Commercial Awareness Update - May 2020

Jaysen

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    Hi All,

    Please see below the updates for this week (Wednesday 6 May 2020).

    Let’s Talk Mergers! Conversation Between Virgin Media and O2

    By @Sairah

    The Story

    Telefonica, owner of mobile network O2, has confirmed it is merger talks with cable network business, Virgin Media, currently owned by Liberty Global. If the deal is sealed, it would create a business with an estimated value of around $30 billion (Goldman Sachs). The potential tie-up would represent the largest deal since the WHO declared the coronavirus a pandemic, which has led to a plummet in global M&A activity.

    Telefonica has been looking to float or sell O2 UK for several years but had so far failed to secure a possible candidate for a sale or stock listing. It previously attempted to sell O2 to the owner of Three, CK Hutchinson, for £10.3 billion in 2015, however the deal was blocked by the European Commission and Ofcom over competition concerns. This deal between Virgin Media and O2 is unlikely to encounter similar issues, as each business would remain a separate entity.

    Despite the current climate, this is an excellent opportunity for Telefonica, given the company is currently heavily indebted. It can seek to reduce its debt from the partial cash out from O2, whilst retaining a presence in the UK, which it identifies as ones of its “core markets”, alongside Spain, Brazil and Germany.

    What It Means For Businesses and Law Firms

    If the merger goes ahead, Virgin Media and O2 will be in a strong position to compete with UK telecoms market leader, BT. Given the demand for 5G networks, investors are increasingly drawn to infrastructure-like returns of fibre optics. By pooling resources, Virgin Media is well-placed to push ahead with its fibre network rollout plans and 5G infrastructure costs would be reduced, a further draw for investors. A particular opportunity emerging for Virgin Mobile would be the operation a full mobile service through O2, which would help boost Virgin’s overall customer base.

    Until the end of the transition period, the UK remains subject to the intervention of EU regulators, which have displayed prior hesitation about telecoms mergers. The deal will also be subject to investigations by the UK Competition and Markets Authority (CMA) to assess if the transaction is likely to prevent or restrict competition. For both businesses, to protect their position in the marketplace its lawyers will be needed to advise on the correct structure for the M&A transaction to secure clearance, and to draft possible co-operation and/ or anti-competitive agreements to avoid infringement penalties.

    It is understood that Virgin Media signed a 5-year contract with Vodafone last November. The deal reportedly requires Virgin Mobile to transition onto Vodafone’s network by the end of 2021. This could cause a potential problem at due diligence stage of the M&A deal between O2 and Virgin Media; lawyers must ensure they can meet their existing contractual arrangements.

    Never Sell Shell?

    By @Rachel S

    The Story

    The stock market adage, “never sell Shell” will likely be resigned to the history books after this week saw the oil major cut dividends for the fist time since the Second World War. Royal Dutch Shell’s 2020 Q1 dividend has been reduced from 47 cents to 16 cents and its dividend yield declined from over 10% to around 3.5%. The listed company closed 11% down on Thursday.

    Shell has cut dividends in part of what CEO Ben van Beurden has named a “crisis of uncertainty”. Oil companies are grappling with coronavirus-driven lockdown measures leading to a global drop in demand and historically low oil prices. This has been exacerbated by a price war between Russia and the OPEC cartel last month, leading to oversupply within the oil market and storage capacity issues.

    Shell believes that preserving cash now will allow for future alternative energy investments which will ensure the company’s long-term health. Other protective measures taken include suspending its share buyback programme, cutting capital spending by $5bn and reducing operating costs by $4bn.

    What It Means For Businesses and Law Firms

    For struggling oil companies, dividend cuts, reduced capital expenditure, suspension of share buybacks or new debt issuance seem a logical move. Competitor, BP, maintained its dividend this quarter despite a 66% drop in first-quarter profits. This was achieved by increasing its gearing ratio with a new $10bn banking facility and the launch of $7bn in bonds. Chevron and Total are yet to provide Q1 results.

    The longer-term concern for oil companies is that a reduction in dividends will accelerate the transition to renewable energy. Income investors have long relied on oil majors like Shell for a consistent source of large dividends with payouts central to the company’s investment case. With shareholders under increasing pressure to divert from the worst-polluting companies, investors may now choose to focus their portfolios on green bonds and renewable energy stocks.

    Law firms may advise struggling oil companies on new debt facilities and future investments into alternative energy. Furthermore, while Shell’s dividend cut is a precautionary measure to preserve cash, restructuring and insolvency work for oil companies who cannot weather the current market conditions may become necessary.

    McDonald’s Reopening: Shielded from Liability?

