that are able to nimbly plug a gap in the on overseas Covid-relief aid that has taken place this year.
market. This trend has continued to increase, and its impact
during the last 12 months has been even more important, as Overall, despite the decline in the number of M&A
various countries across Africa have been impacted by transactions compared to last year, we are starting to see
Covid restrictions which in turn have changed the way in more M&A in Africa, as cash-rich companies look to
which individuals and businesses are able to operate. leverage opportunities, while other companies look to
improve their balance sheets.
Africa is home to over 400 faster-growing companies with
a revenue of US$1 billion+ (according to McKinsey),
covering not just the resources sector, but also financial
services, food and agri-processing, manufacturing,
telecommunications, and retail.
Legal trends Monde Coto
The increased focus on ESG by investors is challenging in Johannesburg
African countries with poor regulation, where companies
arguably have an even greater responsibility to implement
ESG standards in their supply chains. Some international
groups are also finding that the lack of transparency and Rudolph du Plessis
enhanced risks of corruption in some African countries, Johannesburg
and in some sectors, is too complicated to manage in the
light of increased focus from investors and are seeking to
divest some or all of their African assets (or freezing
investments in certain countries). Ross Lomax
Johannesburg
With the collapse of FDI, the confidence of
Rebecca Major
local investors in their own countries’ Paris
ability to recover has been a major boon for
African countries.M&A REPORT 2021 HERBERT SMITH FREEHILLS
A view from
Australia
Despite the pandemic, overall, 2020 was a strong year for M&A. That is a pleasant
surprise given the concerns we had in the dark days in March when lockdowns and
restrictions began in Australia.
Activity important assets. The thresholds for scrutiny were dropped
to zero, which meant that many transactions, even if they
We have not seen many very large transactions (that is,
had been agreed, would be subject to FIRB approval. That
over A$5 billion in value), particularly in public market
has no doubt affected the market to some degree.
transactions, but there has been a steady flow of M&A
activity, weighted towards the second half of the year. Outlook for 2021
Announced activity leading into 2020 was subdued. When
the pandemic became apparent in February and March, M&A activity in the second half of 2020 was very strong
this trend became a decline in activity. At the time, there – and the sense of pipeline activity is perhaps as strong as
were a number of announced transactions which were any other year since the crazy days of 2007. This has seen
pulled or re-negotiated. a number of public market deals and proposals, but most
deals in which we have been involved have been privately
Legal issues negotiated M&A, often a listed company selling a business
division that is no longer core. We expect this type of
The pandemic led to some legal arguments about whether
activity to continue.
sellers could hold their purchasers to their pre-pandemic
transactions. The argument centred on the operation of ESG factors have influenced activity. This has been most
material adverse change clauses and the seller’s notable in the renewable energy space. Typically these
requirement to operate in the ordinary course of business. transactions are relatively small, but steady in number. The
None of these resulted in final court decisions, so we do drivers for these transactions will only get stronger, which
not have any guidance from the courts here as to what the will result in more M&A activity in that sector.
standard clauses require in the context of a pandemic. But
it did lead to more thought being put into the drafting of Therefore, we are optimistic that 2021 will be a good year
agreements afterwards to clarify how transactions were to for M&A in Australia.
proceed in light of the risks raised by the pandemic.
Another big factor affecting M&A practice is the Federal
Government’s attitude to foreign investment approvals.
The Treasurer announced in March that the government
was concerned about foreign acquirers taking advantage
of the downturn caused by the pandemic to acquire
Natalie Bryce
Brisbane
M&A activity in the second half of 2020 was
very strong – and the sense of pipeline activity
is perhaps as strong as any other year since Malika Chandrasegaran
the crazy days of 2007. Melbourne
Rodd Levy
Melbourne
//23HERBERT SMITH FREEHILLS M&A REPORT 2021
A view from
China
China-related M&A has seen a recovery after a Covid-19 slump.
Activity Hong Kong
While deal activity declined sharply in the first quarter of In Hong Kong, 2020 has been marked by privatisations,
2020 as Covid-19 hit, Greater China logged the strongest timed to take advantage of depressed market values.
recovery across the APAC region in the second half of Examples include long-standing listed companies such as
2020. With 4,265 deals announced in H2 worth US$294 Wheelock and Company and Li & Fung, listed in Hong Kong
billion, Greater China accounted for more than half of all for 57 years and 28 years respectively. State-owned
APAC deal activity by volume and over 60% by value in enterprises have also taken the opportunity to delist in
2020, according to Refinitiv. order to consolidate and strengthen core operations on the
Mainland.
Drivers for M&A
Key M&A drivers include the Chinese government’s
continuing efforts to attract foreign investment and push
for domestic restructurings.
