M&A activity in Portugal declined considerably this year, but watch out for some sizeable deals in the energy and infrastructure sectors in the coming months
Though deals activity slowed substantially in Portugal as a result of the coronavirus pandemic, there is expected to be a number transactions in the country’s energy and infrastructure sectors in the coming months as investors look for the security on offer when acquiring regulated assets. In addition, with many businesses struggling as a result of the imposition of lockdowns, there is expected to be a spate of mergers linked to businesses’ need to reduce costs and refinance. As was highlighted in the recent Leaders League Thought Leaders Roundtable, which focused on corporate and M&A in Portugal, another effect of the pandemic has been changes to SPAs [sale and purchase agreements], specifically material adverse change clauses, pre-closing covenants and price adjustment provisions.
RRP Advogados founding partner Ricardo Reigada Pereira said that, as a result of the pandemic, deal volume was drastically reduced. However, he added that sectors had been affected differently – while there is still a reasonable level of activity in the energy, life sciences, real estate and logistics sectors, in contrast, deal flow in the travel and hospitality sectors is at a “record low “. He also said that the “M&A outlook in advanced manufacturing and mobility is also far from great, with an expected decline in transactions in the automotive and industrial sectors”. Reigada Pereira continued: “There is an aversion to risk affecting transactions, Portugal is often used to build scale, but I don’t think Portugal will be the first choice at the moment due to the size of the economy and the comparative scale you can gain in other European economies.”
Investors in Portugal are increasingly targeting regulated assets, said Reigada Pereira – this is largely due to the additional security such assets offer. He added that, in contrast, in some industries there is still a “lack of professionalism” on the seller side. Reigada Pereira also highlighted the fact that “discussion on SPAs [sale and purchase agreements] between investors is not immune to the pandemic, with special attention being given to MAC (material adverse change clauses), pre-closing business covenants and price adjustment provisions”. At the same time new trends are emerging, these include investors using alternatives to cash when making acquisitions. “Some are using their own stock to preserve liquidity,” said Reigada Pereira.
In the coming year, deals will look more attractive due to “depressed valuations”, Reigada Pereira said. “There will be massive undervaluation of specific companies and this will be an opportunity if value is there.” He added: “There is a lot of investment capital available.” However, Reigada Pereira also said “the issue will be, will Portugal be fashionable in the first wave of investment?” He added that another trend will be that the timing of deals will be reduced. “Speed is of the essence for sellers,” Reigada Pereira explained. Meanwhile, it is anticipated that demand in other areas of law will begin to surge. “Restructuring and insolvency will get its mojo back, said Reigada Pereira. “There will also be a lot of litigation in the next few months and years, and tax will have huge significance – tax departments will increase in size.”
'Pricing assets is difficult'
Despite concern during the initial months of the pandemic, Vieira de Almeida partner Paulo Trindade Costa said none of the transactions he was working on were cancelled. However, he added that, while his firm is “meeting targets”, what the future holds for the economy is uncertain. “There will be some transactions in the coming months, but the pricing of assets is difficult,” said Trindade Costa. “Portugal is expecting growth in the coming year, but it is growth from a steep decrease – while private equity is well-funded, they don’t like uncertainty.” However, Trindade Costa said there are opportunities in the infrastructure sector and these are attractive to investors because they are “more secure”. He added that consolidation in the banking sector in Spain could have an impact on deals activity in Portugal. Trindade Costa expects to see more pension funds and infrastructure funds investing in Portugal.
Trindade Costa said Vieira de Almeida will continue to grow its headcount. “2020 has been a good year, but there are some dark clouds in 2021 – the legal industry has to adapt, working remotely will continue and there will be growing use of warranty and indemnity (W&I) insurance.” He continued: “Private equity funds are aggressive but timing will be of the essence – law firms may need to enlarge their teams to meet shorter deadlines.”
