Focus: Energy M&A - Texas tea party
21 March 2011
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31 July 2013
The energy sector is booming and in scouting out opportunities in Houston and challenging the Lone Star State’s incumbent players, some of the planet’s biggest firms are hot on the trail
It is known as the ’shale gale’, a gust of energy-related change blowing across the North American oil and gas industry. Shale, a type of rock containing large quantities of natural gas, has until recently remained largely untapped. But technology developed over the past decade and refined within the past half-decade has made it available. And companies are piling in.
“It’s a real game-changer,” says the chair of Kirkland & Ellis’s energy practice Mitch Hertz. “It’s taking the focus off the traditional sources of fuel, ie offshore drilling, and putting it on newly available shale gas.”
The appetite for shale is best illustrated by the boom in energy-related acquisitions. Last month mining company BHP Billiton swooped for a $4.75bn (£2.96bn) acquisition of Chesapeake Energy Corporation’s Fayetteville shale interests. It was the third $1bn-plus disposal by Chesapeake in almost as many months. Morgan Lewis & Bockius advised BHP, while Wachtell Lipton Rosen & Katz and WilmerHale advised Chesapeake alongside the company’s regular outside counsel, 11-lawyer, Oklahoma City-based firm Commercial Law Group.
“Chesapeake’s always an interesting bellwether,” says Hertz.
As an indication of interest in one of the hottest sectors in the global M&A market, that trio of deals from one highly active client certainly fits the bill.
But shale is just one part of a wider trend towards energy and natural resources-driven deals that is not only providing the traditional M&A heavyweight firms with some much-needed multibillion-dollar acquisitions (see table), but also shaking up the roster of traditional energy market advisers and putting a new focus - read ’pressure’ - on the firms in the oil capital of the US, Houston.
Last year Pillsbury Winthrop Shaw Pittman was dislodged from advising its number one client, Chevron, by Skadden Arps Slate Meagher & Flom when the oil company struck a $4.3bn deal for its purchase of Atlas Energy, just one high-profile example of the recent shake-up in the sector.
Houston has lift-off
In the past year, Houston has moved from an also-ran to one of the US’s hottest markets, driven in part by the rise of shale gas and best illustrated by the decision of Latham & Watkins to open in the city with lawyers from local stalwarts Akin Gump Strauss Hauer & Feld, Baker Botts and Vinson & Elkins.
Numerous sources now say that the trend of new entrants to Houston is about to shift into a higher gear, with the potential entry of a magic circle rival. For the local firms, it is game on.
Houston insiders currently place Linklaters as the firm most likely to launch some kind of new initiative in Texas, a suggestion based on numerous sightings of partners from the magic circle firm in the city in recent months.
The magic circle firm, however, strongly denies it is preparing to launch there.
“There is some fact finding going on,” admits one Linklaters partner when quizzed by The Lawyer, “but it’s got nothing to do with any Houston expansion.”
This would go some of the way to explaining the increased visibility of Linklaters in Houston over recent months, although the firm is hardly alone in raising its profile in the energy capital.
Houston launch fad
Last week Houston was in the headlines again as Winston & Strawn set up shop in the city. This, however, was a move borne out of the demise of Howrey rather than a desire by Winston to tap the energy markets. Indeed, the 40 lawyers Winston has hired are IP and litigation specialists. But the energy market is what is capturing most attention.
In January this year Cadwalader Wickersham & Taft continued its increasingly disparate attempts at broadening its platform when it launched an energy and commodities practice group, opening a Houston office in the process after a nine-partner transatlantic raid on McDermott Will & Emery.
Reed Smith also eyed up the market last year when it entered into ultimately fruitless merger talks with Texas-based firm Thompson & Knight, while Akin Gump’s equally fruitless merger talks with Orrick Herrington & Sutcliffe last year smacked at least of a firm considering its options.
Other firms believed to be scouting around in Houston include Norton Rose and Freshfields Bruckhaus Deringer (although an imminent office opening has been denied by the latter firm).
But the move locals really care about is Latham’s. Other rivals have come in and hired one or two partners; in contrast, Latham coordinated the virtually simultaneous hire of three separate groups of partners from three local firms: four from Vinson & Elkins and two each from Akin Gump and Baker Botts.
“Latham went about it the right way, they hired really solid people,” says one energy specialist at a rival firm. “No question, they prised some quality people away. It was really a surprise to the major players.”
At the beginning of March The Lawyer visited Latham in its New York office to assess the success of its Houston launch one year on. To say the assembled partners - executive committee member Bill Voge, corporate partner Ted Sonnenschein, project finance partner Jonathan Rod and former Akin Gump energy and global transactions practice head Michael Dillard - were bullish is an understatement.
“It’s one of the most successful offices since we opened in New York in 1985,” says Bill Voge. “In the first six months it was the busiest office in the firm.”
