Silence is Golden: Is CFIUS Promoting FDI in Shale Gas Deals?

Posted on June 11, 2010 by Bill Newman

Foreign direct investment (FDI) in a formidable natural gas deposit located under the northeastern United States is occurring at a breath-taking – perhaps even breakneck – pace this year. There is no indication that the U.S. government has reviewed any of these transactions for national security considerations. If it has not, then that is a plus, as review would hinder the accumulation of needed capital. This is a case where the government aids U.S. national security by abstaining from exercise of authority. 

To date in 2010, foreign investments in the Marcellus Shale formation have included transactions between U.S. companies and Japan’s Mitsui & Co., Norway’s Statoil, Britain’s BG Group, and Chinese and Korean sovereign wealth funds, to name a few. If the shale gas that lies below New York, Pennsylvania and West Virginia can be safely extracted at a competitive price, in terms of both economic and environmental costs, the United States may be able to radically decrease its reliance on imported oil. Funding the development costs and building the extraction technology are the primary challenges. Meeting these challenges requires significant investment capital. 

That’s where foreign partners come in. Just as U.S. entrepreneurs were willing to seek significant amounts of foreign investment capital for the building of U.S. railroads in the nineteenth century, their exploration and production descendents have wisely decided to partner with worldwide sources of investment capital. And the current low price environment for natural gas makes these deals attractively priced for foreign investors. Throw in the ability to learn (or even copy) the hydraulic fracturing technology used to access the shale gas, and the investment almost sells itself. 

Although the U.S. government has the authority to regulate, it has wisely chosen not to do so. Marcellus transactions are closing at a record pace, allowing U.S. owners to accumulate the dry powder they need to convert the prospect of energy independence into the real thing. 

Take for example one of the 2010 Marcellus transactions. Mumbai-based Reliance Industries acquired a 40% interest in Pennsylvania-based Atlas Energy Resources. Did the parties file with the Committee on Foreign Investment in the United States (CFIUS)? Their press releases don’t mention a filing. The purchase agreement did not reference any requirement that either party make the voluntary filing with CFIUS. CFIUS clearance was not a condition to closing. The deal was signed on April 9 and was closed on April 21, 2010.   CFIUS review generally takes at least 30 days. The time frame suggests no review and no filing. 

In another deal—the investment by the UK’s BG Group plc in EXCO Resources—the investment agreement references antitrust review but not foreign investment clearance. Purchase agreements for the other 2010 Marcellus Shale deals are not publicly available. It is difficult to assess whether the parties subjected their deals to voluntary CFIUS scrutiny to avoid a regulatory challenge to the transactions after their completion. 

Why is there any doubt about CFIUS review? CFIUS screens FDI transactions to identify U.S. national security risks. The official guidance it published in December 2008 states that U.S. requirements for energy sources is a factor it considers. Effects on critical technologies is another. Effects on physical critical infrastructure “such as major energy assets” is a third. CFIUS has given fair warning that those investors who come to the U.S. to invest in U.S. major energy assets fall within its purview. 

It is therefore not surprising that foreign buyers of U.S. oil and gas interests have invoked CFIUS review. The 2009 Annual Report of CFIUS (unclassified edition) specifies that four of the 404 notices filed with CFIUS in 2006-2008 were for oil and gas extractive industry transactions. The annual report does not identify the transactions. Whether any of them involved Marcellus Shale is simply not known.

CFIUS does not announce its decisions on specific deals. There nonetheless is precedent. At the end of 2009 CFIUS blocked a proposed Chinese investment in a failing U.S. gold miner, FirstGold. Whatever the basis for the regulatory position, FirstGold made clear that CFIUS can wield its authority in extractive industry deals.

CFIUS may have it just right this time. U.S. national security requires that not only the U.S., but also the world at large, develops as many safe alternatives to oil in as many locations as possible. According to a recent special report in The Wall Street Journal, shale gas discoveries in the U.S. and elsewhere will prevent energy cartels from forming and deprive the petro-states of their influence in world affairs. Financial Times columnist Gideon Rachman argues that national security of the U.S. and other countries as well requires development of shale gas wells and that accordingly any investment – domestic or otherwise – that develops these resources should be encouraged. 

