Key takeaways from 2019
- Norwegian M&A activity, defined as transactions where either the target company/seller or the bidder is a Norwegian based entity, reached its highest level ever in 2019, with 468 announced acquisitions in total.
- Inbound M&A was more driven by foreign investment compared with previous years, with 43% of Norwegian companies acquired by foreign investors in 2019, against with 41% in 2018, and 39% in 2017.
- Change of dynamics on the NCS – fewer and larger companies after acquisitions.
- Subdued IPO activity – the listing of Adevinta, the global online classified company demerged from Schibsted, was by far the biggest on the OSE in 2019. The offering valued the entire equity capital at MNOK 53,130, making it the largest IPO since 2006 and the fourth biggest overall in terms of market cap, exceeded only by the past listings of Equinor, Telenor and REC.
- Increased politicization of M&A – policymakers increasingly use economic sanctions as a vehicle to address geopolitical issues, often leaving corporations with a complex job of navigating the relevant legislation when doing M&A.
- Competition authorities on the offensive – more comprehensive and stringent M&A assessment from the NCA. The Authority will regularly ask the merging parties to produce all internal documents, emails, notes etc. Stakeholders should therefore be mindful of the NCA’s information gathering throughout the process – starting from pre-transaction talks.
- Presence and prominence of private capital – PE firms present in Norway has almost EURbn 3 of «dry powder» to spend. The combination of readily available capital and a high-cycle environment has seen valuations rise to record levels.
A record year for M&A
Norwegian M&A activity, defined as transactions where either the target company/seller or the bidder is a Norwegian based entity, reached its highest level ever in 2019, with 468 announced acquisitions in total, according to data from Mergermarket. The figure represents a 10% increase from 2018 (426). The combined value of inbound and outbound M&A in 2019 was EURm 30,932, up from EURm 26,221 in 2018, but slightly down from the recent spike in 2017 (EURm 47,686). In a broader context, M&A in the Nordics remains stable compared to the rest of Europe, with M&A by value down 13% compared to 14% for the rest of the region compared to last year.
Inbound M&A was more driven by foreign investment compared with previous years, with 43% of Norwegian companies acquired by foreign investors in 2019, up from 41% in 2018, and 39% in 2017.
M&A partner Harald Hellebust comments:
We do, however, not expect any significant shifts going forward as the level of foreign investments has been relatively stable over years – although at high levels compared to many other European countries. An open and solid economy with stable politics have resulted in Norway being an attractive market to invest in for foreigners.
Neighboring Nordic countries are still the most active foreign investors, but US investment into Norway surged with almost 60% during the year, with prominent deals such as Thomas H. Lee Partners’ acquisition of AutoStore from EQT and Marlin Equity Partners’ acquisition of Puzzel from Herkules. In terms of sector, TMT continues to dominate the deal space, accounting for roughly 27% of the inbound transactions.
As seen in the graph below, an important observation is that the discrepancy between the total number of transactions and transactions with disclosed deal value has grown steadily since the early 2000s. The development coincides with the proliferation of private equity firms in the Nordics, with PE backed deals up 85% since 2010. Private equity firms appear to be taking advantage of the high valuations, which combined with the continued openness towards foreign investment, has driven exits to their highest point by both value and volume on Mergermarket record. Amongst other things, this means that aggregated deal value is becoming a weaker parameter for understanding the transaction environment in isolation. However, most evidence still suggests that 2019 has been a good overall year for M&A in Norway after some rocky patches in 2018.
Figure 1 – Value and transactions involving Norwegian companies from 2000 to 2019. Value represented on the left axis and number of transactions on the right. Source: Mergermarket
Change of dynamics on the NCS
The largest deal of the year in terms of value was the sale of upstream assets on the Norwegian Continental Shelf (NCS) by US oil and gas giant ExxonMobil to Vår Energi for approx. EURbn 4.1. The transaction is one of the biggest transfer of assets on the NCS, and Wiersholm assisted a syndicate of 25 banks with a credit facility of EURbn 5.4 to finance the acquisition.
