M&A IN 2021 RESILIENT, AGILE AND COMING OFF MUTE

M&A IN 2021RESILIENT, AGILE AND COMING OFF MUTE

https://insights.hsf.com/ma-in-2021/p/1

01 Covid-19 – dealing with a crisis

02 M&A litigation – what we have learned

03 ESG – front and centre, with a new emphasis on social factors

04 FDI – the pandemic adds a new dimension

05 Public M&A – fortune favours the bold

06 Stressed and distressed M&A – portfolio management and opportunities

07 Merger control – no wavering of regulatory resolve

08 Navigating the energy transition to net-zero – the course is set

09 Regional perspectives

SECTION

PG/04

PG/06

PG/08

PG/10

PG/12

PG/14

PG/16

PG/18

PG/20

M&A REPORT 2021 HERBERT SMITH FREEHILLS

Our report considers the most important legal issues in M&A against this backdrop. We consider what lessons we have learnt from the impact of the pandemic that we are building into deal process and documentation, in particular around termination rights, for whatever black swan event next comes along. We look at the continued rise of FDI regimes (latterly in the UK's significant new legislation) and their deployment by governments in the pandemic. We reflect on the significance of shifts taking place in ESG, and the energy transition agenda in particular as a driver of M&A. We consider the rebound in activity in the public markets as bidders seek to take advantage of lower valuations. And we look to the distressed deals that we might expect to see in 2021, when governmental support necessarily runs out and the true impact is felt in the most damaged sectors.

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 DAVIESHEAD OF GLOBAL M&A PRACTICE

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 the UK and Europe.

But the second half of 2020 was a story of agility, resilience and opportunism in the M&A markets. Strategic focus shifted to portfolio management, and to emerging stronger into opportunities beyond lockdown. There was a recognition that 2020 has catalysed fundamental shifts in the way that the world lives, works and plays, not least the importance of technology in all of our lives. And there is a recognition that, for the best placed, M&A can be a tool of choice for effecting a rapid transformation of businesses to address that shift.

While the strong levels of activity in some key markets has not made up for the shortfall in the overall year, if continued into 2021 it would show a very different and much swifter recovery than from previous crises.

2020 showed us that even the most complex deals could be done in lockdown conditions, indeed sometimes more efficiently. We also faced challenges: a need to find other ways of connecting online at a personal level and managing training for younger team members; and the sometimes unsustainable nature of working conditions on deals from home.

Covid-19 — dealing with a crisisGlobal M&A was knocked off balance by the coronavirus outbreak but quickly adjusted to address the impact on risk allocation and execution.

M&A REPORT 2021HERBERT SMITH FREEHILLS

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.

//05

Kam Jamshidi Melbourne

Gavin WilliamsLondon

Antonia KirkbyLondon

HERBERT SMITH FREEHILLSM&A REPORT 2021

Understand the impact on the targetBuyers 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 rightsThe 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 executionThe 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.

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.

//07

Litigation has also been the tool for some sellers to exert pressure on buyers and to compel closing, with governing law and jurisdiction clauses sending some parties’ claims out of the jurisdiction.

One of the most high profile examples where a buyer sought to walk away from an agreed deal was the dispute between LVMH and Tiffany in the US. LVMH agreed to acquire Tiffany in November 2019, with a longstop

date for completion set for H2 2020. When the pandemic hit, LVMH sought to walk away from the deal, claiming that there had been a material adverse effect, and that Tiffany had breached its covenants to operate the business in the ordinary course. It also cited a request by the French government to delay the deal. Legal proceedings were commenced but ultimately a settlement was reached, with LVMH paying over US$400 million less.

Looking aheadAs 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.

//07


Raji Azzam Melbourne

Neil BlakeLondon

Maura McIntoshLondon

Mathias WittinghoferFrankfurt


Focus of ESG concerns in 2021Environmental, social and governance (ESG) issues continued to rise up the agenda for corporates, regulators and investors in 2020, with a particular focus on social ("S") factors, given the pandemic’s impact on workers and vulnerable groups.

2020 also saw employees becoming a more vocal constituency on ESG issues. Physical and virtual walk-outs and other protests were launched in response to concerns around working conditions, freedom of association, moderation of online content, diversity and equality, and climate, to name just a few.

Even while lockdowns and travel restrictions reduced emissions this year, concerns around climate change and its wider impact have continued to increase. This has led to greater investor demands for environmental and climate risk disclosure, scenario planning and portfolio analysis. It has also led to more strident views regarding the need for companies to transition to a lower carbon future in a way that is just and inclusive, advancing “S” factors as well as “E” and “G” factors.

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.

In response to a 2019 survey conducted by IHS Markit and Mergermarket:

of respondents noted that they had walked away from a deal due to a negative assessment of ESG considerations relating to a target

cited investor pressure as a major driver for taking ESG considerations into account in the M&A process

83%53%


//09

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 meet stakeholder expectations and regulatory requirements in the future and, particularly with respect to private equity or opportunistic buyers, ensure that the value of the investment is preserved and a clean and responsible exit in due course is possible.

Fulsome ESG due diligence can also contribute to 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 CrockettHong Kong

Silke GoldbergLondon

Rebecca PerlmanLondon

Timothy StuttSydney

Increasing stakeholder expectations have underscored the importance of carrying out ESG due diligence as part of the M&A process.


FDI — the pandemic adds a new dimensionGlobal 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.



