Sell, sell, sell
29 October 2007
It’s a seller’s market in Spain and Portugal, with English law flooding the jurisdiction. Add to this a host of new homegrown regulations, and M&A is booming. By Francisco Sa Carneiro and Christian Hoedl
M&A activity in Spain and Portugal has continued to boom over the last year. In Spain, as in the rest of Europe and the US, the market has been dominated by the sell-side and their advisers.
As a consequence, most of the Anglo-Saxon inventions that favour the seller in an M&A transaction have come to Iberia, including: auctions that replace buyer-driven proprietary deals; vendor due diligence that aims to substitute the seller’s representation and warranties by the liability of the advisers; and locked box rather than traditional post-closing net debt/earnings before interest, taxes, depreciation and amortisation (EBITDA) adjustments.
In Portugal the 2006-07 financial year was a year for public takeovers rather than private deals. Two very large hostile takeovers dwarfed all the others. There were also a couple of large private deals, where the tendency again was for seller-driven transactions, with limited access to information, low caps on indemnities and heavy resistance to changes in the documentation presented by the seller.
Financing in a time of plenty
The last financial year was also a record year for M&A financing. In a highly competitive market banks have been willing to finance an ever-increasing multiple of the target EBITDA. Conversely, bank covenants have either been reduced (without reaching the covenant-lite provisions that private equity companies were able to impose in other jurisdictions) or their enforcement rendered more difficult.
As in most of Europe, financing has become more stratified, with an increasing number of senior, mezzanine, second lien, profit-sharing and other tranches and facilities. Certainty of funds is imposed by borrowers and sellers even in private transactions and ratio defaults may be cured over several consecutive periods.
Representations and warranties in respect of the target are subject to increasingly generous clean-up periods; decisions are adopted by the simple majority of syndicate banks (except in very exceptional circumstances); consent is presumed by the lapse of time; yank-the-bank provisions are increasingly common; and mortgages and other liens are replaced by the borrower undertaking to create the security interest at a future potential default-related event (and are therefore arguably unenforceable, certainly in the event of insolvency or bankruptcy).
This increase in deal volume has led to an increasing share of English law financings: despite the fact that Iberian banks have been very successful in the syndication of Spanish or Portuguese law-governed acquisition financing of e1bn (£700m) or more, arrangers claim that syndication with collateralised debt obligations (CDOs), collateralised loan obligations (CLOs), hedge funds and other debt providers has been facilitated by English law documentation.
Takeovers and IPOs
The legal framework governing capital markets in Spain has undergone a significant change over the last year. Spain’s 1988 stock market law has been amended on crucial aspects, including market abuse, official listings and public offerings, the information disclosed by listed companies and their shareholders, the clearing and settlement of market transactions, other regulated markets and investment services firms.
Above all Spain has introduced a new takeover regime that has fundamentally modified the Spanish takeover rules. The key developments relate to the thresholds, timing and scope of the takeover offer - the offer becomes mandatory, at an equitable price, once the investor has acquired control of the target, where control is deemed to exist whenever the investor reaches 30 per cent of the voting rights of the target, or in the event that the investor appoints half plus one of the directors of the target within 24 months from the offer.
The new regulation therefore replaces the exclusively Spanish compulsory ex ante (total or partial) takeover bids with ex post bids, which must extend to 100 per cent of the shares and certain other securities. Voluntary (total or partial) offers are, however, still possible.
For the first time in Spain the regulation also includes squeeze-out and sell-out rights, provided that as a consequence of the offer the offeror holds no less than 90 per cent of the capital carrying voting rights and the offer has been accepted by 90 per cent of its addressees.
The Decree Law that implements the Takeover Directive in Portugal was published on 2 November 2006. Although the key principles and provisions of the directive were already introduced in 1999, various alterations were made to the former takeover statute implementing an opt-in system for the passivity rule, an opt-in/opt-out scheme for the breakthrough rule, new rules for competing offers and additional requirements for the exercise of squeeze-out/ sell-out provisions. There have been four takeover offers under the new framework.
As for IPOs, since last year, due to a number of factors, only two of them have been completed, in both cases involving the privatisation of state-owned companies.
Spain has amended the rules in connection with the deductibility for corporate income tax purposes of the amortisation of goodwill. In essence, special rules have been enacted to ensure goodwill deductibility over a 20-year period, despite the fact that the goodwill is not amortised for accounting purposes.
The Spanish tax authorities have also confirmed the right of Spanish corporates to deduct and offset against tax the financial goodwill of foreign subsidiaries. This rule has been considered an advantage for Spanish bidders in the context of cross-border deals and has even given rise to claims before the European Commission from competitors of Spanish companies benefiting from this provision.
In Portugal the tax environment has been improving somewhat, with the introduction of measures implementing the main European tax directives and the recent amendments on direct taxation that are relevant for M&A and cross-border transactions (the so-called ‘parent-subsidiary directive’, ‘merger directive’ and ‘interest and royalties directive’). The corporate income tax rate is still relatively low at 25 per cent when compared with the rest of Europe.
However, the tax system continues to lack the aggressiveness of other European systems, with M&A deals still facing some difficulties when it comes to financing and real estate-related transactions.
On 1 September Spain implemented a new competition act that provides for a higher filing threshold linked to market share (increased from 25 to 30 per cent, while the turnover threshold remains unchanged), devolves the ultimate decision on merger control to the competition authorities rather than the government and, above all, aligns the Spanish merger control rules with the EU merger regulation in respect to takeover bids: under the new regime, bids over Spanish listed companies may be authorised by the Spanish securities regulator (and the acceptance period may start) before antitrust clearance is granted.
Portugal, in turn, has amended its 2003 Competition Act for the first time since it was enacted. This has caused some procedural changes being made to the merger control framework. The changes have been introduced by the above-mentioned Decree Law, which implemented the Takeover Directive.
The most relevant amendment is the reduction of the review period in cases of in-depth (Phase II) investigations, from a maximum of 120 business days to 90. In addition, the possibility of making pre-notifications of concentration operations has been formally introduced. The latter change is in line with the EU ‘best practices’ on the conduct of merger control proceedings.
Francisco Sa Carneiro and Christian Hoedl are partners at Uría Menéndez