14 Dec 2017
Rachel Vella Baldacchino: Malta’s economic climate has witnessed seven years of consistent growth and steady recovery since the onset of the financial crisis, and the Maltese market for mergers and acquisitions is presently by no means insignificant. Corporations actively seek external funding and sources of growth, reflecting an increasing trend towards cross-border mergers and acquisitions involving Maltese companies. This is also reflected by statistics published by Malta’s National Statistics Office, which show that foreign direct investment in Malta at the end 2016 stood at €161.4 billion, marking an increase of €9.5 billion over the corresponding period for the previous year, with 98 per cent of this figure being attributable to the financial services and insurance business sectors.
In May 2017 the European Commission (the Commission) reported that Malta’s real gross domestic product (GDP) growth exceeded expectations in 2016, coming in at 5 per cent as a result of large-scale exports in the services sector, primarily in the gaming and professional services industries, coupled with strong private consumption expenditure. It is in this context that M&A activity has significantly picked up over less than a decade, progressing from a situation where M&A activity was minimal, to one that reflects the buoyant state of the Maltese economy, in particular that of the services sector.
Most M&A activity goes unreported where it relates to private companies, but an insight into the extent of M&A activity can be found through the Malta Financial Services Authority’s annual figures, which report that 214 company mergers were carried out in 2016.
RVB: Malta continues to gain momentum as a centre of excellence for doing business and for persons seeking an efficient entry point to Europe through international asset-holding structures and an efficient tax base. Sectors that have experienced considerable activity in recent years involve businesses engaged in activities such as banking, payment processing, electronic money issuing, software, gaming and gambling, insurance, aviation and yachting. The dynamism driving the ICT lying at the foundations of the online gambling industry has prompted significant M&A activity in Maltese technology-focused companies. Clear and forward-looking regulatory frameworks for remote gaming operators, which safeguard both the interests of players and businesses alike, are coupled with stable regulation in the financial services sector, allowing for the offering of a range of payment gateway services and fintech products. Typical transaction sizes are not always publicised and figures do vary widely across sectors and businesses, however some recent transactions in the online gaming sector have reached values beyond the €1 billion mark.
RVB: The transactions involving Maltese companies, buyers or sellers that receive highest press coverage relate to the remote gaming and banking industries, as some of Malta’s most flourishing business sectors.
Significant gaming industry M&A has been focused on snapping up operators with strength in specific markets. The most significant deal by value over the past few quarters has probably been that the acquisition of a majority stake in the Tipico Group, an international provider of sports betting and casino games, by CVC Capital Partners, a private equity firm, for a sum to the tune of €1.4 billion. The increased interest of private equity firms in the gambling industry is very noticeable. Due to Malta being a centre of excellence for remote gambling, it is inevitable that there would be a fair share of private equity deals relating to the gambling industry. The recently completed acquisition of a Malta-licensed online gaming and gambling operator, ComeOn Malta Limited, by Swedish gaming group Cherry AB, for a total consideration of €280 million could arguably be said to have cemented Malta’s instrumental position in the European market for M&A in the online gaming sector, evidenced by the continual trend for multinational operators flocking to acquire local or locally focused businesses operating in the regulated online gaming space.
Malta also has a sizeable banking sector, estimated to be around eight times larger than its GDP according to figures published by the news agency Reuters. There were at least three recent notable transactions in the local banking sector. One of these was the sale of the Maltese subsidiary of Reiffeisen Bank to Banasino Investments Limited and Hillwood Insurance Co Ltd, part of Kronospan, a global player in the manufacture and distribution of wood-based panels. The second was the acquisition by Mediterranean Bank plc, a Malta grown and licensed credit institution, of 100 per cent of the issued share capital of Volksbank Malta, for a cash price of €35.3 million. More recently, MFC Industrial Ltd, a Canadian company listed on the New York Stock Exchange, successfully concluded its acquisition of Maltese bank Bawag Malta Bank Ltd for a sum to the tune of €91 million.
The hotel industry also saw notable M&A activity in 2015 with International Hotel Investments plc (IHI), the largest Maltese hotel group which announced in January 2016 the acquisition of Island Hotels Group Holdings plc, which brought with it a number of hotels in Malta, as well the target’s catering business and a 50 per cent shareholding in the company that runs the Costa Coffee franchise in Malta and Spain. M&A activity with a Malta connection in the hotel and catering sector remains primarily driven by IHI, which, after acquiring a landmark property in London and developing it into a luxury hotel launched in 2013, has shown that it has more appetite for growth through acquisitions when it announced in May 2016 that it had completed the acquisition of a prominent hotel on Rue Royale in Brussels.
