10 September 2012 | By Joshua Freedman
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The Lawyer reveals who has put in the highest legal bills for UK public M&A deals since the revamped Takeover Code came in a year ago
Talks over a $70bn (£44.3bn) merger between Swiss commodities trader Glencore International and mining giant Xstrata came with enough risk already, but Glencore will have to pay its potential tie-up partner £298m if it pulls out of the deal, which was hanging in the balance as the resources duo geared up for a shareholder vote when The Lawyer went to press last Friday (7 September).
Estimated legal fees of $18.6m (£11.8m) are small change compared with the break fee, but they nonetheless represent the largest amount paid by any party involved in a UK public M&A transaction in the past year. Indeed, with Xstrata estimating its own legal fees at £13m the combination can officially be called the most expensive takeover of a British plc in terms of external lawyers’ fees since the Panel on Takeovers and Mergers introduced its revamped rules of engagement nearly a year ago.
Amounts paid to external lawyers have been disclosed ever since the panel introduced its amended City Code on Takeovers and Mergers, or the Takeover Code, which came into effect on 19 September last year. The code had been in place since 1968, but the 2011 amendment tightened the rules on bids for UK-listed companies in light of the politically heated Kraft-Cadbury takeover (see box). Among a string of changes, parties now have to state an estimate of legal fees on both the buy and sell sides.
Today The Lawyer, with the help of sister data provider Perfect Information, publishes a table of all 50 such deals since last September for which data is available, revealing that more than £75m was spent on outside lawyers, or an average of just more than £1.5m per takeover.
Linklaters comes out as one of the leaders in public M&A, with the magic circle firm advising on four of the top 20 deals ranked by legal fees, totalling £16.2m, although £11.8m of this comes from the Glencore merger in which it is co-advising the Swiss company alongside several local or international firms including South Africa’s Werksmans. Clients are not currently required to give a breakdown of fees by firm, but it is understood that Linklaters is picking up the bulk of the £11.8m. Most of Xstrata’s £13m, meanwhile, is heading for lead UK adviser Freshfields Bruckhaus Deringer, which is advising alongside a similar raft of foreign outfits.
Linklaters also won buy-side roles on Jardine Matheson’s acquisition of Jardine Lloyd Thompson, Investec’s takeover of Evolution Group and HgCapital’s purchase of Group NBT, all three deals coming within weeks of the new code’s implementation.
Slaughter and May has been similarly successful, advising on at least three of the top 20 deals by legal fees and winning a role for an advisory bank involved in a fourth. Its biggest biller was Colfax’s acquisition of Charter International, the second largest in our table, on which it advised Charter alongside co-counsel Sullivan & Cromwell, with sell-side legal fees totalling an estimated £5.95m. Skadden Arps Slate Meagher & Flom advised Colfax, which paid £5.4m in a rare case of the target’s estimated bill exceeding that of the buyer.
Slaughters also advised composites manufacturer Umeco on its acquisition by US chemicals company Cytec – which yielded £1.2m for the target’s counsel – and led for Premier Oil when it bought EnCore Oil for £220m, earning another £1.2m in fees. The £500,000 in fees attributed to Encore adviser Dewey & LeBoeuf did little to save the US firm from collapse.
Canadian IT company CGI Group’s £1.7bn takeover of British rival Logica gifted law firms £6.25m in fees, putting it third in the rankings. Freshfields led for the UK target, which estimated its legal costs at £3m, while Canada’s Fasken Martineau, Norton Rose and SullCrom shared CGI’s £3.25m spillings. However, Freshfields makes noticeably few appearances across the 50 deals: it only pokes its head out for the Xstrata and Logica mandates, although these probably gifted the Fleet Street firm close to £10m together in fees.
The chunkiest deals do not necessarily mean big money in relative terms. The £24.8m coming out of Glencore-Xstrata represents just 0.06 per cent of the total reported deal value of $70m, compared with an average across the board of 2.17 per cent. A crude analysis shows that a number of the biggest deals yielded legal fees of below 1 per cent of the transaction value (0.75 per cent for the Charter-Colfax deal, for instance), while some of the smaller deals paid at a rate more like 1 or 2 per cent, rising to a peak of 16.43 per cent for Thalassa Holdings’s £197,832 acquisition of Rock Solid Imaging (RSI), in which Pinsent Masons advised RSI. Thalassa’s choice of law firm is not confirmed. Legal fees were £12,500 on the seller’s side and £20,000 on the buyer’s.
Aside from this anomaly, Clyde & Co stands out for its role advising THB Group on the takeover of the UK broker takeover by US rival AmWINS for £31.8m, which produced total legal fees estimated at £2.41m, 7.56 per cent of the deal value. The identity of AmWINS’s adviser is unclear.
In most cases, buy-side fees are higher than sell-side ones, although there are a few notable exceptions. Slaughters’ client Umeco spent £1.2m on its takeover by Cytec – more than Cytec’s own £1.1m. The Bunhill Row firm was again the beneficiary on the Charter-Colfax deal, in which Charter’s £5.95m fees outdid Colfax’s £5.4m. And Allen & Overy client Misys spent an estimated £1.5m on the acquisition of the banking software group by private equity buyer Vista Equity Partners, which hired Kirkland & Ellis and spent £1.27m on lawyers. In total, 11 out of 50 deals saw the target outspend the acquirer, while a twelfth deal – Jourdan chairman David Abell’s attempted takeover of the consumer and industrial company – involved one firm, Bird & Bird, advising both the buyer and the seller. Filings attribute these fees to Abell, not Jourdan.
