Portugal – Going Private

Despite its worst recession in decades, Portugal’s recent privatisation programme has sparked renewed investment interest. LB asks whether selling off the country’s prized assets can cure the woes of its legal market

With Portugal’s GDP expected to fall by 4.5% in 2012 and a series of hikes on VAT, corporate and individual income tax included in the 2012 Portuguese state budget, the country’s economy hardly appears inviting. Following its 2011 €78bn bailout (the Troika Memorandum) by the European Commission, the European Central Bank and the International Monetary Fund, Portugal has been forced to introduce a comprehensive privatisation programme that includes the energy and airports sectors, as well as the insurance and media industries.

Crucially, interest in the country’s crown jewels has been strong. ‘As the country implements the bailout plan, companies are being privatised and foreign investors are flocking in,’ says João Vieira de Almeida, managing partner at Vieira de Almeida & Associados (VdA).

A headline privatisation involving a competitive bid for one of the most important companies in Portugal was the December 2011 E2.7bn sale of almost all of the state’s shares in Energias de Portugal (EDP), which is owned by Parpública – a state-run management holding company of the Portuguese Republic – to China Three Gorges Corporation (China Three), a developer of hydropower projects. EDP is active in the field of electricity generation, supply and distribution, and the supply and distribution of gas. China Three – which trumped competitive bids from Germany’s E.ON, Brazil’s Eletrobrás and Companhia Energética de Minas Gerais (Cemig), all of which presented and negotiated a strategic project for EDP – acquired a 21.35% stake in EDP, representing the largest-ever Chinese investment in Europe. Skadden, Arps, Slate, Meagher & Flom corporate partner Gregory Miao, who divides his time among the US firm’s Shanghai, Beijing and Hong Kong offices, led the team advising China Three. Portuguese firm Serra Lopes, Cortes Martins & Associados was local counsel to China Three, led by partner Luís Miguel Cortes Martins.

As a regular adviser to the government, Morais Leitão, Galvão Teles, Soares da Silva & Associados (MLGTS) has picked up the lion’s share of roles throughout the privatisations, with partners Nuno Galvão Teles and Rui de Oliveira Neves leading the representation of Parpública and EDP. ‘We have been active in energy for over 15 years so we were the obvious choice as counsel for the government’s privatisations,’ says de Oliveira Neves.

Naturally the privatisations also produced work for firms acting for unsuccessful bidders or for clients that showed interest in the early stages. PLMJ partner Jorge de Brito Pereira led the advice to Eletrobrás, Linklaters’ Lisbon partner Jorge Bleck acted for E.ON, and Cuatrecasas, Gonçalves Pereira’s Lisbon co-managing partner, Diogo Perestrelo, represented Cemig. Campos Ferreira, Sá Carneiro & Associados’ (CS Associados) partners Francisco Sá Carneiro and Bernardo Abreu Mota, and VdA’s partners João Vieira de Almeida, Pedro Cassiano Santos and Vanda Cascão advised another European utility company that ultimately decided against submitting an offer.

‘These privatisations were particularly complex because of the various goals that the government wanted to achieve and the parallel negotiations with several bidders’

Next in line was the second privatisation phase of the national power grid, Redes Energéticas Nacionais (REN).
In February 2012, the government sold a 40% stake in REN for an aggregate price of almost E600m, with China’s State Grid International Development (SGID) acquiring a 25% share and the Oman Oil Company (OOC) purchasing a 15% stake. MLGTS’ Teles and de Oliveira Neves again acted for Parpública, and PLMJ’s Pereira advised REN. Linklaters’ Bleck and Diogo Plantier Santos represented SGID, while Iberian firm Gómez-Acebo & Pombo – which opened in Lisbon in 2010 – led the advice to OOC through partners Fermín Garbayo Renouard and Luisa Carrilho da Graça.

