In light of the recent Three/O2 merger, Marco Hickey offers his top tips for any companies planning a merger or acquisition.
The European Commission recently cleared the proposed merger between Hutchison 3G (H3G or Three) and Telefónica Ireland (O2 Ireland), subject to certain conditions.
The conditions are very much specific to this deal, as they would be with any merger, but there are many aspects that are relevant to businesses regardless of their size or industry sector.
In the Three/02 deal, the markets were highly concentrated and the Commission recognised that there were significant barriers to entry, but some innovative commitments by the parties ensured the deal got over the line. In light of this, here are some tips to bear in mind when planning an M&A.
1) Notify early
The new competition legislation provides that businesses can seek clearance for a proposed M&A once an intention to make a public bid has been announced, or the parties can demonstrate a good faith intention to conclude an agreement.
In practice, this means that a notification to the authorities can now be made upon the signing of a letter of intent or a heads of agreement document. This means that the process for obtaining competition clearance for a deal can now begin earlier, so any potential problems can be found in good time for a dialogue to be opened with the authorities before it’s too late.
2) Be prepared for a wait
A notification of a merger under the competition rules will have a suspensory effect and parties will be unable to implement a transaction until the authorities have given their clearance for the transaction to proceed.
The time periods for the authorities to review a notified merger have been increased under recent legislation. As a general rule, the authorities now have up to 30 working days in preliminary review and up to 120 working days for an in-depth review.
These periods are significantly longer than under the old regime. Additionally, the legislation also provides for a ‘stop the clock’ provision where the authorities make formal requests for information.
Therefore, it would be wise to be aware of the timescales before embarking on a transaction and provide the authorities with all the information they need to make a decision.
3) Conditions may be imposed, so be prepared in advance
When faced with potential competition issues, an M&A may only be allowed to go through if the purchaser agrees to sell or divest certain assets or divisions of the target. Such ‘divestitures’ can significantly impact on the commercial desirability of a deal, but sometimes they are a necessary sacrifice for obtaining overall clearance.
LK Shields acted for the buyer in the only merger clearance under Irish law to feature an up-front divestiture, where the buyer for the business being divested was required to be put in place by the divesting party prior to the completion of the notified transaction.
This arose in the course of acting for Communicorp Group in the acquisition of Emap plc’s Irish radio assets – Today FM, FM 104 and Highland Radio. The case involved significant competition issues arising from the proposed transaction, principally because of the market share of the purchaser group post-completion and the characteristics of the relevant markets. However, with the right guidance and the correct approach, a suitable divestiture can make a deal more acceptable to the authorities.
The regulatory authorities will normally seek to sell off all or part of the acquired business to a suitable purchaser who can provide effective competition, so potential suitors should be considered as early as possible.
4) Consider licensing arrangements as a possible alternative
In the Three/O2 case, the Commission required Three to commit to provide potential entrants with technical assistance and ancillary services. This is designed to help the entrants to launch their commercial operations as quickly as possible. Any practical measures, such as the licensing of vital technology or know-how, to help new entrants add extra competitiveness to the market should be thoroughly examined.
5) Structural remedies are better than behavioural remedies
Undertakings relating to future behaviour may be accepted in addition to, or occasionally instead of, divestiture. It may be possible to use behavioural remedies, where, for example, structural alternatives may not be viable or in multi-jurisdictional transactions where a behavioural remedy could be more easily tailored to identify competitive harm.
Where a merged entity controls access to key inputs or facilities that other firms need to compete with it, the parties could consider mandating access to key inputs and regulating the price and terms and conditions of that access.
The authorities are generally willing to consider remedies during both a preliminary and in-depth merger review. Whenever remedies are voluntarily suggested by the parties, this will increase the period the authorities have to conduct their review, so it’s wise to set out the potential solutions early.
6) Look to what solutions were accepted in similar deals in other countries
The Irish competition authorities have not published any guidelines in relation to remedies to date. However, its approach would appear to be influenced by both EU and UK guidance. For instance, we have seen the Irish authorities require the appointment of an independent trustee with a mandate to oversee and, if necessary, enforce the divestiture process.
Where behavioural remedies are adopted, the authorities prefer that an annual report be submitted by the independent chairperson reporting on compliance. The best approach would appear to be to make it as easy as possible for the authorities to accept the solutions offered, present them with an option which will require the least possible oversight by the authority itself, while still capable of guaranteeing robust compliance.
7) Be mindful of sector specific regulations
The major deals in Ireland in 2013 were in the pharmaceutical, manufacturing and financial services sectors. Pharma, medical and biotech sectors accounted for the vast majority of M&A value in 2013, although M&A activity by volume was spread more evenly through the sectors.
One particular set of sector-specific regulations that should be noted by businesses are the media merger rules. Media mergers are now subject to a more involved process with the introduction of a dual notification to the normal competition authorities and the Minister for Communications. This means the deal will be examined not only for its competition aspects, but also by the Minister from the perspective of media plurality in Ireland. The definition of a media business is quite broad, so care should be taken to see whether the business being bought or sold falls into that category.
8) Foreign investment may be an option
Domestic funding for potential investors and purchasers of Irish companies and assets continues to be in short supply. Potential acquirers continue to have difficulty raising finance in relation to targets whose business model is purely domestic.
M&A transactions involving foreign acquirers have tended to be financed by institutional investors with strong cash reserves and by foreign conglomerates. This phenomenon has been clearly seen in distressed hotel sales, including the €20m sale of Fota Island Resort from NAMA to the China-based Kang family. Financial services M&A has also been driven by interest from foreign acquirers.
Irish law contains no foreign investment control legislation and competition law poses relatively few barriers in this area. Mergers must also now have a significant Irish element before regulatory clearance must be sought here (in that at least two parties must have €3m turnover in Ireland in addition to a combined Irish turnover of €50m.
Mergers can be pro-competitive and bring benefits to the economy by helping businesses and markets to grow. However, some can harm competition and result in higher prices or reduced innovation. The options outlined above show that there are many possibilities for imaginative and innovative ways to make a merger more acceptable to the authorities.
It remains challenging for potential acquirers to raise the requisite finance in the Irish markets so foreign investment is likely to continue to play a major role in Irish deals. With the right advice, however, merger control rules should not hinder the improving M&A market.
Marco Hickey is a partner with LK Shields. For more information, you can contact him at e: firstname.lastname@example.org t: +353 1 637 1522.