M&A

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Latham & Watkins’ 2018 survey of European private M&A transactions analyses the acquisition and equity documentation for more than 210 European deals signing or closing between July 2016 and June 2018. Key highlights include:

  • The use of the locked box on UK deals has reduced slightly, although it continues to be the norm on deals with PE Sellers.
  • Warranty & Indemnity (W&I) Insurance continues to increase in popularity, particularly in deals involving PE Sellers, and increasingly tax indemnities have been

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By Simeon Rudin and Beatrice Lo

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Recent private equity investments in high-profile deals, such as Bain Capital’s acquisition of esure and Apollo’s acquisition of Aspen Insurance, have brought European insurance sector deal values to record highs. Regulatory changes and regulators’ changing perceptions of PE firms have contributed to increased M&A activity, bringing new opportunities for insurance business investments from buyout firms and increasing competition for insurance assets. In our view, with more PE firms and other new entrants in the market for insurance sector targets, there will be a strategic advantage for firms that are well-prepared and familiar with industry-specific issues, which require navigation to achieve a successful deal.

Drivers of Insurance M&A

The implementation of the European Solvency II Directive (Solvency II) in 2016 introduced major changes to solvency and supervisory regulation for the insurance industry. As the industry has adapted to Solvency II requirements, the process of achieving capital compliance has required that European insurance groups examine their businesses. Such examination has resulted in these groups frequently identifying assets and businesses suitable for divestment. Brexit may lead to further review of assets and capital requirements, which in turn may create sale opportunities — for example, disposals by UK insurers of marginal EU businesses. This shuffling of assets (by sale of companies, transfers, or reinsurance, depending on the circumstances) has created opportunities for private equity to access insurance investments.

Deal making is likely to surge as companies seek funding and private equity firms scour the market for buyout opportunities.

By Andrea Novarese and Cataldo Piccarreta

Italy is poised to help steer automotive deal activity in the final weeks of what has been another bumper year for the industry. According to PwC, global automotive deals reached US$59.3 billion in the first three quarters of 2018 — marking the highest year-to-date value in a decade. As the end of 2018 approaches, automotive deal value is on course to race past previous years at a promising time for sector consolidation and innovation. In particular, private equity firms are on track to play a crucial role in driving deals in the country as Italian businesses seek external investment.

A combination of factors is causing Italy’s automotive companies to increasingly turn to PE funding. For starters, Italy’s autonomous driving development is moving at the wrong speed. According to Roland Berger in Automotive Disruption Radar #4 (2018), Italy ranks 13th among European countries for electric vehicle public charging infrastructure.

In addition, Italy’s automotive industry is highly fragmented and mostly family-owned, which will likely lead to increased demand for investment from financial sponsors. The Italian auto market is currently dominated by small and medium-sized enterprises (SMEs), many of which will require significant additional capital to develop next-generation products. An increase in deal making is probable as companies seek funding and PE firms scour the market for buyout opportunities.

By Daniel Treloar

Last year marked a continuation of strong M&A volumes, with US$3.15 trillion in global transactions according to data provider, Mergermarket. Strong activity, driven by cheap debt and a low growth environment, has continued into Q1 2018, and large deals are expected to be a fixture of the M&A landscape in the year to come. The buoyant M&A market has led to extensive reorganisation work for both sellers and buyers, particularly for mega-deals that frequently require substantial post-deal integration and non-core divestment work — a trend Latham believes will continue while M&A levels remain high. However, while well-executed reorganisations can help facilitate a smooth M&A process or integration project, they require meticulous and timely planning to ensure a successful outcome.

What constitutes a corporate reorganisation and why reorganise?

A corporate reorganisation typically involves the transfer of assets, whole businesses, or shares between entities forming part of the same corporate group, on a solvent basis. Businesses undertake corporate reorganisations for several reasons, and M&A is currently a large driver.

The FCA has recently announced that it will begin a review of how firms have implemented the unbundling rules “within weeks”.

By Beatrice Lo and Jonathan Ritson-Candler

At its recent asset management conference, the FCA announced that it will imminently launch a review of how asset managers have implemented the new MiFID II obligation to pay for the research they receive from sell-side firms separately from execution costs (the so-called “unbundling rules”). This is the first FCA-initiated MiFID II review, and comes only six months after the implementation of MiFID II. This is indicative of the regulator’s focus in this area.

The unbundling rules, as part of MiFID II, came into effect on 3 January 2018. The rules represent one of the most significant implementation challenges for the industry given that previously, research had not been separately priced and the new rules are silent on how sell-side firms should negotiate and price their research services (and what buy-side firms could accept). This meant that firms were still developing their pricing models and were still engaged in negotiations post the 3 January 2018 deadline. In recognition of this, towards the end of 2017, the FCA and ESMA permitted “trial periods”. During these periods, sell-side firms can provide, and buy-side firms can receive, free research for a maximum of three months (within any 12 month period). The regulator is keen not only to ensure that firms are compliant with the new rules, but also to understand the broader impact of the unbundling rules on the market.

