LegalJune 27, 2019

Financial services companies will think twice before choosing the UK as their preferred jurisdiction

London based M&A specialist Nilufer von Bismarck sheds light on trends and deal drivers in the legal corporate world: from shareholder activism to protectionist measures against foreign investors.
Shareholder activists drive a lot of M&A
Nilufer von Bismarck
Nilufer von Bismarck is Head of the Financial Institutions Group and of the Equity Capital Markets practice at leading London-based law firm Slaughter and May. In 29 years she built a wide corporate, commercial and financing practice. She handles private and public mergers and acquisitions (M&A), joint ventures, IPOs and financings for a broad range of clients.

The rise to the top did not come easy, she recounts by telephone from her office. Already at university she knew ‘there was really only one firm for me and that was Slaughter and May’. Whilst finishing her studies at Cambridge University, Von Bismarck applied for the position of trainee at her current firm, but was too nervous to succeed. Terribly disappointed she decided to enroll in the graduate training program of an investment bank instead. ‘Initially I thought I might renounce the law altogether.’ After the bank offered her a job, feeling that it may be now or never, she applied a second time to Slaughter and May, only to be turned down again. ‘Awful. But looking back now I wouldn’t have hired myself either. You’re never at your best when you want something too much.’ Only when she worked on a deal with future colleagues, she excelled in a more natural environment. She was promptly invited to apply for the position of associate. The third time around, she hit a home run.

Von Bismarck does not let herself be defined by defeat but by the obstacles she overcomes. It makes her one of the most in demand dealmakers in the international global corporate market. She was appointed an Officer of the Order of the British Empire in the New Year 2018 Honors List for services to financial services and has contributed to the UK section in the Kluwer Law International best-selling publication entitled ‘Corporate Acquisitions and Mergers.’

Challenges after Brexit

We talk only days after the deadline had expired for an alternative Brexit. ‘There are a fair number of financial services clients that had to move businesses to jurisdictions elsewhere in Europe, says von Bismarck. ‘They have gone to Germany, France, Luxembourg, Ireland. Most of them were operating by way of passporting from the UK. Brexit could mean that such structures would not be possible anymore in Europe. We all think that in the long term it will mean loss of work and income for the United Kingdom (UK) and ultimately lead to the US (New York) rather than Europe benefitting. Going forwards, financial services companies will think twice before choosing the UK as their preferred jurisdiction.’

Her recent activities include a fair amount of financial services mergers, as she is head of the financial institutions group, but she also regularly advises clients in sectors such as retail and the pharmaceutical industry. In 2017 she advised UK Green Investment Bank (GIB) on its privatization and subsequent sale to Macquarie Bank. As part of the acquisition, Macquarie committed to upholding GIB’s green purposes, protected by a ‘special share’ issued to an independent trustee group. In the same year BP, Chevron and ExxonMobil faced a shareholder challenge to set carbon targets in line with the Paris climate agreement. The cases do not only underline an increased awareness of environmental targets within the corporate world; the latter three also exemplify a trend that was more frequent last year than ever: shareholder activism.

Shareholder activists

In 2018 hedge funds acquired record stakes in corporates all over the world, according to a much-cited report from Lazard that was published in December. Last year 226 companies faced activist campaigns, compared to 188 in 2017. The amount of capital invested in the targets was up to a high of US $65 billion.

‘Shareholder activists drive a lot of M&A,’ comments von Bismarck. ‘It’s happening in different sectors.’ She refers to hedge fund Elliott Advisors buying into the Telecom Italia and British Telecom in 2018. ‘Traditional activist campaigns are focused on changes in capital structures, dividends and buyback distributions, corporate governance or executive pay. Current campaigns target mergers and acquisitions-related events such as corporate carve-outs, divestments or spin-offs.’

She mentions Whitbread (a company active in the hotel business) selling its coffee business Costa Coffee to Coca-Cola under pressure from Elliott Advisors. ‘They made a big distribution to shareholders after.’ Now Elliot Advisors, frustrated by the way Whitbread operates hotel chain Premier Inn, is seeking property disposals, according to the Sunday Telegraph. The activist wants the company to sell 10 to 15 percent of its £ 5.8 billion property portfolio.

Other funds such as Starbord Value frequently ‘demand a seat at the table’ and seek to replace board members with their own recruits. Von Bismarck mentions activist Edward Bramson of Sherborne Investors who made a renewed plea for Barclays’ investors to give him a seat on the bank’s board earlier this month. The activist at Barclays agitated for a slim down of the investment bank, but failed to convince the majority required at the annual general meeting. ‘Activists will demand company resolutions but in the end shareholders decide for themselves whether they follow their lead,’ says von Bismarck.

Consolidation in certain sectors

Another trend von Bismarck sees is consolidation in financial services. ‘The German government allegedly pressed for merging Deutsche Bank and Commerzbank. Larger mergers such as this one will usually be more strategically driven,’ says von Bismarck. ‘Some of the smaller consolidation deals, like One Savings combining with Charter Court, are initiated by one of the parties because they aim for scale advantages.’

The current wave of consolidation in asset management is also driven by scale advantages, according to von Bismarck. She mentions the merger between Aberdeen Asset Management and Standard Life as an example, ‘but there are many other smaller combinations.’ In the end, ‘it’s just a question of scale and getting more assets under management,’ explains von Bismarck. ‘Consolidation just gives people a better platform.’ Regulatory requirements are another important driver of consolidation in this sector. ‘There is a lot of pressure to lower fees driven by regulatory requirements. MIFID (the European regulation harmonizing national financial regulatory frameworks) is a big driver.’

Challenges for the high street

Another area where she sees a lot of M&A-activity is the retail sector. ‘We’ve seen a lot of companies going into administration as a result of the surge of e-commerce. Someone else will buy out the profitable part of a retail business in administration. Patisserie Valerie is an example where some of the most profitable parts were bought out of the voluntary arrangement. It’s a bit of an insidious thing but it does preserve some parts of the business and, of course, some jobs.’

At the same time, tech platforms seem to be growing continuously, buying themselves back into physical locations and branching out in a wide range of sectors. Amazon bought Wholefoods in 2017, recalls Von Bismarck. ‘They got into the supermarket sector as a means of expanding their reach. Competition analysis hasn’t quite caught up with reality.’

Foreign Investments

Yet there are thresholds and challenges, even for powerful investors from overseas. In the last couple of years countries in Europe and the UK have become much more sensitive about foreign investments and issued specific legislation around foreign investment, says von Bismarck. ‘The concept of the free market has changed quite a bit in the last year. In the UK it is very sector specific, limited to industries such as press, communications and defence. But it looks like people might go a bit further with that. The US is already quite sensitive about the Chinese buying into things, heightened by the current US/Chinese trade war. Europe has become much more sensitive on that subject too. Going forward I see protectionist measures in the field of M&A becoming more and more prevalent.’
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