Company & Corporate Report 2010: Still not biting – fishing for deals across Iberia

Spanish and Portuguese lawyers take a mixed view as to whether Iberia’s transactional markets are coming back to life. Deal volumes remain depressed, as do values, and financing and liquidity concerns continue to complicate negotiations. But some do however sense a more positive corporate attitude emerging.

At first glance, things seem to be going well. Major transactions on the table include the €5bn merger of British Airways and Iberia, and Liberty Acquisition Holdings €1bn acquisition of troubled Spanish media group Prisa. On a domestic level, the €556m sale of half of Caixa Catalunya’s insurance business to Mapfre, was the largest insurance deal of the year.

Portugal too has experienced the biggest M&A transaction for a number of years, notably last year’s €1bn acquisition of Banco Mais by Banco Banif, and the ongoing hostile €3.86bn bid by Brazil’s steel and mining group Companhia Siderurgica Nacional (CSN) for Portugal’s largest cement producer Cimpor.

The latter deal has drawn in many of Lisbon’s major firms, with Garrigues´ partners Diogo Leónidas Rocha and Marta Graça Rodrigues advising CSN, which is being defended by a PLMJ team led by Luí­s Sáragga Leal and Jorge Brito Pereira. But rival bids for Cimpor stock have also emerged. A team led by João Vieira de Almeida at Vieira de Almeida has advised rival Brazilian construction and infrastructure giant Camargo Corrña on its acquisition of a 30% share in Cimpor, while another Brazilian entity, Grupo Votorantim, is being advised by newly-formed boutique Campos Ferreira Sá Carneiro Advogados (formed by ex-Urí­a Menéndez and PLMJ partners).

But look behind the headlines and Iberian transaction levels are still significantly down on pre-crisis levels. According to mergermarket, only 61 new Iberian M&A transactions were announced in the first quarter of 2010, compared to 68 at the start of 2009 and 113 at the start of 2008.

‘We are still at an early stage of an upturn in corporate activity, and after the financial crisis, the difficulties faced by some European economies, including some European economies, including the situation in Greece, is prompting companies to remain cautious with their investment opportunities,’ says Rocha at Garrigues in Lisbon.

Green shoots

Access to financing at satisfactory conditions continues to be a barrier to buyers ambitions. Although deal structures may not have changed significantly, banking syndicates are helping to make negotiations longer and more difficult. Some companies are beginning to look at the crisis as a buying opportunity and economic green shoots (brotes verdes in Spanish) may yet be emerging, believe some lawyers.

Pedro Pérez-Llorca, Managing Partner of Madrid- based Pérez-Llorca is among those taking a more positive attitude. ‘I am optimistic – we even have a team in the firm called the ‘broteverdistas. We are increasingly busy but the value and volume of transactions, along with the revenues we are seeing from M&A, are still down on previous years.’

Fernando de las Cuevas, Head of Corporate at Gómez-Acebo & Pombo agrees. ‘There are signs of a potential recovery but this is not yet crystallising into more activity. The market is reacting more slowly than expected but at some point in the coming months there should be a perceptible increase in the volume of transactions.’

Heavily leveraged deals will inevitably take longer to return to the market but those transactions requiring little outside finance present fewer issues, adds Luis Riesgo, Managing Partner of Jones Day in Madrid. ‘We believe that yes we are seeing green shoots for those industrial clients looking for strategic investments, forming joint ventures, or making investment in those companies with logical synergies.’

Others are more pragmatic. ‘We did not perceive any green shoots in M&A in 2009, and the majority of the deals we were seeing were still relatively low in value. But this said, the sentiment at the start of 2010 is undoubtedly better than at the start of 2009,’ says Mónica Martí­n de Vidales at Garrigues.

The recovery may however be too soon to call, say others. ‘We have been experiencing some blessed improvement in transactional work, both quantity and quality wise, which we hope to be more a reflex of a sustained market recovery trend and less circumstantial luck,’ says Martim Anahory at Lisbon- based Serra Lopes Cortes Martins & Associados.

Continuing uncertainty in the deal markets is in any event complicating matters. Asset values are difficult to determine while viable business projections remain uncertain.

