Issue 3 Consuming Deals CMS_LawTax_CMYK_28-10 M&A TRENDS IN THE CONSUMER PRODUCTS SECTOR OUR LATEST CONSUMER PRODUCTS DEALS BRIDGING THE GAP Managing M&A Transactional Risk with W&I Insurance
Welcome to the latest edition of Consuming Deals What is happening in the market? Our last issue predicted that the consumer sector would be the third highest sector in the EMEA region in terms of prospective M&A in the coming months. Recent data shows that this trend holds true and the consumer sector continues to perform strongly. IPOs, particularly in the retail sector, are continuing and, although the initial frenzy seen in the first quarter of 2014 has abated, we anticipate there will still be further IPOs across the sector in the remainder of 2014. We are thrilled that CMS continues to be recognised for its experience and knowledge of the consumer products sector. We were ranked No. 1 by Bloomberg for M&A in Europe 2013 and we have now won the ACQ European Consumer Products Law Firm of the Year two years in a row. As always, we are committed to understanding and being a part of your business and your world, and we hope that you enjoy this latest issue of our publication Consuming Deals. In light of the encouraging statistics for increased M&A activity in the consumer sector, we decided our specialist article in this issue should concentrate on Warranty and Indemnity Insurance, a product which has become an increasingly regular feature of the M&A landscape. We have also included the latest statistics on M&A trends in the sector. As before, what is notable is that key CMS jurisdictions, such as the UK, Germany and Central and Eastern Europe, continue to see the highest level of deal activity. Louise Wallace, Head of Consumer Products, Corporate Partner T +44 (0)20 7367 2181 E louise.wallace@cms-cmck.com Our recent consumer products awards Ranked No.1 for M&A in Europe 2013 Law Firm of the Year 2013 Consumer Products - Europe European Consumer Products Law Firm of the Year 2013 European Consumer Products Law Firm of the Year 2014 2 Consuming Deal - Issue 3
M&A trends in the Consumer Products sector M&A and Warranty and Indemnity (W&I) Insurance Proportion of UK & Irish companies for sale by sector (last 6 months) An increase in M&A activity has also seen the steady increase in the use of W&I insurance. Our article on the next page explains what it is, who 4% 3% uses it and when. 21% 6% Proportion of German companies for sale by sector (last 6 months) 11% 2% 20% Prop sect Companies for sale by sector 16% 1 19% The consumer sector has continued to be a hot 11% area of deal activity in the UK, Germany and Central and Eastern Europe and we predict that the sector will remain active throughout 2014. 4% Proportion of UK & Irish companies for Proportion 13% of German companies 1 for Proportion of CEE companies 10% for sale by sale by sector (last 6 months) sale by sector (last 6 months) sector (last 6 months) 14 6% 4% 3% 21% TMT 2% Consumer Products Energy, Mining & Utilities Financial Services 20% 1 Business Services Industrials & Chemicals Pharma, 8% Medical & Biotech Real Estate & Constructio 11% 11% 16% 1 19% 14% 1 13% 1 4% 10% 3% 12% 12% TMT Consumer Products Energy, Mining & Utilities Financial Services Hotels & Leisure Business Services Industrials & Chemicals Pharma, Medical & Biotech Real Estate & Construction Transportation Source: Mergermarket. Based on announced deals. Geographic region is determined with reference to the dominant location of the target. October 2013 - March 2014. Total value of European consumer deals The graph compares the total value ( m) 9,000 of European consumer deals between 8,000 1 January and 1 April 2014 against the 7,000 same quarter in 2012 and 2013, and 6,000 demonstrates a clear upward trend in 5,000 6,386 deal value. 4,000 2012 Source: Mergermarket. Total value of European consumer deals between 01-Jan and 01-Apr each year. Last 3 years ( m) m Total value of European consumer deals between 01-Jan and 01-Apr each year. Last 3 years ( m) m 12,000 11,000 10,000 7,944 2013 11,187 2014 3 12,000
