World View: The International M&A Podcast

Elizabeth

Welcome to the TLT podcast series on international mergers and acquisitions. I'm Elizabeth Delaney, a corporate lawyer and partner at TLT with 20 years’ experience as a corporate finance lawyer with a focus on M&A, private equity, and public equity work. Today we're looking at the French M&A market, specifically key themes that are impacting the market at the moment, emerging trends and anticipated changes.

I'm delighted to welcome today as our guest Lionel Lesur, who is a partner at Franklin Paris. As a specialist in M&A with an international angle, Lionel will add his expertise and experience to this podcast.

Many thanks for joining us today, Lionel. As I'm sure you're aware, in recent years, the UK M&A market has been incredibly volatile and pretty hard to predict due to a host of factors, not least the increases in interest rates and rate of inflation, the war in Ukraine, the COVID-19 Pandemic, geo-political change including of course the dreaded B-word, Brexit. And not unconnected to those factors, some elements of supply chain uncertainty.

Lionel, can you maybe talk us through some of the key factors that, in your view, have been affecting the French M&A market over recent times and how they've impacted on, or changed the shape or structure of, your deals that you're advising on?

Lionel

Of course. Well, as a preliminary, I would say that all the factors that you mentioned with respect to the UK are also very relevant to the evolution of the M&A market in France.

Yes, in particular, and beyond those international factors that are relevant to our countries, we also have a very specific factor that you have that is FDI.

The scope of FDI has been broadened over the last year in France, and it is certainly something that perhaps does not reduce the number of deals, but significantly impacts their duration. Having said that, and in a broader perspective, we consider, based on our experience and general market data, that today the M&A market is pretty acquirer friendly, insofar as the valuations of companies, generally speaking, have dropped.

And therefore, we can see in the negotiations between the acquirer and the seller, that generally speaking, again, acquirers are in a better position. This, of course, needs to be subject to distinction according to the economical sector concern because some are suffering a lot and are very acquirer –friendly for example, the retail sector where you have a lot of distressed opportunities, whereas other sectors are very active and resist better, I'm thinking in particular, but perhaps it's the same in the UK at least Liz, to life science or tech sectors.

Elizabeth

Yes, in the UK, I would agree it's very similar. Life sciences and tech in particular are consistently top of the list of most active sectors. And likewise, the retail sector has perhaps been less active than previously.

Lionel

Yeah, I'm not surprised by that, and to come back to M&A in France, I would say we have noted a decrease by 20 % of the M&A transactions in France in 2023, which is after a decline by 46 % according to data we have in 2022.

Whereas Q1 in 2024 show to be pretty dynamic. The execution of the transactions are not easy, but we have a lot of work ongoing with a few specifics, I would say. We can see that the due diligence needs to be better prepared when we are on the seller side and takes longer when we are on the acquirer side.

This is also, in my opinion, related to the increased use of reps and warranty insurance mechanism that you also have increasingly in the UK, I believe. But this is also a result from the fact that the negotiation of the clauses on prices in the SPA show to be very complex.

There is a strong desire to have the greatest level on certainty. And so therefore, in contrast between the parties, one may want and may prefer a locked box mechanism, whereas another would prefer a mechanism of adjustment. And therefore, we take a lot of time to reconcile the position of the parties in most of our transaction which obviously has an impact on the overall timing of the transaction

I would also, to conclude, perhaps add an element that is very specific to the French market is that under French law you have ,when you are vendor, an obligation to provide all key information to the acquirer and you have a specific legal action based on a specific provision of French law in case you have not done so.

And this also lead us when we are on the seller side to make sure that we help our client to prepare the data room in the best way.

So, I see an increased involvement of lawyers in the preparation of the data room. This is also very true when we are in an auction process.

Elizabeth

Yes. Thanks, Lionel. What you say about changes to the mechanics of negotiating transactions is really interesting, as, agreed, as you say, particularly when implementing W&I insurance.

Those sorts of changes inevitably have a knock -on effect on the timescales for deal -doing. So of course, this issue of timing is often a key area of concern for clients and, of course, for us as their advisors.

Are you seeing big changes in how long M&A deals in France are taking to get across the line and connected with that, what is it most often that impacts the timeline of deals in France?

Lionel

Yes absolutely. First of all, we can see that due diligence may take more time, including in view of the fact that when you are willing to implement insurance, you know that you need to get prepared for that and dive further into the due diligence.

This is, I would say, a first factor. Second factor is that we have longer negotiation as to the clauses of the SPA, and in particular the clauses that relate to the price mechanism. We have a significant negotiation between parties that is willing to have a locked box mechanism, whereas perhaps another one would prefer to have an adjustment as to the price

So basically, I would say that the longer time needed to close transactions results most often both from a longer due diligence process as well as a longer negotiation of the SPA, because parties look forward to having greater certainty so that sometimes we have a need to wait for the very last financials in order to be able to finalize the agreement between the parties.

But we also have some specifics element, I would say to France, in particular relating to the consultation with the HR representatives.

We have in France this obligation to inform and consult with the HR representatives of the target as soon as there is a Works Council in place.