//11

on new UK national

security regime

//11

Market perceptionIn April 2020, participants in a webinar hosted by Herbert Smith Freehills and Global Counsel on navigating foreign investment and merger control regimes during the Covid-19 pandemic were asked what they thought the impact of recent changes in FDI regulation would be:

FDI regulation will deter foreign investment significantly

We are more likely to see foreign acquirers agreeing to remedies to get their deal through

The UK government has also published details of its long-awaited standalone national security regime in the UK (see our "Spotlight" column). The EU Regulation on FDI screening mechanisms (fully operational since 11 October 2020) is also likely to encourage those EU Member States that do not currently have their own regime (just under half of them) to introduce one.

Whilst FDI regimes tend to be less transparent than merger control processes, FDI authorities are increasingly sharing information behind the scenes and liaising with each other during the course of reviewing

transactions. This makes it more important than ever to adopt a consistent global approach to FDI filings.

In terms of addressing potential concerns associated with foreign investment, the possibility of offering up remedies to ease the FDI process remains an important consideration: many cases that raise initial concerns are still being resolved with, for example, undertakings to ringfence sensitive information and maintain certain business activities in the jurisdiction. In such cases, effective and sensitive communication with stakeholders to explore potential options will be critical.

Marius BoeweDüsseldorf

Joseph FalconeNew York

Nanda LauShanghai

Veronica RobertsLondon

UK National Security and Investment Bill tabled in Parliament on 11 November 2020; expected to enter into force in Spring 2021

Will introduce a mandatory filing obligation for acquisitions of 15% or more of a company carrying on activities in one of 17 specified sectors in the UK – for UK and non-UK investors alike

Voluntary notifications encouraged for acquisitions of assets/IP in any sector and any qualifying acquisition outside the 17 sectors that could give rise to national security concerns – including an acquisition of “material influence” (which could sometimes be deemed to exist in relation to a shareholding even lower than 15%)

Regime could apply even where an 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 any qualifying deal completed on or after 12 November 2020

Significant sanctions for non-compliance; non-notified transactions caught by the mandatory filing obligation will be void

No materiality (e.g. turnover) thresholds


64.3%

35.7%


Public M&A – fortune favours the boldPublic M&A is back, after a temporary pause, with a vengeance.

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.

The buyers’ perspectiveExpecting 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.

//13


Mark BardellLondon

Rebecca Maslen-StannageSydney

Hubert SegainParis

The targets of their ambitionThe activity is strongest in sectors and sub-sectors seen as impacted by the global pandemic (due to lower asset values) but robust in the longer term (greater value attributed to growth and potential). Investors are being asked to back the “winners” as businesses emerge from the crisis and debt is made available for the right combinations. Common factors are a target with pandemic or other setbacks – and bidders with cash, prepared to test whether shareholders view cash as king in a market where liquidity is scarce.

In the US the biggest deals of the year have focused on tech and data such as Softbank’s US$40 billion sale of Arm to Nvidia and S&P Global’s US$44 billion acquisition of IHS Markit.

In the UK too tech and healthcare are very active sectors and more broadly there is a growing trend towards North American bidders and North American money, perhaps as US and Canadian backed businesses are emerging more quickly from the crisis. Deals include the hostile bid for G4S by Garda World backed by BC Partners, followed by a recommended bid from Allied Universal Security Services, and the £7.2 billion break up bid for RSA Insurance by Canadian insurer Intact Financial Corporation and Scandinavian insurer Tryg, as well as Caesar’s bid for William Hill and MGM’s proposed bid for Entain (formerly GVC). There have also been a

number of opportunistic approaches by private equity over the last six months, with sponsors more willing than previously to go public and “bear hug” – as seen for example in the four approaches made to the UK roadside recovery services business, the AA plc, (previously taken private by Permira and CVC and IPO’d in 2014), culminating in a recommended consortium deal between Towerbrook and Warburg Pincus.

In France, the market has been quite agitated with the attempt by Veolia to bid for Suez after Veolia acquired from Engie a 29.9% stake, valuing Suez at US$13 billion.

In Australia, the corporate targets range from soft drinks, as Coca-Cola European Partners takes the opportunity to seek to acquire all of Coca-Cola Amatil, through to aged care where Washington H. Soul Pattinson is bidding for Regis Healthcare.

Private equity bidders Pacific Equity Partners and Carlyle approached Link Administration with a bear hug, while BGH Capital was doing the same to cinema player Village Roadshow and Macquarie agricultural fund to the Vitalharvest Freehold Trust, which had seen droughts and bushfires affecting farm output and therefore variable lease rents.


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&AWhere 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.

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.

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 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.

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.



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.

//15

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

Nicolas MartinMadrid

Philippa StoneSydney

Greg MulleyLondon

Christopher Theris Paris


0% 5% 10% 15% 20% 25% 30% 35% 40%

14%

37%

27%UK

AUSTRALIA

US

DOWN IN 2020

Companies have been afforded some protection against insolvency in many jurisdictions, meaning we have seen fewer insolvencies, and so fewer companies being forced into distressed M&A so far in this crisis

Merger control – no wavering of regulatory resolve Conditional clearances and fines for procedural breaches continue to increase.

Strict enforcementDespite 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 of initial enforcement orders, gun-jumping and the provision of incomplete or incorrect information.

Procedurally we are seeing regulators work remotely and this seems to be causing some delays in the process. For example at EU level it appears that pre-notification periods (where parties discuss informally with the regulator before submitting a formal notification) are getting longer.


Regulators are increasingly willing to block transactions, and a number of transactions have had to be abandoned following adverse preliminary indications, so anticipating and planning for potential anti-trust issues is more important than ever.

//17

Focus on digital mergers/killer acquisitionsTech deals and deals involving data remain a key area of focus and are carefully scrutinised regardless of deal value. The CMA for example is increasingly creative with its approach to the share of supply test in order to take jurisdiction over such transactions, even if there is no clear UK nexus.

The European Commission seems to have 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.