The exit by ExxonMobil means the company joins the ranks of Chevron and ConoccoPhillips (UK), which also divested North Sea assets in 2019. On the NCS, Vår Energi is now the third largest oil producer after Equinor and government managed Petoro, with an estimated production of almost 300,000 barrels of oil equivalents per day. M&A partner at Wiersholm, Kristian Martin Lind, says it will be interesting to see how this change of dynamics plays out in the deal space in the coming period:
Over the last years, 4-5 oil companies have grown into approximately the same yearly production and actively sought now operatorships. With Vår Energi doubling their production through the ExxonMobil transaction, it will be interesting to see if the other companies in this group will do structural changes to achieve additional growth in this highly competitive environment.
PE-backed E&P firms have been active dealmakers in the oil and gas sector in 2019, with Chrysaor acquiring ConoccoPhillips’ UK assets and Okea going public this year. Another example is the sale of CapeOmega from HitecVision to the global PE firm Partners Group. Financial investors’ interest in gas infrastructure assets continued to be high and several gas infrastructure asset interests were divested by oil companies to financial investors.
Subdued IPO activity
2019 saw 15 new listings on the Oslo Stock Exchange (all marketplaces), representing a 28.5% decrease compared to 2018 and 2017, but in line with the 10-year average. According to EY, global IPO deal numbers declined by 19% from 2018 (1,383) to 2019 (1,115). Proceeds only fell by 4% in the same period, largely owing to the IPO of Saudi Aramco, the largest IPO on record by proceeds. EY attributes the general IPO development to the US-China-EU trade tensions, concerns about economic growth and other geopolitical issues.
For companies already listed on the stock exchanges, 2019 was a good year in terms of stock returns. The S&P 500 index, measuring the stock performance of the 500 large US listed companies, marked a 29% gain in 2019, its best performance since 2013. The OSE equivalent, OSEBX, gained 16% in the same period. This level of return is above both the 10-year and 20-year averages. As the graph below indicates, the number of new listings in Oslo tends to trend upwards following a year of above average stock returns. On the other hand, the number of publicly traded firms globally has decreased for some time. The number of listed companies in the US has fallen by half over the last twenty years, and similar trends are evident in Europe and starting to emerge in Asia. At the same time, the number of PE-backed companies has expanded markedly, and according to Bain & Company public-to-private deals reached their highest level since the boom years prior to the financial crisis, in terms of both value and count.
Figure 2 – Number of new listings on the Oslo Stock Exchange and percentage change in the OSEBX from 2000 to 2019. New listings represented on the left axis and percentage change on the right. Source: Mergermarket
The listing of Adevinta, the global online classified company demerged from Schibsted, was by far the biggest on the OSE in 2019. The offering valued the entire equity capital at EURm 5,546 making it the largest IPO since 2006 and the fourth biggest overall in terms of market cap, exceeded only by the past listings of Equinor, Telenor and REC. In terms of offering size, the transaction was considerably smaller, as the offering only represented around 6% of Adevinta’s market cap. Wiersholm advised Schibsted throughout the IPO process.
M&A partner Sverre Sandvik comments:
While the number of new listings in 2019 was not particularly high, there were a number of successful placements during the second half of the year, and there should be a potential for an active year in the Norwegian capital markets in 2020.
Increased politicization of M&A
Another trend affecting M&A is the increased risk associated with the enhanced enforcement of trade controls, especially in cross-border deals. Governments worldwide are tightening up controls on foreign investments in their countries. At the same time, policymakers increasingly use economic sanctions as a vehicle to address geopolitical issues, often leaving corporations with a complex job of navigating the relevant legislation when doing M&A. Non-compliance by the target company with trade laws and regulations may not only have an adverse impact on the transaction value, but can also trigger breach of loan covenants and cause irrevocable reputational damages.
We have recently experienced a notable increase in the demand for compliance related services in transactions. Sanctions and rules governing foreign investment control have clearly been subject to more attention in connection with trade disputes, political unrest and a surge in protectionism, says Wiersholm’s compliance partner Georg A. Engebretsen.
