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Commercial Awareness: The Fortnightly Round-Up (w/b 13th March)

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About The Author

Jack Turner (Commercial Awareness Guru)

Jack is a law graduate from the University of Manchester and is currently working for as an analyst for a 'Big 4' accountancy firm. He has an interest in current affairs, business and commercial law, while also being a talented and passionate musician.

This article is part of the 'Commercial Awareness Fortnightly Round-Up' series, edited by Jack Turner.

Every two weeks, Keep Calm Talk Law will bring you an overview of main commercial stories that have occurred. Detailing the main players involved, the interesting and salient facts, and the main points of discussion that arise from each story, this round-up is intended to be vital tool for developing that commercial knowledge and awareness demanded by the country’s top law firms.

Other articles from this series are listed at the end of this article.

Spring Budget

Philip Hammond delivered his first budget as Chancellor of the Exchequer and the first since the Brexit referendum result. The chancellor unveiled 28 new policy measures – considerably less than the 77 George Osborne announced last year – and, in typical Commons style, seemed to spend more time taking shots at the Labour opposition than discussing the challenges the UK economy faces regarding Brexit.

A summary of the key points of the budget can be found on the BBC website – note that the government has since u-turned on its proposed measures to increase national insurance contributions for the self-employed. Highlighted below are the measures that are most likely to impact commercial law firms.

Funding to Support Research and Innovation

Philip Hammond announced that £270m will be made available to fund the development of “disruptive technologies” in the UK such as Artificial Intelligence and robotic systems, batteries to power the “next generation” of electric vehicles, and new medicine manufacturing technologies. This funding is an acknowledgement of the UK’s talent in the tech industry and the positive effect that such technologies can have on the economy.

Research and development in these areas will create opportunities for law firms specialising in intellectual property as companies and individuals will require assistance in protecting their products and innovations. Increased development of disruptive technologies will also lead to greater opportunity for venture capital investment. Venture capital funds are investment funds who typically invest in start-ups and small-to medium-sized enterprises with strong growth potential in return for a stake in the company. These funds take particular interest in companies focused on disruptive technologies because of their capacity for explosive growth and ability to transform and dominate an industry. Greater investment by venture capital funds can provide opportunities for law firms to advise funds on making investments or assist tech companies throughout the fundraising process.

Development of disruptive technologies may also lead to increased M&A activity. M&A is increasingly being used as a tool for companies to capture disruptive technologies – $291bn was spent globally on disruptive innovation related deals in 2016 across multiple sectors. The UK received the most tech related M&A investments in Europe in 2016. The extra funding provided by the government will help UK tech start-ups attract further investment and maintain the UK’s reputation for strength in the tech industry. UK law firms will be well placed to benefit from any uptick in M&A activity on the back of increased development of disruptive technologies.

Law firms with a strong tech focus include Arnold & Porter, Bird & Bird, Bristows, Cooley, Taylor Wessing, Covington & Burling, and Olswang (now CMS Cameron McKenna Nabarro Olswang)

Review of North Sea Tax Rules

An expert panel will be assembled to examine ways of making North Sea oil and gas assets easier to buy and sell. One of the proposed measures is to review the tax relief offered to producers when oil and gas fields cease production.

When oil and gas fields end production or producers want to discontinue production, facilities need to be dismantled – or “decommissioned”. The government assumes part of the cost of decommissioning by paying back some of the tax that oil and gas companies have paid on the assets they have produced. In recent years, big players such as BP and Shell have begun decommissioning North Sea oil fields as oil reserves are depleting and their profits are being hit by low oil prices. There are smaller companies who have the ability to extract the last few drops of oil from these fields who would be willing to buy them, however may be discouraged from doing so because once it comes to decommissioning these fields (something which is inevitable in the life-cycle of an oil field) they would bear much greater costs. This is because these smaller companies are newer and have paid less tax in their existence than their larger, more established competitors. Therefore they receive a much smaller tax rebate from the government upon decommissioning.