Impact of BrexitFrom 1 January 2021 the EUMR and its one-stop-shop regime no longer apply in the UK. Turnover of the parties in the UK will no longer be relevant in assessing whether the EUMR thresholds are met and the Commission will have no jurisdiction to take into account the effects of a transaction it reviews on any UK market. The EU and UK merger control regimes will instead run in parallel and transactions may be subject to both regimes.

//17


Kyriakos FountoukakosBrussels

Marcel NuysDüsseldorf

Stephen Wisking London


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.


Rebecca MajorParis

Lorenzo ParolaMilan

Lewis McDonaldLondon

Ignacio PazMadrid

//19

Oil & gas M&A deals proved difficult to close in 2020, as dealmakers struggled to agree on asset valuations due to the Covid-induced lower oil price, leading many deals to be abandoned or put on hold (for example Energean/Neptune in the UK North Sea). Creativity came to the fore, with Chevron acquiring Noble in a US$13 billion share for share deal and Chrysaor reversing into Premier Oil’s London listing. Distress drove Chesapeake and numerous other higher-cost US shale producers to the wall but intense cash conservation saved many of the companies outside of North America, leaving the oil service companies to take the brunt. A wave of consolidation is still expected to break in the services sector, and the broader upstream market, perhaps next year. The national oil companies were largely absent from auction processes in 2020, but are likely to return in 2021 once stability and opportunism return to the market.

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 wind acquisitions being made by many of the majors in 2020 (including bp, Total and Eni). The oil majors are now competing with traditional renewable energy companies and funds for assets, driving prices up and returns down. Early movers such as Orsted and Equinor are reaping the benefits. European utilities are rapidly unbundling and decarbonising, leading to an even greater focus on wind and solar and on enhancing the customer experience: Origin Energy’s strategic partnership with Octopus of the UK is an indicator of things to come.

In 2021, we can expect to see more of the same, with the major US oil companies (particularly Chevron and Exxon) likely to also enter the fray in some way, with their recently clarified focus on lowest cost, lowest carbon. 2021 is looking likely to be a block-buster year for energy sector M&A.


Regional perspectivesOur colleagues from our offices around the world describe their experiences of M&A in 2020, and their outlook for 2021.


//21


A view from AfricaCovid-19 has halted the African momentum of recent years.

ActivityGrowth 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.

SectorsThe 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 other “green” projects. This is very much reflected in the divestment and investment policies of our clients in Africa.

Africa is one of the world's growth markets for smaller, start-up businesses that are able to nimbly plug a gap in the market. This trend has continued to increase, and its impact during the last 12 months has been even more important, as various countries across Africa have been impacted by Covid restrictions which in turn have changed the way in which individuals and businesses are able to operate.

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 trendsThe increased focus on ESG by investors is challenging in 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 enhanced risks of corruption in some African countries, 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).

Outlook for 2021As a result of Covid, some developing countries have announced that they will be cutting their foreign aid budgets for 2021 which will affect some African countries. This is slightly counterbalanced by the increased spending on overseas Covid-relief aid that has taken place this year.

Overall, despite the decline in the number of M&A transactions compared to last year, we are starting to see more M&A in Africa, as cash-rich companies look to leverage opportunities, while other companies look to improve their balance sheets.

With the collapse of FDI, the confidence of local investors in their own countries’ ability to recover has been a major boon for African countries.

Monde CotoJohannesburg

Rudolph du PlessisJohannesburg

Ross LomaxJohannesburg

Rebecca MajorParis


A view from AustraliaDespite 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 We have not seen many very large transactions (that is, over A$5 billion in value), particularly in public market transactions, but there has been a steady flow of M&A activity, weighted towards the second half of the year. Announced activity leading into 2020 was subdued. When the pandemic became apparent in February and March, this trend became a decline in activity. At the time, there were a number of announced transactions which were pulled or re-negotiated.

Legal issuesThe pandemic led to some legal arguments about whether sellers could hold their purchasers to their pre-pandemic transactions. The argument centred on the operation of material adverse change clauses and the seller’s requirement to operate in the ordinary course of business. None of these resulted in final court decisions, so we do not have any guidance from the courts here as to what the standard clauses require in the context of a pandemic. But it did lead to more thought being put into the drafting of agreements afterwards to clarify how transactions were to 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

important assets. The thresholds for scrutiny were dropped to zero, which meant that many transactions, even if they had been agreed, would be subject to FIRB approval. That has no doubt affected the market to some degree.

Outlook for 2021M&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 the crazy days of 2007. This has seen a number of public market deals and proposals, but most deals in which we have been involved have been privately negotiated M&A, often a listed company selling a business division that is no longer core. We expect this type of activity to continue.

ESG factors have influenced activity. This has been most notable in the renewable energy space. Typically these transactions are relatively small, but steady in number. The drivers for these transactions will only get stronger, which will result in more M&A activity in that sector.

Therefore, we are optimistic that 2021 will be a good year for M&A in Australia.

Natalie Bryce Brisbane

Malika ChandrasegaranMelbourne

Rodd Levy Melbourne

//23

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 the crazy days of 2007.


A view from ChinaChina-related M&A has seen a recovery after a Covid-19 slump.

ActivityWhile deal activity declined sharply in the first quarter of 2020 as Covid-19 hit, Greater China logged the strongest recovery across the APAC region in the second half of 2020. With 4,265 deals announced in H2 worth US$294 billion, Greater China accounted for more than half of all APAC deal activity by volume and over 60% by value in 2020, according to Refinitiv.

Drivers for M&AKey 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 China and EU investment agreement reached on 30 December 2020, for now this will be another driver to push for investments into China from Europe and vice versa.

