M&A in the global energy sector and natural resources space
November 2016 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES
Financier Worldwide Magazine
The last 12 months has been an unpredictable year for mergers and acquisitions in the energy sector. The first half of the year was relatively quiet while deal volume and values have picked up significantly in the second half of the year.
A number of factors have contributed to this pattern of activity, including low commodity prices, uncertainty in global markets, the impact on profitability of energy companies (and also cost pressures) and buyers taking a more conservative approach to mergers and acquisitions.
In the oil & gas space, besides mega deals like the Shell/BG merger and ChemChina’s Syngenta transaction, the volume of completed transactions remains low. This applies for all stages of the oil & gas value chain: upstream, midstream and downstream. However, there are more divestments processes on the market now, so in the next 12 months there should be a significant increase in the level of activity.
The mining sector has seen strong activity, especially large divestments by large mining companies. China Molybdenum acquired Anglo American’s niobium and phosphate business for $1.5bn in April and Tenke Fungurume Mining for $2.65bn. There has been strong activity in metallurgical coal assets. For example, Pembroke Resources acquired Peabody Energy and CITIC Resources’ interests in met coal tenement in May, while BHP Billiton, Coronado Coal and AMCI are all bidding for Anglo American’s Australian coking coal assets. Precious metals (gold, copper and nickel) assets are also in strong demand. The next 12 months should result in even stronger activity levels in the mining sector.
The power and renewables sectors have had a strong year. In power, grid and distribution assets are in high demand. The solar market has seen a lot of activity in the past 12 months. Activity levels should remain constant in the year ahead.
What are buyers looking for?
As always, buyers are looking for a bargain price. This has not been easy to source, especially for quality assets. Despite the lower commodity prices, sellers have been able to maintain good solid pricing for assets. This is largely driven by strong demands from buyers and the relatively small volumes of pure ‘fire’ sales due to insolvency or liquidity issues. Energy companies have been successful in raising financing to keep afloat.
Buyers are much more interested in production assets or assets already on stream. This provides much greater certainty for buyers, especially in the current market. In the past, buyers had more appetite for non-production assets. In addition, buyers find it easier to raise funding for such production assets (as opposed to assets in pre-production stage).
For the larger assets, buyers are looking to form consortiums due to the size of the deal, and for the buyers to share some of the risks between consortium members. Usually these consortium parties will be looking to raise financing, hence production assets will be much more attractive from the financing perspective.
In the current market, buyers are taking a more cautious approach and so there is an expectation to conduct a more detailed due diligence on the assets (legal, financial, technical, tax, etc.). If matters are exposed during due diligence, there is a greater expectation for different forms of buyer’s protection, including not just indemnities but for larger exposures, holding back of part of the purchase price.
What are sellers looking for?
Sellers are now placing much more emphasis on deal certainty and balancing this with the price offered by buyers. Sellers are paying much more attention to buyers’ condition precedents, and require buyers to set out clearly the steps and procedures to satisfy these conditions. Sellers will also, to the extent possible, want any pre-approvals to be obtained prior to signing of the sale and purchase agreement, instead of being inserted as a condition precedent. As the emphasis is on deal certainty, sellers will push hard for a break fee in case of any non-fulfilment of any buyer’s condition precedent.
Buyers’ ability to fund or finance a transaction will be important, especially as we are seeing quite a lot of mega transactions with a large price tag. Sellers will need buyers to provide a clear funding and financing plan for their review and consideration, with a firm commitment from the financing parties to fund the acquisition if the sale and purchase is signed.
In cases where a seller is only selling a part interest in the asset, the sellers will now require more due diligence on the buyer (especially in relation to the funding ability of the buyer in relation to future funding of the asset) in order to avoid future default situations under the relevant licence or concession granted to all the joint venture partners.
There is an expectation, especially in auction situations, for the terms and conditions in the sale and purchase agreement to be relatively seller friendly. Ultimately, this will need to be balanced with the price offered by the buyer and the allocation of risk between the buyer and the seller.
Hilary Lau is a partner at Herbert Smith Freehills. He can be contacted on +852 21014164 or by email: firstname.lastname@example.org.
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