Whatever happened to M&A fees?
7 July 2014 | By Natalie Stanton
30 April 2014
30 April 2014
7 July 2014
7 July 2014
25 July 2014
UK public M&A work is down, as are fees. But as the deals markets shows signs of life, it’s not just the M&A titans that are winning
There have been a few promising moments in the public M&A market in the past six months, a highlight being US pharmaceutical giant Pfizer’s series of aggressive takeover bids for UK drugs company AstraZeneca. Its final offer – valued at about £62bn – would have marked the biggest foreign takeover of a British company.
But the bid fell flat, mirroring a wider trend in the public M&A market in the first half of 2014. Between 1 July and 31 December 2013 there were 26 firm offers made for companies publicly listed in the UK, with a total value of £8.9bn. From 1 January to 27 June 2014 this dwindled to just 21 offers, with a total value of £5.5bn.
- London Irish Holdings’ acquisition by London Irish Consortium
- Heritage Oil’s acquisition by Energy Investments Global
- Essar Energy’s acaquisition by Essar Global Fund
- IG Seismic Services’ acquisition by UCE Synttech Holdings
- Wolfson Microelectronics’ acquisition by Cirrus Logic
- All UK public M&A deals by total legal fees
Given the downward trajectory of dealmaking in the past six months it is hardly surprising that fees paid to lawyers on public M&A deals also tumbled. In the first half of this calendar year, legal advisers picked up about £25.4m in fees (see Fig. 1). That is a 35 per cent drop on the £38.9m they pocketed between July and December 2013, and a 3 per cent drop on the £26.1m posted on the period last year.
A number of reasons have been mooted for the slowdown in deals. The Takeover Code’s fee disclosure rules, implemented in September 2011, are thought to have put off some potential bidders who are yet to get to grips with the robust system. The regulations are understood to have caused a major headache for Pfizer as it approached its London Stock Exchange-listed target this year.
Some legal professionals also suggest confidence is still at a low ebb in the public M&A landscape in the aftermath of the downturn, while others point to the uptick in equity capital markets deals in the past six months as either a distraction from M&A or a discouraging factor due to high equity prices.
Since 1 January legal fees on UK public M&A have ranged from £89,500 for Parkwood Holding’s acquisition by Alston Acquisitions, to £5.6m for Essar Energy’s takeover by Essar Foundation Global.
Of course, a wide range of variables go into settling on legal fees –particularly in the unpredictable world of public M&A. Among the issues to affect fees are the value of the target, transaction complexity, financing options, the number of jurisdictions involved, regulatory aspects, the volume of due diligence, the number of shareholders involved, the history of adviser-client relationships and, last but not least, law firm reputation.
Multi-jurisdictional deals have made a particularly big impression on the market in the past six months, largely because there were so many of them. According to the Office for National Statistics, Q1 2014 featured fewer domestic takeovers than any year since it began publishing these figures in 1969. In fact, 12 of the 21 Takeover Code deals to take place during the period – 57 per cent – featured bidders headquartered outside the UK, from jurisdictions as far afield as Canada, Qatar and Kazakhstan.
A number of the highest-value deals over the period were made between non-English headquartered entities. Two that stand out in this respect are the aforementioned Essar Energy’s takeover by Essar Foundation Global, and IG Seismic Services’ acquisition by UCE Synttech. Both featured foreign targets and a raft of regulatory issues.
The return of private equity
There are hints that private equity investors are once again working up an appetite for public M&A in the UK. Many opted to conduct most of their business via private M&A after the Takeover Panel implemented new disclosure rules in 2011. The move was driven mainly by the increased risk relating to securing acquisition finance within the code’s tight 28-day timeframe between announcing an interest in a company and making an offer.
There have been a handful of private equity bids for public companies in recent years, including the 2012 battle between Vista, a CVC-ValueAct joint venture, and Temenos to acquire London-listed banking software group Misys – which the former ultimately won.
But in general the market has been flagging. According to data from Thomson Reuters, the number of private equity-backed bids for UK-listed companies plummeted from 26 in 2007 to just three in 2013, with the total deal value dropping by an enormous 99.8 per cent, from $33bn (£19.5bn) to just $52m in that time.
So, the £127m acquisition of specialist insurance broker Brightside by Belvedere Bidco – a company set up to complete the deal by private equity firm AnaCap Financial Partners – stands apart. The private equity house financed the acquisition entirely through its own funds, retaining an option to refinance its debt later in the
Despite being structured as a scheme of arrangement, there was a hefty amount of due diligence involved for the bid-side team. Norton Rose Fulbright also took the lead on navigating the business’s regulatory dealings with the FCA, which no doubt contributed to the firm’s relatively high fees.
The public M&A table (Fig. 1) once again shows that a law firm’s reputation and brand has a significant effect on the amount clients are prepared to pay out in legal fees.
In the past six months neither Linklaters, Clifford Chance, Freshfields Bruckhaus Deringer nor Slaughter and May embarked on a single public M&A deal for less than £1.2m in fees from the target and £1.6m on the bid-side.
The four deals these firms had a hand in were the highest-value public M&A deals of the period.
