By Jonathan Snade, Corporate Partner at Thomas Eggar LLP
The European Commission’s recent approval of Telefónica Deutschland’s proposed acquisition of KPN’s German mobile operator E-Plus seems to underscore a continuing wave of consolidation in the industry, with deals across the globe hanging on the decision of the regulators.
With merger and acquisition activity in the telecoms sector likely to continue over the coming months, other telcos are having to consider their strategic options and objectives.
The drivers for increased M&A trends in the telecoms sector are numerous.
For example, heightened competition in the market place, both in the UK and abroad, is forcing telcos to scale-up to remain competitive. In particular, consolidation is needed to make the necessary – and often substantial – investments in mobile broadband.
Market dynamics, in particular rapid developments in big data, the cloud and mobile computing, mean that some telcos are looking to divest their non-core business and service lines. This, in turn, presents competitors the opportunity to scale up and to acquire new technologies, talent, customers and supplier relationships.
Then there is a need to access technologies to facilitate continued growth, which would be too costly or time consuming to build up from scratch. In particular, telcos are increasingly investing in related businesses, such as digital media or IT to build a presence in sectors which may in the long run become part of their core activities.
However, there are a number of legal issues that the parties to M&A deals should consider well in advance of committing to a transaction. Here are six key ones:
Local regulators may have to be notified before a merger can go ahead. For example, O2 and Vodafone had to obtain Ofcom’s approval before being able to merge their networks to compete with EE. The seller and the buyer need to be aware that getting the regulator’s approval will take time, which may mean that sale agreements need to be conditional on consents being obtained.
Structuring sale agreements in this way gives rise to a host of legal and commercial issues, including the circumstances in which the buyer can withdraw from the acquisition, whether that be for the lack of approval or for a “material adverse change” in the target business’ performance in the period between signing and closing the deal.
Competition and anti-trust
Similarly the requirement for obtaining approval of the competition authorities, domestically or abroad, also needs to be considered. Even if approved, certain conditions may be attached to the regulator’s consent for the transaction. For example the European Commission approved the KPN-Telefónica Deutschland deal, subject to the implementation of a so-called “commitments package”.
This involved Telefónica having to sell some of its network capacity and offer to divest its radio wave spectrum assets to a different mobile network operator. Again, if approval of competition authorities is required this may call for a conditional sale agreement, which will give rise to a plethora of legal and risk allocation issues and which need to be considered by both the buyer and seller and their respective legal advisors.
This is a key area for the seller to address early in the transaction process, particularly given the likelihood of the potential purchaser being a direct competitor of the seller. Appropriate non-disclosure agreements should be signed with the potential acquirers at the outset of discussions. In light of the applicable data protection regulations, sensitive client/customer and supplier data should be redacted, or withheld altogether, until transaction negotiations are more advanced.
Maintaining a competitive process
To maximise value of the business being sold, and therefore to maximise the proceeds of the sale for the seller, an auction process may be attractive. This essentially would be run by corporate finance and legal advisers who would simultaneously allow several potential purchasers to undertake initial due diligence and to submit non-binding offers for the acquisition, allowing sellers to evaluate the best deal on the table.
A buyer should undertake legal, as well as financial and tax due diligence to form a view as to any areas of risk in the company’s overall legal or trading affairs. However, with a telecoms business the emphasis of legal due diligence is likely to focus on intellectual property, IT systems, employees, customer and supplier contracts.
In particular, key contracts should be scrutinised to check whether they contain a change of control clause. Such a clause would give the party which is not subject to a change in ownership the right to terminate the contract. Therefore, the buyer needs to consider how the necessary consents will be obtained. Again, a conditional sale agreement may be required.
Successful mergers are those planned well. Therefore the buyer would be wise to have its PR and internal communication plan in place and be ready to act upon a “100 day” integration plan drawn up ahead of completion to facilitate integration. Buyers also need to consider preserving value by seeking to incentivise key managers and staff to remain with the business under its new ownership. This can be achieved in a number of ways, including tax efficient share options and other incentives.
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