‘People typically underestimate the innovative powers that are out there,’ reflects Rick van Aerssen, Freshfields Bruckhaus Deringer’s global managing partner. ‘The adaptability of society has been significant. The way that the different economies have weathered the storm from the pandemic has been north of what we would have anticipated two years ago. I personally think the same will hold true for any crisis.’
Given the lingering impact of the Covid-19 pandemic, 2021 becoming a record year for dealmaking was not what many would have predicted. The global market reached unprecedented highs of an estimated $5.9trn in total deal value. Most big international law firms are reporting revenue increases and citing corporate activity as the key driver behind them.
Legal Business spoke to those involved in Europe’s largest announced transactions by value in 2021 according to Dealogic data to find out what’s been fueling the insatiable appetite for deals.
Private equity boom
It is impossible to ignore the influence private equity had on the market in 2021. Several deals in the table (see below) involved PE houses, including the transaction that took top spot: KKR’s pending acquisition of Telecom Italia (TIM). However, at the time of writing, the completion of that deal looks under threat after TIM’s board elected to reject KKR’s request for advance due diligence.
The transaction, set to be valued at over $40bn including debt should it complete, would take Italy’s biggest telecoms company private. Even if the deal is stymied, it is at the apex of a recurring theme in 2021; there is no longer a limit to the ambitions and capabilities of the big private equity players. KKR is just one of the major houses to enjoy a stellar 2021, the reported $470.6bn in assets it had under management by the end of the year representing an 87% hike from 12 months earlier.
The way that the different economies have weathered the storm from the pandemic has been north of what we would have anticipated two years ago. I personally think the same will hold true for any crisis.
Similarly, the acquisition of a majority stake in Autostrade per l’Italia by a consortium comprising CDP Equity, Blackstone Infrastructure Partners and Macquarie Asset Management is another example of a deal that historically may have been beyond the reach of private equity players.
Autostrade is one of the largest toll road operators in Europe, responsible for the maintenance and operation of around half of Italy’s toll roads, which together accommodate roughly four million travelers daily.
Clifford Chance was a key adviser in both transactions, advising Telecom Italia in the former and CDP Equity in the latter. Jonny Myers, head of private equity at the Magic Circle firm, notes of the recent shift in the market: ‘Traditionally, there was a belief that there was a level at which private equity can’t operate. That play card has been rewritten. When you look at the way in which private equity operates, its vision of a strategy and implementation, and its capacity
to deploy capital.
‘Private equity operates in different constraints to corporates. It’s the classic discussion around investors taking a medium-to-longer term view compared to listed entities living with shareholders trading in and out.’
Market consolidation
Multiple deals in the top ten also show markets in consolidation mode. In Germany, Vonovia’s takeover of Deutsche Wohnen is the most striking example.
Finalised in October 2021, Vonovia acquired 87.6% of voting rights in Deutsche Wohnen. The deal values Deutsche Wohnen shares at €53 each.
Two of the major players in German real estate, the combined entity now manages a portfolio of roughly 568,000 apartments. The deal, valued at $30.6bn including debt, follows other notable acquisitions made by Vonovia
in 2016, 2017, 2018 and 2019.
Van Aerssen, one of the leaders of a multi-disciplinary team at Freshfields that advised Vonovia, explains the significance of the deal: ‘Residential real estate is an industry that has been consolidating for quite some time. We’ve been doing transactions for Vonovia in Austria and Sweden, as well as Germany. So, they’ve been one of the big players in terms of consolidation, and this was a culminating point for the consolidation in Germany.
‘The industry is one where there have only been four or five major players. In terms of public M&A, there has only been one major transaction every few years, and word on the street has it that things are more or less done now as there’s only a couple of players left.’
There has also been significant consolidation in the aviation space, with Aercap’s $32bn acquisition of GE Capital Aviation Services in November. This is hardly surprising, given the buffeting the sector has received in recent years. The transaction sees GE receive 111.5 million AerCap shares, $23bn of cash and $1bn of AerCap notes.
The acquisition establishes NYSE-listed Aercap as a market leader in all areas of aviation leasing, with a portfolio of more than 2,000 aircraft, 900 engines and in excess of 300 helicopters, while GE plans to narrow its focus towards the hi-tech industrials space.
CC’s Myers, who advised GE, explains that the deal re-enforces the globe-trotting nature of transactions in the current market: ‘These types of projects reflect the fact that, if you’re leaders across financial centres and have the ability to deploy talent irrespective of location and operate as a single team, you’re no longer bound by which office you sit in. Physical location is always a factor, but we are no longer restrained by where we sit, and nor are our clients.’
On the other hand, Roche’s reacquisition of 53.3 million shares in the company from Novartis shows a market moving in the opposite direction. The transaction, which closed in November 2021 for a value of $20.7bn, brings to an end a 20-year association between the two pharmaceutical powerhouses. Current thinking is that the split will allow Novartis to simplify its structure with a view to further M&A activity, while Roche is secured against a market predicted to slow as the world moves out of the Covid-19 pandemic.
