2019 has been a year of tariffs announced via tweet, inverted yield curves, avocados and bitcoin (and gold) having things in common, the birth and death of mega deals, and more. It all feels like a blur. Here are a few market and contract drafting trends to keep an eye on and questions to be asking in mergers and acquisitions as we enter 2020.
Shrinking Global Deal Volume But Growing Average Deal Size
Will this year’s global M&A trends—shrinking overall M&A and fewer but larger deals—continue into next year? 2019 has been quite a year for mega deals (valued at $10 billion or higher), with $870 billion announced through the third quarter. This volume already surpasses that of 2018 and 2017, and is in a position to exceed 2016 by the end of the year. Meanwhile, the large and middle markets have suffered significantly.
Mega deals tend to be all-stock deals rather than cash deals. This may render them a preferable path to growth during worrying times. From a macroeconomic perspective, if the current recession forecasts and economic stressors (e.g., the trade war, Brexit, and the like) remain in place, 2020 may be a slow year for smaller M&A deals that are more closely tied to economic and other risks. On the other hand, if the outlook clears, perhaps buyers that were hesitant in 2019 may be more willing to take the risk of a new acquisition, providing a surge in the middle and large markets.
Global Companies Selling Long-Held Overseas Operations
After 125 years of operation in Norway, Exxon Mobil Corp has announced the pending sale of its Norwegian assets to Italian Eni‘s Var Energi joint venture for $4.5 billion. Chevron left Norway last year, and its sale of its U.K. oil fields to Israel’s Delek Group Ltd. is currently pending. But these energy giants aren’t retreating only from the aging North Sea.
Exxon’s Norway deal is part of the company’s “$15 billion divestment plan designed to help fund one of the biggest corporate turnarounds in its history after years of stagnating production and a stock-price that has underperformed rivals,” according to Bloomberg. As part of its plan, Exxon is expected to sell assets in Vietnam, Indonesia, Thailand, Australia and Malaysia.
This year Chevron completed the sale of its stake in Brazil’s Frade field, and the sale of its stake in Azerbaijan’s Azeri-Chirag-Gunashli (ACG) oil field—the oil field that accounts for the majority of Azerbaijan’s total oil output—to MOL Hungarian Oil & Gas PLC is currently pending. Exxon is also reportedly seeking to sell its stake in the ACG oil field.
In August, Kinder Morgan Inc. announced the sale of its Canadian unit and the U.S. portion of the Cochin Pipeline system to Canada’s Pembina Pipeline Corp. for $3.3 billion, following divestitures by ConocoPhillips and others from the oil sands in recent years.
This dropping of historic international operations to raise cash does not appear to be limited to the energy sector. AT&T is selling its businesses in the U.S. Virgin Islands and Puerto Rico (where it has operated for 80 years) to Liberty Latin America for $1.95 billion in cash to help pay down debt. “This transaction is a result of our ongoing strategic review of our balance sheet and assets to identify opportunities for monetization,” stated the AT&T press release announcing the deal. Nissan Motor Co. is now considering the sale of its two European plants, which would mark a major retreat “to curb costs and address a dramatic slide in earnings,” says Bloomberg. Nissan has operated in Spain for 40 years and Nissan’s Sunderland factory is the largest in the U.K. and was established in 1984. Nissan had already warned that “Brexit-induced tariffs on auto exports to the European Union will probably render Nissan’s U.K. operations nonviable.”
Playing it Safe
Targets in the consumer, non-cyclical sector—including pharmaceuticals, food, and the like—have been a major favorite in 2019 both globally and in the United States. Private equity has been betting on warehouses (both refrigerated and non-refrigerated), which are critical to the storage and delivery, via your favorite apps, of these consumer, non-cyclical products. Will buyers keep playing it safe in 2020?
New Deals ... and Deals That Could Die
A number of deals in progress are likely to produce activity in the coming months. Look for the following:
Spin-off sales stemming from the WeWork IPO fiasco. The company, needing cash, is “planning to sell three businesses acquired in recent years: event organizing platform Meetup, office management startup Managed by Q and marketing company Conductor,” according to Bloomberg.
New corporate inversion opportunities, if the current administration follows through on rules changes.
Several big deals have died in 2019 (e.g., Fiat-Renault, Altria-Phillip Morris). Who’s up next? Here are some pending large deals that could close but could also fall apart in 2020:
Sprint - T-Mobile. The merger has been cleared by the DOJ but a lawsuit by a team of state attorneys general is holding up the deal.
Raytheon - UTC. Regulatory approvals and possible small divestitures to make the deal possible lie ahead in the first half of 2020.
Celgene - Bristol Myers Squibb. Celgene has agreed to divest itself of its blockbuster psoriasis drug Otezla ahead of the mega merger, which will increase the likelihood for regulatory approvals.
Refinitiv - London Stock Exchange. LSE shareholder vote on the deal is expected by the year’s end; then regulatory approvals must be obtained.
New Deal Terms: Brexit Clauses and #MeToo Reps
There are two emerging M&A deal terms to be aware of in 2020: Brexit MAE exclusions and #MeToo representations and warranties.
Brexit, along with the other global disruptions and ripple effects it is causing, has begun to impact M&A contract drafting in U.S. public deals in 2019. It should come as no surprise that buyers and sellers are excluding Brexit from the definition of “material adverse effect” (MAE) in large transactions. For example, Brexit was excluded from the definition of MAE in the currently pending $13.4 billion pharmaceutical Celgene Corporation - Amgen Inc. Otezla deal (Asset Purchase Agreement dated August 25, 2019)—between two U.S. parties—with Kirkland & Ellis representing the target and Sullivan & Cromwell representing the acquirer. In that agreement, the following is excluded from the scope of the MAE:
any actual or potential break-up of any existing political or economic union of or within any country or countries or any actual or potential exit by any country or count[r]ies from, or suspension or termination of its or their membership in, any such political or economic union (including, for the avoidance of doubt, “Brexit”)
Parties typically include MAE provisions in order to deal with the possibility that the target company (or the shares of stock used for payment) lose significant value after contract signing and before the buyer delivers payment. For businesses with a nexus to the U.K. or the E.U., Brexit could potentially impact deal value. Excluding Brexit from an MAE’s scope is an acknowledgment by the parties that Brexit is a well-known risk and should have already been factored into the terms of the deal, including the deal price. Given the many Brexit postponements and uncertainties, we expect more Brexit MAE exclusions in 2020.
#MeToo representations and warranties began to show up in significant numbers of public M&A agreements in all market segments this year, with several versions of these clauses becoming market standard in M&A contract drafting. Because of continued public interest combined with significant corporate impacts, this evolution is most certainly expected to continue into next year and beyond.
Updated on November 12, 2019, to reflect the pending acquisition by MOL Hungarian Oil & Gas PLC of the Azeri-Chirag-Gunashli oil field.
Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.