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Spanish M&A: Look Both Ways and Proceed with Caution

By Suzy Bibko, EMEA Content Marketing Manager, Merrill Corporation

The Brexit issue is top of the talk in Europe, with what seems like hourly updates as to what will happen in the UK. Will negotiations be extended? Will the UK crash out of the EU with a no-deal Brexit? Will there be a people’s vote? It’s anybody’s guess at this point. And thus, everyone’s approach as to ‘what to do’ is different: ignore, engage, protest, plan, pray? Spain appears to be in the planning camp, actively preparing for a no-Brexit outcome. 

Proceed with Caution…
On 9 September, El Pais said that Spain's tax authorities have sent more than 90,000 letters to companies with ties to the UK “to warn them about the adverse effects of a no-deal Brexit, and recommend that businesses take steps to adapt to this possibility”, which include customs, tax and health requirements for cross-border trade. The acting Prime Minister also met with his ministers and regional authorities to review Spain’s contingency plan for a no-deal scenario and ensure that such measures are in place.

This cautioned approach seems to go hand-in-hand with the level of M&A activity in the region so far this year. Last year, according to international law firm Latham & Watkins, the Spanish M&A market saw 772 transactions close, totalling a high USD98.6 billion (at October 2018), boosted by a series of large-cap transactions. However, activity has returned to more “mundane levels” this year, with 1H19 having the slowest start to a year value-wise since 2013, according to Mergermarket’s EMEA Trend Summary 1H19.

Source: Mergermarket

Spain has a reputation for being a mid-market M&A player, rather than a mega-deal monger, so the slow-down should perhaps be expected. Moreover, Latham & Watkins believes mid-market M&A is healthy there, with strong competition for assets and thus the possible need to be creative when searching for deals. The bright, or at least warmer spots, for deal activity in the region appear to be TMT and industrials & chemicals, followed by business services, consumer and energy, mining & utilities.

Source: Mergermarket & Merrill Corporation

…And Look Both Ways 
However, Brexit and Spain’s own domestic political uncertainty can’t be ignored. The slow start to the year means these issues could be weighing on deal confidence, as is the ability to get deals done quickly – although Madrid-headquartered international law firm Gómez-Acebo & Pombo stresses that “the Spanish political situation does not have a direct impact on most M&A transactions, certainly not in the mid-market.”

“[T]he Spanish political situation does not have a direct impact on most M&A transactions, certainly not in the mid-market.”  –Gómez-Acebo & Pombo 

“The political situation may affect M&A in heavily regulated sectors and also infrastructure, to the extent that there may be an element of uncertainty towards the future and investors want to have a clear horizon post-investment,” says Gómez-Acebo & Pombo. “Brexit, like any situation of big change, will create opportunities (both in the UK, for domestic and cross-border deals, and also in other countries like Spain), which at this time are difficult to grasp since all around Brexit is uncertain, starting with whether it will happen at all and in what form. Brexit may bring along a decrease in transactions involving Spanish companies (M&A and purely financial) being subject to UK law. It may also redirect investments in Spain coming from a UK platform where the ultimate investor is from a third country.”

Latham & Watkins suggests that, “M&A teams need to ensure they have conducted appropriate pre-deal due diligence to carve-out targets, which is more important now than ever before. Sellers are less willing to give protection, but they want greater certainty and faster deal processes. This places buyers under pressure to conduct thorough and appropriate due diligence in record time, therefore buyers must be equipped to undertake the right pre-deal work on the right areas and with the right depth of analysis and expertise.”

So, it sounds like there is opportunity in Spain – provided you proceed with caution.