It’s a safe bet that the regulators are aware of these views as well. Seeming inaction may be saying more than any articulated policy could. There is more than one way to announce, “Open for business.” 

Or, contrary to our view, does the U.S. need to be more protective here? Is there a case to be made for screening to insure that we are not allowing other nations to strip our prized assets? If you believe there is, your comment is welcome. 

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Focus on Finland, Part 3: Investments from Finland

Posted on June 4, 2010 by Bill Newman

Under the pressure of the global economy, many Finnish companies have transferred manufacturing from Finland to China and to other countries with lower labor costs. Recently there has also been transfers of R&D. In many cases, the transfers are executed by incorporating a new company overseas, but also through acquisitions and joint ventures. On the other hand, many Finnish companies, especially the high-tech sector, have marketed, or at the very least targeted, their focus outside Finland. Consequently, it is common that Finnish companies have subsidiaries and joint ventures outside Finland.As mentioned earlier, there are practically no limitations regarding investments made from Finland and Finpro in assisting Finnish companies, especially small and medium size companies, to invest overseas. Finpro also has locations in the United States.

According to the statistics of the Finnish Venture Capital Association, in 2009 private equity firms located in Finland made investments to Finnish and foreign companies at the value of 362 million euros, nearly equaling the amount invested during 2008. The amount was invested to 230 different target companies in 350 transactions and the value per transaction increased compared to the previous year. 82 million euros out of 362 million were invested into 171 venture capital stage companies in 257 transactions and 280 million euros were buyout investments made to 59 target companies in 93 transactions. 14% of the amount invested went outside Finland and only 2% outside Europe. Even though Finland has several incentives available for all companies located in Finland, the government is not that active in investing. In 2009, the share of investments made by public sector was 6% of the entire amount invested and 5% of the transactions.

Finnish companies have also been quite active in acquiring foreign companies. In the beginning of 2000, the Finnish paper company Stora Enso acquired the U.S. company Consolidated Papers with 70% premium. This transaction was not a success story for the purchaser and the North American operations have already been divested. Nokia has been active in acquiring U.S. companies like Intellisync Corp, Loudeye Corp, Twango, Meta Carta Inc., Navteq and the latest acquisition Novarra Inc. The number of the acquired U.S.-based high-tech companies indicates the strength of the U.S. high-tech industry and the purchase price of Navteq amounting to 8.1 billion shows that it is not only nickels-and-dimes that are spent.

 

A special thanks to Ville Heikkinen, Sullivan & Worcester’s Finnish intern, for his assistance in preparing this post.

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Focus on Finland, Part 2: Investments to Finland

Posted on June 2, 2010 by Bill Newman

Finnish companies together with the government are heavily investing in R&D. According to the Organization for Economic Cooperation and Development (OECD) statistics, Finland ranks second in the OECD in terms of R&D intensity – at 3.45% of gross domestic product (GDP) – and aims at 4% of GDP by 2010, leads the OECD in number of researchers in the labor force, ranks fourth among OECD countries in terms of scientific articles, and ranks above average in number of triadic patents per capita. However, R&D investments are concentrated in certain manufacturing sectors, especially electronics, and dominated by a handful of large domestic multinational companies. For example, Nokia, the Finnish power house in mobile business, alone accounts for almost half of overall R&D business. The number of R&D-oriented start-ups has not met the expectations and the problem is partly owed to a lack of risk capital.

Generally, Finnish companies are considered to have high expertise in technology while sales and marketing require more development. Due to the above mentioned lack of risk capital and need to strengthen their organizations, Finnish companies are actively seeking financing and active financiers outside Finnish borders. Traditionally, Swedish investors have been active in Finland, but investors from other areas are also of interest of Finnish companies and vice versa. Lower entry valuations and greater increase potential of the enterprise value, compared to their U.S. competitors, makes Finnish companies rather attractive targets, especially for U.S investors.

The new Finnish Companies Act, entered into force during 2006, makes the investment process very flexible including, inter alia, a possibility to increase share capital without issuing new shares and issuance of new shares without increasing share capital. The Companies Act also includes a possibility to make the investment into a so called invested unrestricted equity fund enabling more flexible return of the investment. Incorporation of a new company is an easy and fast process that requires Memorandum of Association with Articles of Association, investment of the minimum share capital EUR 2,500, and nomination of the board members. The minimum number of board members includes one ordinary member and one deputy member and the general coalition consists of 3-5 ordinary members. Without exemption of the National Board of Patents and Registration of Finland, at least one ordinary member and one deputy member must be domiciled within the European Economic Area.

