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Dealwatch: €5bn Vodafone deal shows ‘the debt is there, if you can find the right transaction’

The biggest European transaction of recent weeks came when Vodafone announced the sale of its Spanish business to TMT investor Zegona Communications for €5bn.

Slaughter and May advised Vodafone with a London-based team led by corporate partners Victoria MacDuff and James Cook and including IP and IT partner Duncan Blaikie, finance partner Charlie McGarel-Groves, tax partner Mike Lane, employment partner Philippa O’Malley, and competition partner Claire Jeffs, who splits her time between London and Brussels.

Garrigues provided Spanish law advice to Vodafone. The firm fielded a team from Madrid, including corporate and commercial department co-head Álvaro López-Jorrín Hernández, corporate partner Javier Marzo, EU and competition partner Oriol Armengol Gasull, and employment partner Rafael Giménez-Arnau.

Zegona was represented by a London-based Travers Smith team led by funds department head Aaron Stocks and including corporate partners Mohammed Senouci, Tom Coulter, and Ben Lowen, US securities partner Brent Sanders, tax partner Madeline Gowlett and head of tax Russell Warren, technology partners Richard Brown and Ben Chivers, head of technology and commercial transactions Dan Reavill, and competition partner Stephen Whitfield.

A London team from Milbank advised Zegona on debt funding, including leveraged finance and capital markets partners Tim Peterson and Sarbajeet Nag and tax partner Russell Jacobs.

Gómez-Acebo & Pombo advised Zegona on Spanish law. The team included head of M&A Fernando de las Cuevas Castresana, corporate partner Alexander Kolb, public law partner Irene Fernández Puyol, banking and finance partner Fernando Herrero Suárez, and employment partner Ignacio del Fraile, all in Madrid. Also involved were Barcelona-based head of competition and European law Íñigo Igartua and competition partner and Brussels office head Miguel Toroncoso Ferrer.

Allen & Overy advised Deutsche Bank, ING, and UniCredit on the financing of the deal, with a London team led by leveraged finance partner Darren Hanwell, US-qualified high-yield partner John Kicken, and Alice Smith, who was promoted to the partnership in May.

Simmons & Simmons acted for the global coordinator and joint bookrunners on the planned equity funding for the deal. The firm’s team was led by corporate partners Andrea Tompkins and Jamie Corner in London and Ignacio Dominguez in Madrid.

The transaction is one of a spate of recent moves Vodafone has made under its new CEO Margherita Della Valle, at the helm since April. ‘The Spanish market has been challenging for Vodafone in recent years’, said MacDuff. ‘It’s also a market where there has been a lot of M&A activity in telecoms in recent years, including consolidation between existing players. It was the right time for Vodafone to execute a transaction and to leave that market to focus elsewhere.’

Zegona, too, was a unique buyer: an investment vehicle set up solely to buy and sell European TMT assets. ‘Zegona was uniquely placed to acquire Vodafone Spain. Its management team has extensive experience in running Spanish telecoms companies and it had the ability to raise the finance to fund the transaction’, Stocks explained. ‘The other potential bidders were either private equity houses or incumbent telecoms operators. Incumbent operators would be subject to EU merger control, and likely wouldn’t be able to get approval on terms they would like. And PE buyers wouldn’t want to buy until they knew the outcome of the EU merger control decision on the Orange/MasMovil merger.’

Orange-MasMovil remains under review after the European Commission announced on 27 June that the acquisition ‘may reduce competition in the retail supply of mobile and fixed internet services as well as of multiple-play bundles in Spain’. In the UK, too, Vodafone’s ambitions face regulatory scrutiny, with its proposed merger with Three UK awaiting the opening of a Phase 1 Competition and Markets Authority (CMA) investigation.

The transaction’s significance for the wider M&A market is, then, limited. But the sheer scale of the deal nonetheless gives some cause for hope. MacDuff commented: ‘It’s one of the few recent transactions in which that volume of debt has been raised. That’s potentially a good sign: the debt is there, if you can find the right transaction.’

For Stocks, too, ‘the scale of this deal in comparison to the size of the cash shell is record breaking. Zegona’s market capitalisation at the time the deal was announced was around £2m. And it’s buying a €5bn business funded by one of the largest debt financings of the year. They’ve got €4.2bn in debt provided by a club of banks, and €900m of financing effectively provided by Vodafone. The deal will still go ahead if no equity is raised.’

Echoing the views of many transactional lawyers in a difficult year, Cook argued that: ‘We’ll see more deals with these bespoke features, as clients look to navigate challenging M&A markets.’ For A&O’s Hanwell, ‘Banks are ready, willing, and happy to lend. It’s just a question of finding the right deal.’

Kicken explained banks’ willingness to underwrite in the context of a settling down of interest rates. ‘There’s less interest rate uncertainty on the part of the banks. People seem comfortable that we’re going to stay on this rate for a little while.’ At its most recent meeting on 21 September, the Bank of England held the interest rate at 5.25%, breaking a streak of 14 successive increases. The Federal Reserve, too, has since July agreed to hold rates in the 5.25-5.5% range.

‘2023 has seen global M&A and acquisition finance on a shaky road to recovery’, Kicken added. ‘But the prospects are better now, in particular on the financing side. Let’s put it this way: it would have been very surprising if a deal like this had been done at the start of the year.’

