Corporate Deal Tracker: Texas Lawyers Stay Busy Despite Wacky M&A Climate

© 2016 The Texas Lawbook.

By Natalie Posgate
(July 28) – At first glance, the amount of M&A work Texas-based lawyers handled in the first six months of the year appears to be the same as last year. But a closer look shows a market riddled with uncertainty and distress.
New data from The Texas Lawbook’s Corporate Deal Tracker shows that Texas-based lawyers worked on 276 mergers, acquisitions, divestitures and joint ventures for companies around the world in the first half of 2016 – a 1 percent decline from H1 2015.
Deal value, according to the Corporate Deal Tracker, is up 20 percent, from $141 billion during the first six months of 2015 to $170 billion this year.
But there’s a catch. A single megadeal announced in February – Chinese state-owned ChemChina’s $43 billion acquisition of Syngenta, a Switzerland-based agribusiness – accounts for more than 25 percent of the total H1 2016 deal value.
Discounting the ChemChina transaction, overall deal value declined 10 percent in H1 2016.

The energy sector accounted for about half of all M&A handled by Texas lawyers last year and so far this year. The value of those deals, however, has significantly declined.
Excluding utilities, energy businesses accounted for 65 percent of all deal value reported to the Corporate Deal Tracker in H1 2015, but only 31 percent of all deal value in the first half of this year.
One factor for this is the 7.54 percent uptick in reported deals with confidential deal values. Experts say this is a symptom of an increase in deals involving private companies or private equity firms. Another big factor is the drop in the value of assets tied to the suffering commodity pricing environment, which is still less than half of the $89 per barrel price tag for crude oil in April 2014.
There were also fewer deals publicly disclosed at $500 million and above or $1 billion and above. The former saw a 13 percent decline from H1 2015, while the latter dropped 19 percent.
Further, of the 21 deals reported in the first half of 2015 valued at $1 billion or higher, 71.4 percent of them were energy deals, and they accounted for nearly 64 percent of the cumulative value of billion dollar-plus deals. This year, energy deals have only accounted for just 23.5 percent of the 17 deals valued at $1 billion or higher and 18 percent of the 17 deals’ overall value.
M&A experts say a continued disconnect between buyers and sellers on how much assets are worth – a phenomenon that began last year – have continued to be a buzz kill for deal flow this year.

See the full chart at the end of this article.
“Hurdles in M&A this year include people’s different views on valuations,” said Josh Davidson, a partner in Baker Botts’ Houston office. “A lot of companies have a lot of debt, and that kind of scares people – especially in upstream if they’re going to go bankrupt. Lenders are being more conservative, and capital markets are not as open, making deals hard to finance.”
Current events, notably Brexit and the upcoming presidential election, may have affected deal flow, Davidson said.
“I definitely have heard people say the uncertainty of the election might affect [deal flow],” he said. “Brexit was a huge shock, then a couple weeks later we were in a record stock market in the U.S. It might be hard to get a deal done around the election.”
A Different Type of Deal
Even energy M&A lawyers who report being buried in work admit that their full plates are under distressed circumstances.
“That is the dynamic of oil and gas deals, whether I like it or not,” Locke Lord partner Jason Schumacher recently told a room full of in-house oil and gas lawyers and other legal professionals at a CLE presentation in Dallas. “It’s split between those hunting cheap deals and those getting hunted.”

Schumacher said he and his colleagues have seen more deal flow compared to the first half of last year, especially in relation to large oil and gas companies divesting non-core assets. He’s also seeing an uptick of private equity firms and energy companies with strong balance sheets, which he described as the wolves, wanting to purchase assets from companies close to or already in bankruptcy (the lambs). Yet, few of those types of transactions are actually closing, he said.
“We’ve probably been contacted 30 to 40 times with possibilities of buying something in bankruptcy,” Schumacher said. “How many actually closed? It’s probably in the single digits.
“There’s still a substantial group of sellers who are unwilling to sell their assets at current prices,” he added. “However, we are anticipating a change in that there will be sellers forced to either sell assets or file for bankruptcy.”
Bankruptcy may be more inevitable than some companies want to believe. Schumacher said at the CLE that around 85 exploration and production companies have filed for bankruptcy since last year, and an uptick of filings have occurred in Texas – which could create great opportunities for Texas-based buyers that are swimming in cash.
“Private equity cannot be overestimated by the hundreds of billions of dollars they raised in 2013, 2014, 2015 and 2016 that is yet to be deployed in deals,” he said.
Thompson & Knight’s Sarah McLean is already seeing this at play.