These privatisations were particularly complex because of the various goals that the government wanted to achieve and the parallel negotiations with several bidders. In particular, MLGTS’ Teles and de Oliveira Neves had to ensure that they achieved a level playing field between the bidders so that they could put forward the best offers. ‘The legal structuring of the project and the negotiations proved to be very demanding exercises,’ says de Oliveira Neves. Teles and de Oliveira Neves also had to take a strategic view on behalf of these state-owned companies. The privatisations were not just about getting cash in, but also concerned the future of the companies once the government became a residual shareholder, and which bidders best suited the companies’ prospects. Additionally, these were the first privatisations that the government had conducted under a new legal framework so their success was important in leading the way for the remainder of the privatisation programme.

At the end of March 2012, another state sale was sealed when the European Commission gave its blessing to Portugal’s E40m disposal of debt-ridden nationalised bank Banco Português de Negócios (BPN) to the Portuguese subsidiary of Angolan bank BIC. MLGTS, led by Teles and de Oliveira Neves, was again selected by Parpública. Cuatrecasas’ partners Maria João Ricou, Duarte Abecasis and Maria da Glória Leitão advised Caixa Geral de Depósitos (CGD) as selling shareholder. PLMJ partners de Brito Pereira and Magda Viçoso represented BIC.

Because of the quality and strategic nature of the assets involved, the appetite of foreign investors has been particularly keen, especially from economies that are in growth mode or are culturally similar to Portugal. PLMJ’s de Brito Pereira believes that inbound investment from China is growing and that this will be a trend for the forthcoming years.

With low or stagnant growth for several Portuguese law firms, and with practices competing for prime work by cutting their fees, the privatisation programme could not have been better timed. But Portugal’s top lawyers are also realistic about the limited opportunities presented by the programme. They know that once the state’s most prized assets have been sold off, the law firms with enhanced survival prospects will be those that have not only invested properly in alternative service areas such as litigation, insolvency, restructuring, employment law and taxation, but that have also carved out a winning international strategy (see ‘Portugal – Getting Away’).

Reality bites

With several law firms invited to participate in the privatisation beauty parades, a great deal of legal work has been up for grabs. Diogo Leónidas Rocha, a Lisbon-based partner at Garrigues, believes that it is important to be on the privatisation deals as they boost the credentials of firms. But he also says that the work in itself is not especially challenging from a legal perspective. ‘When the privatised company is already listed, it is simply a matter of buying the shares of another company. Ultimately, Garrigues is more interested in investing long-term in its existing client relationships, rather than one-off deals.’

The pace of the privatisations has disappointed some legal advisers. ‘A few law firms will be kept busy for a while but only a small part of the privatisation programme has been implemented with speed,’ says Rui Amendoeira, managing partner at Miranda Correia Amendoeira & Associados (Miranda).

It is also important to distinguish between the foreign investors attracted by the privatisation programme in the hope of buying good companies and those who do not wish to invest in Portugal’s real economy due to the current uncertainty plaguing market confidence. The state sell-offs aside, Pedro Pais de Almeida, a partner at Abreu Advogados, says that more foreign investors have recently closed down their businesses in Portugal – and are leaving the country – than new investors have started up new enterprises. For example, Japan’s Nissan announced the suspension of its lithium ion battery factory project in December last year, which would have injected E156m into the national economy. There have also been cases where large Portuguese holding companies have redomiciled their holding companies to Luxembourg or other jurisdictions in order to reduce their tax burdens.

Consensus is that the privatisation programme has proved interesting for stimulating outside investment. ‘Foreign investors held back for a while,’ says Duarte Garin, a Lisbon-based partner at Iberian firm Uría Menéndez – Proença de Carvalho (Uría Menéndez). He believes that investors were waiting to see what the first signals would be once the current austerity programme was set in motion. ‘The signs are positive in so far as most of the harsh measures were implemented without any social unrest,’ Garin says. ‘It is evident that Portugal is prepared to do what it takes to extract itself from the situation into which it has fallen.’