By Simon Baskerville and Ed Richardson

Schemes of arrangement are a well-known and familiar tool for many within M&A. They are often used to implement acquisitions of public or widely held companies or restructurings of financial indebtedness, frequently as part of an acquisition through a debt-for-equity transaction. What is less well-known is how schemes of arrangement can potentially be used to manage a target company’s liabilities beyond financial indebtedness particularly in an increasingly litigious and regulated world.

What is a scheme of arrangement?

A long-standing feature of company law, a scheme of arrangement allows a company to impose a compromise or arrangement on its shareholders and/ or creditors, provided the scheme of arrangement is sanctioned by the court and approved by shareholders and/or creditors (depending on who is affected by the scheme) accounting for 75% in value and 50% in number.

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By William Lu and Jiyeon Lee-Lim

The fundamental US tax reforms brought in this year by the Tax Cuts and Jobs Act (TCJA) have changed the tax landscape for M&A more significantly than any other legislation in the modern era. Businesses and tax advisors will be considering the various opportunities created and threats posed by the TCJA for quite some time. This article looks at the tax drivers behind the current surge in US corporate M&A.

Federal corporate income tax rate reduced to 21%

From 1 January 2018, the TCJA reduces the federal corporate income tax rate from 35% to 21% (although the effective differential will often be less than 14% as a result of new deduction limitations and the addition of new taxes, as discussed below).

This tax rate reduction could increase the cash on balance sheets and overall value of US target corporations and by doing so increase their outbound M&A capabilities.

Buyers of businesses that produce military or dual-use goods, certain aspects of computing hardware, or quantum technology for supply in the UK should carefully assess the risk of governmental intervention if their targets fall within the scope of the new regime.

By Jonathan D. Parker and Calum M. Warren

On 11 June 2018, the UK government will gain new powers to review transactions raising potential national security issues if the target business is active in the production of military or dual-use goods, computing hardware, or quantum technology for supply in the UK. The government may intervene if the target business’ UK turnover is as low as £1 million, or if the target business has a share of supply of goods or services within the relevant areas of at least 25%. While these powers will apply to only a limited subset of transactions and do not give rise to mandatory notification requirements, the application of the new powers will require careful scrutiny during the due diligence phase of transactions that are potentially within scope. The new thresholds are the result of the government’s ongoing review of its foreign investment review powers, which may result in a further expansion of governmental powers in the longer-term.

By Christian McDermott

In recent years, PE firms have been paying to play in the payment processing sector. From Worldpay and Nets, to Bambora and Paysafe, payment processing companies have proven to be attractive investments for European PE. In our view, a wave of regulation in the FinTech sector will unleash further growth potential, and PE firms may be well-positioned to take advantage of this.

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The number of M&A transactions in the payment services industry has increased in Europe over the past five years, and we believe the sector will remain hot. A wave of regulation has been designed to stimulate competition and encourage new market entrants. Chief among this is EU Directive (EU) 2015/2366 on payment services in the internal market (known as “PSD2” since it replaces the existing EU payment services directive). PSD2 came into effect in EU Member States in January 2018, and has been designed to help newer market entrants (including FinTech startups) compete with traditional banks. Under PSD2, banks must open up their consumer data to FinTech companies. This is designed to allow these companies to use the data to take a bigger slice of the payment processing market, which has been typically dominated by banks and more established payment processors.

In our view, PSD2 will result in the creation of innovative financial products and potential investment opportunities. It allows FinTech companies to launch financial services products that link into banks’ infrastructure. The two key business models contemplated by PSD2 are: (i) “account information service providers”, who provide consolidated account information to consumers (e.g., via a smartphone app on which users will be able to see their various balances all in one place); and (ii) “payment initiation service providers”, who facilitate online payments from consumer bank accounts (while avoiding the costs associated with maintaining the account itself).

By Richard Butterwick, Jonathan Parker, Jana Dammann and Katie Campbell

Growing economic nationalism is threatening to impact M&A across Europe, as governments and regulators take an increasing interest in “foreign” acquisitions of nationally important companies. Deal teams have previously focused on established national security review regimes, including the Committee on Foreign Investment in the US (CFIUS) and the Foreign Investment Review Board in Australia. Now legislative changes in Germany, proposed changes and heightened government interest in the UK and recent statements from the European Commission (EC) indicate a more interventionist approach to acquisitions.

Germany Increases Powers to Scrutinise and Block Sensitive Deals

Recently implemented changes to the German Foreign Trade and Payments Ordinance (FTPO) regime allow the German government to scrutinise and block direct and indirect acquisitions by non-EU bidders of German companies active in security-sensitive areas. The affected industry sectors subject to potential review are broad and include energy, water, nutrition, information technology, healthcare, financial services and insurance, transport and traffic, and software. The changes will affect German inbound deals, which we anticipate will be subject to a greater number of investigations and a stricter approach from the regulator.