    By @Lauren2

    The Story

    Following six weeks of closure, several of the largest fast food chains plan to reopen on a limited basis, in line with government rules permitting takeaway services. Such plans are also in anticipation of the lockdown being eased.

    McDonald’s has trialled new operational safety measures in ‘viral proof’ stores. The restaurant announced that deep cleaning, floor markings and Perspex screens will be introduced to ensure the safety of employees and customers through social distancing.

    Meanwhile, Greggs has postponed its plans to re-open 20 stores in the Newcastle area to trial operating with social distancing measures in place. The company cited the “significant risk” as the reason for their U-turn. They similarly plan to carry out private trials before opening to the public. Competitors including Burger King, Five Guys and Nando’s have also trialled reopening.

    The proposed reopening of several restaurants has evoked significant criticism and concern, notably that insufficient personal protective equipment (PPE) will be provided to employees. Amazon recently faced legal action from trade unions in France, due to taking inadequate health and safety precautions which led to the closure of all French warehouses.

    What It Means For Businesses and Law Firms

    Whilst chains are keen to reopen to protect their business models and generate revenue, it poses significant health and safety concerns. In turn, employers expose themselves to significant legal risks, at a cost. Failure to provide sufficient PPE protection, which has proven notoriously difficult to source, with the NHS lacking sufficient supply, exposes employers to potential liabilities.

    The Personal Protective Equipment at Work Regulations 1992 imposes a duty on employers to ensure that employees exposed to health and safety risks are provided with PPE. Additionally, adequate training on how to use/ wear PPE must also be provided – failure to do so may similarly lead to employers’ liability.

    Constructive dismissal claims present a further threat; failure to create a safe working environment amounts to a breach of trust and confidence. Negligence claims may also arise where workers contract coronavirus, although there will be notable difficulties establishing that they contracted the virus in the workplace.

    Lawyers at firms including Mishcon de Reya and A&O have warned of legal action on a monumental scale. Trade unions have voiced similar concerns. Last week, the TUC called on the government to intervene to ensure safe workplaces across a range of industries, as they already anticipate a multitude of claims will be brought against care homes and NHS Trusts due to lack of PPE. Leader of the Labour Party, and former lawyer, Keir Starmer, joined unions to highlight the need for action against reckless employees to ensure compliance with employers’ legal duties. Employers also find themselves in a difficult predicament where staff refuse to return due to fears of inadequate protection, and how this can be dealt with legally.

    Businesses wishing to reopen their doors face a plethora of concerns. They must urgently identify ways to manage their operations which mitigate risk; this may go so far as remaining closed, to avoid the fallout of attempting to operate which Amazon faced in France.
     
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    Jaysen

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    Alibaba and the 40 Million Items

    By @Curtley Bale

    The Story

    Chinese e-commerce company, Alibaba, has experienced significant international growth in the face of the Coronavirus pandemic. Global sales have increased by 67% since the start of the year, partly due to the online retailer’s ability to source and distribute face masks. Alibaba has shipped 40 million items of PPE to 150 countries, in addition to donating 101 million masks to the World Health Organisation.

    Their European expansion is quite the anomaly; several competing companies including eBay and Amazon are currently struggling to meet increasing consumer demand due to logistical challenges and stressed supplier and delivery networks. The company is now undercutting Amazon sellers’ fees to establish a solid foothold in the European market.

    What It Means For Businesses and Law Firms

    Alibaba has experienced huge growth in Europe despite lacking an established market presence until recently. Alibaba’s visitor traffic has increased by 20% in Spain and 14% in Italy. Their app is also the most downloaded in Spain, France and Poland. By providing reliable PPE, customer confidence in the brand is building, and they are now increasingly likely to opt to order other items from delivery from Alibaba, where they may have previously chosen a competitor. If they can continue to show reliability and deliver products in high demand, they could become a market leader in Europe.

    Alibaba plans to target areas including southern Europe to take advantage of their limited online shopping habits. The company also intends to tap into the African market, as the continent’s huge population represents an enormous potential new customer base. Alibaba believes emerging markets may be key to reaching their target of 2bn global customers by 2036.

    Alibaba’s growth comes at a time when Amazon looks set to see its entire $4bn Q2 2020 operating profit wiped out by COVID-related expenses. Since the start of the outbreak, Amazon has experienced record sales, however, they are having to make costly adjustments to operations to observe social distancing, as well as recruiting thousands of new staff members to cope with increased demand.

    Amazon’s recent struggle to meet demand has helped facilitate Alibaba’s European growth. With sustained quality and consistency, the Chinese company looks set to capitalise and become one of the very few winners of the Coronavirus outbreak.