Stocks, meanwhile, highlighted the importance of Zegona’s structure in getting the deal over the line. ‘There’s frustration among many in the market. The London Stock Exchange and the FCA brought out a set of specialist SPAC rules, and no-one has launched a SPAC in London since. We’ve done a lot of work over decades for cash-shell companies. A well-designed acquisition company provides many advantages. Raising money as a listed company is quite simple. There’s a prospectus, it tells you what you’re getting, you can read it in a day. The speed at which you can raise capital in the London market is the reason that these investment vehicles are so valuable.

‘It’s not for everybody. In order for it to work, the management team needs to be made up of people who equity investors know and trust. But if you’ve been a senior executive and made money for investors before, it can be a recipe for success.’

Travers does not intend to make major investments in cash-shell work. But, Stocks noted, ‘we’re already the market leader in this very narrow world, and there are good opportunities to grow with the market here.’

For Slaughters, the deal vindicates a strategy that has seen the firm increase its capacity to provide cross-practice support on tech transactions. ‘Because we’ve now done a number of deals for Vodafone, our team really understands not just the legal mechanics of how these deals work, but the technical side too’, said Cook.

‘It seems every company is saying they are, or are becoming, a tech/data company’, added Blaikie. ‘Some are more credible than others, but everyone’s on a digital transformation journey. We as a firm need to be able to plug in at every stage of that process – with established players, including major tech and telecoms companies like Vodafone, through to start-ups and scale-ups in the emerging tech space. And we find our experience across that spectrum is complementary. Our work with smaller specialist tech companies means we can better understand technologies that are coming to market, and which our bigger clients are looking to develop, invest in, or otherwise deploy in their business.’

The deal is expected to close in the first half of 2024, subject to approval from Zegona’s shareholders and any regulatory clearances.

Also in the tech sector, cybersecurity company Proofpoint announced that it had entered into a definitive agreement to acquire Tessian. Valued at $500m in May 2021, Tessian uses AI and machine learning to prevent email threats and protect against data loss.

Kirkland advised Proofpoint with a cross-border team led by corporate partners Vincent Bergin and David Higgins in London and Peter Stach, Andrew Struckmeyer, Corey Fox, and Bradley Reed in Chicago. Also involved on the London side were technology and IP partner John Patten, tax partner Peter Abbott, antitrust partner Matthew Sinclair-Thomson, and debt finance partner Kirsteen Nicol, while US-based employment partners Sydney Jones and Jackson Phinney provided support from Washington DC and New York, respectively.

Goodwin advised Tessian with a team led by life sciences partners Bill Schnoor, who splits his time between Boston and London, and Adam Thatcher, in Cambridge and London.

Proofpoint was acquired by longtime Kirkland client Thoma Bravo in 2021 in a $12.3bn cash transaction that saw Skadden advise Proofpoint. Tessian, meanwhile, raised $65m in series C funding in 2021, where it was again represented by a Goodwin team led by Schnoor and Thatcher, alongside Longon-based life sciences partner Ali Ramadan.

While Proofpoint’s market cap has yet to top what Thoma Bravo paid for it, it has held steady around $10bn since 2021. The transaction highlights both the resilience of the tech sector and the ongoing attractiveness of buyouts to deep-pocketed US-based investors. According to data from Refinitiv, tech accounted for 14% of the value of global M&A in the first three quarters of 2023, despite a decline in value of 55% compared to the same period in 2022.

The acquisition is expected to close in late 2023 or early 2024, subject to customary closing conditions, including any required regulatory approvals.

The infrastructure sector also saw activity, with DIF Capital Partners and EDF Invest reaching an agreement to purchase Norwegian electric ferry operator Fjord1 from US investment firm Vision Ridge Partners and Havila Holding, which is owned by Norway’s Sævik family, which together took Fjord1 private in 2021 after Vision Ridge first invested in 2019.

Ropes & Gray advised Vision Ridge Partners and Havila Holding. The team included private equity partners Carl Marcellino and Gabrielle DiBernardi in New York and Elizabeth Todd in London, and capital solutions and private credit partner Samuel Norris, also in London. Vision Ridge and Havila were also advised by an Oslo-based team from Schjødt, including corporate partners Christoffer Bjerknes, Viggo Bang-Hansen, and Caroline Karlsson.

DIF and EDF were advised by an Oslo-based team from Wikborg Rein led by the firm’s corporate, finance, and tax practice head Ole Henrik Wille. Allen & Overy, meanwhile, advised DIF and EDF on debt financing, with a team led by London-based finance partner Edward Moser. Ashurst advised the lenders with a team led by London banking partner Laura Ho, and Wiersholm advised the sponsors.

Fjord1 reported revenues of nearly 2.9bn NOK in FY2021 – £207.6m or €238.9m based on current exchange rates. The company operates a fleet of 81 vessels, of which approximately 60% are electric, representing around half of all electric ferries currently operating in Norway.

‘The Norwegian ferry market has been an active one for investors over the last few years’, said Moser, citing acquisitions including EQT’s 2020 purchase of Torghatten and CBRE’s 2022 purchase of Norled. ‘These businesses are largely backed by long-term availability-based contracts, typically with municipalities, and with strong incentives to accelerate decarbonisation from the Norwegian government.  As a result, they have attracted infrastructure investors with their strong fundamentals and compelling decarbonisation story.

‘The Nordics have been hugely active markets for energy and infrastructure transactions for over a decade: from district heating, to social infrastructure, transport and, increasingly, new technologies such as hydrogen and the battery value chain.  We have advised on many of the leading transactions in that period and expect that trend to continue over the coming years.’

The transaction is expected to close in early 2024, and will see Fjord1 CEO Dagfinn Neteland remain in position at the head of the company.