Catalonia crisis causes M&A to slow as €27bn loss is forecast for Spain

Future dependent on regional election outcome, but firms not expected to close Barcelona offices as opportunities remain in real estate, tax and employment

With the Bank of Spain warning that the crisis in Catalonia could cost the Spanish economy up to €27 billion in the next two years, law firms in Spain are reporting a slowdown in M&A activity, particularly in the real estate and automotive parts sectors. As political tensions rise, some partners highlight the fact that Barcelona is a “tough market” for Madrid-based law firms at the best of times, with the clear implication being that the Catalonian independence movement will make it an even more difficult place for law firms from the Spanish capital to do business. However, some partners also reject suggestions that any law firms will close their offices in Barcelona as a result of the turmoil. “If a law firm closes its office in Barcelona, it will not be because of the political uncertainty, it will be for other reasons,” says one managing partner at a Madrid-based law firm.

Uncertainty still prevails, with the general consensus being that the situation will be given more clarity by the result of the Catalonia regional election on the 21 December this year. Given the sensitivity of the issue, many managing partners are reluctant to speak on the record about the crisis, but one in the Madrid office of an international firm, who notes that some M&A activity has been delayed as a result of the Catalonia situation says: “If the Catalonian election yields a result that favours political stability, it is likely that business activity will be resumed and those projects that were postponed will be started, so in the end maybe there won’t be a significant drop [in M&A activity in 2018].” However, the managing partner adds that activity is decreasing and that “some investment banks have mentioned that they have seen some slowdown too”.

Potential double taxation
It has been reported that nearly 1,700 companies – including notably CaixaBank, Banco Sabadell and Abertis – have moved their registered offices from Catalonia to other parts of Spain since the country’s constitutional crisis developed. One partner at a law firm based in Barcelona says companies based in Catalonia have faced “commercial pressure” to relocate their businesses. “The Spanish economy is interlinked; some companies have been told that if they don’t move their domicile, some businesses won’t continue working with them,” he explains. The partner adds that there are also concerns among clients that, in the event Catalonia was to become independent, there would be an impact on freedom of movement and potentially double taxation.

While many Catalonian companies have re-registered their office in other parts of Spain, one managing partner says that some businesses could take the step of also moving their operations – that is their staff and assets – out of the region if the uncertainty continues, but the partner adds that this will depend on the outcome of the 21 December election. The significance of a company’s registered office is that it determines the nationality of the company. If Catalonia were in fact to become independent, the companies with their registered office in Catalonia would cease to be Spanish. Consequently, Catalonia would no longer be a member of the European Union and therefore would not be part of the EU single market, with the effect that exports to elsewhere in Spain or the European Union would be subject to tariffs and other restrictions.
However, such a scenario is purely hypothetical at present. But the drive for independence has already had a significant impact on the region’s economy. For example, according to the Institut d’Estadística de Catalunya, the number of trading companies registered in the region in November 2017 was down 24 per cent on the same period the previous year. Meanwhile, deal flow is also slowing. “While difficult to measure, over the last few weeks, we have sensed that new projects are being incepted at a slower rate compared to the pace of previous months,” says one managing partner. But the partner adds: “Spain continues to be an interesting market, but rather than start projects now, some investors prefer to wait and see until they have a better grasp of the macroeconomic situation in a few weeks’ time.”

Jose María Roji, managing partner of CMS Albiñana & Suárez de Lezo in Barcelona, says some M&A activity has been suspended, or even permanently abandoned, as a result of the instability and uncertainty in Catalonia. However, he adds: “We also have experience of other operations that have completed or continued their natural course in spite of it.” Roji says the sectors currently experiencing a decline in M&A opportunities include automotive components and real estate. Yet he also points out that in the consumer products and food sector, some investors have been using the uncertainty to negotiate improved terms and conditions on deals, rather than pulling out of transactions.

Roji says uncertainty usually results in a decrease in the number of transactions in the short-term, but also a drop in the price of assets in the medium-term. He continues: “We are optimistic and confident that there will be a stable and secure environment that will return Barcelona to the position it has held for centuries as an economic and development centre.”

Some partners argue that Madrid could attract more investment at the expense of Barcelona as result of the Catalonia crisis. However, others take a different view – Roji argues that in a globalised market, while part of the business lost to Barcelona will be captured by Madrid, “another non-quantifiable part will be lost by Spain for the benefit of other [worldwide] jurisdictions”. He explains: “When a company considers alternatives to an investment in Barcelona, it does not take into consideration only other Spanish locations such as Madrid, but other European cities or other places in the world depending on what the investment requirements are. For example, if the investment requires that it be a city that has an important port, the alternative to Barcelona may be Valencia, but also Genoa, Marseille or Le Havre. If the investment consists of creating a shared services centre of a multinational group, it will compete with other locations such as Poland or Romania but also India and South Africa.”

For law firms, a prolonging of the uncertainty will spell trouble. “If the situation continues, it is likely to generate more disadvantages than opportunities, as a lengthier crisis would mean that transactional activity slows down for a longer period,” says one managing partner. But one partner at an international firm doubts that law firms will close offices in Barcelona due to the crisis. “There has been uncertainty in countries like Venezuela, Egypt and Turkey, but despite it, law firms have done well in those jurisdictions,” the partner says. “M&A work in Catalonia may decrease, but there are opportunities in real estate, tax, criminal law and employment as there will be lay-offs.”