Managing M&A Transactional Risk with W&I Insurance Bridging the Gap Over the last decade, Warranty and Indemnity ( W&I ) insurance has developed from a relatively unused product to become an increasingly regular feature of the M&A landscape, both in the UK and around the globe. Its growing popularity is testament to the results it facilitates and a proven claims track record has removed some initial scepticism as to its real value. Once a time-consuming and intrusive procedure, as the product has matured, it now fits seamlessly into the transaction mechanics and it is being utilised in ever new and innovative ways. All those involved in M&A should therefore take the time to understand the product and the opportunities and solutions that it presents. Managing transactional risk W&I insurance, or as it is sometimes known, Transactional Risk insurance, fundamentally bridges the gap between the contractual protection that a seller is willing to give in respect of a transaction and the protection that a buyer requires to do the deal. W&I insurance therefore enables parties to a transaction to achieve an outcome or position, for the relatively low cost of a premium, that would otherwise be unattainable through a more traditional negotiation process. 4 Consuming Deal - Issue 3 Will Hemsley, Senior Vice President within the Private Equity and M&A group at Marsh, has commented that 2013 was a record year for the number of transactions supported by W&I insurance, citing the private equity and corporate markets as a key driver behind this growth. In its basic form, W&I insurance provides cover for unexpected issues arising in connection with a corporate transaction, which would give rise to a claim under either the standard warranties in the share purchase agreement or the tax covenant in the tax deed. The policy can enhance the protection on offer under a share purchase agreement, which is particularly useful where a seller is unwilling or unable to offer sufficient protection. This can be in terms of scope of the warranties on offer or in terms of quantum/time where the insurance tops-up the financial cap or longstop date offered by the seller. A policy can be purchased by either a buyer or seller to a transaction. A sell-side policy allows the seller to claim from the insurer to cover a liability it has to the buyer. By contrast, a buy-side policy, which is more common, allows the buyer to claim from the insurer in respect of its losses without recourse to the seller. Sell-side and buy-side policies Unsurprisingly, the rationale for taking out a policy may vary depending on whether it is driven by sell-side or buy-side motivations. Sell-side policies enable sellers to limit their liability and achieve a clean exit, free from a long warranty tail. This may be driven by a desire to distribute sale proceeds to shareholders or wind up a fund. Buy-side policies provide comfort for buyers doing deals in unfamiliar jurisdictions where they are uncomfortable with the enforceability of the contractual protection against the seller. They can also provide comfort as to credit risk where there are doubts as to the solvency of the seller. Where a seller remains involved with a target company post transaction, for example in the private equity sector that has been quick to embrace the product, a policy can alleviate the need to pursue a management team and potentially damage an ongoing working relationship.
W&I insurance is also becoming a frequently used strategic tool in auction processes, where the use of W&I insurance allows buyers to differentiate and enhance the attractiveness of their bid. Recent developments have seen insurers provide protection on a nilrecourse basis, when no contractual protection is available from the seller, for instance in sales out of insolvency. Generally, basic W&I policies exclude any liability arising from known risks, those identified as part of the buyer s due diligence process or the seller s disclosure exercise. It is, however, possible to gain cover for identified risks, though, unsurprisingly this will usually be more expensive and time-consuming than the basic cover. Such risks tend to be in areas of high exposure but low risk, where insurance provides an alternative to the unattractive position of having funds tied up in an escrow account for a potentially long period. Tax risks are frequently covered in this way, where the buyer is unwilling to take a view on issues identified in tax due diligence and the seller sees the risk as arising from over-enthusiastic due diligence and over-cautious advice. W&I policy premiums The price of a W&I policy will depend on the nature of the transaction being insured. Insurers will consider factors such as the policy limit and policy excess sought, the nature of the target business (including the jurisdictions it operates in) and the breadth and duration of the warranties before setting a premium. The premium for unknown risks will typically be 1%-2% of the policy limit. The policy excess will normally be around 1% of the transaction deal value, although it is possible to obtain W&I insurance on a nil excess basis but the premium payable will understandably be higher. CMS is the leading adviser in the W&I insurance market, advising all key players. We have extensive experience advising insurers in connection with the underwriting of transactions and tax risks as well as advising insureds on arranging W&I insurance, including clothing retailers, food manufacturers and other businesses within the consumer products sector. Our global footprint enables us to advise on multi-jurisdictional transactions and provide local law advice where it is needed in connection with W&I insurance. Please do not hesitate to contact us if you are considering a transaction where you think W&I insurance may be required. Aaron Fairhurst Partner T +44 (0)20 7367 2863 Henry Wood Associate T +44 (0)20 7367 3528 E aaron.fairhurst@cms-cmck.com E henry.wood@cms-cmck.com 5