According to the statistics of the Finnish Venture Capital Association, in 2009 Finnish target companies received investments from Finnish and foreign private equity firms at the value of 655 million euros – about 4% more than received during 2008. The 655 million euros were invested in 223 different target companies in 357 transactions and the value per transaction increased compared to the previous year. 87 million euros out of 655 million were categorized as venture capital investments and invested to 162 target companies through 251 transactions and the remaining 568 million euros were categorized as buyout investments invested to 61 target companies through 106 transactions.

During the first decade of 2000, many Finnish companies were acquired by foreign companies and/or investors. For example, GE acquired Instrumentarium, a Finnish medical device designer and manufacturer; Bank of America acquired Paroc Group, a manufacturer of mineral wool insulation products and solutions; Technitrol Group acquired LK Products Oy, a supplier of antennas for mobile phones and other wireless terminal equipment; and Google has acquired some smaller high-tech companies such as social mobile start-up Jaiku. Foreign owned companies are, equally with Finnish-owned companies, eligible for government incentives that are given in the form of cash grants, loans, tax benefits, equity participation, guarantees and employment training. The R&D incentives granted by Finnish Funding Agency for Technology and Innovation (Tekes) must, however, be returned in case there is a change of ownership in the company that has received such R&D incentives and no prior written consent of Tekes is received for the change of control.

Invest in Finland assists international companies in finding business opportunities in Finland and provides all the relevant information and guidance required to establish a business in Finland. One of their latest success stories was to assist Google in locating their data center in Finland. Further, private service providers have developed services to enable foreign investors to find and evaluate investment opportunities in Finland. One example of these kind of services is Technopolis Online.

 

A special thanks to Ville Heikkinen, Sullivan & Worcester’s Finnish intern, for his assistance in preparing this post.

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Focus on Finland, Part 1: Investment Climate in Finland - Building Up Windmills Instead of Wind Shelters

Posted on May 28, 2010 by Bill Newman

Due to the limited size of the Finnish market, companies and entrepreneurs located in Finland have – from the very beginning – gone overseas to grow business. Also, the amount of capital available in Finland is limited and, especially in the areas requiring large investments like the mining industry, foreign investors are appreciated.

Investments made from Finland to other countries used to be regulated but several amendments of legislation during the 1980’s and in the beginning of the 1990’s have changed the environment. As of October 1, 1991, movement of capital to and from Finland have not been restricted. Restrictions regarding foreign ownership of Finnish securities have also been dissolved and from the beginning of 1993 there has been no restriction. Certain acquisitions of large Finnish companies may require follow-up clearance from the Ministry of Employment and the Economy in accordance with the Act on Control of Foreign Acquisitions of Finnish Companies. The purpose of the clearance is to protect essential national interests. However, except for those relating to money laundering, there are practically no legal obstacles to direct foreign investments in Finnish securities or exchange control regarding payments into and out of Finland.

The state owns portions of several Finnish companies, some publicly-listed, which are considered to be critical for the society or from the point of maintenance surety. The state, however, has no majority ownership in these publicly-listed companies and the government does not interfere to the day-to-day business in order to avoid reducing attractiveness in the eyes of other investors. Debate regarding areas where the state should keep its ownership is ongoing and every now and then the foreign ownership raises discussion. For example, the sale of the Finnish company responsible for national transmission and broadcasting networks, as well as for the radio and television stations, to the French company have raised some criticism. At the end of 2009, it was reported that the government has planned to acquire the ownership to the said networks to Finnish owners. Lately, there has also been some political activities regarding more efficient supervision of non-Finnish ownership in order to prevent takeovers on the areas and of the companies that are considered to be essential from the national and welfare perspective. The previous Minister of Labor of Finland sent a working group of officials to examine the above mentioned supervision but no proposal or conclusion of the working group has yet been reported.