Foreign direct investment into China has remained resilient,
achieving a 6.4% year-on-year growth to reach over
RMB800 billion for the first ten months of 2020. In October
alone, foreign direct investment increased by 18.3%
compared to the same period in 2019. China reaffirmed its
determination to level the playing field for foreign
investment, opening up more sectors (such as financial
services and agriculture) and implementing the new Foreign
Investment Law. Foreign exchange control was also further
liberalised, offering foreign investors more alternatives for
funding investments and businesses in China. With the Hong Kong-focused M&A activity also saw levels rebound
China and EU investment agreement reached on 30 at the end of the year as the market adjusted to the
December 2020, for now this will be another driver to push challenges, with cash-rich corporates taking advantage of
for investments into China from Europe and vice versa. market opportunities due to Covid to make strategic
acquisitions in Hong Kong targets. We have also seen a
Domestic deals and restructurings have also been driving number of Hong Kong-listed corporates pursuing strategic
M&A activity, as China focuses on stimulating its domestic expansion opportunities as China's economy rebounds.
economy and upgrading its industries. Mega deals
emerged, such as the restructurings of Petro China and
Baoshang Bank.
Key M&A drivers include the Chinese
government’s continuing efforts to attract
Gavin Guo
foreign investment and push for domestic Shanghai (Kewei)
restructurings.
Sectors Nanda Lau
Shanghai
Amongst the overall recovery, certain sectors stand out.
The TMT, industrials and financial sectors have been the
most active, highlighted by mega deals such as the
acquisition and privatization of 58.com by an investment
consortium and the acquisition of Zhongwang Group by Tommy Tong
Cred Holding. The energy sector has also been one of the Hong Kong
most active, with China's natural gas market opening to
greater competition and expansion.M&A REPORT 2021 HERBERT SMITH FREEHILLS
A view from
France
A good start to M&A in France in the first two months of 2020 was halted by the Covid-19
pandemic, marked by national lockdown measures and overall economic slowdown.
Activity Legal issues
The pandemic resulted in a significant drop in deal volume As in other jurisdictions, 2020 saw a rise in the French
in France in 2020 (with a 35% reduction compared to government's scrutiny of foreign investments. The threshold
2019) and a number of transactions being suspended. For triggering the French FDI regime was lowered temporarily
example Covea aborted its bid for Partner Re and instead (until 31 December 2021) from 25% to 10% for all non-EEA
agreed on a partnership (which is also a good example of investments in French listed companies. In addition, we
the growing trend of joint venture and alliance transactions saw the first ever refusal to grant an FDI clearance by the
this year as a substitute to traditional M&A). French Ministry of Finance to be made public on the
proposed acquisition of Photonis by US based Teledyne,
despite the parties agreeing more stringent conditions with
the French ministry.
French governmental intervention on M&A was also felt in
domestic deals. The French government publicly (and
unsuccessfully) opposed the sale by Engie of its 29.9%
stake in Suez to Veolia. This transaction paved the way to a
proposed takeover bid for Suez by Veolia which is one of
In spite of this, deal value has increased nearly 90% year the main French public M&A highlights of 2020.
on year, due in part at least to the completion of certain
major deals announced in the beginning of the year (in
particular Worldline's acquisition of Ingenico for €9.1
billion), although in some instances the initially agreed
purchase price was adjusted downwards, as was the case
for two very significant outbound deals of this year, i.e. the
acquisition of Bombardier Transport by Alstom, where the
price range was reduced from €5.8-6.2 billion to €5.3
billion, and the takeover of Tiffany & Co by LVMH where
the overall price tag was reduced by more than US$400
million to US$15.8 billion.
Sectors Outlook for 2021
While sectors such as TMT, health and energy (particularly Despite 2020 being a rather gloomy year for French M&A,
renewables) saw strong M&A activity in 2020, most there is some hope for better M&A activity despite a
sectors were negatively affected by the global pandemic, second lockdown, as the business world learns to live with
especially (and unsurprisingly) transportation, aeronautics, the effects of the pandemic. And it seems likely that
tourism, leisure and hotels. increased volumes of M&A through distressed deals will
begin to materialise in the coming months.
However, the search for synergies, in particular in more
impaired sectors, could generate new M&A opportunities,
especially as the effects of the French government's
business support measures wear off.
As in other jurisdictions,
Frédéric Bouvet Christopher Theris 2020 saw a rise in the
Paris Paris French government's
scrutiny of foreign
investments.
Hubert Segain Edouard Thomas
Paris Paris
//25HERBERT SMITH FREEHILLS M&A REPORT 2021
A view from
Germany
M&A in Germany, as in the rest of the world, was initially hit by the pandemic but
recovered significantly in the second half of the year.