ESG essentials
It’s no secret that ESG considerations are becoming more of a driving force behind deals, but this reached new heights in 2021. PPL’s $20.1bn including debt acquisition of Western Power Distribution from National Grid is the most striking example, seeing National Grid take control of the UK’s largest electricity distribution business.
A key motivating factor behind the deal was the opportunity it represented to enhance National Grid’s capabilities in the delivery of the UK’s net zero targets,
as the company now becomes a major player in both transmission and distribution.
It’s no secret that ESG considerations are becoming more of a driving force behind deals, but this reached new heights in 2021.
Commenting on the transaction, Caroline Rae, who led the Herbert Smith Freehills team that advised National Grid alongside Bob Moore, notes: ‘ESG is a major trend in M&A, and this deal is an example of that. A couple of years ago when we started talking about ESG being a trend in M&A, we were thinking about deal protection in the form of ESG focused diligence and warranties. Now it’s moved on to being a big driver of deals. I often thought of it as being more of a negative driver in the sense of disposals of risky assets like fossil fuels, whereas actually this was an example of ESG being a driver in a positive sense giving National Grid an even greater role to play in the journey to net zero.’
Nick Williamson, head of Ashurst’s corporate group and leader of the deal team that advised PPL, agrees, noting that ESG as a factor of M&A is not going away, irrespective of any turmoil in the market: ‘People used to pay lip service to ESG considerations in M&A, but not anymore. It is one of the major trends in M&A, and events in Ukraine won’t change long term goals. What we may see is a short-term increase in interest in oil and gas.’
The deal is also illustrative of another trend; the increased focus on regulated assets. The turbulence of recent years has seen such assets become something of a safe haven for investors, as they seek to guarantee consistent revenue streams.
Williamson asserts: ‘Ashurst’s corporate practice covers a multitude of things, but one of them is infrastructure M&A. Recently there has been a lot of interest in regulated assets, which are a very attractive purchase as they provide a regular income.’
The rise and fall of SPACs
Evidence of ESG considerations being a positive driver for deals is also reflected elsewhere in Europe. Swedish electric-car manufacturer Polestar’s $20bn merger with Gores Guggenheim, a US-listed ‘blank-check company’, is further evidence of the amount of money there now is in sustainable products. Polestar is a producer of high-performance electric vehicles and seeks to be at the forefront of environmentally beneficial developments in the sector, having committed to producing carbon neutral vehicles by 2030.
The transaction is also reflective of another trend that swept the market in the last 12 months; SPAC mergers. Once a little-known route to the public markets, the explosion of activity that began in 2020 continued into 2021, as household names such as WeWork and SoFi opted to make their market debuts using SPAC transactions. The surge reached fever pitch in Q1 2021, with 317 SPAC IPOs on the US markets.
Silicon Valley-based partner Kyle Krpata of Weil Gotshal, which represented Gores Guggenheim in the transaction alongside Davis Polk, explains that the company has seen a significant level of activity in recent years: ‘We have worked with The Gores Group on their SPAC transactions since 2016 when they successfully closed a business combination with Hostess and we have signed or closed nine other business combinations for Gores affiliated SPACs since then.’
The rate of activity at the start of the year could not be maintained, however, with Q3 seeing just 111 IPOs, and opinion is now divided on the role SPACs will have to play in the long-term future of the market. Nevertheless, the Polestar/Gores Guggenheim transaction, which closed in September, shows that there are still substantial deals to be done. Krpata notes: ‘The SPAC market has been under quite a bit of pressure in the last several months, but this transaction illustrates that high-quality transactions led by blue-chip sponsors can still get done in this market.’
Spin-offs and strategics
Spin-off transactions were also popular in 2021. The most high-profile of these was arguably Vivendi’s sale of 70% Universal Music Group (UMG), the world’s largest record label featuring the artists such as Taylor Swift and Billie Eilish.
The transaction saw Vivendi list 60% of the company on Euronext Amsterdam in September, with 10% going to blank-check company Pershing Square, a hedge fund owned by Bill Ackman.
The consensus among partners feels broadly bullish – while all expressed horror at the turmoil currently engulfing Europe – the hope is that there is sufficient residual heat in the market for a reasonably prosperous year.
Elsewhere, German automotive giant Daimler spun off its bus and truck division into a new standalone company, Daimler Trucks. The new company subsequently listed shares on the Frankfurt stock exchange in late 2021. Under the terms of the transaction, Daimler shareholders receive one additional share in the new company for every two Daimler shares held. The result of this is that 65% of the shares in Daimler Truck Holding will be held by existing Daimler shareholders.