Domestic deals and restructurings have also been driving M&A activity, as China focuses on stimulating its domestic economy and upgrading its industries. Mega deals emerged, such as the restructurings of Petro China and Baoshang Bank.

SectorsAmongst 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 Cred Holding. The energy sector has also been one of the most active, with China's natural gas market opening to greater competition and expansion.

Hong KongIn Hong Kong, 2020 has been marked by privatisations, timed to take advantage of depressed market values. Examples include long-standing listed companies such as Wheelock and Company and Li & Fung, listed in Hong Kong for 57 years and 28 years respectively. State-owned enterprises have also taken the opportunity to delist in order to consolidate and strengthen core operations on the Mainland.

Hong Kong-focused M&A activity also saw levels rebound at the end of the year as the market adjusted to the challenges, with cash-rich corporates taking advantage of market opportunities due to Covid to make strategic acquisitions in Hong Kong targets. We have also seen a number of Hong Kong-listed corporates pursuing strategic expansion opportunities as China's economy rebounds.

Gavin GuoShanghai (Kewei)

Nanda LauShanghai

Tommy TongHong Kong

Key M&A drivers include the Chinese government’s continuing efforts to attract foreign investment and push for domestic restructurings.


A view from FranceA 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.

ActivityThe pandemic resulted in a significant drop in deal volume in France in 2020 (with a 35% reduction compared to 2019) and a number of transactions being suspended. For example Covea aborted its bid for Partner Re and instead agreed on a partnership (which is also a good example of the growing trend of joint venture and alliance transactions this year as a substitute to traditional M&A).

In spite of this, deal value has increased nearly 90% year 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.

SectorsWhile sectors such as TMT, health and energy (particularly renewables) saw strong M&A activity in 2020, most sectors were negatively affected by the global pandemic, especially (and unsurprisingly) transportation, aeronautics, tourism, leisure and hotels.

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.

Legal issuesAs in other jurisdictions, 2020 saw a rise in the French government's scrutiny of foreign investments. The threshold triggering the French FDI regime was lowered temporarily (until 31 December 2021) from 25% to 10% for all non-EEA investments in French listed companies. In addition, we saw the first ever refusal to grant an FDI clearance by the 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 the main French public M&A highlights of 2020.

Outlook for 2021Despite 2020 being a rather gloomy year for French M&A, there is some hope for better M&A activity despite a second lockdown, as the business world learns to live with the effects of the pandemic. And it seems likely that increased volumes of M&A through distressed deals will begin to materialise in the coming months.

//25

As in other jurisdictions, 2020 saw a rise in the French government's scrutiny of foreign investments.

Frédéric BouvetParis

Christopher TherisParis

Hubert SegainParis

Edouard ThomasParis


A view from GermanyM&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!Not surprisingly, the German M&A market was affected by the global events that are still shaking the world, starting most notably with the global Covid-19 pandemic in spring and continuing until after the US election in autumn (and one must not forget Brexit). However, after a few months in which the market assessed, and adapted to, the new situation, M&A professionals switched to deal mode again and market activity significantly recovered in the second half of the year. So far, we have not seen a significant rise in stressed or distressed transactions that many feared would be the inevitable consequence of the struggling economy. Restrictions due to the pandemic, e.g. limited travel options, appear to have largely been compensated for by technology, such as the frequent use of videoconferencing or virtual deal rooms.

SectorsIndustry 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.

Alternative deal structuresNot only the pandemic but operational needs, such as digitalisation and other technology-driven disruptions, mean that businesses may require fast access to the required technologies. In that situation, co-operations in joint ventures, strategic alliances or the acquisition of minority stakes can be attractive alternatives to traditional M&A acquisitions.

Legal issuesWe saw the continuation of a number of trends that had already had an impact on M&A in 2019. Recent (and coming) changes to the FDI regime are likely to lead to an increase in political intervention, a trend that can be seen across Europe with the EU Regulation on FDI screening 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” business while at the same time investing in the renewables space. M&A agreements now frequently account for any consequences of the pandemic, through the return of material adverse change clauses or refined force majeure provisions.

Quenie HubertFrankfurt

Christoph NawrothDüsseldorf

Nico AbelFrankfurt

Soenke BeckerDüsseldorf

Where companies need to innovate fast, a joint venture or strategic alliance can provide a simple route to invest in technology.


//27

A view from IndiaIndia 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 storyUnquestionably, the big M&A story for 2020 was Mukesh Ambani’s Reliance – investors flocked to put money into Reliance, and in particular Reliance Jio (the digital arm) and Reliance Retail (the retail arm). Jio raised over US$20 billion in total through 13 deals with an all-star cast of strategic investors, led by Facebook and Google. Financial buyers including KKR and Silver Lake also had a piece of the action. Retail raised over US$6 billion through 9 investments and replicated the financial investors in Jio.

The combined investment in Jio and Retail of some US$26 billion amounted to over 60% of the total inbound M&A value for 2020.

The other big story of India M&A in 2020 is the continued rise of financial investors, with over US$22 billion invested in 2020.

The outbound storyIndia remains an inbound and domestic M&A story, with outbound M&A dwindling to US$1.7 billion (through 137 deals) down from US$2.8 billion (through 151 deals) in 2019. Of the total M&A deal value for 2020, outbound represented just 2%.

Geopolitical tensionsThe trade war between the US and China and the border issues between India and China have both played out in the 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 to decrease, mainly due to geopolitical factors. India 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 from China at a six-year low. The impact is expected to be 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

the last two years, Chinese investors have made over US$6 billion worth of investments into the Indian market, especially into the growing start-up ecosystem.