Los abogados españoles y portugueses tienen visiones diferentes sobre si el mercado ibérico de transacciones se está reactivando. Se están llevando a cabo grandes transacciones en la pení­nsula ibérica, pero a pesar de estas buenas noticias, el volumen de transacciones sigue siendo menor que el anterior a la crisis. El resultado es un cambio en el modo de conducir los acuerdos y en la respuesta de los despachos al nuevo ambiente del mercado.

‘We are still seeing divestments as a result of restructurings and insolvencies, and sentiment seems to change week by week. We are a long way from the markets we were experiencing two years ago, so what recovery there is remains very much in its infancy,’ says Alejandro Ortiz, partner with Linklaters in Madrid.

He is one of many striking the middle ground. Restructurings mean continuing opportunities for buyers, while some sectors seem to be more crisis resistant than others.

‘What is evident is that transactions are more complex than before. More loans will be syndicated, and there will more restructurings but there is not a clear M&A pipeline out there. There will be fewer deals but that demand a higher level of legal input,’ agrees Juan Miguel Goenechea, corporate partner with Urí­a Menéndez in Madrid.

The situation is complicated further by evident structural problems in the Iberian economies, believes Gabriela Martins, partner with AAA Advogados in Lisbon. ‘Nonetheless, we may say that investors in certain sectors keep their spirit and initiative, particularly in the case of energy and natural resources.’

The worst of the turmoil may be over, but the fall-out continues to make corporate life difficult. ‘Historically low interest rates and the lower price expectations are key concerns to deal with but banks remain reluctant to make new loans,’ says José Diogo Horta Osório, partner with Cuatrecasas Goncalves Pereira in Lisbon.


One area that continues to be depressed is privateequity (PE). There is money to spend but the new funds being established are on a smaller scale than waspreviously the case. ‘We still see clients looking at deals, analysing options, but very little is being taken forward,’ says Martí­n de Vidales at Garrigues.

Others agree that market analysis continues but funds are being cautious. There is still a mismatchbetween buyers and sellers expectations. ‘The main difficulty is to find investment opportunities for theright price. PE investors are still active but transactionstake much longer to complete and are fewer,’ says Helena Vaz Pinto of Vieira de Almeida.

The sector faces recurring challenges, say lawyers: the management of portfolio companies in financial difficulties, the need to exit investments that have reached maturity, and the demand from investors to utilise funds established immediately before the crisis.

This may yet however prompt a rise in distressed debt transactions and the reappearance of secondary buyouts and IPO exits, believes Alvaro Sainz, partner with Herbert Smith in Madrid.

‘In either case, the failure to determine a price at which transactions should be performed, for example, discounts over distressed debt and what multiples are acceptable in acquisition, seems to be delaying the reanimation of the sector across the Peninsula.’

Others sense that the decline of highly leveraged transactions dominated by the international PE playersmay however lead to an increased profile for domestic funds. Cuatrecasas Goncalves Pereira in Lisbon has notably this past month advised on the formation of the €800million Fundo de Gestao Passiva – Fundo Especial de Investimento Fechado, Portugal’s largest investment fund in terms of assets.

He is one of many striking the middle ground. notably this past month advised on the formation of theRestructurings mean continuing opportunities for €800million Fundo de Gestao Passiva – Fundo Especial buyers, while some sectors seem to be more crisis de Investimento Fechado, Portugal’s largest investmentresistant than others. fund in terms of assets.

‘LBOs are still largely not on the agenda for most clients. Some are in the planning, but we remain in a deep pit as far as the large acquisition financings are concerned;’ says Pérez-Llorca.

Deals with no or very limited bank debt, a focus on distressed assets and buy and build investments, and co-investments may be what the coming year brings, predicts Christian Hoedl, partner at Urí­a Menéndez in Madrid.

‘Domestic Iberian PE houses continue being active in the mid-market and international buy-out funds that were targeting ever bigger deals are now more inclined to consider mid-market transactions. The competition is not likely to decrease although certain sponsors may eventually drop out of the market,’


Day-by-day however, the greater syndication of loan financing will mean more parties involved in deal negotiations, which may also take much longer. Many deals may begin but relatively few complete, say lawyers.

‘Liquidity concerns continue to restrict buyers ambitions to pursue an acquisition. An agreement on a price that is considered fair by both parties is top of the agenda as, at least in our opinion, sellers continue to expect prices higher than can be offered, and realistically financed, by potential bidders,’ says Javier Ybáñez, Head of Corporate at Garrigues.

