The champagne corks may have been popping at Atlantic House last month, but the news that Lovells has won the most coveted PPP mandate in the marketplace must have caused more than a little pique at Linklaters.
Even for a partnership renowned for its hard-headedness, the news that Lovells has secured the key instruction on Galileo – the EU’s mammoth satellite project – was a bitter blow to Linklaters. Just one month earlier, the firm was informed that it would be retained on the high-profile project, which will see 30 satellites launched into the sky to rival the US’s global positioning system (GPS) satellite navigation system.
In fairness, the progress of the project has not, so far, been plain sailing.
The first stage of the procurement process, which dictated ludicrous budgets and time constraints, was a spectacular bungle. Even the Joint Undertaking, an entity dual-owned by the EU and the European Space Agency, which is overseeing the project, itself admitted the process was a “farce.”
A farce it may have been, but Linklaters certainly believed itself instructed. It is understood that partners from the firm were on the Eurostar to Brussels when they were informed that the procurement was aborted and they were suddenly “uninstructed”. New advisers would be appointed through a second tender process.
The second procurement was launched, which saw a preliminary cap on legal fees three times that of the first, and a month later Lovells and PricewaterhouseCoopers (PwC) won the mandate. Denton Wilde Sapte, which had conducted an extensive feasibility study for the Joint Undertaking, also missed out. But the firms are back for round three, working their contacts in the hope of winning a funders role.
Galileo has all the makings of a dazzlingly lucrative instruction for those firms lucky enough to get a look-in. Unprecedented in the legal market, involving a cast of parties, complex cross-jurisdictional legal issues, an estimated cost of at least &eoro;3bn (£2bn) and a lead time of several years, Galileo is a project lawyer’s ultimate dream.
In a time when juicy corporate deals are few and far between, in recent years the projects market has witnessed a bonanza of major transport and defence deals. The TubeLines PPP and refinancing, the Metronet PPP and the £5bn Skynet 5 project dominated the headlines and saw projects practices – CMS Cameron McKenna, Freshfields Bruckhaus Deringer and Lovells in particular – celebrate massive fees windfalls.
And in the pipeline is a clutch of deals that put even these in the shade. Galileo aside, Future Strategic Tanker Aircraft, the St Barts and London hospital redevelopment, Crossrail and the Allenby Connaught Ministry of Defence (MoD) accommodation scheme are all multibillion-pound deals over which the big City practices are salivating.
However, in the relatively mature health market, legal work on low-value hospital PFI deals is becoming ever more commoditised. Though even here, City firms are gearing up for a raft of jumbo projects. The £1bn St Barts and London NHS PFI is merely the first of what promises to be a buffet of giant hospital deals, including the redevelopment of the Paddington, Mersey and Birmingham hospitals. On St Barts, Clifford Chance scooped the role for construction group Skanska and Allen & Overy (A&O) bagged the Barts and London NHS Trust. In a surprising move, Ashurst won the funders role from the more natural choice of Linklaters following a recommendation from Skanska.
However, there is no avoiding it – margins on PFI deals are narrowing. Fixed and capped fees are part of the projects landscape, forcing firms to manage their deals within strict budgets. On the smaller transactions, which comprise the bread and butter of most projects practices, City firms are feeling the price squeeze from regional players such as Addleshaw Goddard, Bevan Ashford, Eversheds and Pinsents.
Diminishing margins on routine deals make it critical for the major outfits to win roles on the jumbo projects, where there are still good fees to be had. But here is the rub: while premium deals are growing larger, project volume has remained relatively stable. The result? Firms at the top end of the market are chasing more lucrative, but fewer, deals, and competition for places on premium projects is tougher than ever.
The importance of jumbo deals to the major City projects and PFI practices cannot be understated. According to one partner: “If we didn’t have the jumbo deals, we couldn’t make money out of the small stuff alone. We really only do that to build credentials for the major deals.”
But Gavin McQuater, head of projects at Lovells, insists that routine deals are an essential part of a profitable practice. “For every TubeLines or Skynet you do, there are 20 ordinary deals. To have a healthy practice, you must have a mixture of routine and unusual deals,” he says.
Risk is an inherent part of the projects market and most London practices can expect to win on average one in every three roles they pitch for. As A&O discovered on Galileo earlier this month when its Eutelsat consortium backed out, acting for failed bidders on projects is inevitably a loss-making enterprise for firms. Most major practices focus on private sector clientele, where the rewards are greater, and then balance the risk with some public entity instructions – whether for NHS trusts, the MoD or transport authorities – which offer greater certainty.
Recovery rates for projects groups currently sit at around 2-3 per cent less than those in corporate departments, normally around 85 per cent. But deals on the scale of Skynet 5 – which lasted for five years and included, for some firms at least, a mammoth closure bonus – are virtually unheard of in the corporate landscape. In the past year, when prime M&A transactions were nowhere to be seen, successful projects practices have quietly shone.
The Galileo saga is illustrative of the dangers and potential triumphs of projects/PFI. For the winners – Lovells, and thus far Clifford Chance and Freshfields – the prizes can be dazzling. But for the losers – A&O, Denton Wilde Sapte and Linklaters to name just three – there is simply nothing to do but get up, dust off, and get on the phone to those banks.