The quartet were also rather cheerful about the mechanics of Latham’s Houston launch, which bordered on a coup.
“It was a simultaneous operation,” adds Dillard, one of the partners who joined Latham from Akin Gump last January to launch the firm’s office in Houston. “In fact, nobody’s done it in any market, to open with that kind of group.”
Dillard says that, having spent 28 years at Akin Gump, the Latham offer was “the kind of opportunity that in Houston might never come again”.
In other words, other firms might come in, but few if any have the platform that Latham could offer. That said, while Latham boasted an energy practice prior to its Houston launch, it was primarily on the finance side of major projects.
What it lacked was a pure oil and gas presence.
A year after opening Latham now has 10 partners and around 35 lawyers in total based in what Houston insiders still regard as an insular market.
You ain’t from around here…
According to sources at rival firms, the elevation of Houston to nearer the top of strategic to-do lists is leaving the indigenous firms worried.
“Texas was the fortress and it’s looking less secure,” says one partner. “And they have reason to be concerned. No one had succeeded in doing what Latham did before. People hadn’t felt the pull to other firms until recently. Now the energy sector’s becoming increasingly international and there’s a benefit of having strength in capital markets, finance and an international platform.”
The citing of the phrase ’a better platform’ is a familiar refrain, but in this case it is probably justified.
Few of the Texas firms have made expansion outside the state or the US a strategic priority.
“They’re not a force in New York or London,” continues the rival partner, referring generally to Texas firms. “Why not? It’s an interesting question. But clearly there’s a group of partners at some of these firms, the go-getters, who think their platforms are too narrow. Texas firms used to be impenetrable. Not any more.”
Texans hold ’em
Neither Baker Botts nor Vinson & Elkins, commonly regarded as Houston’s top firms, are likely to admit to feeling the pressure.
Indeed, a review of the global energy and power sector M&A tables (see table, page 18) offers some comfort to any partners in those firms currently feeling the heat.
So far this year Baker Botts is second only to Wachtell in terms of deal value, with a 30 per cent market share (Vinson was 10th with a 10.8 per cent share).
And last year the number one firm in the global rankings was Vinson, topping the charts by both value and volume of deals (Baker Botts was fourth).
Indeed, Vinson rocketed up the rankings last year from 20th place in 2009 to secure the top spot. And the firm it dislodged? Latham.
Joe Dilg, managing partner at Vinson, sounds remarkably unconcerned when asked about the current interest in his home turf.
“Houston’s the energy centre of the US and the world, so the investment banks with experience of the sector are here, the lawyers are here and the technical expertise is here,” says Dilg. “There are already plenty of firms from outside Houston here, including Skadden and Weil Gotshal & Manges.”
Dilg’s relaxed attitude can be explained not only by his firm’s elevated position in the deals tables, but also by its 2010 financial results. Total revenue at Vinson grew by 7.3 per cent to $602.7m, while the distributable profit rose by 3 per cent. Average profit per equity partner (PEP) was just shy of $1.35m.
Financially it was Vinson’s best-ever year, a position boosted significantly by energy’s role as the number one driver of M&A in 2010.
“Obviously shale’s been important for the past four or five years, but there’s been an acceleration over the past two to three years as companies target large acreage positions based in shale zones that need to be drilled,” confirms Dilg. “These projects are very capital-intensive. How much Latham’s move was triggered purely by shale I don’t know. But there’s a lot of headhunter activity [in Houston].”
It is a similar story over at Baker Botts. Last month the firm’s corporate group chair David Kirkland advised on offshore drilling specialist Ensco’s $7.3bn acquisition of Pride International and the $2.8bn sale of UK-based Wood Group to General Electric (GE). Allen & Overy advised GE on both sides of the Atlantic, with Slaughter and May advising Wood Group in the UK.
”It was a very busy February,” quips Kirkland.
Gross revenue at Baker Botts, which last week hired 32 antitrust lawyers from Howrey, dropped by 3.5 per cent last year to $554.9m from $574.8m, but PEP hit a record $1.37m.
Scoring a century
“Imitation’s the greatest form of flattery,” says Kirkland. “We’ve been doing this for more than 100 years.”
Well, maybe. Both Baker Botts and Vinson have office networks that extend across Europe and Asia - the former goes to great lengths to stress the current success of its Moscow office in particular, but in comparison with Latham - or the magic circle - both firms’ international coverage remain relatively small.
“Those firms with a genuine global platform - Dewey [& LeBoeuf], Latham, Milbank - are the ones that are likely to be hearing from their clients, ’If you want the big stuff from us you’ll be there’,” claims one rival energy partner (not, incidentally, one that works at Latham or a magic circle player).
Later this year The Lawyer’s annual Transatlantic Elite magazine will focus on the strategic moves the top firms are making to capture the premium work in the booming energy and natural resources sector.
The Houston firms will feature prominently this year. The same, though, might not be true a decade hence.