The result say some, is an increase in the use of earn-outs and other clauses requiring sellers to either part-finance or participate in the future profitability of targets. ‘In order for vendors to realise the perceived value of what they are selling they have to help bridge the gap. Many are now looking at deals in two stages, an initial cash-out and subsequent earn-out,’ says Francisco Aldavero corporate partner at Madrid’s Araoz & Rueda.

Vendor’s loans are an emerging phenomena, although subordinate to banks own ‘senior’ loan financing, albeit such structures have to date been preferred by the most sophisticated investors or those companies already with private equity participation.

Nonetheless Spain is seeing consolidation in certain sectors, notes Jordi Casas, corporate partner at Roca Junyent, in the media, airline and food sectors, as companies seek economies of scale as consumer demand continues to wobble. ‘Many industrial buyers are looking hard at their own structures and those of others in the sector to capitalise on synergies.’

Wavering market confidence and a reluctance among the banks to underwrite major transactions – given their own balance sheet worries – continues also to dampen capital markets activity. Despite reports of likely imminent IPOs in Spain and recent success on Spain’s new secondary market, Mercado Alternativo Bursátil, lawyers question whether there is sufficient consistent market appetite for new equity offerings. Spain’s main Borsa has not seen a float since before 2009.

Madrid-based global eticketing and travel booking provider Amadeus has notably had its IPO on hold since 2008, and the recent decision of British Airways not to liquidise its shareholding has further complicated the Group’s plans for a flotation.

Debt and high yield offerings may continue but deal volumes are still significantly down on recent years, their success again dependent on market sentiment and the viability of investor spreads. Nonetheless some remain slightly more upbeat. ‘We may yet witness a couple of IPOs in the course of 2010, and there will surely be a number of share subscription public offers aimed at funding companies growth strategies,’ says Joao Vieira de Almeida.

International attraction

Investor confidence is also having an impact on international interest in Iberia, say many. Asset values may be cheaper, but continuing economic uncertainty has meant that the region has fallen down the priority list of many. Other countries have cheaper assets or greater economic stability.

‘The perception of Spain internationally is not good, probably worse than deserved. Some investors maintain their optimism but many more do not and cite a lack of funding opportunities and structural flexibility in the economy as why. At the same time certain sectors like energy, banking and infraestructures are attracting large interest,’ says Ortiz at Linklaters.

The situation in Portugal is similar, despite the scale of the battle for control for Cimpor. However a reduction in the flow of inbound Spanish investment may yet present rising opportunities for domestic companies, suggest some. ‘Foreign investors, from outside Iberia, are probably busier with their own domestic problems and, as such, this might be a time of opportunity for domestic investors. The Spanish crisis is notably forcing some groups to withhold their investments in Portugal and, in some cases, to leave the Portuguese market,’ says Rodrigo Almeida Dias partner with Lisbon’s F Castelo Branco & Associados.

Some Portuguese businesses may be looking at Spain with greater interest, but the main focus for the largest companies remains the liberalising economies of lusophone Africa and of course, Brazil.

‘Portuguese companies are looking not only to Spain but outside the Iberian Peninsula for opportunities. We have to try to follow our clients wherever they go, and this has generated legal work both domestically and in other jurisdictions,’ says Vasco Ataí­de Marques, Head of PLMJ’s Central and East European desk.

Expansion is not only a means to grow may be essential for survival, say others. Portuguese internationalisation is also being backed by the Government, which has put together financial incentives. Notably in Angola and Mozambique Caixa Geral de Depósitos has supported new banks intended to help finance infrastructure projects sponsored by Portuguese companies.

‘It is a clear sign of the Government’s perception of the decisive importance of these new markets for Portuguese businesses. A strong international Portuguese presence can also attract greater interest on the part of other international investors,’ says Luí­s M. S. Oliveira, partner with Miranda.

For Spanish investors, traditional markets such as Latin America remain on the agenda, but markets across Europe and particularly the US are now major targets – notably as a result of the US Stimulus Plan’s emphasis on renewable energies and infrastructure projects.

‘In dramatic contrast to the situation only a decade ago Spain now has many major companies doing very well internationally, and the focus of their practices for the foreseeable future. world is interested in what they will be doing and where they will be going next,’ says Goenechea at Urí­a Menéndez.