Another matter of fact, the French practice has developed the use to sign first a put option agreement because French law prohibits to sign an SPA before you have actually completed this information consultation process.

So, this is also a factor that provokes longer deals. However, we have good news for investors in France as long as a law has been changed and it has limited to a maximum of two months this period for information consultation of the Works Council.

So, this is at least an improvement in the law. And we also have, I would say, some additional delay which may of course result from the need to notify your transaction with the French Competition Authority, but also to manage the scrutiny under the FDI regime in France, of which the scope has been enlarged over the last years.

Elizabeth

Yes, I'd agree that deal timetables do seem to be stretching out in the UK too. I'd say to accommodate, much more frequently than previously, conditionality around completions, whether that's due to regulatory requirements of ESG, or, as you indicate in relation to funding and pricing certainty. Obviously, you've just mentioned foreign direct investment controls, and we’re also seeing similar impacts on timing, connected with our UK recent legislation on overseas investment into the UK, which we're all getting to grips with as an advisor community, but it can require a similar strategy of separation of the signing and completion of a transaction to ensure that the relevant consents can be obtained in that interim period. -

So, moving on to talk about one of the really topical issues on deals at the moment, in the UK we’ re increasingly seeing much greater focus by our clients on all aspects of ESG, not only in the general day -to -day business as usual, but particularly on deals. Would you say you're seeing similar trends in France? And if so, how important would you say ESG factors are to your clients?

Lionel

Yes, in fact, in France as well Liz, ESG factors are increasingly important, not only in the day -to -day business of the company, but also in the occasion of M&A transactions.

However, I would make a distinction between the kind of companies involved in the transaction. The importance of ESG factors in M&A transactions is, based on our experience, very important when we are talking about very large companies, including those that are listed.

So, in particular, the large M&A market segment. It may be less important on the small or even small/mid segment, and of course, we have in this occasion to check the box in our due diligence as soon as a client, as an acquirer, has some kind of compliance requirement that prevents it from carrying out a transaction if several elements have not been checked beforehand.

And it may also be the case that for this specific reason, when we are on the seller side, we need to get prepared for the transaction in implementing some procedures, some corporate organs that may not exist before actually launching the sale of the company.

To conclude on this, and having said that, I have to say that but in one very specific case regarding an acquisition in Africa by a French client, I have not been aware of an ESG factor that became in itself a deal breaker on a specific transaction

Elizabeth

Absolutely. From what you say, it sounds as though the approach is very similar in the UK.

For some clients, ESG factors will be of much greater significance than others.

But in most cases now, we're all being asked to think much more about ESG impacts and also to help clients think about how they can bridge the gap between where they are at the outset of a deal, and where they aspire to be on ESG and as advisers we are on that journey alongside them. Certainly, where we are working with clients on a sale mandate, the initial vendor due diligence phase is a really good time to assist with that review, and updating of policies and practices, to help those sellers identify those areas where a buyer might want to make changes, and to help them put their best foot forward in terms of preparing for the negotiations.

When talking about preparation for deals, for your clients who might be doing deals so as to expand into UK markets, how are you seeing them approach this, and are there any elements of UK M&A which you have seen from a French perspective to be creating unexpected hurdles perhaps?

Lionel

Well on this and as a preliminary at least our experience in France is that we may arrived after the UK in the sense where for example when we act for US clients in most cases they have already set up operation in the UK and only in turn and as a second step turned to Continental Europe starting with France and perhaps after a source Europe.

So in fact you certainly have a better point of view on this but having said that It may be correct, at least to some extent, to state that Brexit unfortunately has had a negative influence on the perception of the UK for either a French client or a non -French client that we are assisting in France and thereafter consider in which other country in Europe they would like to develop the business.

This is correct. This may not apply, however, for very sophisticated clients that see the UK as, in any case, a very important market for their business. And so, in that case, with you and U.K. colleagues, we are very happy to help them to come to the U.K. and always have a very comfort approach, saying that with the right advisor and in spite of Brexit, there is nothing that should really prevent them from entering into the U .K. Very soon we discuss if the industry is concerned FDI, because this is a topic of concern as it is in France, but once again being very positive about the fact that in spite of what could be here but Brexit, the UK remain a very good market for them. So, we have not seen in conclusion someone that started to consider the UK and abandoned the project because of some specific hindrances he would have actually faced into the UK.

Elizabeth

So, when talking about preparation for deals, for your clients who may be doing deals so as to expand into UK markets, how are you seeing them approach this? And are there any elements of UK and M &A which you've seen from a French perspective creating unexpected hurdles?

Lionel

In fact, it is as a preliminary pretty correct that at least for some companies turning to the UK, the Brexit has not been, at least in the beginning, a good element. Having said that and working most of the time for sophisticated clients, if they think that the UK is and remain an important market from a business standpoint, they will continue with their project.

What we advise to them, and they in most cases agree with the approach, is to engage at a very early stage with very good advisors such as TLT to prepare in the best way for their project.