As in any other year, some deals were instigated by specific considerations, rather than any overarching market activity. South African Holding company Naspers engaged in a share swap deal with Prosus, a subsidiary listed on Euronext Amsterdam. The transaction, completed in May 2021, saw Prosus gain a 49.5% stake in Naspers with the purpose of alleviating the concentration risk associated with the rising share price of Tencent, in which Naspers has a 29% holding.
Crystal ball gazing
With 2021 now feeling like a lifetime ago, the question of what is to come in 2022 looms large. The consensus among partners feels broadly bullish – while all expressed horror at the turmoil currently engulfing Europe – the hope is that there is sufficient residual heat in the market for a reasonably prosperous year.
One of the key economic concerns relating to the uncertainty in the market is inflation, as HSF’s Rae explains: ‘the biggest challenge for M&A going forward will be what happens with inflation and increased interest rates. If you have a deal that makes strategic sense and you’re happy with the valuation, I think the deal will go ahead, regardless. But if you’ve got a deal where there’s a bit of doubt around the strategic rationale or the price, I think that’s when the geopolitical uncertainty we are experiencing will have an impact.’
In addition to political instability, clients and firms must both contend with a regulatory climate that has intensified in recent times. The Competition and Markets Authority is at the apex of a general move towards more scrutiny by the major regulatory bodies, while regulators have also turned their attention to security issues, as can be seen by the recent National Security and Investment Act, which came into force in January 2022.
Latham & Watkins’ David Walker explains what these changes mean for deals: ‘There is more regulatory intervention than ever. FDI rules have become much more prominent, so now many deals need antitrust as well as FDI clearance. If they don’t get cleared, then of course it can stop deals going through.’
Van Aerssen sums up the market sentiment: ‘2022 doesn’t feel white hot. In all fairness, not all of 2021 was white hot either. It depends to an extent on which sector you’re looking at, but I think it is fair to say that, when it comes to the really big bets, the €10bn+ transactions, do you really see a board taking that kind of bold move when there’s so much uncertainty? The risk appetite clearly is not as high as it was last year and that will ultimately drive the transactional appetite.’
Return to the Deals Yearbook 2022 menu
| Transaction | Deal Value US$ (including debt) | Advisers |
|---|---|---|
| KKR acquires Telecom Italia (TIM) | $40.1bn (pending) | For Telecom Italia: Clifford Chance For KKR: Paul Weiss and Simpson Thacher |
| Prosus and Naspers establish a share swap | $39.8bn | Dutch legal adviser to Prosus and Naspers: Allen & Overy. Lead partner: Tim Stevens South African legal adviser to Prosus and Naspers: Webber Wentzel. Lead partners: Jesse Watson, Riyaad Cruywagen, Cor Kraamwinkel US legal adviser to Prosus and Naspers: Cravath, Swaine & Moore |
| Daimler spins off Daimler Truck | $32.6bn | For Daimler AG: Linklaters. Lead partners: Hans-Ulrich Wilsing, Ralph Wollburg, Marco G. Carbonare. Also, Glad Michel Witz. Lead partners: Marco Sustmann and Andreas Merkner |
| Vivendi spins out Universal Music Group | $32.0bn | For Vivendi: Cleary Gottlieb. Lead partner: Paul Shim For Universal Music Group: Freshfields. Lead partners: Sebastian Fain, Dirk-Jan Smit |
| Aercap acquires GE Capital Aviation Services from General Electric | $31.1bn | For General Electric: Clifford Chance. Lead partner: William Glaister For Aercap: Cravath. Lead partners: Mark I. Greene, G.J. Ligelis Jr., Keith Hallam |
| Vonovia takes over Deutsche Wohnen | $30.6bn | For Deutsche Wohnen: Sullivan & Cromwell. Lead partner: Carsten Berrar For Vonovia: Freshfields. Lead partners: Rick van Aerssen, Gregor von Bonin, Kai Hasselbach |
| Roche repurchases Novartis’ stake in the company | $20.9bn | For Roche: Lenz & Staehelin. Lead Partner: Tino Gaberthüel For Novartis: Davis Polk |
| National Grid purchases Western Power Distribution from PPL | $20.1bn | For PPL: Ashurst. Lead partner Nick Williamson. Also Skadden: Lead partner: Pankaj Sinha For National Grid: Herbert Smith Freehills. Lead partners: Caroline Rae, Bob Moore |
| Polestar and Gores Guggenheim agree a business combination agreement | $20.1bn (pending) | For Polestar: Kirkland & Ellis. Lead partners: Eric Schiele, David Feirstein and Marshall Shaffer For Gores Guggenheim: Davis Polk. Lead partners: Leonard Kreynin, Stephen Salmon. Also Weil Gotshal. Lead Partner: Kyle Krpata. |
| A consortium led by CDP Equity acquires an 88.06% stake in Autostrade per l’Italia | $20.0bn (pending) | For CDP Equity consortium: Clifford Chance. Lead partner: Paolo Sersale For Atlantia: White & Case. Lead partners: Ferigo Foscari, Leonardo Graffi, James Greene. |