    Big Tech, Big Earnings – But Q2?

    By @Alice Manners

    The Story

    This week saw public companies publish their Q1 2020 earnings. Apple reported higher-than-expected revenue, despite in February warning investors that factory shutdowns in China would lead to a disappointing result. Microsoft put out a similar warning, however the recent uptake in remote-working and cloud-based services contributed to a 27% growth in revenue.

    Amazon also benefited from the closure of physical stores and the increased demand for cloud computing, announcing a higher Q1 revenue than forecasted. Although, the increased cost involved in meeting customer demand and ensuring safe working conditions has meant they reported lower profits than anticipated.

    What It Means For Businesses and Law Firms

    It is evident that the COVID-19 crisis has brought about changes in consumer and corporate activity, namely an increase in online shopping and remote working. The rapid digital transformation which has occurred over the past two months has played into the hands of many tech companies, leading to some Q1 revenues which exceeded analysts’ initial predictions. However, it is not entirely a positive picture; less time than usual has been dedicated to the privacy concerns surrounding social media platforms and tech companies, which could hit their share price in the long run. It will also be interesting to see how much of the new online activity transpires into permanent change.

    By contrast, the banking sector did not perform so well – HSBC revealed a 51% decline in profit and hedge funds suffered the worst quarterly outflows since the financial crisis. Additionally, the closure of high-street stores has significantly affected many companies, with Adidas reporting a $198 million shortage in expected earnings. Q2 earnings are likely to paint an even bleaker picture, in light of the increased defaults and growth of “bad loans” on banks’ books, and retail stores being closed for potentially a majority of this quarter.

    Q2 is likely to deliver exceptionally different earnings; even the tech companies who performed well in Q1 might struggle to deliver. Although it is difficult to forecast further results given the continuing uncertainty, Apple are likely to benefit from longer-term remote contact, with sales of devices including iPad and Macs helping users to stay connected, alongside an uptick in services revenue, including streaming TV. However, the company is reportedly having to delay its release of the iPhone 12 due to manufacturing issues over the summer, which will significantly reduce earnings.

    At this stage, there are a few indications of who might come out on top in Q2. Those who appear to be thriving in the current conditions may not generate the revenue epected. For example, video conferencing app, Zoom, experienced a phenomenal increase in user numbers and subsequent skyrocket in its share price, however, growing privacy concerns have caused it to plunge. The future of the company is far from certain.

    Similarly, Netflix and Snapchat have pointed to the pandemic as a source of accelerating growth revenue, however they anticipate muted sales growth following the pandemic – whenever that may be. The uncertain growth trajectory for the apparent ‘winners’ of the pandemic leads to questions over what the next quarter’s results will truly deliver.

    Twitter Reports Slump in Ad Revenue

    By @Ayah

    The Story

    Last week, Twitter announced its Q1 2020 earnings. The social media platform has increased revenue by 3% to US$808m, however one of the starkest features of their report was the slump in advertising revenue. Ad sales fell by 27% in the last three weeks of March, correlating with measures put in place worldwide in response to the global pandemic. Even so, Twitter still exceeded its expected revenue despite the fall in advertising.

    Like most other social media companies, Twitter has witnessed an increase in user traffic during the pandemic. The company’s daily users grew by 14 million to 166 million during Q1 2020, an increase of 24%. With the potential to reach a larger audience, the resolution of the company’s existing problems surrounding advertising will be key throughout Q2.

    What It Means For Businesses and Law Firms

    Twitter has adopted a more pessimistic outlook than Google and Facebook, warning that advertising sales will continue to be weak. The question of how and why Twitter has been unable to successfully monetise advertising as much as Facebook has long been asked by observers. One possible explanation is the company’s own platform issues.

    Last November, Twitter stopped platforming all political advertisements on its site. This is the first set of results to not include revenue from political sources. In the run up to the 2020 US election, the impact of the decision to remove political ads may become more apparent.

    An area of promotion which did not show any signs of weakening for Facebook and Google were those requiring instant results, such as the download of an app, known as “direct response advertising” (‘DR’). Unfortunately for Twitter, the platform has experienced problems facilitating this form of advertising so it will spend the next quarter working on improving its Mobile Applications Promotion, as these products enable advertisers to more effectively promote mobile via Twitter, to increase future ad revenue. The success of DR signals a trend towards video gaming and e-commerce; Twitter must tap into this to offset the downturn in other ads, as Google has similarly done. Twitter has stated that DR will become the company’s “top priority” to utilise their increased addressable market and ensure resilience throughout the economic downturn.

