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Top Stories
Coal a Core Deal: ArcelorMittal Buys Macarthur Stake
 ArcelorMittal announced that it has acquired a 14.9% stake (31,611,354 shares) in Macarthur Coal Limited. This purchase includes 9,058,676 shares (4.27%) from Talbot Group Holdings and 22,094,851 (10.4%) from Tinkler Investments. The share purchases were conducted in on-market transactions at an average price of $AUD 19.96. Total consideration for the purchase of the shares amounted to $AUD631 million ($USD 604.8 million). As of now, ArcelorMittal will be pursuing discussions with the Board and Management of Macarthur Coal and will update the market if there are any further developments resulting from these discussions.
Transaction is a Team Effort: Pipeline Data Merges with COCARD(R)
 Pipeline Data Inc., and COCARD(R) Marketing Group have signed a definitive merger agreement for Pipeline to acquire COCARD for approximately $79.5 million. COCARD processes over $3 billion of credit card transactions annually from its base of over 26,000 merchants. Pipeline Data has received a senior secured debt proposal of $90 million for the funding of the transaction led by a Fortune 10 financial institution, of which approximately $70 million will be available to support the purchase. This COCARD transaction, is subject to the approval of the proposed financing institutions.
If the Shoe Fits: K-Swiss Purchases Palladium
 K•Swiss Inc. announced the company has signed a definitive agreement to purchase 57% of the equity interests of Palladium SAS for a total purchase price of approximately 5.3 million Euros in cash (including a loan of 3.6 million Euros). In addition, K•Swiss has agreed to acquire the remaining 43% of Palladium based on a formula driven by Palladium’s EBITDA for the year ending December 31, 2012. Closing of the initial 57% equity purchase is expected by July 1st of this year. Palladium designs and sells fashion footwear under the Palladium brand primarily in Europe. Palladium revenues are projected to be approximately 15 million Euros for the fiscal year ending September 30, 2008. In a separate transaction, K•Swiss previously acquired the Palladium trademarks for the United States and Canada for $6,000,000 in cash.
Water Everywhere: Heckmann Corporation to Acquire China Water
Heckmann Corporation and China Water and Drinks Inc. announced that they have signed a definitive agreement under which Heckmann will acquire China Water for an aggregate purchase price of approximately $625 million. Of the total price, approximately $455.0 million is expected to be paid in common stock at an exchange ratio of 0.80 per share of Heckmann stock for each share of China Water stock, and approximately $170.0 million is expected to be paid in cash at $5.00 per share. Following completion of the transaction, China Water will become a wholly-owned subsidiary of Heckmann. Holders of a majority of China Water’s stock have already approved the transaction. Heckmann has been cleared to apply to list its securities on the New York Stock Exchange (NYSE) and expects its common stock to begin trading on the NYSE today.
Out of Africa: Devon Energy Closes Sale of Assets
 Devon Energy Corporation announced that it has completed the sale of its operations in Gabon to Oranje-Nassau Energie B.V., a subsidiary of Oranje-Nassau Groep B.V. The sale price is $205.5 million. Devon expects to incur no income taxes on the transaction. Devon is currently in the process of divesting all of its operations in Africa. The company has previously announced signed purchase and sale agreements with an aggregate value of more than $3 billion. Sales of its operations in Guinea remain to be completed. The company has agreed to sell its operations in Guinea to GEPetrol, the national oil company of Equatorial Guinea, for $2.2 billion. Devon expects to complete these transactions around mid-year 2008.
With oil at $135 a barrel and climbing, a stalled Fed and continuing credit market woes, the knee jerk reaction would naturally be that this is a bad market for any sort of M&A deals. Recently, however, the Boston Consulting Group (BCG) concluded an analysis of 408,076 transactions. The report found that buyers perform best in downturns. The report also found that downturn divestitures help sellers as well; with returns increasing to 13% on average.
Corporate deal teams, such as the Microsoft Yahoo players understand this. The report found that many deal makers back away in this market, but to their loss.
What BCG discovered is that downturn deals have a greater chance of creating shareholder value and thus delivering greater returns. For buyers the right type of company is one with strong financials and relatively weak profits. As well, downturn deals are more likely to create value for buyers than upturn deals. As it turns out, downturn deals are twice as likely to produce long-term returns in excess of 50% and bring in more than 14.5% more value to buyer shareholders.
Likewise, divestitures have a higher probability of success for buyers than the purchase of entire companies. On average, 57.5 % of buyers of divested generate positive returns, compared with 41.7% of buyers of companies. Meanwhile, a seller’s overall returns from divestitures are 1.5%, on average, rising to 1.7% (a 13%) during downturns. For sellers the ideal is to clean balance sheets during this time.
As demonstrated by Microsoft, corporate buyers in this market are uniquely positioned to take advantage of the tough economic times, with cash on hand. BCG also found that the average cash surplus of the S&P 500 is 56% higher than it was in 2000, when M&A values and volumes reached record heights.
While the total value of M&A transactions did decrease 17.8% in the first and second halves of 2007—a result of private equity firms retreating in the wake of the credit crunch—the number of transactions has remained somewhat stable and even on par with the 2000 wave of M&A activity. Now the main differences are that deals are now smaller, and corporations are taking the lead. Corporate share has risen from 73% to 85% of dollar value and private equity’s share has fallen from 27% to 13%.