‘It is important to distinguish between the foreign investors attracted by the privatisation programme in the hope of buying good companies and those who do not wish to invest in Portugal’s real economy’

Many contend that Portuguese assets currently represent a buying opportunity. João Caiado Guerreiro, a partner at Caiado Guerreiro, is seeing certain clients acquire real estate, as well as a variety of solid companies and other assets. ‘In particular, we are seeing a new kind of investor coming from emerging markets such as Brazil, Angola, South Africa and Asia (especially China), and they are asking: “Can we really buy such assets at these prices in an EU country?”’ he says.

Under attack

For some law firms a recent series of high-profile takeover bids has been more interesting than the privatisation programme. At the end of March, Portuguese company Brisa – Auto-estradas de Portugal, one of the largest private motorway operators in Europe, announced a E700m offer for its shares by Tagus Holdings, a tender offer vehicle led by Portugal’s José de Mello and Arcus European Infrastructure Fund, which together already hold 53.81% of Brisa.
Led by partner Maria Castelos, CS Associados is advising Arcus, and Linklaters partner António Soares is representing Tagus. Sérvulo & Associados is Brisa’s sole legal adviser, led by corporate partner Fernando Ferreira Pinto and finance partner Paulo Câmara; José de Mello has been advised by VdA partner Pedro Cassiano Santos; and MLGTS partner Luís Branco advised the bank syndicate that is financing the tender offer.

Some Portuguese companies have come under attack from overseas because Portuguese shareholders have struggled with punishing debt and have liquidity issues. Consequently, it is easier to buy up their shares. ‘It is an excellent time to bid for good Portuguese companies, whose prices are low,’ says Lino Torgal, an executive partner at Sérvulo.

Portugal’s largest cement producer Cimpor is a recent, high-profile example. It is currently on the receiving end of its third takeover attempt in recent times. In late March, Brazil’s second-largest construction group, Camargo Corrêa made a E2.48bn offer for the remaining 68.1% it does not own in Cimpor. CGD said it would sell its 9.6% holding in Cimpor to Camargo if Votorantim, Brazil’s largest cement producer and owner of 21.2% of Cimpor, agreed to end a shareholders’ agreement under which Votorantim has a right of first refusal to buy CGD’s stake.

‘Cimpor is definitely one of the most attractive, listed Portuguese companies and this is one of Portugal’s most relevant capital markets deals of the last few years,’ says Uría Menéndez’s Garin.PLMJ banking and finance and capital markets partner Viçoso is representing Cimpor. Uría Menéndez is acting for Camargo, led by partner Daniel Proença de Carvalho. CS Associados, which advised Votorantim in the acquisition of its qualified shareholding in Cimpor from Lafarge in 2010 and the shareholders’ agreement with CGD, has since continued to advise the company. Its partners Fernando Campos Ferreira and Martim Morgado now lead the team advising on the ongoing bid for Cimpor.

Traditional transactions

Away from the world of privatisations and takeover attempts, conventional M&A activity remains slow. Nonetheless, impressive deals are occurring. In November 2011, VdA’s partner Cassiano Santos led the team advising Deutsche Bank (Portugal) in a cross-border merger with Deutsche Bank (Hungary) when Deutsche Bank converted these two subsidiaries into branch offices as part of a pilot transaction. The deal involved the transfer of E1.6bn total assets from Deutsche Bank Portugal incorporated into Deutsche Bank Germany. VdA also advised on the Portuguese regulatory banking, capital markets and insurance law aspects of the deal. Corporate partner Daniela Favoccia of German firm Hengeler Mueller represented Deutsche Bank Germany, while Allen & Overy’s Budapest office acted for Deutsche Bank (Hungary).

Abreu Advogados has also picked up high-profile mandates. Led by Miguel de Avillez Pereira, the firm is advising Brazilian company Embraer, one of the world’s leading aircraft manufacturers, in an investment into manufacturing aeronautical parts and structures. The deal concerns the building of two factories for the manufacturing of aeronautical parts and structures. This is ongoing and represents the largest investment ever made in Portugal’s aeronautical sector.