The increasing level of transactions triggering national security issues occurring in jurisdictions such as the US and EU has happened in Norway as well, with the new Security Act that came into force in 2019. The act introduced mechanisms for control of foreign ownership, opening up for authorities to intervene if an acquisition involves a «not significant» threat to Norwegian security interests. The threshold for intervention under the new act is however likely to be high, and so far, no known deals have been blocked. As mentioned in the introduction, the level of inbound investment from foreign investors remains high, which suggests that the new legislation has not decreased the attractiveness of Norwegian targets.
The Competition Authority on the offensive
The Norwegian Competition Authority (NCA) is responsible for supervising and exercising merger control in Norway. In recent years, the NCA has taken a more comprehensive and stringent approach when assessing mergers and acquisitions. This tendency is similar to what we have been witnessing in other European jurisdictions.
The stringent approach of the NCA was apparent in the case of Sector Alarm/Nokas, in which Wiersholm represented Sector Alarm. Sector Alarm acquired a non-controlling stake in Nokas, and for the first time the NCA intervened against a minority acquisition. The case raised novel issues of law. The NCA challenged the legal threshold for intervention against minority acquisitions by arguing that the shareholding would provide the parties with the ability and incentive to restrict competition. The NCA approved the acquisition in the end, subject to certain remedies.
In recent years, the NCA has been successful in reducing time spent on non-complicated mergers. Typically, clearance will be given within two to three weeks if there are no horizontal or vertical overlaps between the parties. This is a very welcomed improvement. Nevertheless, cases that are not cleared in phase 1 often tend to result in comprehensive and time-consuming procedures.
Competition law specialist and partner at Wiersholm, Håkon Cosma Størdal, argues that the NCA, in general, must strike a balance between careful assessments and the need for an efficient and timely review process:
The level of information gathered for review is often overwhelming, and the parties should be mindful that the NCA would typically ask them to produce internal documents, including notes, emails and reports. Merging parties should therefore start preparing for the process at an early stage.
It also seems to be a discrepancy between how the Authority and the merging parties evaluate the competitive environment, according to Cosma Størdal:
The NCA has traditionally taken a strict academic approach to the concepts of market definition and market power, drawing on economic theories in their assessments. The merging companies typically have a more practical perspective on the competitive situation, given their first-hand experience from the markets. An important role for the advisers is therefore to bridge the gap and present documentation and arguments that resonate well with the NCA.
In an attempt to find middle ground, Wiersholm hosted in 2019 a seminar together with Oslo Economics to further discuss how to best facilitate an efficient merger control. The seminar featured, amongst others, the NCA’s Director General, Lars Sørgard. The initiative was very well received, and it led to some fruitful debates between the different stakeholders.
Another trend observed in Norway is greater involvement by the NCA in the procedural aspects of the M&A processes. According to Cosma Størdal, it is an increased focus on issues like «gun-jumping» (pre-approval implementation) and information sharing. His advice is therefore to establish clear guidelines for the DD-process and post-signing interactions at an early stage.
On a political note, there has been discussions on whether to take into account social objectives such as environment, labour conditions, and sustainability in merger control. However, the Nordic competition authorities have so far rejected such suggestions, and shown reluctance to expand the scope beyond the current economic considerations. Only the future will tell – will the competition authorities decide to be part of the green shift?
Another «hot potatoe» is the competitive impact of nascent acquisitions (when large, dominant market players acquire fledgling businesses) and vertical integration.
A final question that has been debated in the Norwegian context; is whether the traditional working methods of the NCA are sufficient in meeting the demands of the rapidly evolving dynamic markets. Some have argued that the tools available today, such as current economic models, literature and legal framework, are not designed to handle the platform economy and two-sided markets. These dynamics and innovative markets have certain characteristics, which have not yet been thoroughly examined by the NCA. This leaves us with the question of whether the NCA’s toolbox is sufficiently equipped or if it should be updated accordingly.
The key takeaways from a competition law perspective are:
- Stakeholders may experience comprehensive and time-consuming case proceedings if the NCA initiates a phase 2 review.