For the purposes of promoting direct investments to and from Finland, two organizations have been established. Invest in Finland, a government agency promoting foreign investments into Finland and Finpro, an association founded by Finnish companies, aims to assist Finnish companies in their business activities outside Finland. So far, the net amount of capital flow has been negative for Finland, i.e., more investments and related capital transfers have been made from Finland than to Finland. 

 

A special thanks to Ville Heikkinen, Sullivan & Worcester’s Finnish intern, for his assistance in preparing this post.

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Chesapeake Energy Restructures its Balance Sheet with Rapid-Fire Foreign Direct Investments

Posted on May 21, 2010 by Bill Newman

Chesapeake Energy Corporation, headquartered in Oklahoma City, is one of the largest producers of natural gas and the most active driller of new wells in the United States. Earlier this month, Chesapeake Energy announced that it expected to raise $5 billion of equity over the next 2 years to repay senior debt and increase investments. As part of that plan, it will sell up to a 20% stake in its Marcellus Shale properties before May 2011. Reuters reported that the sale of the Marcellus shale gas business will net Chesapeake at least $2 billion from the sale as part of its latest plan to raise cash. 

Now, Korea Investment Corp (KIC) and China Investment Corp (CIC) are turning their attention to natural resources, which they see as more tangible than financial services, and may have bought stakes in Chesapeake Energy. According to the Financial Times, KIC and CIC were set to lead a $900 million investment in Chesapeake Energy, becoming the latest Asia-based groups to focus on the sector. While Chesapeake is set to issue the convertible preferred stock, KIC and CIC are expected to acquire $300 million each. 

At the same time that it announced its intended restructuring, Chesapeake also announced a sale of $600 million of nonvoting 5.75% cumulative non-voting convertible preferred stock to an affiliate of Singapore state investor Temasek Holdings and an affiliate of Beijing-based Hopu Investment Management Company. The offshore investors also received an option to acquire $500 million of additional preferred stock for 30 days. 

The Asian funds generally believe the price of natural gas, trading at less than a third of the price of oil on an equivalent basis, is at a cyclical low point and that demand will climb for environmental reasons. 

Today Chesapeake announced that it has sold $1.7 billion of its 5.75% cumulative non-voting convertible preferred stock to Asian investors. Although the release does not specify, based on the prior press speculation, those investors could include KIC and CIC and indeed that KIC and CIC led the deal as forecasted. It could also mean that Temasek and Hopu exercised their option. Chesapeake may provide information to clarify.

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International Players Vie to Invest in Marcellus Shale Projects

Posted on May 20, 2010 by Bill Newman

International investment is snowballing to the multi-billions in the Marcellus Shale, a large deposit of natural gas embedded in shale deep below the northeastern United States. This month British BG Group closed its deal for Marcellus assets with EXCO Resources for slightly less than $1 billion. Last month, India’s Reliance Industries bought a 40% interest in the Marcellus acreage of Atlas Energy, Inc., a U.S. exploration and production company. In February, the Japanese energy conglomerate Mitsui & Co. purchased a 32.5% stake in the Marcellus Shale assets of energy giant Anadarko Petroleum Corp. The value of each of these deals exceeded $1.3 billion. 

According to a recent report by industry expert John-Laurent Tronche appearing in the Fort Worth Business Press, during the first three months of 2010, there were more than $2 billion of Marcellus Shale deals, including foreign investments--a record for unconventional oil and gas plays. 

The Marcellus Shale is a formation of marine sedimentary rock located in much of the Appalachian Basin of eastern North America. The rock formation is named for a distinctive outcrop near Marcellus, New York. The Marcellus Shale runs across the New York’s Southern Tier and Finger Lakes regions, northern and western Pennsylvania, eastern Ohio, western Maryland, most of West Virginia and extreme western Virginia. In eastern Pennsylvania, the Marcellus bedrock lies across the Delaware River into New Jersey. Consequently, the shale is relatively close to some of the largest consumer and industrial markets for energy in the United States. 