    The company has recently taken other action to protect its high-volume ad business model during this time. Twitter, alongside Google, has now lifted their earlier ban on advertising messages related to the coronavirus. An accurate assessment of the impact the pandemic has had on advertisements will only be fully realised when Q2 results are released in July 2020.
     
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    Jaysen

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    Law Firms in the COVID-19 crisis

    Squire Patton Boggs has temporarily reduced salaries associates by 20% and support staff by 10%. Staff who are unable to perform their job remotely are also being furloughed. The firm issued a statement explaining that the measures aim to prevent long-term job loss and assure the future success of the firm (The Lawyer).

    Gowling WLG has temporarily moved over 80% of staff onto reduced working hours, with accompanying 20% pay cuts. The firm presented staff with a flexible “menu” of choices, including furlough (with top-up payments), unpaid leave and sabbaticals. Partner distributions were also deferred (The Lawyer).

    The Law Society has warned that small law firms maybe particularly hit by coronavirus. Small firms in particular have suffered drastically reduced activity. This reduced fee income has produced liquidity issues, due to a sharp decline in work in areas including employment, private client and housing. Research they carried out found that 71% of high-street firms believe they may have to close within next six months.

    Simon Davis, President of The Law Society, has urged the government to introduce a specific set of measures to help small firms unable to access existing initiatives introduced to help small businesses. He suggested support packages for lawyers paid via dividends, extending support to include sole practitioners operating via a professional service company, such as an LLP. The loss of such firms he warned would be damaging to local communities, given the crucial role many small firms play in helping vulnerable people.

    ‘Business as usual’ – the deals which went ahead as usual this week:

    • HSF and CMS closed the acquisition of a 20% stake in UK-based electricity and gas supplier, Octopus Energy, by the largest energy supplier in Australia, Origin Energy. Origin is now estimated to be worth £1bn.
    • A&O and Dentons closed Imperial Brand’s sale of its worldwide premium cigar business for more than £1bn to two private buyers, a deal which was nine months in the making. Dentons represented the acquiring consortiums, whilst A&O acted for the FTSE 100 tobacco company, a long-standing client of the firm. The disposal is part of Imperial’s strategy to simplify its business model and realise value for shareholders.
     

    Jaysen

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    Hi All,

    Please see below the updates for this week (Wednesday 13 May 2020).

    Saudi Arabia and Warner Music – A Potential Top Hit?

    By @Sairah Saeed

    The Story

    Warner Music Group, the world’s third-largest music recording label, looks set to be acquired by one of the world’s largest sovereign wealth funds, Saudi Arabia’s Public Investment Fund (‘PIF’). According to reports, PIF have submitted a $12.5 million bid to purchase Warner Music.

    The PIF currently manages over $300 bn in assets and Warner Music could represent the latest step in Saudi Arabia’s plans to diversify its global investment portfolio. The entertainment and sporting industries have proven particular targets; the fund has so far purchased a 5.7% stake in Live Nation Entertainment in a deal valued at $500 million, alongside Newcastle United (covered in the 29th April update).

    Last Thursday, Warner Music obtained approval to list its shares on the NASDAQ stock exchange in the US. It has anticipated a US$1bn IPO since February, however the listing was delayed due to the coronavirus outbreak and subsequent stock market uncertainties.

    Warner Music is currently 100% owned by Len Blavatnik’s Access Industries and must now choose whether to explore a private sale to the PIF, or to progress with the planned IPO. If this deal is sealed, Warner Music Group may choose not to float on the stock exchange. Volatility within the markets will likely result in decreased demand from investors if the IPO go ahead, given the company would be looking to raise such a high level of investment.

    What It Means For Businesses and Law Firms

    According to Warner Music’s IPO filling with the US Securities and Exchange Commission, the owner, Access Industries has only been interested in floating a small fraction of Warner Music’s shares to the public. This would allow Warner Music to remain a “controlled company” with Access Industries maintaining the majority of voting shares in the business. However, it has been reported the PIF is looking to purchase the entirety of shares of Warner Music, which has raised questions - why would Len Blavatnik now suddenly sell 100% of his company to Saudi Arabia?

    Before Access Industries confirms the deal, its lawyers will be needed to carefully negotiate a firm price for the share purchase sale in the interest of its shareholders. According to Moody’s analysts, the $12.5 billion offer to purchase Warner Music Group may be an inaccurate reflection of its actual value. This comes after Universal Music Group sold a 10% stake to Tencent Holdings for $3.4 billion in December and is still valued at $33 billion.