While there was a decline in M&A activity, 2020 was “not dreadful” for M&A lawyers, said Morais Leitão partner Ricardo Andrade Amaro. “Very large transactions got closed and even at the high point of the pandemic, we were seeing transactions being generated,” he added. Andrade Amaro added that major businesses – such as Galp, for example – quickly adjusted to the new environment and found ways to get deals done. “There are still a lot of transactions ongoing,” he said. “There are still challenges, such as restrictions on travel, but that has not prevented deals closing.” However, Andrade Amaro also commented that there was uncertainty regarding what pandemic-related measures the Portuguese government may introduce in 2021 and what the potential impact will be on getting deals closed.
Assets will be undervalued
There are currently a number of obstacles to the completion of deals, according to Andrade Amaro. “On the buy side there is tax uncertainty, specifically the impact of tax levied on infrastructure,” he said. “There is also concern about counterparty risk – on infrastructure deals, the state/consumers are the ultimate payer.” Meanwhile, Andrade Amaro also said that, given the level of protection sellers are willing to provide in deals is limited, it could jeopardise the prospect of deals getting done.
Large energy and telecoms companies are expected to rotate their assets in the coming year, while mid-sized companies will be able to “realise value” because there will be a tendency to undervalue assets, said Andrade Amaro. There will be an increase in deals in the energy and infrastructure sectors because such assets are becoming very mature, Andrade Amaro said.
Though there has been a reduction in deal count in Portugal, there has not been a reduction in total deal value, said Cuatrecasas partner Mariana Norton dos Reis. She highlighted the recent Brisa deal (in which a consortium of investors bought an 81 per cent stake in the company) and Partners Group’s acquisition of Rovensa earlier this year as evidence of major billion-pound deals that are still taking place. “We started 2020 with a good pipeline,” Norton dos Reis said. “Transactions in energy and infrastructure have survived the pandemic, though mid-market deals have been postponed – next year investors will be looking for good opportunities especially in infrastructure and the energy sector will also be active.”
Norton dos Reis added that there would be considerable competition for good assets in the coming year. She also said there would be interest in good Portuguese assets from infrastructure funds, private equity funds and pension funds – in addition to regulated sectors such as infrastructure and energy, there would also be notable activity in sectors that have “performed well”, such as agribusiness, Norton dos Reis said. She added that, if the pandemic continues, there would be a lot more work for law firms’ insolvency and restructuring teams as well as M&A teams specialising in distressed assets.
The initial impact of the pandemic posed “additional challenges to closing deals that were already agreed and ongoing”, said Linklaters counsel Diogo Plantier Santos. He added that a number of deals in the tourism sector were actually cancelled or suspended.Plantier Santos continued: “We’re still busy on M&A deals but the market seems to be moving to crisis mode – there will be more opportunistic M&A with investors looking for discounted deals.” He also said that Covid-related legislation was creating uncertainty for investors and highlighted how the second wave of the virus has had a big impact: “There has been a moratorium on bank loans – sellers are holding on to assets, stock exchange prices are going down – however, next year we could see deals starting again.
SRS Advogados partner Dulce Franco said that, while there is currently a climate of considerable uncertainty, there will be opportunities for investors that are “not too averse to risk”. She added: “If the target is attractive (if, for example, it operates in the energy or infrastructure sectors), investors will be willing to take the risk.” Franco also said: “The businesses most affected by the pandemic – for example, those in the hotel and real estate sectors – may also present opportunities.” Franco highlighted the fact that the pandemic had meant that changes were being made to M&A contracts, specifically in relation to terms in SPAs “aimed at balancing the risk by including mechanisms of protection and adjustment.”
Franco added that, in the coming months, there is likely to be a number of deals driven by the need for businesses to cut costs and refinance. She continued: “There is likely to be an increase in labour, litigation, restructuring and insolvency work for law firms.” Franco also said there is a high probability that there would be less government funding available to incentivise investment, both foreign and domestic. “I can’t see enough funds coming in to support investment nor to effectively back most affected businesses,” she added.