On April 21, Mumbai-based Reliance Industries Ltd. bought a 40% interest in shale gas acreage owned by Atlas Energy, Inc., based near Pittsburgh, Pennsylvania, as part of its $1.7 billion joint venture with Atlas. Reliance is the largest private sector company in India. The reported terms of the deal were $340 million in cash on closing and an additional $1.36 billion to fund part of Atlas’s drilling costs over 5 ½ years. Atlas’ announcement emphasized that Reliance’s inbound investment would result in a significant number of well-paying jobs for Pennsylvanians. Atlas reported that Reliance also obtained the right to acquire a 40% interest in new parcels plus a right of first refusal should Atlas elect to sell additional acreage in the future. Reliance is paying approximately $14,000 an acre, which is the highest price to date for Marcellus acreage.

Two months earlier, on February 16, Anadarko reported that it had signed its joint-venture agreement with Mitsui E&P USA LLC, a subsidiary of Japan’s Mitsui & Co., Ltd. According to Oil and Gas Eurasia, Mitsui paid $1.4 billion for its share in the venture. Anadarko stated that Mitsui will earn a 32.5% interest in Anadarko's Marcellus Shale assets by funding nearly all of its development costs through 2013. On a per acre basis. Mitsui paid slightly less than Reliance did for its deal. According to The Wall Street Journal, an RBC Capital Markets study calculated the 2010 average price for an acre in Marcellus Shale at $5,650. 

The trend is continuing. In the first week of May, Dallas, Texas-based independent energy business EXCO Resources signed a Marcellus Shale joint venture for $950 million with BG Group, Plc, a natural gas company based in Reading, England. BG Group is an integrated natural gas company with operations across five continents. Under the terms of the transaction as disclosed by EXCO, BG Group acquired a 50% interest in EXCO’s Marcellus Shale assets, principally in Pennsylvania and West Virginia. The operations of the joint company will be based in Pittsburgh. Under the terms of the deal, EXCO and BG will each participate in further acreage that the other acquires in the same region. These global partners have a history. In June of 2009 BG Group has acquired an interest in EXCO’s shale gas resources in Texas and Louisiana for $1.3 billion. 

The 2010 cross-border transactions added momentum to the investment that has been building since November 2008. In that month Oklahoma-based Chesapeake Energy Corp. formed a joint venture with Norway’s StatoilHydro for the exploration and development of natural gas in the Marcellus region. In that deal, Chesapeake sold a 32.5% interest in its Marcellus Shale assets for $3.375 billion and retained 67.5% working interest. Statoil paid $1.25 billion at closing and agreed to fund 75% of Chesapeake’s share of drilling and completion expenditures until its $2.125 billion obligation has been funded.

Not all industry analysts are encouraging investment in U.S. shale gas. Oil and Gas Eurasia quotes Texas geologist and consultant Arthur Berman who suggests that this is yet another market bubble. Berman thinks shale gas reserves are greatly overstated, while the cost efficiency of shale gas production is questionable at best.

Furthermore, the prospect of producing natural gas from the Marcellus Shale using new hydraulic fracturing, or “hydrofracking,” has raised serious environmental opposition. The principal question is whether the drilling fluids used to break through the rock in which the shale gas is housed can contaminate the drinking water aquifer. For example, today’s Capital Business Blog reported that the Tompkins County legislature (representing Ithaca, New York and surrounding communities) just passed a resolution urging the State Legislature to ban hydrofracking pending further independent study. The debate promises to become far more robust than it had been, given the environmental disaster resulting from the massive BP spill in the Gulf this month. 

None of the debate has focused on U.S. regulation of inbound investment in this potentially significant source of clean energy for much of the U.S. A subsequent post will analyze the role of the Committee on Foreign Investment in the United States for the Marcellus Shale transactions. 

 

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Up to Bat Again - Will it be Strike Two for Huawei in the United States?

Posted on April 16, 2010 by Bill Newman

Top Chinese telecom equipment manufacturer Huawei Technologies is at it again. Back in 2008 Huawei made an attempt to participate with Bain Capital’s proposed acquisition of 3Com Corporation. The deal didn’t go through. There was much speculation that the Committee on Foreign Investment in the United States (CFIUS) determination that Huawei had ties to China’s People's Liberation Army and posed a threat on national security grounds. The failed transaction is discussed in more detail in a past December 2009 blog posting.

Huawei’s latest endeavor, despite continuing U.S. security concerns, is its reported bid for a unit of Motorola, the U.S. mobile phone manufacturer. Earlier this year, Motorola announced a plan to split into two separately traded companies, one for mobile and home business and the other focusing on enterprise mobility and networks business. In March, Motorola Co-CEO Greg Brown paved the way for a sale or merger of its mobile network business unit. 