    Saudi Arabia’s political stance on a number of issues are considered to be quite ruthless in the Western world. If the PIF attempts to directly purchase Warner Music, or even wait until the IPO and purchase stock on the open market, Saudi Arabia’s involvement in the record label would likely prove to be controversial. However, as the pandemic causes disruption on the Hollywood economy, companies would rather take a PR hit than lose their financial footing.

    Competitor, Universal Music Group, is set to publicly list within the next three years, therefore Warner Music is likely to want to secure its position before this time.

    JD Sports and Footasylum Bag a Disappointment

    By @Alice Manners

    The Story

    The Competition and Markets Authority (‘CMA’), the regulator responsible for tackling anti-competitive behaviour, has been investigating the takeover deal between JD Sports and Footasylum, following JD Sports’ agreement to purchase Footasylum 14 months ago, in a deal worth £90 million.

    This week Phase 2 of the investigation was finally concluded, following an earlier extension of the deadline. The CMA blocked the takeover, deciding that it would lead to a “substantial lessening of competition”, limiting consumer choice.

    What It Means For Businesses and Law Firms

    JD Sports will now be forced to sell Footasylum in full. JD have criticised the decision to block the takeover, arguing that it “fails to take proper account of the dynamic and rapidly evolving competitive landscape” in which retailers are operating, claiming that the regulator misunderstood the market. They have also questioned the methodology used to reach this decision, arguing that the customer surveys used to conclude that the two businesses are close competitors are “outdated and flawed”, and have threatened to bring legal action against the CMA to challenge how the merger enquiry was conducted.

    In the current climate, it is unclear whether Footasylum will be able to find a suitable buyer. The retailer was facing difficulties prior to the buy-out and without this financing, may be at risk of following in the footsteps of the many retailers which have fallen into administration in recent years, notably since the pandemic began. The CMA said that it had considered the effects of Covid-19 and acknowledged that trading conditions were currently “uncertain and challenging”, however, this did not affect competition concerns nor relax the standards by which mergers are assessed. They concluded that the removal of one of JD Sports’ direct competitors would leave consumers “worse off”, with access to fewer discounts and receiving lower quality service.

    Earlier this year, the CMA faced criticism for pursuing an “aggressive approach” (see February’s update for an analysis of the impact of this). However, these concerns failed to re-emerge last month when the CMA allowed the JustEat and Takeaway.com merger and provisionally approved Amazon’s investment into Deliveroo, after the company informed the CMA that it would otherwise fail.

    However, the decision could prove counterproductive; if Footasylum cannot survive and are removed as a competitor through financial hardship, the CMA will no doubt be held accountable for the further decline of the high street. The CMA remains most active antitrust enforcer globally, having frustrated the highest share of deals worldwide in the past five years – the prohibition of this deal likely represents an increasing trend of intervening in large mergers.

    There are also issues surrounding the length of time the CMA takes to reach decisions; the deal was agreed by shareholders in April 2019 and the CMA investigation began last May. With the final decision only reached last week, this prolonged uncertainty could frustrate and deter future deals.

    Jio Platforms: Elevating Facebook’s Presence in India

    By @Lauren2

    The Story

    Last week, Facebook announced it was investing $5.4bn in Jio Platforms, in exchange for a 9.9% stake. The company is a subsidiary of telecoms operator, Reliance Industries, the most highly valued company in India. The deal represents the largest foreign direct investment into the Indian technology space, to date.

    The primary reason behind Facebook’s investment is their desire to gain a foothold in India, given the increasing competition from China’s ByteDance, owner of TikTok, which has established a sizeable 119m userbase in India (Nov 2019). Mark Zuckerberg announced the tie-up was part of Facebook’s “commitment to India”. The tech giant has previously suffered poor luck when seeking to establish a solid foothold in India, notably when regulators banned their free internet initiative.

    What It Means For Businesses and Law Firms

    Facebook has shown an increasing appetite for investment into the Indian tech sphere; their portfolio also includes a social commerce start-up, Meesho and EdTech start-up, Unacademy, however Jio is by far the company’s most significant move.

    India is projected to become the third largest global economy by 2025 (Capital Economics). The country is a standout emerging market and is on the radar of many international companies looking to expand their operations, due to its democratic government, investor-friendly corporate sector and a young population.

    Facebook now occupies a strong position in the Indian market, due to its ability capitalise upon Jio’s prior success to promote new digital services, ahead of its competitors. The company can utilise a host of Jio-owned services and their accompanying customer bases; Jio’s discount mobile internet service attracted 370m Indian consumers in just three years. The collaboration notably provides the ability to connect Jio’s shopping platforms to Facebook-owned WhatsApp. With a market reach of 400 million users, Facebook will likely seek to break into India’s e-commerce sector.