Reviewing the way these tax breaks work will encourage smaller companies to buy late-life oil fields and aid the recovery of remaining oil and gas reserves in the North Sea. Increased investment in the North Sea will lead to opportunities for UK law firms. For example, Pinsent Masons advised North Sea operator, Ithaca Energy, on the $1.24bn sale of its assets to Delek Group in February 2017. Similarly, Clifford Chance and Dechert are leading on Shell’s $3.8bn sale of its North Sea assets to Chrysaor Holdings, with White & Case, Watson Farley & Williams, and Bond Dickson also landing roles in the deal. This deal is expected to close in the second half of this year. Shell have agreed to cover around $1bn worth of future decommissioning costs.

Law firms with strength in oil and gas include Allen & Overy, Ashurst, CMS Cameron McKenna, Clifford Chance, Dentons, Herbert Smith Freehills, Norton Rose Fulbright, White & Case, and Vinson & Elkins.

PSA buys Opel from General Motors

PSA, the owner of Peugeot, announced a €2.2bn agreement to buy Opel (branded as Vauxhall in Britain) from US carmaker, General Motors (GM). This deal will make PSA the second-largest car manufacturer in Europe after Volkswagen. GM will receive €1.32bn for the Opel manufacturing business and €900m for the Opel financing arm - which offers services to customers to insure and finance their vehicles. The financing arm will be operated as a joint venture between PSA and French bank BNP Paribas.

For GM this sale is part of its strategy to streamline global operations and dispose of underperforming assets. Opel has made losses for 17 years, totalling more than $8bn since 2010. For PSA, the rationale is that the deal will help the company achieve scale; moving the production of Opel and Peugeot models onto a single platform will help cut costs. There is also a hope that acquiring Opel will help PSA break into new markets in Asia and Africa.

Talking Points

A good way of developing your commercial awareness and practising for future interviews is to break down a deal like this, identify some of the obstacles facing the deal, and thinking about how commercial lawyers will be working behind the scenes to overcome them.

When this deal was in its early stages and before any offer was accepted by GM, this story was doing the rounds because of its potential impact on jobs. Opel employs around 20,000 members of staff in Germany and around 4,500 in the UK. Given that the PSA chief executive Carlos Tavares has a reputation for cutting costs in order to ensure profitability, this deal caused concern for UK and German politicians. Under UK law, ministers can only prevent foreign takeovers for reasons of national security, financial stability and media plurality. However, they can exert considerable political pressure on the parties involved to ensure the deal does not damage UK interests. As such PSA’s lawyers would have been working hard to negotiate with politicians and secure concessions in return for a guarantee to protect jobs. Indeed, such a guarantee was made by PSA who pledged to respect existing labour agreements in Europe.

Despite this, analysts believe that future job cuts are inevitable given the overlap between Opel and the brands currently owned by PSA. As part of their due diligence, commercial lawyers involved in the deal on the buy-side will need to evaluate the labour laws in each jurisdiction to establish what challenges may arise from any planned restructuring. They will similarly need to evaluate what opposition they may face from politicians and unions and what effect this might have on the day-to-day operations of the business.

Deals such as this where a subsidiary is being acquired from a wider entity often come with significant complications. For example, GM also own other brands such as Cadillac, and Chevrolet. It is important that in completing the deal, only Opel and Vauxhall are extracted from GM and transferred to PSA. However, often these separate brands are not so distinct and may rely on each other for the provision of certain design, engineering, and production services. Similarly, separate brands might use the same parts and components such as engines or in-car technologies – all of which will be protected as GM’s intellectual property. Lawyers will, therefore, be negotiating to secure transitional agreements to allow the brands to be separated smoothly. For example, as part of the deal, Opel will continue to benefit from intellectual property licences from GM until its vehicles are gradually converted to PSA platforms. In return, PSA cannot sell any Opel cars containing GM’s intellectual property in markets where GM already compete. Once the conversion of Opel cars to PSA platforms is complete the company will not be barred by any non-competition clauses.  