Huawei is considered the most probable potential buyer and intends to expand its sales in the North American market.

Since Huawei has lost major deals in the past because of political and security fears, the company is considering negotiating a "mitigation agreement" with CFIUS to show its willingness to cooperate with the United States government.

When asked about its motivation to enter such an agreement, Charlie Chen, senior vice-president of marketing at Huawei, responded to questions by the Financial Times, "We are aware that some in the U.S. government have expressed concerns about Huawei and we will work diligently to address those concerns."

If Huawei does manage to receive approval from the U.S. government, the Huawei-Motorola deal could create a new powerhouse and increase competition among the other major mobile network equipment manufacturers: Nokia-Siemens, Cisco, Alcatel-Lucent and Ericsson. It is uncertain whether or not Huawei’s bid will be successful, but it all may not be lost for Huawei in the United States.  

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The Final Days of the Hummer Sale

Posted on March 19, 2010 by Bill Newman

 

 

February 24 brought the end of GM’s proposed sale of its Hummer business to Sichuan Tengzhong Heavy Industrial Machines Company of Sichuan, China, with GM’s direct announcement that the buyer “was unable to complete the acquisition of Hummer.” The deal was initially announced in June 2009 and was to have been completed by the end of January 2010. The sale would have resulted in the first Chinese-owned automobile business in North America. Hummer’s operations were to have remained in the United States. 

GM stated that it would work closely with Hummer employees, dealer and suppliers to wind down the business. It also stated that it would honor warranties and provide service and parts to owners.

What killed the deal? There were no definitive announcements and as a result various theories have been advanced. The general media speculation was that Sichuan Tengzhong was apparently not able to receive necessary approvals from Chinese regulatory authorities. Time Magazine reported that, according to Yale Zhang, a China market analyst for auto-industry consultants CSM Worldwide, "The purchase of this brand is not a match for China. The government's general policies about efficiency and environmental protection, and No. 2, about consolidation — it is all about these two very broad, general policies. This purchase does not match those." The environmental blog Ecosalon emphasized the ecological basis for the Chinese’s government’s refusal to approve the deal. 

More plausible is that insufficient financing was available. The New York Times reported that because the Chinese government had not approved the transaction, Chinese banks were unwilling to lend. As to western banks, the current nonfunctioning state of acquisition finance markets for mid-size deals meant that other bank financing was not available to Sichuan Tengzhong. 

On the day the deal collapsed, there also was a press report that a private equity fund was about to enter the transaction. The fund, newly formed and based in the Cayman Islands, had proposed to acquire a 20% stake in the Hummer business. 

Despite all of the other reports, the Motor Authority blog, ever hopeful, says that the real deadline is May 31 and that the deal is not yet over. That report is not likely to be reliable. To paraphrase General Douglas MacArthur, “old transactions don’t die; they just fade away.”

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Coming to America

Posted on March 18, 2010 by Bill Newman

Ameek Ponda and Douglas Stransky, partners in Sullivan & Worcester’s Tax Department, co-authored the following article. Mr. Ponda is the director of the Tax Department and a member of the Firm's Management Committee. He concentrates his practice in structuring corporate mergers and acquisitions, advising emerging companies on financing and business issues, designing REIT transactions and financial instruments, and working on cross-border financings and acquisitions. Mr. Stransky concentrates his practice on international tax planning. He has structured numerous tax efficient international mergers, acquisitions, dispositions and reorganizations for a broad spectrum of public and private clients in the financial services, life sciences, manufacturing, private equity, technology and venture capital industries.

 

United States businesses of all sizes and sectors are more likely than ever to be targeted by buyers from around the globe, including buyers from rapidly emerging economies such as Brazil, China, India, Israel, and Russia. This “inbound” deal flow stems from the convergence of several trends, including globalization, the rise of sovereign wealth funds and a weakened U.S. dollar. In addition, the United States’ comparatively welcoming legal and regulatory environment signals to the rest of the world that “America is open for business.”