Another recent keynote deal of 2016 was the acquisition by Tunisian telecommunications company Tunisie Telecom, through its Malta-incorporated subsidiary TT ML Limited, of a 65.4 per cent share in GO plc, a major Maltese quadruple play telecoms provider.
RVB: Generally, the consideration preferred in mergers and acquisitions in Malta consists of a combination of share transfers or allotment and cash considerations. At times, the consideration may be variable and depend on earn-out clauses and key performance indicators reached by the target company. The final consideration structure and breakdown is largely dependent on the outcome of deal discussions and detailed valuations of the company’s balance sheet, profitability and potential growth, and there is no one formula for a preferred shareholder consideration.
Furthermore, the Listing Rules applicable to public companies whose securities are listed on the Malta Stock Exchange, bidders in public offerings may offer securities, cash or a combination of both, provided that a cash consideration must be offered as an alternative in all cases. The principal difference between offering cash and non-cash considerations lies in the nature and scope of the information that the bidder will need to provide to the shareholders in the offer document. In this context, shareholders are often willing to accept allotments or issues of shares in a foreign acquirer.
RVB: There is an important interplay between a number of key pieces of local legislation that an M&A practitioner must keep in mind when advising on a transaction under Maltese law, some of which have been shaped by EU law, others that are centuries old. Many laws are shaped by traditional civil law principles, while others borrow heavily from statutes of common law jurisdictions, primarily those of England and Wales, and other statutes are the result of the local transposition of EU law. Malta’s Companies Act governs the formation and functioning of companies and is the central piece of legislation with respect to corporate governance and mergers, acquisitions, taking security over shares, dissolution and consequential winding up of companies formed under Maltese law. Together with other subsidiary legislation enacted under the Companies Act and laws regulating commercial activities, taxation and other sector-specific regulated activities may be periodically referred to by an M&A practitioner. There have been a number of recent changes to Maltese company law that are intended to make Malta more attractive as a financial centre in Europe and some of which are the result of EU harmonisation efforts. Malta’s growing network of double tax treaties, all 70 plus of them currently in force, also very often play an important part in the structuring of an M&A transaction.
RVB: The principal source of funding for M&A transactions with a Malta connection is private equity. Local banks typically impose strict requirements when it comes to financing M&A. In general, local banks tend to seek to limit their exposure to sectors that they know well, primarily local real estate. A certain degree of reluctance by risk-averse banks to lend funds to businesses on favourable terms has driven Malta’s commercial and financial services landscape to experience considerable growth in its alternative financing sector. Several recent legislative initiatives aimed at facilitating access to finance for business growth and investment have supported its emergence as a growing financial hub. Foreign investors and businesses seeking alternative sources to finance find that their projects are bolstered by Malta’s modern and originator-friendly framework for securitisation transactions and its unique statutory solutions, such as the domestic creation of a statutory position of insolvency remoteness of the securitisation vehicle, and the possibility of creating individual cells with separate, ring-fenced patrimonies within such vehicles. 2017 saw the first admissions to listing on the Malta Stock Exchange’s multilateral trading facility ‘Prospects’, launched earlier in 2016, to appeal to small and medium sized enterprises seeking alternative sources of finance (small- and medium-sized companies are those that employ fewer than 250 persons and that have an annual turnover not exceeding €50 million, or an annual balance sheet total not exceeding €43 million).
The majority of deals by volume and value see foreign involvement in some way, whether on the buy or sell side. Often, the target business has been structured through Maltese entities due to the favourable local business environment. Other times, Maltese structures are used as acquisition special purpose vehicles and in this sense several acquisitions have been made by Maltese companies over the past years.
RVB: Shareholder activism is viewed as important part of the democratisation of corporate processes, and is prevalent in the context of the largest Maltese listed companies in Malta. In fact, the recent acquisition of the majority stake in Go plc was temporarily stalled by the refusal by a majority of individual private shareholders to sell their shares at the offer made by TT ML Ltd of €2.87 per share. This shareholder rejection reflects a strong willingness by local shareholders to keep their shares openly tradeable on the Malta Stock Exchange and evidences public confidence in the growth prospects of Maltese companies.
RVB: A merger or an acquisition based on Maltese law may be quite a complex transaction, predominantly accomplished through a number of stages. Although no one corporate deal is analogous to the next, the typical stages of an M&A transaction typically commence with the identification of potential targets, whether these are the buyers or sellers, and a subsequent solicitation or indication of interest in doing a deal. There are no mandatory rules on how to approach a takeover target, and both friendly and hostile public takeovers are possible under Maltese law. Recently, we have seen an increase in vendor-led acquisition processes, reflecting a strong market for potential targets seeking to maximise price upon exit. Confidentiality agreements to restrict disclosure of deal discussions and documentation made available to potential buyers are typically entered into between the target and the potential buy and sell side. Such non-disclosure agreements become particularly relevant once parties proceed to the due diligence phase, when the potential buyers examine the books and records of the target company both to assess the veracity of information claimed about the position of the target as well as to identify potential risks or ‘red flags’ associated with the deal.