Domestic marketWith all eyes on the international investment in Reliance Jio and Retail, it was easy to miss some important domestic deals. Reliance was the headline story here as well, with Retail's purchase of Future Group’s retail and related empire 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 worldIndia has been hit hard by the Covid pandemic, but the sheer size of its domestic market will continue to attract international investment. India is expected to overtake China before long to become the most populous country in the world. The online world, including in India, has already seen significant deal activity, led by the telecoms, fintech and edtech sectors. Telecoms and tech in particular contributed some US$14.6 billion of deal value in 2020.

The billion $ unicornsIndia is now home to over 20 unicorn companies and ranks fourth in the global list of host countries. These unicorns continue to play a significant role in the India M&A chapter, attracting money from an array of financial and strategic investors with SoftBank out in front by some margin, having invested over US$10 billion in total over the last three years.


Shruthi AnandLondon

Alan MontgomeryLondon

Roddy MartinLondon

Chris ParsonsLondon

A view from ItalyThe 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.

ActivityItaly was the first European country where the pandemic spread, and the first country outside Asia to implement social distancing and lockdown measures. Despite the huge disruption caused by Covid-19, the value of deals was up over 70% year on year, although deal volume was 21% lower compared to 2019.

Quarterly M&A volume steadily declined in 2020 but rebounded in the last weeks of 2020 and returned to volumes seen in recent years. Despite this fall in volume, deal value remained strong, due to the large number of €1 billion+ deals, the largest number annually since 2007.

Inbound M&A deal volume was also down nearly 30% in 2020. Despite this, deal value is up over 180%, again due to the number of deals over €1 billion.

Sectors 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.

The number of transactions decreased in all sectors, due to the months of confinement and the reduction in disposable income resulting from the economic effects of the pandemic. The most affected sectors include industrials & chemicals, media & entertainment and consumer. However, one deal of note in the consumer sector was the purchase of a 30% stake in Italian supermarket chain Esselunga by private investors Marina Caprotti and 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 due to two deals over €3 billion.

Some sectors have proved to be more resilient during the pandemic, including some segments of the energy, technology, life sciences and food & beverage sectors.

State interventionThe Italian government reacted to the spread of the crisis with a package of measures to support businesses. These included deferrals for the payment of taxes, recourse to the 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 Deposits and Loans Fund (Cassa Depositi e Prestiti), for investment by the Italian Ministry of Economy and Finance in the equity of large national companies.

In order to protect Italian strategic assets against speculative transactions by foreign investors, the Italian government significantly expanded the scope of application of the Golden Power Law in March 2020, by introducing a number of additional, broadly defined sectors deemed to be of strategic importance for the purposes of the FDI screening. These include critical infrastructure, such as water and health, energy, transport and communication in general (not just grid/network infrastructure), critical technologies and dual-use items (including artificial intelligence, robotics and biotech), supply of critical inputs, agri-food business, steel business, access to sensitive information (including personal data), media, financial, credit and insurance. With two Decrees issued by the President of the Council of Ministers, the scope of the FDI regime has been limited to certain strategic assets within the sectors mentioned above. In addition, the government extended FDI notification duties to EU investors acquiring a controlling interest in companies owning strategic assets. until June 2021.

Outlook for 2021Although few mega deals are expected in the short term, the market is showing signs of recovery. Most of the sectors that were negatively affected by the pandemic, including retail and consumer, may see a slow but steady restart. Significant investment opportunities will be offered by the infrastructure sector, as the Italian government is considering large transport infrastructure projects. The construction sector is also in the consolidation phase and several smart city projects are expected to be launched in the next two years.

Giulia MusmeciMilan

Lorenzo ParolaMilan

Although the pandemic has already forced companies in sectors impacted by the pandemic into insolvency and restructuring, an increase in distressed M&A, restructuring activity and corporate defaults is expected in the coming months as government support mechanisms unwind.


//29

A view from JapanAs was the case globally, the Covid-19 pandemic disrupted M&A in Japan in 2020. However, unlike some of their competitors, many cash-rich Japanese companies could afford to adopt a “wait-and-see” attitude as the economy reeled from repeated lockdowns.

ActivityAccording to Refinitiv, the total transaction value of mergers and acquisitions by Japanese companies dropped by nearly 17% in 2020 to 18 trillion yen, with deal activity in Europe being particularly hard hit.

Whilst Japanese corporates were hesitant buyers – a sharp break with an acquisitive trend which had lasted more than ten years – we did see them move toward disposing of non-core assets, with the SoftBank group emblematically leading the pack.

In many instances, these sales were low-profile, bilateral deals, with companies’ minority stakes being acquired by former joint-venture partners or being sold back to the target company itself. In other instances, companies chose to restructure larger investments with partners in share-for-share deals.

However, there appeared to be little appetite for opportunistic, distressed M&A in Corporate Japan. This is not particularly surprising given the generally conservative nature of Japanese firms and the ability of their balance sheets to weather this storm.

Through much of 2020, large Japanese players were generally more focused on rethinking their supply chains than making new acquisitions. Having said that, we saw sustained activity at the high- and low-value ends of the spectrum. It is likely that the high-value deals were comprised of stalled or slower-moving transactions, which may have been approved before the pandemic took hold or which were perceived as strategically “necessary” for businesses.

SectorsLarge deals appeared to be particularly prevalent in the technology and telecommunications sectors. For instance a number of deals in the semi-conductor sector exceeded 1 trillion yen, and Nippon Telegraph and Telephone made a tender offer to acquire all shares that it did not already hold in NTT Docomo, exceeding US$40.3 billion. According to Refinitiv, Japanese companies announced 18 acquisitions over US$1 billion. Smaller deals also featured regularly throughout 2020, albeit some of these were “safe” minority investments into listed companies.