The recurring challenge for Iberia’s law firms remains however to demonstrate the value they can offer clients as they move abroad. Firms have to ensure they are ‘international’, that they have the trust of their clients and are able to make them aware that if they are embarking on complex cross-border transactions that they can still assist them.

A new approach

Law firms are therefore looking to adapt their offerings to the prevailing market sentiment and needs, with more multidisciplinary teams and greater emphasis on senior lawyer input. Some business sectors – for example, energy, renewables or pharmaceuticals – may seem to be more resistant to the downturn, but transactional lawyers accept that restructurings and reorganisations may well be the focus of their practices for the foreseeable future.

Sectors such as real estate and construction remain precarious, while in Spain the ongoing, albeit slow, consolidation of the over-stretched savings banks may present growing opportunities.

The merger of the cajas is being encouraged by The Bank of Spain and supported via the Government’s Fund for Orderly Bank Restructuring (FROB), but some lawyers suggest the same process may yet have a negative impact on the deal market as a whole.

‘It is a fact that financing is not there and liquidity levels may even worsen as a consequence of the deterioration of the solvency ratios of the financing institutions. Deal structures are more like the kind of transactions that were usual in the late 90’s: very little leverage, plenty of negotiation on reps and warrants and strong guarantees,’ says Pedro Rueda.

Pressure and flexibility

More demanding clients, a greater emphasis on value for money and more complex transactions mean more demand for partner time although with continuing pricing pressure, say lawyers. Less work means also that firms will have to be more flexible in the way they approach and staff deals.

Lawyers complain in public of heightened price competition but in private admit that reducing fee levels is an important element of protecting market positions. ‘We all say we are not in favour of price dumping or lower fees, but in order to compete and remain busy we all do it,’ says one partner.

Others note that while they are increasingly looking at contingency fee agreements, they cannot take a risk on everything. Firm’s costs still have to be covered, and also there is question of value perception.

‘Our clients have demanded that we become leaner when it comes to costs and more transparent and competitive when it comes to fees. Alternative fee billing practices have became a very familiar concept for clients and firms alike,’ says Manuel Santos Vitor, Deputy Managing Partner at PLMJ.

His firm has pioneered the use of regional associate firms to manage more cost-sensitive issues, akin to the Mexican wave concept now being used by some Anglo Saxon firms and legal departments. But the relative lack of super-specialisation of Iberian lawyers continues to present an ability to adapt to changing client needs and sensitivities.

‘You can adapt your work areas as long as you can ensure that you give the same level of service your clients expect. But many of the things we are now doing we were not doing before the crisis, and what is also significant is that we see the same banks in these new areas – it is clear that this is all very new for them too,’ says Pedro Pérez-Llorca.

The degree of flexibility lawyers can offer may however be determined by the structure of their law firms. ‘It is not right for us in the corporate team to change one day to finance or another to tax work, at our convenience. You have to show an example to the younger lawyers, to demonstrate that we are all in it together. We cannot jump from one area of practice to another, it does not fit the firm’s profile,’ says Fernando Torrente at Cuatrecasas Goncalves Pereira.

There is though clearly a value in being able to offer multidisciplinary teams, as parties look to protect their positions post-merger, and for the corporate lawyers to be at the centre of things, say others. But investors and banks are much more cautious than they used to be.

‘Deal structures tend to reflect these additional concerns, the parties envisioning to include additional layers of protection against, namely unexpected and/or unforeseen developments,’ says Vasco Marques Correira at PLMJ.

In any event, the new environment may yet benefit firm’s junior lawyers who have more exposure to more complex transactions. ‘As senior practitioners we were lucky enough to grow up with a broad practice view. Junior lawyers have more recently developed in a much more narrow way. Now we have the opportunity to expand their expertise,’ says Alejandro Ortiz, partner at Linklaters in Madrid.

It may also help dilute the power of the law firm brand, suggest others. ‘ ‘Less lawyers better lawyers is certainly in vogue and people are again looking more to the traditional high-profile lawyer and less to the ‘brand’ that renders different specialised legal counsel services,’ says Lisbon’s Rafael Lucas Pires of Serra Lopes Cortes Martins & Associados.