This is not to say that private equity is out of the game. With approximately $300 billion cash on hand, private equity is likely to return in full force to the M&A market.
Contrarians know that on the surface a recession would seemingly depress M&A activity because deal values and volumes are closely correlated with GDP. Contrarians, however, understand that a downturn offers huge opportunities to create record breaking shareholder returns.
As smart buyers know, the key to a successful divestiture is the purchase of assets that strengthen the core business. Such purchases earn nearly 24% higher returns than divestiture purchases in noncore areas. The BCG report states, “Acquirers’ returns from divestitures are systematically higher when the relative size of the asset is substantially higher for the buyer than for the seller. In deals where the divested unit represents more than 50% of the value of the buyer and less than 10% of the value of the seller, acquirer returns (6.5%) are almost three times higher than in deals where the relative sizes of acquirer and seller are similar (2.2%).” That’s real reason for all deal makers to grab opportunities while the getting is good.
Publication
Microsoft Yahoo Deal
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Coming Events |
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Keynote Speaker
Dick Morris
on the Race to the White House |
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Q & A
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Deal Process and
Terms in a Downturn
Steve Keeler and Rob Marks
With market volatility continuing and  credit bottlenecks partners Steve Keeler and Rob Marks at McGuire Woods, LLP offer sound deal advice.
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M.A.: Wall Street anticipates a turnaround for the second half of ’08, do you think this is accurate?
A: We anticipate two competing forces in the lower-to-middle market for private equity deals in the second half of 2008: (1) the credit markets crisis, litigation over busted private equity buyouts and general economic concerns should result in more buyer-friendly deal terms, while (2) an increase in the number of potential buyers such as special purpose acquisition corporations, foreign buyers and hedge funds, coupled with the resilient private equity overhang, should cause deal terms to become more seller-friendly.
M.A.: What should deal makers be looking at given the current market conditions?
A: We’re on the lookout for tighter closing conditions and narrower material  adverse change (MAC) clauses. Buyer-friendly terms, like financing outs and other closing conditions, may ultimately command a premium price rather than disappearing from deal terms altogether.
M.A.: What litigation issues come to light in this market?
A: The litigation surrounding high-profile transactions should produce the first judicial interpretations of such old concepts as MACs and “reasonable best efforts,” as well as the enforceability of termination fees and specific enforcement clauses. Good confidentiality agreements (including those tailored to the particular buyer) drafted (or at least reviewed) by legal counsel will take on renewed importance.
M.A.: How is the due diligence process being impacted?
A: With more difficult financing and the need for greater due diligence by funds, everyone expects longer auction processes and “no-shop” (or exclusivity) periods. To avoid a more lengthy transaction process, smart sellers will plan ahead and engage their lawyers and accountants to conduct “reverse due diligence.” Informed sellers will also amend management and third-party assignment or control provisions, in an effort to head off buyer surprises and delays.
M.A.: Should deal makers turn to “go-shops”?
With more buyer concern about no-shops, “go-shop” rights exchanged for exclusivity (a target’s right to test the buyer’s offer with other potential buyers) may become more common. While the seller is afforded the opportunity to receive a higher price, both the buyer and seller can save time as compared with an auction.
M.A.: What should deal makers ask for if credit is not available?
A: Buyers may increasingly ask sellers to accept promissory notes for part of the purchase price – especially to bridge valuation gaps or to overcome due diligence concerns (by using note setoffs as an escrow alternative). Sellers may also be convinced to leave more equity in the deal to reduce the buyer’s need for debt or equity financing. Sellers may have to agree to take part of their payment for their equity as compensation under an employment agreement, frequently with time and performance-based vesting provisions.
M.A.: Who is favored in “Material Adverse Change, Material Adverse Effect Clauses”?
Many attorneys agree that published cases addressing what constitutes a “material adverse” change or effect suggest that the analysis is relatively seller favorable. Therefore, buyers are drafting non-exclusive, specific lists of things that would constitute a MAC. It is unclear how events not listed will be treated, and whether a private equity buyer’s three-to-five-year “flip” perspective (as opposed to a long-term strategic buyer) might be factored in.
M.A.: If financing contingencies, termination fees and sponsor guarantees are on the table, what should deal makers consider?
Sellers should be expected to be more cautious about “financing outs.” However, in contrast to larger public deals, we have not seen “reverse” termination fees or buyer penalties for failure to obtain financing in middle market or smaller transactions. The same goes for sponsor guarantees.
M.A.: What financing sources should buyers be on the lookout for?
Buyers will likely be more interested in closing estimates of working capital and other price adjustments, as well as in providing a separate escrow to cover adjustments rather than allow the indemnification escrow to be used for this purpose. Buyers may also increasingly tie post-closing adjustments (and or closing conditions) to financial metrics or milestones other than just working capital.
M.A.: What should buyers look for regarding indemnification issues?
Losses eligible for indemnification may increasingly include those relating to “diminution in value” as opposed to actual damages or third-party claims. Buyer conservatism may also result in smaller indemnification baskets, increased indemnification caps and escrows, and fewer carve outs from each.
M.A.: In this tight market, how does competition impact deals?
A: Competition among buyers will definitely increase, allowing sellers to exercise more leverage regarding deal terms. At the same time, sellers will have to accept that valuation multiples may decline or “normalize.” In any event, arguments about what terms are “market” may become less effective as a negotiating strategy.
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