- The NCA will regularly ask the merging parties to produce all internal documents, emails, notes etc. Stakeholders should therefore be mindful of the NCA’s information gathering throughout the process – starting from pre-transaction talks.
- Stakeholders should be aware that also minority acquisitions (of non-controlling stakes) may be subject to review by the NCA
- Stringent enforcement of procedural rules
- Although there are discussions of expanding the scope of the merger review, these are still pure speculations and it appears likely that the NCA will continue on the current path.
Presence and prominence of private capital
M&A activity is inherently cyclical, rising and falling with the fluctuations in the general economy and business environment. The economic expansion since the global financial crisis is now the longest continuous growth period on record. Low interest rates and access to favorable debt financing over time has led to increasing allocation of capital to the private equity industry. According to a report by Norwegian Venture Capital & Private Equity Association (NVCA) that was launched at Wiersholm’s annual Nordic Buy Out Forum in December, PE funds present in Norway has almost EURbn 3 of «dry powder» to spend. The combination of readily available capital and a high-cycle environment has seen valuations rise to record levels. According to DNB Markets, the average European entry multiple, measured by EV/EBITDA, has increased to 11,3x in 2019, compared to its 10-year average of 9,8x.
Harald Hellebust comments:
Further, a general scarcity of high-quality assets has resulted in PE funds finding minority investments more attractive than before, exemplified by KKR’s purchase of a 30% stake in Sector Alarm in 2019.
PE firms appear to be taking advantage of the high valuations, which combined with a continued openness towards foreign investment, has driven exits to their second highest YTD point in the Nordics by both value and volume, according to Mergermarket. At the same time, the number of PE buyout deals has also increased. In Norway, there were a record high 69 acquisitions of controlling interests conducted by PE firms in 2019.
Wiersholm advises many of the largest PE firms on M&A, and one of the trends in 2019 was the increased focus on, and sophistication of, Management Incentive Plans (“MIPs”). Because of high demand for attractive assets and a number of competing bidders, optimal structuring of management incentives and employee retention plans are increasingly important, says Wiersholm partner Nicolay Vold, who works with tax structuring of M&A and corporate matters.
When a PE firm acquires a company, senior management retention is often a crucial factor. Research suggests that well-constructed incentive programs can increase the subsequent performance of the target company. At the same time, management teams are becoming more professional, placing higher demands on the design and content of MIPs. The provision of such schemes requires legal competence across a range of disciplines such as corporate law, contract law and tax law.
Outlook for 2020
Despite the backdrop of trade tension, political uncertainty and concerns about slowing economic growth, there are reasons to be optimistic about the market sentiment for 2020. Morgan Stanley forecasts that global growth will recover from the first quarter of 2020 onward as trade tensions and monetary police ease, reversing the downward trend of the past seven quarters. A great deal still depends on the outcome of the US-China trade talks, but easing trade tensions could reduce business uncertainty and make policy stimulus more effective according to the investment bank. In this regard, the US presidential election will be a decisive factor. The outcome of the Conservative Party’s majority win in the UK election in December is still uncertain, but the markets reacted positively to the now likely prospect of passing a Brexit deal through parliament.
The Norwegian economy experienced a modest upturn during 2019, and once again proved its resilience against the developments abroad. While global growth recorded its slowest pace in 2019 since the global financial crisis a decade ago, the Norwegian mainland GDP for the full year is estimated to have increased by 2.7 %, and unemployment has fallen steadily since 2016. However, the Norwegian economy is also likely to face a change of pace according to Statistics Norway. The slowdown in the international economy and the markedly lower growth in petroleum investments are contributing to the change of pace. Despite this, interest rates will probably remain at a historically low level, due to the likelihood of very low international interest rates continuing.
M&A activity in Norway going forward is likely to remain high, driven by a moderately strong economic sentiment, stable political circumstances and continued favourable financing conditions. Transactions in the oil sector are expected to be a main driver of value, with young E&P companies seeking expansion and additional players looking to enter the market.