What a year! Alternative deal structures
Not surprisingly, the German M&A market was affected by Not only the pandemic but operational needs, such as
the global events that are still shaking the world, starting digitalisation and other technology-driven disruptions,
most notably with the global Covid-19 pandemic in spring mean that businesses may require fast access to the
and continuing until after the US election in autumn (and required technologies. In that situation, co-operations in
one must not forget Brexit). However, after a few months in joint ventures, strategic alliances or the acquisition of
which the market assessed, and adapted to, the new minority stakes can be attractive alternatives to traditional
situation, M&A professionals switched to deal mode again M&A acquisitions.
and market activity significantly recovered in the second
half of the year. So far, we have not seen a significant rise in Legal issues
stressed or distressed transactions that many feared would We saw the continuation of a number of trends that had
be the inevitable consequence of the struggling economy. already had an impact on M&A in 2019. Recent (and
Restrictions due to the pandemic, e.g. limited travel coming) changes to the FDI regime are likely to lead to an
options, appear to have largely been compensated for by increase in political intervention, a trend that can be seen
technology, such as the frequent use of videoconferencing across Europe with the EU Regulation on FDI screening
or virtual deal rooms. being fully operational since 11 October 2020. Furthermore,
ESG is now a regular factor and driver of M&A activity.
Traditional energy companies need to completely redefine
their business and as a consequence dispose of the “old”
Where companies need to innovate fast, a business while at the same time investing in the
renewables space. M&A agreements now frequently
joint venture or strategic alliance can account for any consequences of the pandemic, through
provide a simple route to invest in the return of material adverse change clauses or refined
technology. force majeure provisions.
Sectors
Industry sectors with the highest levels of activity include
TMT, manufacturing & industrials and pharma/medical.
The largest transaction to date is ThyssenKrupp’s €17.2 billion
sale of its elevator business to a consortium of PE sponsors,
Advent and Cinven. Also, earlier this year EQT and OMERS
Infrastructure Management bought Deutsche Glasfaser, the
optical fibre business previously owned by KKR – and that
was only the largest of a number of transactions in that
industry. The research into Covid-19, including for a vaccine,
has spurred interest in the pharma/medical sector with
BioNtech (together with Pfizer), a German player, being at
the forefront. It can be expected that the energy sector will
also see an increase in M&A activity, fuelled by the change in
the German energy mix, the recent adoption of a national
hydrogen strategy and the increasing number of electric and
connected autonomous vehicles.
Nico Abel Quenie Hubert
Frankfurt Frankfurt
Soenke Becker Christoph Nawroth
Düsseldorf DüsseldorfM&A REPORT 2021 HERBERT SMITH FREEHILLS
A view from
India
India has consolidated its position as the second largest M&A market (with regard to inbound
and domestic investment) in Asia Pacific with a total deal value of US$65 billion for 2020.
The big story the last two years, Chinese investors have made over US$6
billion worth of investments into the Indian market,
Unquestionably, the big M&A story for 2020 was Mukesh
especially into the growing start-up ecosystem.
Ambani’s Reliance – investors flocked to put money into
Reliance, and in particular Reliance Jio (the digital arm) and Domestic market
Reliance Retail (the retail arm). Jio raised over US$20
billion in total through 13 deals with an all-star cast of With all eyes on the international investment in Reliance Jio
strategic investors, led by Facebook and Google. Financial and Retail, it was easy to miss some important domestic
buyers including KKR and Silver Lake also had a piece of deals. Reliance was the headline story here as well, with
the action. Retail raised over US$6 billion through 9 Retail's purchase of Future Group’s retail and related empire
investments and replicated the financial investors in Jio. for over US$3 billion. This seems to be part of Reliance's
larger plan to consolidate its supply chain and ultimately
dominate the e-commerce and tech market in India.
Other notable domestic deals included NTPC Ltd acquiring a
majority stake in THDC India Ltd and a 100% stake in North
Eastern Electric Power Corporation Ltd, and an SBI consortium
acquiring a majority stake in the distressed Yes Bank.
The pandemic and the rise of the online
The combined investment in Jio and Retail of some US$26 world
billion amounted to over 60% of the total inbound M&A India has been hit hard by the Covid pandemic, but the
value for 2020. sheer size of its domestic market will continue to attract
international investment. India is expected to overtake
The other big story of India M&A in 2020 is the continued
China before long to become the most populous country in
rise of financial investors, with over US$22 billion invested
the world. The online world, including in India, has already
in 2020.
seen significant deal activity, led by the telecoms, fintech
and edtech sectors. Telecoms and tech in particular
The outbound story
contributed some US$14.6 billion of deal value in 2020.
