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Dealwatch: ‘Heading back in the right direction’ – positive mood continues for public M&A as UK elite line up on big-ticket deals

In the first half of June, the UK economy suffered another blow. Global soda ash producer, WeSoda, made the decision to pull out of its $7.5bn London IPO, citing a lack of investor demand, leading to criticism of UK investors for being unduly conservative and tight-fisted with their cash.

However, there is a glimmer of hope on the horizon in the public M&A arena, in the form of some recent promising, high-value transactions.

One of the biggest deal announcements so far this year came from Vodafone and Three, who have agreed to merge and form the UK’s largest telephone operator. Although still subject to rigorous competition and regulatory approvals, the announcement of such a large transaction is a positive sign.

Involved over several months in this complex deal has been Magic Circle trio Linklaters, Slaughter and May, and Freshfields Bruckhaus Deringer. Linklaters’ corporate partners, Robert Cleaver and Hugo Stolkin, as well as Freshfields’ antitrust partners James Aitken, Thomas Wessely and Michele Davis, lead the representation of CK Hutchinson Holdings and its subsidiary, Three UK Group. Meanwhile, Vodafone is being advised by Slaughter and May’s Victoria MacDuff, Roland Turnill and Richard Hilton.

In conversation with Legal Business, MacDuff, who is co-leading the team on behalf of Vodafone, explained what this transaction means for the market: ‘This is a transformational deal for M&A generally in 2023. When you look at where M&A has been for the past six to eight months, it is difficult to predict which transactions will come to fruition. This deal shows that it is possible to do difficult and complex transactions in this current M&A market.’

She added: ‘This deal has the capacity to have a positive impact on the UK’s efforts to be at the heart of future technology. The more that the UK can be at the forefront of developments and digital transformation, the more attractive the UK will be for investors.’

Asked how strong the future pipeline of work will be, MacDuff said: ‘The honest answer is that I don’t really know. ‘We are still in a world where it is difficult to predict how M&A activity will evolve over the next six to twelve months. We are not at the same levels of activity in 2021, but there is still a healthy pipeline. There are people looking to do transactions and we may see further consolidation in other sectors.’

She elaborated: ‘The FCA has proposed making radical changes to its listing rules to make the UK a more attractive place for companies to list. It will be interesting to see what the FCA concludes and how that impacts the UK listing environment. For major transactions like this one, once you get past a certain size you need shareholder approval. The FCA is proposing that that is abolished. If they pass those rules, it will be interesting to see if companies will do bigger transactions.’

June saw further promising signs in the deals market, with IKEA-owned investment group Interogo Holding agreeing to purchase 49% of a 1066MW portfolio of renewable energy company BRUC Group’s operational and under-construction solar photovoltaic assets in Spain.

Linklaters is again involved in this deal on behalf of BRUC, with London-based partners Francesca Matthews and Ben Rodham, as well as Madrid-based Lara Hemzaoui and Jose Gimenez leading on the sale. Meanwhile, Herbert Smith Freehills’ London corporate partner Sarah Pollock advised Interogo Holding on its acquisition.

Gavin Davies, the head of HSF’s global M&A practice, reflected on the current trends in the M&A market and where it is heading: ‘UK public M&A activity, both announced and interest, continues with the key focuses being recommendable value, the importance of key shareholder support, and the potential for competitive situations developing. Corporates are active with a lot of appetite for transformational deals and carve-outs to accelerate portfolio realignment, as well as smaller portfolio acquisitions and divestments. There’s also a lot of planning being done by both corporate and private equity sellers to prepare businesses for auction processes in the autumn, in case conditions are then thought to be good enough to take to market.’

He added: ‘We knew that 2023 was going to be a challenging year for M&A, but the market has been hopeful that the effects of inflation, valuation expectations, interest rates, and the availability of debt, would have eased by mid-2023. There has been a strong underlying confidence that the big secular themes will continue as drivers of M&A in the medium term, such as digital transformation (an example of which is how quickly AI has come into the public consciousness) as well as energy transition and the ESG imperative.’

In response to whether hopes can be hung on the latest flurry of deals, he concluded: ‘No-one is going to call a sudden change in conditions, but the deals that have been announced in recent weeks are optimistic indications that the M&A market is heading back in the right direction, yet the pace at which it picks up in the second half of the year is still to be determined.’

In another key deal, Luxembourg credit institution PayPal revealed its agreement to sell up to €40bn of its ‘buy now, pay later’ loans in Europe to American private equity firm KKR, adding yet another much needed boost to the deals market.

PayPal’s legal advisers on the deal include Freshfields, with a team led by London and Hong Kong-based financing partner Andrew Heathcote and London-based corporate partner Emma Rachmaninov.

Allen & Overy’s Luxembourg practice also represents PayPal, with capital markets partner Paul Péporté leading alongside regulatory finance head Baptiste Aubry.

A large cross-border and multi-disciplinary team from Latham & Watkins was engaged by KKR on the transaction. London finance partners Jeremiah Wagner and Patrick Leftley led the team, alongside several additional partners: Karl Mah, Ulf Kieker and Ivan Rabnillo, who provided tax-related counsel; Suzana Sava-Montanari and Thomas Votel, who assisted on French law; Fernando Colomina on Spanish law; Ellen Marks on US law; and Jonathan Parker on antitrust matters.

Spanish firm Pérez-Llorca  also provides PayPal with legal counsel, with transactional partner Carlos Pérez Dávila and regulatory partner Josefina García Pedroviejo overseeing on Spanish law matters.

Paul Péporté, A&O’s capital markets partner who co-leads the deal from Luxembourg, explained what he thinks this transaction represents: ‘There have never been deals similar to this one in the Luxembourg market before, which is a very good sign. It is a landmark transaction.

‘The takeaway points include  the fact that a Luxembourg bank doing this kind of transaction is a novelty. The purchaser is also using a Luxembourg securitisation vehicle to acquire the portfolio.  The flexibility and legal certainty that the Luxembourg securitisation laws can bring to this work is a strong case for Luxembourg, and a good illustration of what our vehicles can achieve.’

Péporté spoke about the market from his perspective in mainland Europe: ‘We have had a lot going on the last couple of years in Luxembourg, but the overall volumes have been slightly down over the last ten months or so. You have certain classes of capital markets work, such as high yield bonds which is a big market that was very low for a while. It is picking up again now. There are various reasons for that, such as the interest rate environment.’