Likewise, Cuatrecasas has been very active. In February 2012, capital markets partner André Luiz Gomes acted for Banif – Banco de Investimento and Banif-Banco de Investimento (Brasil) in the Banif Financial Group’s sale of a majority shareholding in brokerage house Banif Corretora de Valores e Câmbio (Brazil) to CGD, through a capital increase and the sale of shares. In March, led by Perestrelo, Cuatrecasas advised CGD and the Ministry of Finance in the reorganising of Galp Energia (Galp)’s shareholder structure. This was necessary because Eni wished to sell its remaining 5% stake in Galp to Amorim Energia, but such sale was prohibited by the shareholders’ agreement. AAA Advogados partner Gabriela Rodrigues Martins acted for Amorim.

Change for the better

Portugal’s bailout is also likely to prove an indirect source of legal work. The government has pledged to pass several reforms in areas such as labour, tax, civil procedure and insolvency practice. These are likely to give rise to legal needs and to make up for the general dearth of M&A activity.

Labour law reform is a current hot potato, imposed on Portugal as a consequence of the EU financial bailout. Portugal has been compelled to amend its employment rules to render them more flexible and to lower its employment costs in a bid to increase the country’s competitiveness.

The meat of the reform is currently in draft form, with the government expected to approve it later this year. However, some changes related to contract periods, redundancy compensation, unemployment protection rules, and early retirement conditions have already been introduced.

‘Although labour reform in Portugal was long needed the workforce’s mentality may take longer to change,’ says Inês Reis, a founding member and head of Pedro Pinto, Bessa Monteiro, Reis, Branco, Alexandre Jardim & Associados’ (pbbr) employment team. ‘Therefore, any amendments to the law must be accompanied by a persistent and clear message.’ For example, the anticipated reform will alter certain aspects that were previously considered untouchable, such as the 40-hour working week.

pbbr has been investing in its labour and employment practice for some time. The work currently being generated for its team includes raising clients’ awareness of these changes and showing how they can benefit clients’ businesses, but also helping them implement changes in the smoothest way possible.

Since March this year, the new Arbitration Law has been in force. Created to simplify domestic and international arbitrations, the legislation intends to market Portugal as an international arbitration venue, particularly in relation to cases involving companies with ties to Portuguese-speaking countries such as Brazil, Angola and Mozambique.

‘Labour law reform is a current hot potato, imposed on Portugal as a consequence of the EU financial bailout’

Unsurprisingly, dispute resolution practices are currently busy. CS Associados set itself the challenge of launching a new litigation practice just one year ago, but its team has already been involved in complex arbitration and insolvency cases. Generally all of them involve the issues currently affecting Portugal’s economy, such as the lack of liquidity and public cuts.

Abreu Advogados identified the opportunity for dispute resolution mandates back in 2008. It invested in a mass litigation department that carries out debt collection and insolvency proceedings for financial institutions, insurance companies and car leasing companies. Managing partner Miguel Castro Pereira says that the firm’s most significant recent piece of litigation is its ongoing assistance to LDK Solar – the world’s largest producer of solar wafers – in a multijurisdictional international arbitration against Itarion Solar over an alleged breach of an $800m contract. Abreu’s Pereira, together with partners Guilherme Santos Silva and Duarte de Athayde, are leading LDK’s case. Latham & Watkins’ Paris-based Rachel Thorn and Bär & Karrer’s Geneva-based Saverio Lembo are also involved.

New restructuring-related legislation is also on the cards. The current insolvency/restructuring law favours insolvencies over restructurings in order to protect creditors. However, the reforms will expand the restructuring options available and are designed to avoid insolvency where possible.

Even without some reforms fully live, restructuring and distressed sales mandates have increased. Traditional private equity funds appear to have suspended activity, but fund restructuring work is buoyant. In response to increased work levels, Garrigues created a Portuguese insolvency and restructuring team as part of its worldwide insolvency and restructuring practice.