India remains an inbound and domestic M&A story, with
outbound M&A dwindling to US$1.7 billion (through 137 The billion $ unicorns
deals) down from US$2.8 billion (through 151 deals) in
India is now home to over 20 unicorn companies and ranks
2019. Of the total M&A deal value for 2020, outbound
fourth in the global list of host countries. These unicorns
represented just 2%.
continue to play a significant role in the India M&A chapter,
attracting money from an array of financial and strategic
Geopolitical tensions
investors with SoftBank out in front by some margin,
The trade war between the US and China and the border having invested over US$10 billion in total over the last
issues between India and China have both played out in the three years.
M&A story.
The good news for India is that the US is attempting to
diversify its supply chains away from China, with many
investors seeing India as a credible new home, thus
providing positive pressure for deal activity.
On the other hand, Chinese investment in India is expected Shruthi Anand Alan Montgomery
to decrease, mainly due to geopolitical factors. India London London
amended its FDI policy in April 2020 to require all
neighbouring nations with which it shares a border to seek
prior approval before investing in the country. Previously,
only Pakistan and Bangladesh were subject to this
requirement. The impact has already been felt, with FDI Roddy Martin Chris Parsons
from China at a six-year low. The impact is expected to be London London
particularly acute in the IT/ITeS and tech sectors, given the
historical interest from Chinese companies such as
Alibaba, Ant Financial and Tencent in these sectors. Over //27HERBERT SMITH FREEHILLS M&A REPORT 2021
A view from
Italy
The pandemic’s disruption will influence the Italian economy in the short and medium
term. Nevertheless, M&A activity will be sustained by certain strategic sectors.
Activity In order to protect Italian strategic assets against
speculative transactions by foreign investors, the Italian
Italy was the first European country where the pandemic
government significantly expanded the scope of application
spread, and the first country outside Asia to implement
of the Golden Power Law in March 2020, by introducing a
social distancing and lockdown measures. Despite the
number of additional, broadly defined sectors deemed to
huge disruption caused by Covid-19, the value of deals was
be of strategic importance for the purposes of the FDI
up over 70% year on year, although deal volume was 21%
screening. These include critical infrastructure, such as
lower compared to 2019.
water and health, energy, transport and communication in
Quarterly M&A volume steadily declined in 2020 but general (not just grid/network infrastructure), critical
rebounded in the last weeks of 2020 and returned to technologies and dual-use items (including artificial
volumes seen in recent years. Despite this fall in volume, intelligence, robotics and biotech), supply of critical inputs,
deal value remained strong, due to the large number of €1 agri-food business, steel business, access to sensitive
billion+ deals, the largest number annually since 2007. information (including personal data), media, financial,
credit and insurance. With two Decrees issued by the
Inbound M&A deal volume was also down nearly 30% in President of the Council of Ministers, the scope of the FDI
2020. Despite this, deal value is up over 180%, again due regime has been limited to certain strategic assets within
to the number of deals over €1 billion. the sectors mentioned above. In addition, the government
extended FDI notification duties to EU investors acquiring a
Sectors controlling interest in companies owning strategic assets.
until June 2021.
2020’s largest completed Italian deal was in the financial
services sector, with Italian bank Intesa Sanpaolo bidding
€4.25 billion for UBI Banca, to create Europe’s
seventh-largest bank by assets.
Although the pandemic has already forced
The number of transactions decreased in all sectors, due to companies in sectors impacted by the
the months of confinement and the reduction in disposable
income resulting from the economic effects of the
pandemic into insolvency and restructuring,
pandemic. The most affected sectors include industrials & an increase in distressed M&A, restructuring
chemicals, media & entertainment and consumer. activity and corporate defaults is expected
However, one deal of note in the consumer sector was the
in the coming months as government
purchase of a 30% stake in Italian supermarket chain
Esselunga by private investors Marina Caprotti and support mechanisms unwind.
Giuliana Albera, who now own 100% of the company after
a €1.8 billion deal. The most active sector by value was the
financial services sector, followed by telecoms primarily Outlook for 2021
due to two deals over €3 billion. Although few mega deals are expected in the short term,
the market is showing signs of recovery. Most of the
Some sectors have proved to be more resilient during the
sectors that were negatively affected by the pandemic,
pandemic, including some segments of the energy,
including retail and consumer, may see a slow but steady
technology, life sciences and food & beverage sectors.
restart. Significant investment opportunities will be offered
by the infrastructure sector, as the Italian government is
State intervention
considering large transport infrastructure projects. The
The Italian government reacted to the spread of the crisis construction sector is also in the consolidation phase and
with a package of measures to support businesses. These several smart city projects are expected to be launched in
included deferrals for the payment of taxes, recourse to the the next two years.
redundancy fund, suspension of dismissal procedures and
a guarantee fund for SME financing. In addition, up to €44
billion of recovered assets have been allocated to the Italian Giulia Musmeci Lorenzo Parola
Deposits and Loans Fund (Cassa Depositi e Prestiti), for Milan Milan
investment by the Italian Ministry of Economy and Finance
in the equity of large national companies.You can also read