There are the usual caveats with this data. A number of deals involved several firms advising a single client, especially the larger ones. This makes it impossible to be sure, based on filings alone, how much each firm earned from a mandate, although sometimes they can be very specific indeed: the deal document for Portnard’s acquisition of Airsprung Group points out that the target’s £90,000 fees were complemented by £23,000 spent on a secondee from Bond Pearce.
The second caveat is that the figures are only estimates made by the parties, which often point out in the filings that they are based on hourly rates and could change. Often they published a figure calculated as fees paid to date in addition to estimated future fees, based on the established rate, but the needs and timescale of a deal can change.
That said, the data does work in favour of a few select firms. DLA Piper – and international corporate head Charles Severs in particular – makes frequent appearances, advising NBT on its takeover by HgCapital (a Severs mandate); Better Capital on its acquisition of Clarity Commerce Solutions; SDL on its purchase of Alterian (another Severs deal); Melrose Resources on its merger with Petroceltic International and Invista REIM on its acquisition by Internos. Assuming the firm was the only adviser on its side of the table on each mandate it earned a total of £2.55m from these five deals, putting it close to the magic circle.
Lawrence Graham and Osborne Clarke make a few appearances in mid-level deals, while Norton Rose does relatively well in the middle and upper market, earning a share of CGI’s £3.25m fees and acting as main adviser to German company Müller Dairy, which spent £540,000 in legal fees on its £279.5m acquisition of the UK’s Robert Wiseman Dairies. The table, meanwhile, suggests the likes of Ashurst and Hogan Lovells were both quiet, but the limited nature of the deals – excluding those where the target was not listed – means a number of the firms’ deals will not have made it in.
The Takeover Code
It has been a year almost to the day since the new regime for takeovers of UK-listed companies came into effect.
It was Kraft’s multibillion takeover of Cadbury in 2010 that changed the nature of UK public M&A deals forever. The politically heated acquisition and the way Clifford Chance client Kraft was able to dictate affairs when bidding for the UK confectionary maker, advised by Slaughter and May, led to a wholesale review of the rules of engagement that led to the introduction of a new-look City Code on Takeovers and Mergers. The Panel on Takeovers and Mergers ushered in the new code on 19 September last year.
The key features were a ban on inducement fees that encouraged the target to give in to bids and the implementation of a ‘put up or shut up’ rule forcing potential buyers to make a firm announcement that they will or will not pursue a bid within 28 days of declaring an interest in the target.
The Lawyer, however, has decided to focus on one of the more peripheral changes to the code, namely the requirement to disclose the buyer’s and seller’s estimated legal fees for the bid process. While previously deal parties had to disclose only the total advisory fees, now they must release bidders’ and targets’ estimated fees specific to adviser types, such as financial advisers, lawyers and public relations.
The idea was to create an environment of disclosure; it is not thought that the Takeover Panel has any plans to make regulations tougher and require clients to declare how much they spend on each individual law firm as this is not the point of the exercise.
“When it came out, people thought – wow, this is going to give more disclosure than they’ve focused on to date,” one partner comments.
Legal fees are very much estimates: firms take a stab at the total cost based on experience and the amount billed to the time of filing, but final amounts can vary, especially on long drawn-out mandates such as Glencore International’s merger with rival natural resources giant Xstrata, for which the total estimated fees came to £24.8m. The amount is likely to have spiralled after negotiations became longer and more complex following opposition from Xstrata shareholders such as Qatar Holdings.
A firm will usually ask the client to sign an engagement letter at the outset stating a fee estimate, but the reality is that the bulk of bills will have gone out by the time shareholder filings including fee disclosure are published. That makes taking a guess relatively easy, but this is not always the case.
“Sometimes, if you’ve agreed a fee cap with the client it’s easy,” comments a corporate partner at a top UK firm. “Especially if you’ve got a private equity offer, it’s relatively commoditised. The difficult ones are things like the Xstrata deal [with Glencore] or if you’re acting for the Chinese, where you don’t know what direction negotiations are going to take.”
Similarly, the figures do not necessarily tell us how much a particular firm earned from a deal. Bidders and targets do not have to break down fees by law firm, with the Glencore mega-merger a prime example of a deal involving broad international antitrust issues where several firms, including South Africa’s Werksmans and Bennett Jones in Canada, have taken roles. Linklaters will have taken the bulk of the estimated £11.8m from Glencore stated in the deal documents, while Freshfields Bruckhaus Deringer will have earned much of Xstrata’s £13m.
As one law firm partner stresses: “It’s a pretty difficult piece of analysis to unbundle either lawyers’ fees or investment banks’ fees when the fees of potentially a number of advisers are aggregated.”
Margin of error
The rules give lawyers a margin of error when estimating fees: if the final amount is more than 10 per cent out they are required to disclose a new figure. It is understood that the estimate for the Glencore-Xstrata deal was made while taking into account the likelihood that the deal would involved extended negotiations, with the ultimate timescale no longer than that initially expected, given the original timeline for regulatory approval.
The target’s legal fees sometimes include those paid by the company’s management in a private equity transaction, but only in cases where they are paid by the target itself. These are usually small amounts compared with the main roles.
Neither do the legal fee figures include financial advisers’ or lenders’ counsel fees which, if charged by the bank to the client, are included under corporate advisory fees. Indeed, market commentators are keen to stress that the latter are almost invariably much higher than legal fees.
“When you look at the legal and accountancy fees relative to the banks, they always are much less,” one corporate partner points out.