As an important subplot to this story, private equity firms took advantage of the opportunities presented by revised valuations of domestic and non-core businesses, acquiring targets such as Takeda’s over-the-counter business.

Outlook for 2021Despite the depressing effects of a year which many would prefer to forget, with highly-effective vaccines now becoming commercially available, plenty of "dry powder" in Corporate Japan, an unchanged long-term trend of needing to look outwards for growth, and Japan set to take to the world stage with the Olympics in 2021, we are optimistic that M&A activity by Corporate Japan will experience a renewed vigour in the coming months.

According to Refinitiv, the value of M&A transactions by Japanese companies plunged 17% year-on-year to 18 trillion yen, with deal activity into Europe being particularly hard-hit. The second half of 2020 appears though to show a rebound in M&A by Japanese companies, with value only down 3% compared to the second half of 2019.


Joseph FisherTokyo

Graeme PrestonTokyo

A view from the Middle EastConsolidation has remained a feature of the M&A landscape in the Middle East given the focus on liquidity in the first half of 2020.

ActivityPre-pandemic M&A activity in the Middle East was largely driven by business consolidations, particularly in the banking and finance and energy sectors. Due to the pandemic, the Middle East saw an overall decline in M&A activity during the course of 2020 with a 50% decline in deal values compared to the same period in 2019.

SectorsDespite the impact of the pandemic, there have still been a number of high value deals, particularly in the energy sector. This includes Abu Dhabi National Energy Company’s merger with Abu Dhabi Power Corporation to create a company with combined assets estimated at AED 200 billion (approximately US$54 billion) and Abu Dhabi National Oil Company’s US$10.1 billion sale of its pipeline assets to a consortium of global investors. Elsewhere in the region, Kuwait Finance House’s US$8.8 billion acquisition of Al Ahli Bank in Bahrain was a significant transaction in the financial services sector, whilst Oman’s biggest deal so far was in the industrial sector with the US$1 billion acquisition of Jindal Shadeed Iron Steel LLC by Templar Investments Limited.

We have seen a recent uptick in activity and interest in certain industries that are being specifically targeted by initiatives launched in 2020 by Middle Eastern countries, such as the pharmaceutical sector. The percentage of deals in this sector in the Middle East and Africa increased to 10.9% in H1 2020 and such government initiatives can be seen as the catalyst for growth. The UAE, for example, is heavily dependent on imports in critical industries such as health care, pharmaceuticals, energy, and food production and in July 2020 the Abu Dhabi government launched its “Basic Industries Project” to attract investment in four industrial sectors, being food production, medical supplies, power generation and important materials such as iron, aluminium and cement industries. We are witnessing a number of sovereign wealth funds and family offices pursue targets in these sectors in support of the UAE government's localisation efforts and we expect this trend to continue into 2021.

Legal issuesMiddle Eastern countries are also looking at other ways to stimulate their economies and increase foreign direct investment. The UAE government announced in November 2020 that the UAE Commercial Companies Law will be amended to relax the foreign ownership restrictions. At present, the law only permits 49% of the shares in a company incorporated “onshore” in the UAE to be owned by foreign investors and this restriction is to be abolished for the majority of commercial activities. The UAE’s Foreign Direct Investment Law issued in 2018 is also set to be repealed on account of the profound changes to foreign ownership restrictions. The amendments and supporting implementation regulations are expected to take effect during the first half of 2021 and we anticipate that this development will lead to an increase in demand for foreign investment into the UAE, corporate reorganisations, liquidity in the UAE capital markets and public M&A activity.

Shazi AskarpourDubai

Chris WaltersDubai

Due to the pandemic, the Middle East has seen an overall decline in M&A activity during the course of 2020 with the first half of 2020 seeing a 58% decline in deal values and a 26% decline in the volume of deals compared to the same period in 2019.


A view from RussiaA solid pipeline of major M&A transactions had been expected in Russia in 2020 but didn’t materialise.

ActivityInstead, in line with other major economies, the Russian economy sharply contracted in 2020, driven largely by the impact of the global Covid-19 pandemic, the drop in the price of oil followed by a cut of production deal reached with OPEC in May and uncertainty around the outcome of the US presidential election – all of which led to a decline in M&A activity. According to Refinitiv, M&A deal volume was down 21% compared to 2019.

SectorsDespite the overall decline in M&A activity, the extractive industries sector was a strong performer and there were a number of standout deals in the sector before the impact of the Covid-19 pandemic set in. Notable deals included the US$1.8 billion share buy-back of En+ shares from VTB and the US$5.1 billion sale of shares by Gazprom to two undisclosed buyers.

At the same time, we have seen the diversification of M&A activity across a broader range of sectors outside the traditional extractive industries, including construction, communications and media and innovation and technology.

In the technology and communications space, standout deals included the acquisition by Rostelecom of a majority stake in Tele2 Russia Telecom (a Russia-based company engaged in mobile telecommunications services) from VTB and other shareholders for US$2 billion, the acquisition by Ivan Eremin of Business News Media (the publisher of leading Russian business daily newspaper, Vedemosti) from Demyan Kudryavtsev and Sberbank’s US$1 billion investment in building its digital ecosystem (including the joint venture with Mail.ru Group and the acquisitions of Rambler and mapping app 2GIS).

We expect M&A activity in this sector to continue given the trend towards digitalisation of the economy and the apparent appetite of major Russian corporates (e.g. Sberbank and Mail.ru) to invest in innovation.

Sberbank also boosted M&A activity in the construction sector in the third quarter of 2020 through acquiring control over the Eurocement Group (the biggest Russian supplier of cement, ready-mix concrete and aggregates) by converting its debt into equity. We expect that Sberbank and other large Russian banks will continue the trend of acquiring businesses through conversion of their debt, as well as a more general increase in distressed M&A activity, as the businesses continue to feel the effects of the Covid-19 pandemic.

