Issue link: https://digital.shearman.com/i/1300408
Before the crisis, deal terms in the European M&A market for infrastructure assets would be best described as "super" seller friendly. Generally, almost all transactions were structured around a locked box purchase price structure with sellers offering no more than fundamental warranties (as to title and capacity) and purchasers required to give 'hell or high water' undertakings to obtain regulatory approvals. Most deals involved a separate limited or no recourse warranty deed to allow a purchaser procured warranty and indemnity (W&I) insurance policy to be put in place. However, depending on the competitive dynamic and on the basis that a broad and thorough set of due diligence materials had been made available, it was not uncommon for there to be no such warranty/insurance package offered. Purchasers knew the risks and, given the appetite to deploy the ever increasing capital available for European infrastructure assets, were willing to take the risks. It is still too early to tell whether deal terms in the market have moved back to a more balanced position. Deals that are taking place in the sectors where revenues have had limited impact from the crisis are still being run as competitive auctions and transacted on a similar basis to the position pre-pandemic, as the appetite to buy these assets remains strong from investors. What has yet to be gauged is how deals for assets whose revenues were significantly impacted by the crisis will be run. We anticipate that some of those deals will be structured based on completion accounts, given the inherent difficulty of pricing (and adjusting) a historic 2019/2020 balance sheet. A number of other off-balance sheet items would also potentially need to be factored in as pre- or post-closing adjustments (e.g., rent/tax/interest deferrals, employee furlough costs, etc.). Purchasers may even push for earn-out type structures to provide protection in the event the revenues do not return to pre-COVID levels and may also look to build in conditionality in the event that COVID or other MAC-type events occur that affect their ability to close (e.g., an availability of financing CP, repetition of warranties at closing, etc.). Whether Purchasers will achieve much success in introducing such terms into deals remains to be seen. The European infrastructure market remains highly competitive as investors look to deploy the significant capital that has been allocated to the sector. Purchasers will be unlikely to persuade sellers in a competitive auction dynamic to accept anything less than the seller friendly terms seen pre-COVID. However, if the impact of the crisis on certain sectors means that transactions occur on a limited auction or bilateral basis, then purchasers may have some success swinging the balance back towards a purchaser-friendly set of deal terms. 6 Impact on Deal Terms FOR MORE INFORMATION PLEASE CONTACT: Tim Sheddick Partner London T +44 20 7655 5657 tim.sheddick@ shearman.com Tom Pound Senior Associate London T +44 20 7655 5056 thomas.pound@ shearman.com Iain Elder Partner London T +44 20 7655 5125 iain.elder@ shearman.com