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M&A monitor

States intervene in European deals

November’s US election result will cast ripples across the Atlantic, with Franco/US trade tensions implicated in LVMH's decision to scrap its $16.6bn buyout of luxury jeweller Tiffany.

The LVMH board invoked a letter from French foreign minister Jean-Yves Le Drian when they walked away from the deal, with the missive requesting a delay until after 6 January 2021 - the date President Trump (election permitting) has promised to start levying customs duties on French luxury goods over France’s decision to introduce a digital services tax. Tiffany responded by filing a suit against LVMH in Delaware, claiming Bernard Arnault has been trying to break the agreement since the coronavirus struck. The story took a twist in late September when M. Le Drian told parliament his letter was in response to a question from LVMH, although he confirmed the communication was normal in the circumstances and well-founded. LVMH's countersuit argues that, alongside the minister's request, there was no pandemic carve-out in the deal's material adverse change clause and that Tiffany failed to 'behave as usual' in line with the contract (notably by paying the highest possible dividend during the COVID crisis). The case has been fast-tracked to January, although whether the parties will reach an agreement before it gets that far remains to be seen.

The Italian government’s decision in August to gatecrash the sale of Telecom Italia’s secondary network to KKR was a more domestic affair but equally startling nevertheless. Deal-makers say they cannot recall an administration intervening in a transaction so late in the day (the government delivered a letter requesting a one-month moratorium to the board meeting where the parties were signing the agreement), and while the transaction is now going ahead, the interruption worked. The government urged Telecom Italia to revisit a possible merger with rival broadband provider Open Fiber, which is jointly run by state-owned utility Enel and the national lender Cassa Depositi e Prestiti. When it eventually signed the deal with KKR at the start of September, Telecom Italia also announced it had agreed to talks with CDP’s board with a view to ensuring the latter has a significant presence in Italy’s future broadband company.

Other themes we’re tracking

Q3 has seen the return of ‘zombie deals’, transactions that have lain dormant through the pandemic only to be reanimated by the recent economic upswing. We’re seeing renewed aggression among buyers as market uncertainty recedes, and sellers who are prepared to listen. Looking ahead, conditions look primed for a rise in mergers of equals (antitrust approvals permitting) as corporates seek scale to ride out the storm.

Linked to this trend, we’re monitoring whether valuation gaps between parties will be bridged with deferred value instruments such as contingent value rights (CVRs) and earn outs, or whether sellers will continue to dictate terms amid a dearth of quality assets.

And seller deal leverage will only be buttressed by the surge in SPACs – which shows there’s still plenty of capital available for M&A, especially when you take into account the continued availability of inexpensive debt to fund leveraged buyouts. Fundless sponsors, who can be thought of as SPACs in reverse (ie they seek deal opportunities before raising investment), are also on the rise.