    US technology private equity fund, Silver Lake, also invested US$746.8m into Jio Platforms – the latest addition to a portfolio which includes several high value tech companies, such as Alibaba, Airbnb, Twitter and Dell. This recent string of high-profile investments has led to prolific interest in the Jio telecommunications empire; at the beginning of this week, US private equity firm, General Atlantic, was reportedly considering investing around US$1.3bn. Despite the current challenging global situation, interest in certain emerging markets opportunities has not dampened.
     
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    Jaysen

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    Redundancies on the Horizon for British Airways


    By @Rachel S

    The Story

    British Airways (‘BA’) has announced plans to cut 12,000 of its 42,000 workforce as coronavirus-driven lockdowns halt commercial air travel and airlines burn through cash. Parent company IAG revealed revenues fell 13% to €4.6bn (£4bn) in the first three months of 2020, with BA Chief Executive, Alex Cruz, citing the reasons as the need to “take action now”.

    Views of V-shaped economic recovery now appear overly optimistic and BA’s redundancy plans paint a bleak picture for the future of the weathered aviation sector. IAG, which also owns Aer Lingus and Iberia, stated the redundancies formed part of a necessary "restructuring and redundancy programme", given airline travel is predicted to take several years to return to 2019 levels.

    Furthermore, as part of a phased exit from lockdown, the UK government has announced the introduction of a 14-day quarantine on all arrivals into the country. IAG warned on Thursday that BA would not resume flying under these conditions.

    What It Means For Businesses and Law Firms

    As the UK furlough scheme is wound down and to navigate the turbulence that lays ahead, more airlines will likely move toward a leaner business model and consequential large-scale redundancies. Both Ryanair and Virgin Atlantic have announced 3,000 jobs are at risk and Qatar Airways also warned of substantial job losses.

    CEO of Berkshire Hathaway, Warren Buffett sold out of American Airlines, Delta Air Lines, Southwest and United Airlines in April, warning that the “world has changed” for the aviation industry. While Australian carrier Qantas Airways has now shelved plans for ‘Project Sunrise’, the world’s longest commercial flights, further exemplifying the lack of faith in the future of long-haul travel.

    Employment lawyers will be needed to advise on consultations with unions over mass redundancies. In this case, BA has served official notification about redundancy preparations on the GMB union, representing ground staff; Unite, representing cabin crew; and the British Airline Pilots’ Association (‘Balpa’). Accordingly, Balpa, which represents BA's 4,300 pilots, is understood to have asked lawyers to begin the legal process to apply for redress on behalf of the 1,100 pilots who are at risk of redundancy.

    Airbnb Staff Vacate

    By @Curtley Bale

    The Story

    Short-term rental specialists, Airbnb, are cutting 25% of their workforce after seeing revenue significantly decrease. The American company was once touted as a revolutionising force in the market but has recently had to take drastic steps to steady its balance sheet.

    Airbnb has also cut advertising from social media platforms, in order to save $800m. Worries about the company’s long-term future have grown in recent weeks as the vacation/hospitality sector looks set to be most terribly affected by Coronavirus.

    What It Means For Businesses and Law Firms

    Airbnb has recently revised its expected 2020 revenue to be less than half of the $4.8bn it turned over in 2019. This is particularly worrying considering the company’s strong financial position prior to the outbreak; in 2019, the company was valued at $31bn. The market had been eagerly anticipating the company’s IPO, with some analysts predicting it to be one of the largest of 2020.

    Instead, the short-stay rental specialists have had to explore new funding, raising $2bn last month. This valued the company at just $18bn. Moreover, there will now be a push towards the more domestic, affordable properties as opposed to the lucrative, luxury properties which generate far more commission for Airbnb. Alongside cutting 1,900 jobs, the company has to find other ways to save cash. Whilst it is hoped that promoting domestic experiences will be the key, April revenue is already down 50% compared to last year.

    Airbnb is not alone in the struggle. Another travel booking giant, Expedia, recently cut 3,000 jobs and raised $3.2bn in fresh capital. Airbnb’s competitors are also having to take drastic action to protect their balance sheet during the currently unpredictable climate. This may provide reassurance for Airbnb, alongside a recent pick up in booking numbers across the US and Europe, perhaps an early indication of economic recovery and the return of consumer confidence in making travel plans. Domestic bookings in Denmark and the Netherlands have so far increased by 75%, compared to booking numbers in April 2019. Whilst the company has not witnessed the blockbuster figures it expected prior to the pandemic, 2020 may be the year for Airbnb to prove its resilience to the market, which will only enhance its reputation and potential value, when it eventually goes public.