Given that this deal represents a considerable consolidation in the European car manufacturing market it will require approval from competition authorities. Competition lawyers will need to review the deal and assess whether the acquisition will gain clearance. Competition authorities may require PSA to sell or restructure some of its assets in order to increase competition in the market before the deal can gain clearance. If this is the case, PSA and their lawyers will need to decide whether, in light of this, the deal is still worth it. It is unlikely that the competition authorities will require PSA to separate any of its assets, nevertheless, given the size of the deal and the attention it has received from European politicians, PSA and its lawyers should expect the merger to undergo a thorough assessment.

PSA are being advised by French firm Bredin Prat, Swiss firm Bär & Karrer, German firm Hengeler Mueller, Dutch firm NautaDutilh and the Paris office of Linklaters. GM are being advised by US firm  Cleary Gottlieb Steen & Hamilton.

Increase in Domestic Deals

15 deals worth around £19.5bn have been attempted so far in 2017 between UK companies, highlighting a willingness by some UK companies to combine in order to cut costs and prepare their business for Britain’s exit from the EU. This fortnight we have seen a number of deals which follow this trend.

Standard Life, the UK investment company, has agreed to a £3.8bn deal to buy rival Aberdeen Asset Management. The combined business will manage over £660bn in assets and become the biggest investment management group in the UK. This deal is an all-share deal, meaning that Standard Life will buy Aberdeen with shares in the new company rather than cash. Aberdeen shareholders will hold 33.3% of the merged group and Standard Life shareholders will hold the remaining 66.7%. An all-share deal means that Aberdeen shareholders can benefit from the synergy achieved through the merger. This illustrates that the rationale behind this deal was to achieve scale and cut costs rather than dispose of unwanted assets or sell assets for profit. 

Wood Group, a Scottish energy services company with interests in the North Sea, has agreed to a £2.2bn takeover of UK rival Amec Foster Wheeler. Like the Standard Life – Aberdeen deal, this tie-up is also an all-share acquisition. Amec Foster’s shareholders will own a 44% stake in Wood Group upon completion of the transaction. Through this merger, the companies aim to cut costs by at least £110m annually.

Talking Points

The effect that Brexit has had on the UK M&A market has definitely been a story of two halves so far. In the second half of the last year, there was a slowdown in transactions following the referendum result. There was a real uncertainty in the UK economy and companies were unsure of what their global position would be after Brexit. As such, there was a lull in investment as companies decided to exercise caution rather than make large capital expenditures or accumulate large amounts of debt. In the second half of 2016, there were only two deals of note involving UK companies: Japanese telecommunications company Softbank acquiring Cambridge-based computer company Arm Holdings for £24bn, and 21st Century Fox’s £11.7bn bid for Sky – a deal which is currently being referred to regulators for approval. Both of these deals were a result of foreign investors seeking to take advantage of the falling value of the pound.

However, so far this year we have seen UK companies striking domestic deals at their fastest pace in almost a decade. The logic behind many of these transactions is that for UK companies in the same industries, the effects of Brexit are going to be broadly the same. Therefore the best way to prepare for any potential profit hit is to cut costs by combining resources and achieving scale. All-share deals, as many of these transactions are, allow companies to combine without taking on debt to finance the transaction. Another interesting element of these domestic transactions is that they are arranged very quickly. The Wood Group – Amec deal was struck after negotiations lasting less than two weeks and the Standard Life – Aberdeen deal came after talks that began at the start of this year. A possible explanation for this is that parties are keen to get these deals agreed and have cost efficiencies in place prior to Britain’s formal exit from the EU.

Slaughter and May are acting for Wood Group, while Linklaters are representing Amec Foster Wheeler. Standard Life is being advised by Slaughter and May, while Aberdeen is being advised by Freshfields and Scottish firm Maclay Murray & Spens.

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Tagged: Banking & Finance, Brexit, Commercial Awareness, Commercial Law, Legal Business, Legal Careers, Parliamentary & Elections

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