Perhaps more surprising are the firms that were enlisted to advise on the third-highest value deal during the period – Heritage Oil’s £924m buyout by Energy Investments Global. The parties involved in that transaction spent far less on legal fees than those in either BMO’s £708m acquisition of F&C Asset Management, Cirrus Logic’s £291m takeover of Wolfson Electronics or the combined £3.7bn merger between Carphone Warehouse and Dixons Retail.
Rather than turning to a magic circle firm or Slaughters, the bidder – Energy Investments Global – instructed Mishcon de Reya. Meanwhile, the target, Heritage Oil, looked to Canadian firm McCarthy Tétrault, which worked alongside Mourant Ozannes.
At the other end of the table a diverse range of firms were seizing a slice of the M&A action. Fieldfisher and Hill Dickinson advised Alston Acquisition on its takeover of Parkwood Holdings – the lowest-paid transaction of the period, despite the target’s price tag of £15.9m.
The low legal fees, totalling £89,500, were largely due to the deal’s simplicity – an uncontested and relatively straightforward scheme of arrangement involving a majority shareholder buying out a smaller one through a newly established shell company.
However, the smaller fees in the lower half of the table also show the flexibility afforded by firms or offices operating outside the City. These include Leeds-based Walker Morris, Gateley’s Birmingham office, Charles Russell’s offering in Guildford as well as Fieldfisher’s in Manchester, and Osborne Clarke’s in Bristol.
Notably, the second-lowest fees paid during the period – a combined £125,000 for Le Bas Investment Trust’s £6.3m acquisition of Tex Holdings – were paid to regional East Anglian firms Birketts and nine-partner outfit Prettys, both of which won their spots on the deal thanks to existing relationships with locally based clients.
One partner based outside London notes: “We look with amazement at how much our City brethren can recover in fees. They clearly provide a service clients wish to pay for, but people should look outside London at lower rates as we don’t have to deal with City property prices and salaries.”
Another echoes this sentiment.
“The disclosure rules have made people think twice about having a big City name on the ticket,” they say. “It shows there are alternatives out there, and that public M&A does exist outside the City.”
That said, some smaller firms that are not traditionally known for public M&A work face an additional hurdle to winning a spot on deals: the banks. As lenders become increasingly influential in the selection of clients’ legal advisers, it falls to law firms to convince banks they are up to the task.
Shepherd & Wedderburn is thought to have taken on the bidder’s banks with some success after long-standing client Wolfson Electronics vouched for the firm’s
ability. As a result, the Scottish firm secured a spot opposite Slaughters on the period’s fifth-largest deal by value and fourth by legal fees.
Hourly rates are alive and well, being used at least to provide a rough estimate of fees by clients including Wolfson, Essar, Heritage, FN Herstal, investor Peter Jones, One51, Carphone Warehouse and Dixons in the past six months.
However, fixed fee arrangements are becoming more prevalent in the legal profession. Both Sintech and Straight agreed fixed fee structures with their advisers. A number of deals, including the Wolfson one, also featured a chunky conditional fee element.
As one partner puts it, “We used an hourly rate on this deal because we have a long record of working with the client. But, we’d usually seek to work on a fixed fee basis. Normally, we’d seek to do most deals on a fixed fee arrangement, with significant success or abort fees.”
Another explains that “on the target side you have to expect to take a bit of pain alongside the client if things go off the boil – I don’t think it’s at all unusual”.
While it might have been a quiet period for public M&A, it certainly has not been a static one. And with experts predicting a market return to health it will soon become clear how much of an effect the underlying changes have had on the way deals are done – and the way they paid for.
London Irish Holdings’ acquisition by London Irish Consortium
Total fees and expenses: £515,000
Total legal fees: £380,000
London Irish Holdings: £225,000 – Pinsent Masons (James Earl)
London Irish Consortium: £155,000 – Charles Russell (Geoffrey Sparks)
This deal saw a consortium of London-based Irish businessmen acquire a controlling stake in rugby club London Irish’s holding company.
It was a rare public-private transaction, falling under the Takeover Code due to the target being de-listed from Sharemark (now known as Asset Match) within the past 10 years.
The hybrid deal involved the sale of just over 50 per cent of London Irish Holdings by sales and purchase agreement, before making a mandatory bid under Rule 9 of the code.
Pinsent Masons advised the buyout target, London Irish Holdings, charging fees of about £225,000. Meanwhile, Charles Russell received £155,000 for
its bid-side work for the London Irish Consortium – an existing client.
Heritage Oil’s acquisition by Energy Investments Global
Total fees and expenses: £10.26m
Total legal fees: £1.51m
Heritage Oil: £1.06m – Mourant Ozannes (James Hill), McCarthy Tétrault (Robert Brant)
Oil production company Heritage Oil, founded by Anthony Buckingham, agreed a £924m cash takeover offer from a Qatari investment vehicle owned by the state’s former prime minister, known as HBJ.