OutlookIn terms of outlook, given that the fundamentals of the Russian M&A market are relatively robust (as evidenced by the strong deal activity before the effects of the Covid-19 pandemic were felt), once the Russian and global economy have better adjusted to the effects of the pandemic, we expect to see a return to more normal levels of M&A activity in Russia.

Olga AkhmedshinaMoscow

Alexei RoudiakMoscow

Anna SokolovaMoscow

We expect that Sberbank and other large Russian banks will continue the trend of acquiring businesses through conversion of their debt, as well as a more general increase in distressed M&A activity, as the businesses continue to feel the effects of the Covid-19 pandemic.


//31

A view from Southeast AsiaIn Southeast Asia, as in the rest of the world, total deal value and volume experienced a decline as a result of the Covid-19 pandemic in 2020, but the decline was not as severe as in other regions globally.

Singapore continues to lead in the region, with a 56% market share by value of deals in the Southeast Asia region, totalling US$46.4 billion of deals, followed by Thailand (US$14.7 billion), Indonesia (US$7.9 billion) and Malaysia (US$5.6 billion).

SectorsIn Singapore, REITs (real estate investment trusts) were a key area of focus in terms of M&A activity as a source of capital for outbound real estate investment. The trend of REIT consolidation continued this year, with the US$8 billion merger of CapitaLand Mall Trust and CapitaLand Commercial Trust, a combination resulting in the third largest REIT in Asia-Pacific. The real estate sector more generally was the top sector by deal value (US$18.5 billion) and so, even after taking the size of the CapitaLand transaction into account, the real estate sector remains one of the key areas of M&A activity.

Retail was also one of the top sectors in the region by market value (US$12 billion). However, this is mostly a result of one of the largest transactions of the year in Southeast Asia, being CP Group’s US$10.6 billion acquisition of Tesco’s Asian operations in Thailand and Malaysia.

Industrials was the largest sector in the region by deal volume, with 282 deals in Southeast Asia, and the materials sector (including mining) was a key sector by deal value (US$15.4 billion).

Drivers for M&AIn terms of trends, private equity funds and venture capital funds continue to be a key source of investment fuelling M&A activity in a number of sectors, including real estate and tech. PE funds have also started to expand into new sectors, including into Fintech and digital infrastructure, whilst certain traditional sectors of interest such as healthcare remain of interest.

Fintech and financial services remain key areas of focus in many parts of Southeast Asia, with traditional banks and non-financial services players seeking to enter the market. Governments around the region have sought to respond to the significant changes in the financial services sector posed by digital banking and payment platforms. In December 2020 the Monetary Authority of Singapore awarded digital full bank licenses to a Grab-Singtel consortium and to Sea. In addition, digital wholesale bank licences were awarded to Ant Financial and to a consortium comprising Greenland Financial Holdings, Linklogis Hong Kong and Beijing Equity Investment Fund Management.

OutlookOverall, Southeast Asia is an attractive investment environment, with young and increasingly middle class populations and strong economic growth. Whilst M&A deal value and volume may take some time to return to pre-pandemic levels, the continued focus across Southeast Asia on high growth sectors such as digital infrastructure, renewable energy and healthcare – sectors which are more pertinent now than ever – as well as strong traditional sectors such as oil & gas, industrials and consumer, should ensure that Southeast Asia continues to attract the investment required to fuel top tier deals in the region.

Glynn CooperKuala Lumpur

Vik TangJakarta

Jamie McLarenSingapore

Nicola YeomansSingapore

Mark RobinsonSingapore

Overall, Southeast Asia is an attractive investment environment, with young and increasingly middle class populations and strong economic growth.


//33

A view from SpainAs in most countries, M&A activity in Spain has been severely impacted by the Covid-19 pandemic and its wide-ranging effects.

According to the latest data available, while the total value of M&A deals during 2020 was higher than in 2019, the number of transactions fell by more than 33% in comparison with the previous year.

In April, May and the beginning of June, the M&A market was practically at a standstill. However, throughout and after the summer we observed greater transactional activity, which was maintained through to the end of 2020. The upturn has been a result, on the one hand, of the resumption of some transactions suspended due to Covid-19 once greater visibility was available as to what impact the pandemic would have on different sectors and companies. On the other hand, it has also been a result of new sale processes launched in sectors and companies that have proved to be resilient against the impact of Covid-19.

Drivers for M&AIn most cases, we encountered large international funds with high levels of liquidity generated from fundraising processes completed in previous years, which continue to appreciate the value and potential of growth in certain Spanish companies and in specific sectors.

As for domestic transactional activity, this fell considerably compared to previous years, although some significant transactions were nevertheless completed by local investors. There are a number of reasons for the drop in the volume and size of domestic deals, primarily the fact that local players’ investment teams had to devote extraordinary resources to the management of their investments and portfolio companies to tackle the impact of Covid-19. Additionally, investments by local private equity funds also decreased in 2020, due to those investors adopting a more cautious approach given that the territorial scope of their investment is limited to Spain or the Iberian Peninsula where the impact of the pandemic has been very significant in macroeconomic terms.

From the perspective of the most attractive sectors, the investor focus has been directed at certain specific sectors such as energy and infrastructure, e-commerce, TMT or online education.

OutlookLooking at 2021, it is still difficult to foresee the level of M&A activity given the degree of uncertainty that still remains in the market. We predict, however, that foreign investors will still be focusing on the Spanish market and, particularly, on the specific sectors mentioned above. We also expect that local players (particularly private equity houses) will be more active in 2021 on both the sell-side and buy-side.