Recent examples of significant restructuring/insolvency mandates have included Abreu Advogados’ advice, led by Pereira, to Portuguese private co-operative financial group, Caixa de Crédito Agrícola Mútuo de Alcobaça, on the financial restructuring and insolvency of several civil construction companies. And in November 2011 MLGTS partner Segismundo Pinto Basto led the representation of Portugal-based aviation group Omni and its shareholders in a E70m corporate restructuring of the group’s presence in Portugal (and Brazil) that separated the group’s fixed-wing and helicopter businesses. The restructuring also prepared the group for the arrival of pan-European private equity firm Stirling Square Capital Partners as financing partner to its helicopter business. Stirling, which invested E40m into Omni Helicopters International in December 2011, was represented by VdA’s João Vieira de Almeida in the structuring and implementation of the investment alongside VdA’s best friend in Brazil, Pinheiro Neto Advogados.

Enjoy it while you can

In the short-term, Portugal’s top legal advisers will have further privatisation mandates to look forward to. On the horizon is the privatisation of the national airport authority, Aeroportos de Portugal (ANA); national airline Transportes Aéreos Portugueses (TAP); state-owned postal operator, Correios de Portugal (CTT); one of Rádio e Televisão de Portugal (RTP)’s television channels; water operator Aguas de Portugal; and rail freight company CP Carga. Caixa Seguros, the insurance company owned by state-controlled bank CGD, is also set to be part of Portugal’s privatisation programme. Plus, the government is poised to sell its remaining 7% in Portuguese oil and gas company Galp Energia, which sold its Brazilian assets to Chinese oil giant, China Petroleum & Chemical Corporation (Sinopec), for $5.2bn in November 2011. MLGTS’ Teles and de Oliveira Neves have again been selected to advise Parpública.

But once the privatisation programme is concluded, one of the great challenges for law firms will be to find alternatives to the traditional way that legal services are provided, notably by reorganising and resizing teams in practice areas that no longer bring the workflow.

Cash-strapped

A constant challenge for Portuguese law firms has been how to operate in an economy with liquidity issues. Naturally, billing policies have had to change significantly. In the past, Miranda automatically raised all billing rates at the start of each January. For the last few years, the firm has only introduced modest fee hikes every two years.

‘Clients are obviously very sensitive to fees, especially in the current market conditions,’ says CS Associados’ Martim Morgado. Yet Morgado’s experience tells him that clients are willing to make the investment in fees if they believe that the value is there. One of the firm’s principles is to stay close to the client. This also means keeping a keen eye on billing matters.

Clients have also become creative in their demands. These days they ask for all sorts of fee structures, from flat to capped. Fortunately, this happens less with longstanding clients, than with clients instructing firms on one-off projects with a fixed duration.

Some believe that law firms should be flexible, but only up to a certain point – that it is preferable to lose a bid rather than endure a large loss on a deal, or to feel compelled to put a younger or less specialised legal team on a specific assignment, thereby risking the quality of the legal service. ‘My view is that it takes time to build up a good reputation and only a second to jeopardise it,’ says Pedro Pais de Almeida, a partner at Abreu Advogados.

Some Portuguese law firms have focused considerably on the diversification of their practices. Aside from non-cyclical service lines such as labour law, certain niche areas that demand high levels of expertise merit investment. pbbr’s Reis says that energy, IP/TMT and life sciences have consistently been developing, and are areas where the markets’ interest and demand have grown.

Other market commentators believe that in difficult times it is crucial to achieve the correct partner-associate ratio. ‘We have a ratio of 1/10 between partners and associates, which is excellent for a market like Portugal,’ says Nelson Raposo Bernardo, the managing partner at Raposo Bernardo. ‘The firms that are suffering from the crisis are those which have a large number of partners in relation to the number of associates, those who have a concentration of more than 50% of their turnover in less than 20 clients, and those who are just starting to get involved in activities outside Portugal.’

Sérvulo’s Torgal is optimistic about what lies ahead: ‘The government announced that there are already signs of recovery. One can probably expect the return of confidence by the beginning of next year.’

Nor does Miranda’s Amendoeira feel like complaining. ‘We’ve continued to enjoy modest growth in terms of new clients, fee-earners and revenue,’ he says. ‘Miranda has not suffered any major trepidation, and it has been greatly assisted by the success of its overseas strategy. We feel confident that we have adapted well to the new realities.’ LB

julian.matteucci@legalease.co.uk