A new breed of international investor is eyeing up the UK food and leisure industry sparking a rash of complex big money deals that offer rich pickings for private practice. David Wigan and Claire Smith report.
When United Biscuits (UB) was sold to an international consortium last month the headline writers had a ball: ‘Crunch time’, ‘Hard to digest’, ‘Penguins fly around the world’ and ‘The strange world of gherkins and cross-dressers,’ which appeared in The Times. That one really took the biscuit.
But behind the jokes, a serious piece of business was taking place. UB was sold to an international consortium for £1.26bn.
The deal was fascinating because the nature of the funding – a chunk of the purchase price was paid by US venture capitalist Hicks Muse Tate & Furst – formed a purchase structure which signals a new era of merger and consolidation for the UK’s food and leisure trade.
The past few months have witnessed the UB buyout, the merger of the beer businesses of Scottish & Newcastle and French Danone Group, the battle for Allied Domecq between Punch Taverns and Whitbread and the merger of Guinness and Grand Metropolitan.
All the deals had an international element and had a share of the equity funding from outside the industry – and more complicated deals mean more work for private practice.
“There is a degree of consolidation in the sector,” says Mark Oldham, director of legal affairs at UB. “Investors no longer have to have a background in the industry. They are looking to unlock value in these businesses, which means a lot of movement and a lot of change.”
And that means work for corporate lawyers, and in a sector which prides itself on offering value for money, in-house lawyers focus on finding the best service for the lowest price, with the legal teams prepared to go to great lengths to make sure they get value for money.
And they will turn their backs on the City if they think they will get a better deal elsewhere.
Scottish & Newcastle Breweries uses a systematic method to evaluate its lawyers. The company employs a panel system of preferred and approved suppliers. Among firms on the preferred list are Lawrence Graham, Linklaters & Alliance, Kimble & Co in Milton Keynes and Eversheds in Newcastle.
Since 1990, it has used a unique system, called the Dupont Model after the US firm that first employed it, to evaluate the service it receives from its law firms (see box). The system sets out objective criteria aimed at reducing costs and adding value.
“Since using the model we have had fewer and fewer suppliers,” group legal director Andrew Vellani says. “We are aiming to cut the numbers down all the time.”
Among the criteria demanded are technical ability, responsiveness, cost and attitude – which includes pragmatic business sense. “The question we ask ourselves is: ‘What difference will this individual make to our business?'” Vellani says.
“For example, Peter Holden at Kimble worked with us in a previous incarnation before setting himself up in Milton Keynes. He specialises in the pub industry and is very loyal to the company.”
Scottish & Newcastle recently acquired 800 pubs from Greenalls, and is required to dispose of some to comply with government regulations. “The UK brewing industry is going through a very dynamic period and looking more to alliances in Europe,” Vellani says.
Peter Kennerley, company secretary at Scottish & Newcastle, says that because of government regulations it is important to use firms that understand the industry.
“Like any major company we need top level technical commercially-oriented legal advice, but there are important regulatory areas where it is important that firms understand the business and business background,” he says.
Regulations aimed specifically at the brewing industry include the 1989 Beer Orders, which limit the number of pubs brewers can own, and UK and EU competition rules that affect the contracts between brewers and retailers.
“Competition is a major issue. Brewing as an industry has always attracted the attention of successive governments. The Beer Orders are under review by the Office of Fair Trading, and it is possible we may see a change in those regulations.
“There has also been speculation about consolidation in the industry. Bass has put its brewing arm up for sale and there is speculation about Whitbread,” says Kennerly.
Vellani wants a quick response from law firms on any issue. He says: “We are dealing with people in the States and on the Continent and our lawyers must be able to respond effectively.”
Perhaps the most interesting part of Scottish & Newcastle’s relationship with its exterior legal advisers is its scrupulous attention to detail.
The company has set up an intranet system called Devil’s Advocate by which every person in the company who comes into contact with external lawyers can evaluate the service they receive online.
“Say if we use a law firm – the individual then keys in what department he used, then what name and then a whole series of evaluations,” Vellani says. “The site gets 200 hits a day, so we are able to track exactly what the lawyers are doing and how well they are doing it.”
Whitbread also pays a lot of attention to evaluating its outside advisers. It has a panel of 10 or 11 firms, including a lot of local practices, which is reviewed each year for a legal directory published in February.
The directory includes a detailed breakdown of fee rates so that those dealing with law firms in the various divisions of the company can use it to decide which firm to use.
Simon Barratt, company secretary and legal affairs director, says: “Maybe one or two firms drop off, but with those that do drop off one year, then two years later we are happy to put them back on again.
“We find the best people to do work with for the division at the best price. So it is regional firms we tend to use, not people from the City, so we can get the best value.”
He stresses that local firms are used for the standard work but the larger corporate deals are handled by big City players.
“I think it is acknowledged that local firms shouldn’t be trying to copy City firms, but instead be asking, ‘What can we do differently and better than City firms?’ The most difficult thing is that people are constantly ringing up saying, ‘We’ll be as good as Clifford Chance‘.
“I’d rather people were honest with themselves and said, ‘Well actually what can I offer that is different’.”
Ian FitzSimons, head of legal and European counsel at Canadian drinks giant Seagram, says that relations with individuals are more important than with firms.
He instructs outside firms on major corporate transactions, litigation, and information technology and telecoms work.
“I would definitely identify the lawyer rather than the law firm,” says FitzSimons. “Of course, some firms have got more depth and if you are dealing with a large transaction you look for a firm that can give you full support in all areas.”
And like others in the sector, he likes the regional players. He recently instructed Addleshaw Booth & Co because he used it before he joined Seagram two years ago from household products company Reckitt & Coleman.
He says it does transactions that fall just below the company’s large corporate deals.
“Being a regional firm, it offers better value for money and it has excellent lawyers. I know them well and I know exactly where to go.”
UB, which operates in 26 countries, used Allen & Overy for the recent sale of its frozen and chilled food business to Heinz, but does not always go for the big firms.
“We use Allen & Overy for our corporate work but smaller, cheaper firms for parts of the business which do not need the resources and expense of a big firm,” Oldham says.
So if the big firms want a slice of the food industry action in a rapidly consolidating sector they need to keep an eye on the bottom line and remember they are being watched.
The law firm will be judged on:
Speed of work
Attitude to work (they are expected to be businesslike, proactive, pragmatic)
Ease with which lawyer is understood
The difference an individual lawyer makes to us
The approachability of the responsible partner
The law firm will be judged on:
Whether it is businesslike
Ability to manage cost
Willingness to agree a cost format and to supply information
Fit without cost parameters
The firm will be judged on these aspects of how it handles its on-going relationship with us:
Cost Control – including periodic meetings to discuss costs and supply of information for cross-checking
Staffing – its ability to staff any matter at the lower category of fee-earner able to competently carry out the work
Ability to do things at their cost not ours