    Law Firms in the COVID-19 crisis

    Eversheds has introduced ‘flexi-working’ and extra holiday for carers. The flexible working scheme allows for the reduction of team working patterns, meaning teams are moved ‘on’ and ‘off’ throughout the coming months, with pay ‘on flex’ where the team becomes less busy (below 80% of their usual working). The enhanced holiday scheme gives an additional day of holiday for every four taken to care for others. The firm also set up a hardship fund to help impacted employees access financial support (The Lawyer).

    Taylor Wessing announced a second wave of measures to mitigate the effects of coronavirus on the firm, also introducing a flexible working programme, which involves employees agreeing to a 20% hour and salary reduction from 1st June, to make necessary cost reductions whilst preserving jobs (The Law Gazette).

    Litigation funder, Augusta Ventures conducted a study into the financial state of law firms. Investigation of the accounts of 40 law firms showed that 55% had insufficient cash reserves to cover expenses for one month, alongside 38% lacking the ability to pay salaries for one month. The study showed how many firms “left balance sheets arguably undercapitalised to deal with a prolonged financial shock” and the significant strain the coronavirus will have on the balance sheet of many firms (City AM, The Law Society Gazette).

    ‘Business as usual’ – the deals which went ahead as usual this week:

    • Clifford Chance acted for Telefonica on its estimated £31bn acquisition of Virgin Media from Liberty Global. HSF also advised Telefonica on the M&A deal. Liberty Global were represented by A&O; Shearman & Sterling also provided advice on the US aspects of the transaction, given Liberty are a long-standing client. Ropes & Gray advised on the financing of the transaction.

    • White & Case acted for Omilia, a Cypriot start-up focusing on the development of conversational AI. The company received US$20m investment from Grafton Capital, a UK-based growth capital firm, advised by Hogan Lovells. The funding will be applied to develop. This represented the company’s first round of fundraising from external investors.
     

    Jaysen

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    Hi All,

    Please see below the updates for this week (Wednesday 27 May 2020). Many thanks to our team of writers once again this week!


    Exam ‘Bitesize’ Commercial Awareness

    We realise that many of you are in the midst of exams, so this week we have summarised several of the week’s top new stories, in an easily digestible ‘bitesize’ format:

    Norwegian Cruises receive a US$400m cash injection from PE House, L Catterton
    • The cruise industry has been hit hard by the COVID-19 crisis. Despite being the third largest cruise operator globally, Norwegian Cruises expressed “substantial doubt” in early May over its future survival. All cruises have been cancelled until 31st July, further hitting its revenues.

    • Consumer-focused PE house, L Catterton, has come to the cruise liner’s rescue, making a private investment of US$400m.

    • L Catterton identified Norwegian as an “ideal partner” due to the resilience demonstrated by the cruise industry, and growing consumer demand for cruises. The company’s growth, execution and success records also made Norwegian a prime target for the mammoth investment.

    • PE firms entered the crisis in a strong position after a solid decade of fundraising and growing transaction volumes (McKinsey). Many may now look to further deploy funds into distressed investments and expand their portfolios.

    • Distressed asset investment was already an emerging trend for PE investors, pre-COVID-19 and the looming global recession would further increase such opportunities.
    BP cuts back its management team, as part of the company's energy transition strategy
    • Bernard Looney, BP’s new CEO, has announced that the company’s management team will be more than halved. Leadership positions will be reduced from 120 to 250, as Looney seeks to “reinvent” BP, to make the oil giant “smaller and nimbler”.

    • BP has recently suffered significantly due to the combined effects of the oil price collapse and coronavirus drying up demand – profits fell by 2/3 in Q1 2020 and BP are now taking measures to save US$2.5bn by the end of 2021.

    • The cuts also form part of BP’s strategy to move towards green energy and become a net zero emissions company by 2050 – a significant goal, given they have traditionally been wedded to unrenewable energy sources.

    • To attain this goal, BP are growing their alternative energy business and is investing heavily in their renewables. For example, in late 2019, they formed BP Bunge Bioenergia, a Brazilian bioenergy joint venture focusing on bioethanol. The company is focusing its investment efforts on development of alternative energy sources, moving away from its reliance on oil.

    • BP and its lawyers now face the task of implementing large scale job cuts as it seeks to make many highly paid, veteran leaders redundant.
    New conditions for the UK bailout scheme: bar on bonuses and dividends
    • Last week, the government revamped the coronavirus business interruption loan scheme amid concerns that the bailout programme would be abused and used to reward investors or fund higher management pay-outs.