Our latest deals Some recent examples of deals CMS has advised on in the Consumer Products sector Dr Gerard Advised a syndicate of banks on the financing of Bridgepoint s acquisition of Dr Gerard, a leading producer of branded and private label biscuits in Poland. Poundland Advised a key selling shareholder in relation to the IPO of Poundland, the British variety discount chain store. Axell Advised Omega Trading International on the acquisition of Axell, a France based meat, poultry and food trader. Wells Fargo Bank Advised Wells Fargo Bank N.A. on its funding of Cirrus Logic s 291 million acquisition of Wolfson Microelectronics plc, a leading UK audio chip designer that supplies audio components in phones and tablets. RM2 International Advised Cenkos Securities plc in relation to the 278 million IPO of RM2 International S.A., the largest flotation on AIM announced in 2013. Les Crudettes Advised Groupe Pomona on the sale of Les Crudettes, a France based company that sells fresh vegetables to supermarkets. Didix BV Advised Didix International B.V. on its acquisition of the restaurant voucher company owning the Gourmet Society. McColl s Advised a key selling shareholder in relation to the IPO of McColl s Retail Group, the UK s leading neighbourhood retailer in the convenience and newsagent stores sector. 6 Consuming Deal - Issue 3
Consumer products insight Opportunities from CMS to gain insight into the Consumer Products sector Annual CMS European Consumer Products Conference CMS Consumer Products Conference Cologne 23 September 2014 Geneva 6 November 2014 Consumer Products Bulletins A publication containing consumer products focused articles. CMS sends out regular email updates relevant to the consumer products sector and your business. These include a monthly snapshot of ASA Adjudications, relevant developments in law and summaries of important decisions and cases: www.law-now.com Taking Stock affecting Current legal issues and retail sectors the consumer products Spring 2014 Taking Stock Current legal issues affecting the consumer products and retail sectors CMS European M&A Study 2014 An analysis of over 2,000 European M&A deals on which CMS advised between 2007 and 2013, giving unique insight into recent M&A deal trends. Meeting We would be delighted to set up a meeting to discuss any matters relevant to your business..eps 28-100 egative_ wtax_n CMS_La pean o r u E S CM 2014 y d u t S M& A Please feel free to contact any of the team members on the following page, should you be interested in any of the above matters. 77
yiv Glasgow Aberdeen Edinburgh Moscow bul Mexico City Rio de Janeiro Hamburg Amsterdam London Utrecht Berlin Duesseldorf Leipzig Warsaw Bristol Antwerp Cologne Brussels Prague Kyiv Frankfurt Luxembourg Paris Stuttgart Vienna Strasbourg Munich Bratislava Zurich Budapest Lyon Geneva Ljubljana Zagreb Milan Belgrade Sarajevo Bucharest Aberdeen Sofia Glasgow Edinburgh Rome Barcelona Tirana Istanbul Dubai Madrid Lisbon Hamburg Muscat Amsterdam Seville Berlin London Utrecht Leipzig Warsaw Duesseldorf Bristol Algiers Antwerp Cologne Brussels Prague Kyiv Frankfurt Luxembourg Casablanca Vienna Paris Stuttgart Strasbourg Munich Bratislava Zurich Budapest Lyon Geneva Ljubljana Zagreb Milan Belgrade Sarajevo Bucharest Madrid Barcelona Rome Tirana Sofia Istanbul Moscow Beijing Shanghai Dubai Muscat Lisbon Seville Algiers Casablanca Rio de Janeiro Meet some of the Consumer Products London corporate team Dubai Muscat Louise Wallace Head of Consumer Products Partner Corporate T +44 (0) 20 7367 2181 E louise.wallace@cms-cmck.com Martin Mendelssohn Partner Corporate T +44 (0) 20 7367 2872 E martin.mendelssohn@cms-cmck.com Helen Johnson Partner Corporate T +44 (0) 20 7367 3339 E helen.johnson@cms-cmck.com Henry Wood Associate Corporate T +44 (0) 20 7367 3528 E henry.wood@cms-cmck.com Jai Patel Lawyer Corporate T +44 (0) 20 7367 2419 E jai.patel@cms-cmck.com Lucinda Glazebrook Lawyer Corporate T +44 (0) 20 7367 3687 E lucinda.glazebrook@cms-cmck.com CMS Cameron McKenna LLP 2014. This document and its contents are the property of CMS Cameron McKenna LLP and are for use only by the partners and staff of the firm. 1404-000028-8