It may include, for example, because it is a point of concern when the industry is one industry concern, check at the very early stage FDI aspects. We can see that clients are concerned by how the review could be, how long it will take, and therefore we strongly inside them to get prepared as soon as possible. I would add also that this is based on our experience, but most often are foreign clients, including those located originally in the US. When they turn to us in France, are already present in the UK, which remain a quite natural door of entry, I believe, on the European continent for US players.

On top of that, I would say that I've not seen any specific points on concern for our clients when they turn to the UK in addition to FDI, which is also a point of concern in France, and that, once again in preparing in advance with good advisor making a M &A deal in the UK does not seem more complex today than it was a few years ago and That clients as long as they are not in the UK still consider it as a major market in which They would like to develop and in which they should be present.

Elizabeth

Well, that is a relief for us in the UK M&A market. 

Speaking of which, in terms of planning and looking to the future, would you say that there are upcoming legal or perhaps anticipated market changes that we should be thinking about relevant to the French M&A market?

Lionel

I can think of two in particular. The first one, as I mentioned earlier, is that for several years now, under a general effort of simplification of corporate law in France, several laws have been passed. And others may come in order, for example, to favour the use of digitalization, to speed up the process, to give more certainty to parties engaging into deals, including from a timing standpoint. So others will come and may favour further execution of M&A transactions.

The second aspect, which may also favour speediness of transaction, is a very recent announcement of the next increase of French merger thresholds.

Today, in order to notify a transaction in France, you need two parties achieving a turnover in France of at least 50 million euro. These thresholds are in place for now 20 years.

So certainly, they need and will be increased very soon and one is talking about 80 millions. According to the French Competition Authority, this should decrease by 30 % the number of transactions to be notified.

And as the review is quite time consuming. This would certainly favour faster closing for a significant number of transactions.

So, I think this is a quite important change in the very next future that needs to be spotted.

Elizabeth

Yeah, that's really interesting what you say about those changes to the thresholds.

It does sound as though that's going to have a really material impact on the ability of companies to engage in M&A going forward generally, but also on the speed of deals, which is fantastic for our French colleagues in the M&A market. And it's been really interesting to hear from you Lionel, about some of those key similarities and differences across the French and UK M&A markets at the moment. Its really useful to share some of that market intelligence and understand that our colleagues in France are having some of the same experiences as we are in the UK.

If there's a few key takeaways that you'd like our listeners to get from our conversation today, how would you summarize those issues?

Lionel

Well, I think that when you approach an M&A transaction in France, in particular as an acquirer, you have a list of items to be checked as soon as possible in order first to planify the necessary delays to close your transaction and also to structure your offer and your process in the best way.

The first item is, of course, whether the target has one or several Works Councils, because as I said, it has a significant impact on the deal structure.

If yes, you need to explain to your foreign client, which may not be familiar with it, that he will not be in a position to execute an SPA before having completed this process, and that French market practice has developed in order to secure, you know, in the best possible way, the vendor, this use of the put option agreement.

And in particular, when you work for US clients, you need some time to educate them, I would say, about this instrument that in the first instance may seem quite weird to them. Once it is explained, it is all fine and it goes smoothly, but better to do it quite early.

Second point, of course, you need to review whether you will have an FDI issue, as you have in the UK.

This has a material impact on the deal and on its timing, so better to factorize it very soon. The same also applies, but for many years now, to merger control. And on another aspect, we need to consider also what is the time period in a year of the deal with respect to the date of closing of the financial year of the target.

Because as I said, we have seen a lot of difference in the respective expectation of acquirers on the one hand and sellers on the other hand as to valuation, and this has an impact on the structure of the price clauses of your SPA. And it may lead to an impact on the calendar and perhaps to a trend to wait a bit longer to get the last financial figures, and have more certainty and adapt, as a consequence, the price clauses in your SPA.

So, these are, I would say, the main takeaways that we use in the very early days of the discussion with our clients. And it shows to be saving time later on and favor closing because the statistic we have, I would say as a conclusion, show that over the last two years, the time necessary to close the deal has been increased by two or even sometimes by three.

And early preparation avoids, very often, a too lengthy negotiation and favour as quick as possible closing.

Elizabeth

Absolutely. I mean, I think your top tips sound pretty similar to mine. I’m engaging with advisers, legal and other advisers, at an early stage to plan out, and map out, the steps you’ll have to follow, and really get that clarity on pricing and how the pricing is going to be calculated, so that you factor that into the deal timetable.

It's really positive to hear, though, that despite the various uncertainties facing our clients at the moment, there's a lot of great activity going on in M&A and some really interesting developments expected in the coming months and years

It just remains for me to thank Lionel Lesur of Franklin Paris for such an interesting overview of the French M&A market.

Lionel

Thank you

Elizabeth

Thanks also to all those who were listening. If you’ve enjoyed this podcast, please do like and subscribe on your usual podcast provider. I hope you found this podcast useful, and please feel free to visit www.TLT.com to listen to our other podcasts in this international M&A series.

We will also have new episodes covering the Indian and Italian M&A markets coming soon. Thank you.