Special Report: Europe 1H20 public M&A sees compromise on terms help stave off spike in deal failures

The number of failed deals in the European public market space has been low during 2020 even as the coronavirus pandemic has ravaged financial markets, according to analysis by Dealreporter.
 
That’s not to say 2020 has been plain sailing for merger arbitrage funds. Pre-definitive or ‘expected’ deals have remained vulnerable to collapse during the period, pricing has been revisited in two definitive or ‘live’ situations and there remain some live transactions where there is increased perceived risk because of the ongoing impact of coronavirus.
 
The headline number from Dealreporter’s analysis of public markets transactions is perhaps a surprising one however: no live transactions in Europe have lapsed during the first six months of 2020. This is the first time this has happened in the region during the first six months of a year since at least 2015.
 
Two live deals failed in the first six months of 2019 as shareholders rejected the proposed tie-ups of Non Standard Finance /Provident and EP Global/Metro.
 
The picture is fairly similar when examining deals which lapsed at the pre-definitive or 'expected' stage, prior to a merger agreement having been signed, with no obvious escalation in lapsed deal trends.
 
In the six months to 30 June 2020, six European deals classified by Dealreporter as expected lapsed. That compared to 13 a year earlier. All of the deals which lapsed in 2020 were at the pre-definitive stage where there was no binding merger agreement. 
 
This reduction in lapsed transactions during 2020 is partly a function of the reduced number of deals which were announced during 2020. A total of 21 transactions were announced in the first six months of 2020, compared to 44 in the same period of 2019.
 
There have been a few situations where compromises reached between bidder and target helped save transactions which had appeared at risk of collapse. In two cases, BorgWarner / Delphi Technologies and Blackstone , pricing was amended to save transactions where widening deal spreads had indicated market participants had little confidence in deal closure.
 
In the case of the BorgWarner/Delphi automotive supply chain all-share merger, which valued the target at USD 1.5bn on announcement in January, bidder BorgWarner withheld consent for UK-headquartered Delphi to draw down a revolving credit facility. BorgWarner then argued on 31 March, after Delphi drew down the credit line, that the target’s board had breached the parties’ merger agreement. Delphi’s board argued the draw down was prudent in light of market conditions and that no breach had occurred because BorgWarner unreasonably withheld its consent. Both parties said they remained committed to the transaction at the time. After a month of uncertainty and a blow-out on the transaction’s spread to 37%, the parties agreed to a 5% reduction in the merger exchange ratio from 0.4534 to 0.4387.
 
In Blackstone/NIBC, which involved a stake sale by majority shareholders to the bidder followed by a mandatory offer, a number of stumbling blocks occurred before the transaction was repriced. First, Blackstone argued NIBC’s cancellation of a scheduled dividend payment meant its bid vehicle had insufficient funding to complete the transaction. It also said that COVID-19 had created substantial uncertainty around the transaction-related business plan and this could affect regulators’ views on the deal.
 
NIBC resolved to pay the dividend in order to remove the first hurdle but, shortly afterwards, Blackstone was reported to be seeking a renegotiation of the price. The parties subsequently agreed a revision to the proposed offer price from EUR 9.85 cum dividend to EUR 7.53. A liquidated damages clause of EUR 43m in the event of deal failure in certain circumstances was also added. The clause had a value of 4.2% of the transaction price excluding dividends.
 
While both of the above transactions saw bidders lean on contractual merger terms to win concessions from the target rather than invoke them in court, there is one sizable European situation where a dispute between target and bidder may end in a legal dispute over the MAC clause. The USD 1.7bn acquisition of privately-held UK-headquartered payment service providers eNett and Optal by WEX may end up in court after WEX threatened to call off the deal in May citing the coronavirus pandemic. Travelport, owner of the payments platforms, disputed WEX’s statement and claimed the parties’ merger agreement “expressly excludes the effects of a pandemic from the definition of Material Adverse Event”. While in this case the target is not publicly traded and so does not fall in Dealreporter’s ‘live deal’ universe, its outcome could have important implications for future merger agreements in public markets.
 
 To view the full article, please email Kasia Koslowska.
 
by William Cain and Saritha Dantu