New collaborations are starting to change the M&A landscape. In recent years we have seen corporations and financial sponsors engage in joint ventures and other innovative collaborations to pursue their business objectives. The gathering momentum of this trend demonstrates the appetite for dealmaking amid the current global economic environment. Below we discuss the reasons why these new unions are gaining ground.
Access to Financing
With markets currently in flux, businesses with exceptional prospective assets and ambitious development goals, particularly in the areas of oil and gas and mining, are experiencing internal and external challenges to obtaining financing through traditional private debt and capital markets. To gain access to capital, they are turning to creative business combinations that might have historically not been considered. Businesses are joining forces with financial investors (including foreign and domestic private equity firms and sovereign wealth funds) who are seizing the opportunity to invest directly in projects on flexible terms designed to support sharing in the upside of successes while protecting capital returns.
This approach was effectively used by Harvest Operations Corp. (an Alberta corporation wholly-owned by the Korean National Oil Company) in its joint venture arrangements with KERR Canada Co. Ltd., the subsidiary of a Korean investment fund, in connection with the exploration, development and production of certain oil and gas assets in the Deep Basin area in northwest Alberta.
Access to Markets
The increasingly global scale of doing business is driving competition and costs. Many businesses are looking for opportunities in new markets. These markets may be closed to direct foreign investment or ownership, or otherwise be challenging from a regulatory, political or risk perspective to pursue without a domestic counterpart. Businesses are therefore seeking local partners to carry out these foreign investments—and potentially provide a gateway to further business initiatives in those locations.
A successful example of this approach is Alberta-based Husky Energy’s entrance into a 50-50 contractual joint venture with CNOOC to jointly develop the US$9 billion Liwan subsea gas development project in the South China Sea.
We have also seen dealmakers use creative structuring with tax inversion transactions where the parties have effectively relocated their jurisdiction of incorporation with a view to reducing their overall tax rate.
Joint Ventures Between Companies
In other instances, businesses are choosing to advance their strategic objectives by partnering with competitors. These arrangements are collaborative in nature and may be used to increase collective purchasing power, pursue research and development, or jointly distribute parties’ respective products. For example, Rogers Communications Inc. recently formed a joint venture with BCE Inc. under which the two companies will own the Canadian retail distribution outlets of GLENTEL Inc. At the international level, digital music service provider Spotify has entered into strategic partnerships with mobile carriers around the world to offer its music streaming services to data service subscribers.
Collaborative arrangements are also especially prevalent in the pharmaceutical sector and are growing in number. Large pharmaceutical companies are increasingly pursuing alliances with smaller biotechnology companies as they search to bring new products to market. They are also partnering with academic institutions for similar purposes.
Strategic collaborations with competitors may, however, be complex from an antitrust perspective. Care must be taken to ensure that they do not contravene provisions in the Competition Act or Sherman Act that regulate competitor collaborations. Alliances that are structural in nature could also be subject to long and complex merger notification and review processes that could affect deal timing.
Access to Strategic Partners
A corporation needs technical expertise and experience, sufficient capital for development, and a strong reputation. Corporations that excel in only one or two of these areas may find that missing elements have caused opportunities to be left on the table. These gaps in business profile are being addressed with increased willingness from buyers to seek out the perfect union with an entity or investor that has compatible strengths and business objectives to create a more competitive and balanced business vehicle benefiting both parties.
We saw this in the M&A context when Pershing Square teamed up with Valeant Pharmaceuticals International in a bid to acquire Allergan Inc. In Canada, Canadian Tire and Scotiabank entered into a strategic partnership whereby Scotiabank acquired a 20% interest in Canadian Tire’s financial services business—their co-marketing agreement has resulted in new business growth opportunities for both companies.
KKR’s establishment of the Veresen Midstream Limited Partnership with Veresen Inc. is another example of this type of collaboration. The partnership made a C$760 million acquisition of certain natural gas gathering and compression assets from Encana Corporation and the Cutbank Ridge Partnership (CRP) and negotiated a related 30-year fee-for-service arrangement following its commitment to fund up to C$5 billion of new midstream infrastructure. KKR’s combined business acumen, access to capital and long-standing reputation represented an ideal match for Veresen’s industry expertise and highly reputable business profile.
Gaps in business profile are increasingly being addressed through strategic unions with entities or investors with compatible strengths and business objectives.
Creative Collaborations to Get Deals Done
Parties are also structuring transactions creatively in order to get their M&A deals done, in many cases by dealing upfront with certain assets to avoid extended regulatory reviews or opposition. For example, to secure Competition Act approval, building and construction materials makers Holcim and Lafarge decided to sell all of Holcim’s Canadian operations and all associated assets to ensure that their US$47 billion merger would pass muster in Canada. Similarly, in connection with Anheuser-Busch InBev’s US$106 billion offer to acquire SABMiller, InBev plans to sell SABMiller’s interest in the MillerCoors U.S. venture to help secure regulatory approval.
Foreign investors under the Investment Canada Act have adopted the same sort of strategy, perhaps most famously when Glencore agreed up front to sell certain Viterra business units to Canadian companies Agrium and Richardson International to secure a “net benefit” approval. Some parties are even opting to litigate in order to resolve regulatory reviews (see Trend 6, “More Regulatory Reviews Will Be Resolved With Litigation”).
The nature, structure and scope of these new collaborations will vary greatly according to the commercial goals and financial, technical, geographic or political restrictions or limitations of the parties. These arrangements—and the necessary contractual framework required to implement them—can be complex due to the combination of typical joint venture concepts with more traditional financing or acquisition models.
Determining and executing appropriate engagement, risk, downside protection, and upside sharing should be approached on a case-by-case basis with sensitivity to the parties’ goals.
M&A’s new collaborations offer various benefits that appeal to a wide range of businesses and investors. The presence of these innovative unions seems set to expand as corporations and sponsors alike seek new ways to satisfy complex business objectives in global markets.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2018 by Torys LLP.
All rights reserved.