Buckingham, Heritage’s largest shareholder, with a 34 per cent stake in the business, agreed to remain an adviser and keep hold of 20 per cent of the company for at least five years. The scheme took the unusual form of an 80:20 joint venture. However, once the joint venture was drafted, lack of financing ensured the transaction was relatively plain sailing.
Mishcon advised new client HBJ on the matter, pocketing the bulk of £450,000 in fixed fees. The total sum was also shared with Nigerian counsel and Ogier in Jersey.
Charles Russell, which advised Heritage’s controlling shareholders, was first to wade into the transaction, despite not being included in these publicly disclosed fees. Rather, the seller’s £1m was paid to Canadian firm McCarthy, which took the lead from London, and Mourant Ozannes in Jersey.
Essar Energy’s acaquisition by Essar Global Fund
Total fees and expenses: £41.3m
Total legal fees: £5.6m
Essar Energy: £1.2m – Linklaters (Charlie Jacobs, Nick Rumsby, Ian Hunter)
Essar Global Fund: £4.4m – Clifford Chance (Tim Lewis)
The largest deal of the period, and that with the highest legal fees, was India-focused oil refiner Essar Energy’s buyout by its biggest shareholder, the Ruia brothers.
The Ruia brothers, who owned 78 per cent of the company, made a cash offer deemed “lowball” by minority shareholders. But after the takeover offer became unconditional the independent committee “reluctantly” recommended that Essar shareholders should “seriously consider accepting” the bid.
The deal and adviser line-ups closely mirror those instructed on Eurasian Resources’ take-private of ENRC last year, which also featured a few big shareholders and a perceived lack of corporate governance. On that transaction Jones Day and Freshfields were paid a total of £2.47m by target ENRC. Meanwhile, Clifford Chance and Reed Smith pocketed £7.23m thanks to their work on the bid-side. Linklaters also received a substantial sum for their work for ENRC shareholder Kazakhmys.
It is understood that Linklaters and Clifford Chance won the key roles on the Essar deal thanks to their experience on that much bigger transaction. Both also fielded teams that including the same key partners – Charlie Jacobs and Tim Lewis respectively.
The bid-side forked out about £1.2m on the deal, largely to Linklaters. It is thought that the fees were paid in hourly rates, with a conditional success fee built in.
The target paid about £4.4m in legal fees, with Clifford Chance picking up the lion’s share – advising on documentation and financing elements. A chunk also went to Mauritian and Indian counsel.
IG Seismic Services’ acquisition by UCE Synttech Holdings
Total fees and expenses: £6.1m
Total legal fees: £744,461
IG Seismic Services: £155,122 – Akin Gump Strauss Hauer & Feld (Harry Keegan)
UCE Synttech Holdings: £589,339 – Latham & Watkins (Graeme Sloan, Richard Butterwick)
This multi-jurisdictional deal saw Russia and CIS-focused seismic data services business IG Seismic Services (IGSS) bought out by its CEO Nikolay Levitskiy’s newly created vehicle UCE Synttech.
As well as involving states such as Kazakhstan, Azerbaijan and Uzbekistan, it is thought to be the first time the UK’s Takeover Panel has shared jurisdiction with the Cyprus Securities and Exchange Commission on a takeover offer.
There was added complexity in that IGSS had shares and global depositary receipts listed on the London Stock Exchange. These needed to be exchanged for shares as part of the transaction, thought to be the first time this has been achieved across jurisdictions. Senior debt financing added yet another layer of complexity.
The bid-side fee of £589,399, paid to Latham & Watkins and Cypriot counsel, reflects these technicalities.
Akin Gump is understood to have won IGSS as a client thanks to a relationship with one of the company’s board members. The firm received £155,122 for its work on the deal, after having given a rough estimate of fees at the outset.
Wolfson Microelectronics’ acquisition by Cirrus Logic
Total fees and expenses: £12.25m
Total legal fees: £2.11m
Cirrus Logic: £1.6m – Slaughter and May (Frances Murphy), Vinson & Elkins (Bill Volk, Robert Dixon and Francois Feuillat), Burness Paull (Peter Lawson)
Wolfson Microelectronics: £500,000 – Shepherd and Wedderburn (Michael Wylie)
This deal saw struggling Edinburgh-based microchip company Wolfson bought out by US rival Cirrus Logic. The transaction was relatively straightforward from a legal perspective – a bread and butter public M&A transaction navigated to avoid involving the Competition and Markets Authority.
Cirrus Logic handed Slaughters a first-time mandate on the deal. Vinson & Elkins, which Cirrus had worked with previously, dealt with funding and due diligence issues, while Burness Paull was drafted in to advise on the transaction’s Scottish elements. Cirrus paid a total of £1.6m to all three firms, with Slaughters receiving the lion’s share.
Wolfson trusted go-to adviser Shepherd & Wedderburn (S&W) to step into the fray on the buyout, paying £500,000 in hourly rates. A chunk of that sum went to counsel and a Scottish court reporter handling the scheme.
Much of the heavy lifting on the deal was dealt with by the bid-side, but the fees give an insight into the reputation and monetary weight behind the Slaughters brand, costing clients three times as much as Scottish firm S&W.
All UK public M&A deals by total legal fees