In Portugal, lawyers point favourably however to the efforts being made to protect the value of the euro, including the joint EU and IMF bailout of Greece, the continuing influence of the EBRD, and obviously domestic efforts to boost confidence in the economy.

‘The recently approved Portuguese Stability and Growth Pact contemplates the privatisation of a number of publicly held companies in various sectors, such as insurance, energy, post-offices, etc, which are due to complete within the next few years, and which will in all likelihood boost the market,’ says Paulo de Barros Baptista at Vieira de Almeida.

Others point to continuing hope for the PE sector. ‘Portugal remains an underdeveloped market for PE investors. The lack of competition ensures a steady deal flow, enabling funds to avoid auctions and focus on proprietary deals with considerable price benefits,’ says Gonçalo Capela Godinho, partner at Cardigos.

Across Iberia institutional investors continue to commit to PE but the market expectation remains that we will see smaller transactions and much more adjusted leverage levels.

‘We expect to see smaller funds, capital focused and funded principally by domestic investors where managers can enhance their own advantages and give rise to an interesting level of deal flow out of the opportunities created by the economic situation,’ says Isabel Rodriguez at SJ Berwin in Madrid.

The consensus is therefore across Iberia that it will be some considerable time before we again see a return to the leveraging levels of the past. This result will be a change of transaction financing structures and buyers having to strengthen their own balance sheets and commit more equity to deals. Greater concern is evident in reviewing targets financial positions with a focus on financial covenants and deeper due diligence reviews.

For senior corporate lawyers this may indeed mean working longer hours for lower revenues, and for their law firms, a greater emphasis on senior lawyers and other areas of practice.

‘We have though to accept that the transactional and M&A arena may this year be less of a driver for our practice than we, as corporate lawyers, would perhaps like,’ says Torrente at Cuatrecasas.

The continuing effects of the downturn

‘The main change to be noted, indeed not only now, is that buyers are resorting to a broader number of lenders mainly because financing from one sole source is more difficult and also to be in a better position to discuss credit terms.’
Dulce Franco, AAA Advogados

‘There do exist a significant number of strategic buyers who are prepared for cash deals on their own, the issue however is pricing: you hear and you notice potential buyers claiming that the price of companies for sale is not in line with the economic downturn.’
Miguel De Avillez Pereira, Abreu Advogados

‘Good corporate management, imaginative industries and service providers tend to overtake quickly the current downturn. It is now ‘sink or swim’ time!’
Manuel P. Barrocas, Barrocas Advogados

‘The downturn has effectively impacted the structure of transactions, obviously in the equity/debt ratio, but also in a decrease of the level in risk that the parties are willing to assume, the restriction on guarantees given to secure their respective obligations and the structure of payment of the price, all of which have definitively contributed to a greater complexity of the transactions.’
Lourdes Ayala, Lener

‘Limited financing, less profits generally, and uncertainty (in some cases in regulation) impact on the morale of decision makers who find it difficult to submit investment proposals to their Boards unless such proposals are tremendously attractive.’
José Marí­a Balañá, Managing Partner, Lovells Madrid

‘The current situation has increased the ability of the bank/lenders to dictate credit terms. Buyers are also being required to significantly increase their equity contributions in relation to proposed M&A transactions, as a consequence of which the leverage ratio of transactions is decreasing dramatically.’ Juan Francisco Falcón, Urí­a Menéndez

‘Flexibility, adaptability and a very open minded attitude will be crucial in this business as in others, to the detriment of rigid approaches or solutions.’
Pedro Pinto, Pedro Pinto Reis & Associados

‘At present, clients are focused primarily on cutting costs and streamlining management. This clearly implies internal restructuring. Similarly, overseas, plans tend to involve restructuring debt with banks, which implies much legal work and negotiation of banking and financial law.’
Joana Andrade Correia, Raposo Bernardo.

‘The latest economic indicators in Portugal show a downturn in the recovery pace if we consider the results of the last quarter of 2009. Also, the climate of economic confidence in the country lacks of vitality. On the other side, in any event, the more recent successful international placements of Portuguese public debt show that there are reasons not to loose faith.’
Antonio Mendonça Raimundo, Albuquerque & Associados

Company & Corporate Report 2010: Still not biting – fishing for deals across Iberia


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