In Massachusetts, some notable inbound deals over the last 18 months included the $11.6 billion acquisition of GE Plastics by Saudi Arabian Basic Industries Corporation, the $8.8 billion purchase of Millennium Pharmaceuticals by Japan’s Takeda Pharmaceutical Co., the $3.9 billion acquisition of Putnam Investments by Canada’s Great-West Lifeco, Inc., the $2.6 billion purchase of Sepracor, Inc. by Japan’s Dainippon Sumitomo Pharma Co., and the $1.7 billion acquisition of Samsonite Corporation by United Kingdom-based CVC Capital Partners Ltd. 

 

Cross-border deals are always more complex than comparable domestic ones. They involve at least two sets of legal and regulatory frameworks, additional currencies, multiple languages and time zones, and potentially significant differences in business culture. Foreign investors and U.S. sellers exploring inbound deals should proceed with informed boldness when developing transaction strategies.

 

On the sell side, understanding the foreign buyer’s goals and recognizing its possible inexperience with U.S. laws and commercial customs and practices will go a long way toward maximizing value in the deal and ensuring a smoother process. For example, a foreign buyer will likely not be familiar with U.S. employment laws, tort litigation, etc., which are markedly different than those of many other countries.

 

On the buy side, it is critical for foreign investors to understand U.S. laws and commercial customs and practices. Successful execution is more art than science, and early involvement by experienced U.S. advisors will be important. For example, in contrast to market practice in other parts of the world, there is generally less emphasis on due diligence in the United States, particularly protracted, intrusive due diligence, and instead a reliance on seller representations and associated indemnities. Of course, exceptions to this general rule exist when statutes, cases, and regulations have expanded successor liability into particular areas, and thus more due diligence may be appropriate, for example, with respect to environmental, employment/benefits, money laundering and international trade issues. 

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Indian FDI Transactions Give New Meaning to Cross Border Deals

Posted on March 16, 2010 by Bill Newman

A pair of transactions between U.S. and India was announced during the first week of March. Essar Group, an Indian conglomerate, with $15 billion of revenue and one of India’s biggest steel producers, announced its acquisition of Trinity Coal Corporation from its parent, Denham Capital Management LP. Founded in 2005, Trinity Coal is based in Scott Depot, West Virginia and is one of the U.S.’s ten largest coal producers. Trinity operates mines in Kentucky and West Virginia. Trinity’s annual coal output is about 7 million tons, and it has reserves of 200 million tons. The reported price for Trinity is between $550 million and $600 million. The basis for the deal was Trinity’s substantial metallurgical coal reserves and its skilled personnel. 

Essar has interests in telecommunications companies, steel, power, oil refining and outsourcing. Essar is controlled by Shashi and Ravi Ruia, who are brothers. One of India’s biggest steel producers, it has manufacturing capacity of 14 million tons. According to VCCircle, the purpose of the deal is to secure raw materials for Essar’s North American steel plants and iron ore operations. 

Last November Essar acquired a controlling interest in Warid Telecom Uganda and Warid Telecom Uganda. Essar had earlier launched a telecom service in Uganda. Essar looks to be opportunistic around the world. The Trinity transaction fits this opportunistic bent. 

In a transaction going the other way, U.S.-based private equity fund New Silk Route Partners, agreed to invest $50 million for approximately 30% of Nectar Life Sciences Ltd. of Chandigarh, India. Nectar Life Sciences is an integrated generic pharmaceutical manufacturer with technology that is used to inject its products into patients. Its shares are traded on the Bombay Stock Exchange and the National Stock Exchange of India. Nectar will use the investment to fund its growth. New Silk Route is based in New York and is a growth capital firm dedicated to private equity investments in India, South Asia, Middle East and other rapidly growing economies of Asia. As recently as last November, the fund said it was looking for investments in the $100 million range. Nectar must have been quite attractive to win over New Silk Route. According to RTT News, New Silk Route is now the largest overseas investor in Nectar. 

This pair of transactions is emblematic for the contrast apparent in the current world of cross-border transactions. In one direction, a large multinational is vertically integrating by acquiring available resources in a developed market, such as the U.S., aggregating its components close to their ultimate markets, rather than shipping the components in from low-cost sites overseas. At the same time, in stark contrast, U.S. investors are funding potential high growth investment opportunities in emerging markets. 

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