Alberto FrasquetMadrid

Henar GonzálezMadrid

Glynn CooperKuala Lumpur

Vik TangJakarta

Jamie McLarenSingapore

Nicola YeomansSingapore

Mark RobinsonSingapore

Both value and volume of investments in 2020 were derived fundamentally from transactions led by foreign investors.


A view from the UKM&A activity in the UK dropped off sharply when the Covid-19 pandemic first hit but, in the second half of the year, activity levels rebounded.

Deal activityM&A activity was impacted at the outset of the crisis due to the uncertainty caused by the pandemic, the need for many companies to manage their liquidity and focus on the day to day running of their business, and the practical difficulties in doing deals.

However, as markets settled and people adapted to the new normal, activity picked up, perhaps more rapidly than anticipated.

The obstacles to doing deals that arose when the pandemic first hit, such as the inability to hold face-to-face meetings and the difficulties in collating a data room, were worked around. Whilst there are undoubtedly still some challenges, they are by no means insurmountable.

As well as the revival of deals that were paused when the pandemic hit, we have seen new transactions explored and executed, including some transformational and mega deals. As we anticipated at the outset of the crisis, private equity buyers have been quick to return to the markets, and we have seen them be more willing to go public on public M&A, and even engage in hostile public M&A.

SectorsTech, consumer products & services and financials were leading target sectors, representing nearly 50% of deal volume. Perhaps unsurprisingly in the current environment, the tech sector appears to be the most resilient. The pandemic has also acted as an accelerant for some trends that were already in train, such as increased interest in warehousing space and a move away from retail.

Legal issuesThe M&A market has already largely factored the impact of Brexit into deals and the end of the transitional period for the UK’s exit from the EU is unlikely to have a significant impact on M&A but the trade deal will help remove some of the uncertainty for the UK in the short and medium term. Following Brexit, the UK is no longer part of the EU’s “one-stop-shop” for merger clearance, and the CMA will assess transactions in parallel with the European Commission – it expects to see an increase of 40 to 50% in the number of cases it will review.

When the National Security and Investment Bill becomes an Act, it may cause overseas investors in particular to pause when considering investment in the UK, but we expect that, as the regime develops and M&A practitioners and parties get greater clarity around how it operates in practice, it will rapidly become just another aspect of a transaction to be factored into the timeline and conditionality, and we expect remedies to be offered, and accepted, to address any national security concerns in many cases.

Outlook for 2021As we look forward to 2021, we may see companies worst hit by the crisis look to distressed M&A when government support packages are withdrawn, and other companies refocus on their main businesses and dispose of non-core assets, but we also expect “business as usual” transactions, particularly as a vaccine is rolled out.

Whilst parties initially struggled doing deals remotely, parties and their advisers quickly adapted to the new way of executing a transaction, with the bidders on the £7.2 billion bid for RSA noting that the deal was 100 per cent virtual.

Alex KayLondon

Caroline RaeLondon

CMA expects case reviews to increase following Brexit


//35

A view from the USA tumultuous year globally, M&A lows and highs were marked in the US, but despite such extreme fluxes the 2021 outlook is cautiously optimistic.

Deal activityUS M&A activity in 2020 was a tale of two halves.

The first half of 2020 saw the decline in activity which started at the end of 2019 accelerate with the Q1 spread of the virus to the US leaving the country with one of the highest infection rates in the world (4.25% of the world’s population but approaching 20% of recorded Covid-19 deaths) and, given its primarily consumer spending led economy, consequent enormous economic impacts with Q2 lockdowns and restrictions. The unemployment rate hit nearly 15%, reaching levels not seen since the 1930s, and real GDP fell compared to previous years.

However, following the 2020 H1 decline in activity (down 67% in value v 2019), the US M&A market bounced back markedly in the second half of the year with more than 170% increase in value between Q1 and Q2 and a year on year volume increase of nearly 6%. This was driven in part by the easing of lockdowns and restrictions in the economy generally and also likely by the release of on-hold deals with the increasing confidence of deal-makers.

SectorsTMT was the most active sector for M&A activity in the US in 2020, accounting for more than a third by value of all sectors (and also up by more than a third in value from 2019). Pharma deals saw a decline by value of nearly 65% from 2020 to 2019, largely due to the sharp decline in mega deals (over US$10 billion).

Deal playersWhilst US strategic investors with strong balance sheets took the opportunity to acquire at more reasonable valuations compared to 2019, activity continued to be driven by private equity, together with increased SPAC actions (special purpose acquisition companies listed on public exchanges to raise money for M&A). Funds raised by SPACs in 2020 were more than five times the amount raised in 2019 (itself a record year and the highest for a decade).

Cross-border deal flowUS deal activity continued to take the largest share of global M&A (38% by value). Whilst inbound cross border activity was steady year on year (up 4% from 2019), outbound was up 50% from 2019. This appears to reflect as much the relatively greater economic strength of US investors in disrupted times as the increased difficulty of navigating the US CFIUS regime for non-US investors.

2021 OutlookThe imminence of Covid-19 vaccines from several US providers, greater political stability following the election of Biden (with a more evenly balanced US Senate to counter perhaps more radical measures) and non-health-related economic fundamentals, lead many to expect a more positive 2021 for the US M&A market.

James RobinsonNew York

Though not without challenges, the anticipated return to political and health “normality” is expected to also deliver a return to economic growth and M&A activity in 2021.


For a full list of our global offices visit HERBERTSMITHFREEHILLS.COM

3978O - M+A Report 2021_draft 17/2101212021© Herbert Smith Freehills

M&A IN 2021 RESILIENT, AGILE AND COMING OFF MUTE

Documents

Transcript of M&A IN 2021 RESILIENT, AGILE AND COMING OFF MUTE