Following a positive due diligence process, the submission of a letter of intent would be expected from the prospective buyer to the prospective seller. At this point, legal advisers acting for the parties proceed to draft the purchase agreement that will reflect the deal price and payment mechanisms, and that may include a wide range of warranties and representations to be made by either party to the other. After all prerequisites for the completion of the deal are fulfilled, the transaction agreement is completed and the deal is ‘closed’. After the deal closing, several post-closing adjustments may need to be handled by the target and the new owners, such as the integration of the company operations and the entering into of post-closing obligations such as regulatory filings and reporting requirements. Additionally, the acquisition of a public listed company entails several additional compliance requirements in terms of the Listing Rules, including prompt public company announcements and the compilation of offering memoranda and prospectuses.
RVB: Malta’s gaming industry is on the brink of an overhaul in the coming months. The material changes that the industry can expect from the new Gaming Act are forecast to foster innovation and embrace the convergence of technologies, which should continue to drive both organic and inorganic growth in this sector. Malta’s stable political and economic climate lends itself well to ensuring that no disruptive changes in the legal and regulatory landscape are anticipated in the near future. The broad scope of the forthcoming update to the EU data protection regime, becoming applicable in May 2018, could, however, impact the due diligence process undertaken with respect to employee and customer databases, although its practical impact will only be seen after this date.
RVB: M&A activity in Europe is expected to continue to rise beyond 2017, and it is anticipated that the current level of transactional activity in Malta will follow the same growing trend, especially in the sectors referred to above. A lot of this activity is driven by the desire to consolidate and achieve economies of scale and a geographic reach that spans beyond Europe. Another factor is the restructuring of businesses with increased focus on regulatory and tax efficiency with respect to operations in Europe. Furthermore, the ongoing uncertainty in post-Brexit trade talks and the vast macroeconomic repercussions of Brexit expected in early 2018, ranging from a strong devaluation in the pound and increased uncertainty in the future of applicable laws, has led to indications of increased demand in M&A involving Maltese targets due to their favourable EU location in an English-speaking jurisdiction.
Malta’s fiscal regime is at once attractive, unique and ingenious, and coupled with Malta’s stable political climate and positive economic outlook, Malta boasts an attractive base for international business investors and a thriving hub for mergers and acquisitions. Malta’s corporate taxation system incentivises shareholder investment in businesses due to its adoption of a full imputation system. This means that while the corporate tax rate is 35 per cent by default, the application of a participation exemption, a full imputation system and a refund system result in an effective Malta tax rate ranging between zero per cent and five per cent.
First and foremost, a client should identify corporate counsel that has a keen eye for practical solutions that take into full account the time-sensitive nature of such transactions and the inherent complexity that arises in the context of transnational corporate deals. An essential step in selecting outside counsel is to seek law firms that have demonstrable practical experience and that have garnered a strong reputation for their knowledge of the in the business landscape. A third consideration that is closely tied to strong knowledge and experience is cost-effectiveness and efficiency, which usually lie at the foundation of the best corporate counsel’s stellar reputations.
We recently encountered a particularly interesting security arrangement in the context of an acquisition of an online gaming operator. The security package for the deal was structured through multiple pledges on shares issued in the target company, with more than one pledge being constituted over the same issued shares. Each pledge secured different obligations, owed towards multiple pledgees. Since a pledge at civil law is a traditional form of security completed by the delivery of the subject matter or of a document that constitutes title to the said subject matter, this multiple-party arrangement lent a new slant to a traditional form of guarantee.
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Rachel Vella Baldacchino joined WH Partners in 2014 as a trainee lawyer, taking up the post of associate in 2016. Her main practice areas are corporate law, M&A, corporate finance and capital markets.
Rachel graduated from the University of Cambridge with the degree of Master of Corporate Law with first-class honours in 2017, where she is a member of Pembroke College.
Rachel read law for six years at the University of Malta, graduating with a Bachelor of Laws with European studies in 2013 and a Doctor of Laws in 2016. Her doctoral thesis critically revisited securitisation laws in a post-financial crisis world. As part of her studies, Rachel spent a semester at the University of Bologna, where she studied IT law, comparative law with a focus on East Asia, and the law of capital markets.
Rachel is a lover of languages and cultures, and has a good working knowledge of Italian, German and French in addition to her mother tongues, English and Maltese.
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