“I’ve been busier from November to now than I ever have [been] in my career,” said McLean, an Austin-based partner who often represents private equity firms or private equity-backed companies in deals. “A lot of bigger oil companies are selling non-core assets, which can be a big opportunity for a private equity-backed smaller company.”
Energy isn’t the only industry private equity is interested in, other lawyers say.
“Energy, wherever you are, is feeling the same hurt that companies in Texas are feeling,” said Houston Baker Botts partner A.J. Ericksen. “As a firm, you do try to increase what you’re doing for non-energy companies, such as pushing private equity in [other] businesses to grow.”
Ericksen said his firm is currently working on some of those types of transactions that are in the transportation industry.
Energy M&A lawyers say they are encouraged by the apparent stabilization of oil prices, which have lately stayed in the mid to upper $40s. Many see more deals coming in the second half of the year.
“I think a lot more M&A is yet to come when prices firm up,” said Mike O’Leary, a partner in Andrews Kurth’s Houston office.
Even if a company goes into bankruptcy, O’Leary believes more deals will be announced purely from the fact that creditors who decided to take equity into the restructured company will want to sell their stake “when the timing is right.
“As companies emerge and conditions improve, I think we’ll see more M&A going on,” he said.

Another aspect of M&A practice that has been keeping Texas lawyers busy are behind-the-scenes matters that do not show up on the Corporate Deal Tracker, such as helping clients address their balance sheets to refocus on their core strengths.
“The nice part about M&A tends to be that you’re busy when the markets are hot, and also when the markets are really cold,” said Chris Schmitt, a partner in Vinson & Elkins’ Dallas office. “It’s when things are sort of OK when work slows down. There’s a high level of activity on the M&A front, but they’re not deals that are necessarily hitting the Wall Street Journal.”
Other Texas-based lawyers who are not solely energy-focused report being busier than ever – both in and out of Texas.
Jeff Chapman, a partner in Gibson, Dunn & Crutcher’s Dallas office, said the Dallas corporate team has been busy with industries beyond energy, including real estate, transportation, consumer products, grocery stores, restaurants, building products, retail and entertainment.
In late June, Chapman closed Dean Foods’ $155 million purchase of Friendly’s Ice Cream’s manufacturing business. It is the busiest year for M&A that Chapman has seen for Gibson Dunn Dallas since Chapman joined the office five years ago – and a lot of the work isn’t even in-state.

“I’m working on nine deals right now and not a single one is energy,” said Chapman, global co-head of M&A for Gibson Dunn. “Deals are pouring in from new and existing private equity and public and private clients, and we are exporting work to both coasts and even internationally to help staff the new business.”
Corporate Deal Tracker indicates that the amount of deals in the technology sector saw the largest uptick. Tech deals increased 93 percent from the first half of 2015, the data shows. The value of tech deals has increased by more than 1,000 percent.
“There’s no indication that things are slowing down, at least in the TMT [technology, media and telecom] sector,” said Courtney York, a partner in Baker Botts’ Dallas office. “It’s been a hot industry.”

Corporate Deal Tracker data also shows that many Texas-based lawyers who usually focus on capital markets turned to M&A work to keep them busy.
“A couple of years ago, when capital markets were more robust and the IPO market was open, I was probably doing as much as 75 percent capital markets deals,” said Bill Cooper, a partner Andrews Kurth who divides his time between the firm’s Houston and Washington, D.C. offices. “Now, it has definitely shifted. I’m doing probably 75 percent M&A.”
The Texas Lawbook will examine the capital markets practice and Corporate Deal Tracker data for securities offerings later this week. Next week, The Texas Lawbook reveals the busiest M&A and capital markets lawyers and firms during H1 2016.

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