    • The Treasury announced that participating companies are now blocked from using the to pay bonuses to directors and distributing dividends to shareholders.

    • These changes seek to ensure cash is applied for the desired purpose – “to keep the company[ies] going through the crisis” (The Treasury).

    • Companies who have been granted such loans may need to rethink their corporate governance, including any proposed payments to either party, to ensure compliance with the loan conditions.

    Whitbread Raises a Fresh £1bn

    By @Curtley Bale

    The Story

    Last week, Whitbread, the parent company of the hotel chain Premier Inn, announced plans to raise £1bn in new capital. This move comes amidst a significant decline for the hospitality sector, with revenues down 99% in the UK.

    Having recently suffered a 12% drop in share price, Whitbread now needs to turn to the market to ensure they can ride out this tough period, to ensure they long-term survival as a key player within the hospitality space.

    What It Means For Businesses and Law Firms

    According to the Whitbread’s CEO, the company is not just raising cash to stave off the effects of the COVID-19 crisis. Instead, they intend to apply the capital to make distressed advantages and take advantage of emerging investment opportunities which will likely arise as their competitors suffer – acquiring smaller hotels or chains, which cannot survive in the current climate. The company estimates there is potential to grow by 170,000 rooms in the UK and Germany, as small and independent hoteliers go bust. Therefore, having a large amount of capital on hand will allow the company to make these strategic acquisitions (likely at a cut price) and grow its market share, at the expense of former competitors.

    Whitbread’s finances are currently looking healthier than the other hospitality chains. This is mainly due to the company’s disposal of the Costa Coffee brand to Coca-Cola in 2018 for £3.9bn and their recent negotiation of covenant waivers until 2022 to overcome its interrupted cash flow. The company currently has an exceptionally strong balance sheet, with £1.55bn of undrawn credit.

    These expansion plans may make a sizeable dent in the business of their Premier Inn’s, including Travelodge and Holiday Inn. Travelodge recently appointed restructuring advisors due to difficulties meeting rent payments, whilst Holiday Inn needed to secure £600m in commercial papers (short-term loans to fund day-to-day business) from the Bank of England. Despite the economic downturn, Whitbread is demonstrating both resilience and commitment to growth in the coming years, as one of few hospitality companies able to confidently look to the future.

    TikTok’s New CEO Presses Play on Growth Plans

    By @Rachel S

    The Story

    Disney’s former Head of Streaming, Kevin Mayer, has been appointed as CEO of TikTok and COO of parent company, ByteDance. As TikTok surges in popularity, breaking the quarterly record for app installs in Q1 2020, Mayer is a welcome addition and can assist TikTok in accessing new revenue streams. Once tipped to be CEO of Disney, Mayer told reporters of his excitement “to help lead the next phase of ByteDance's journey as the company continues to expand its breadth of products across every region of the world”.

    After helping orchestrate Disney’s four major acquisitions over the last several years, including the US$71.3bn purchase of 21st Century Fox and having overseen the successful launch of Disney+; Mayer’s background in strategic acquisitions and brand development is well-aligned to TikTok’s future growth plans.

    Aside from big deals and streaming services, Mayer faces a significant challenge in his new role. As a Chinese-owned company, TikTok’s success has been met with deep distrust from the US government and employees across several US government and military agencies have been barred from downloading or using the app. US-born Mayer could help the company build legitimacy in the US and further develop existing practices, such as the launch of a Transparency Centre out of its Los Angeles office.

    What It Means For Businesses and Law Firms

    Valued at over $100bn, ByteDance, is now the world’s biggest unlisted technology ‘unicorn’ (privately held start-up valued at over US$1bn). The company is also welcoming further investment and at its last funding round raised $3bn from investors including Japan’s SoftBank Group. With Disney, Netflix, Amazon, Google and Facebook racing to establish themselves as the dominant entertainment platform, additional challenge from ByteDance’s TikTok could lead to a wave of retaliatory practices from the behemoths of Silicon Valley. For example, the launch of Facebook Shops this week exemplifies how technology companies are developing new platforms to engage consumers and grow their entire platforms, to facilitate cross-selling.

    Under Mayer’s lead, lawyers may be called in to advise on future acquisitions. Competition/ antitrust advice will likely be needed address issues, given the US Committee on Foreign Investment has committed to playing an active role in screening potential takeovers on national security grounds.

    Furthermore, TikTok has this month been accused of violating US child privacy regulations, having already been fined $5.7m last year, by the Federal Trade Commission for illegally collecting children’s data. Lawyers may advise on redressing these violations and brand management, as Mayer attempts to improve TikTok’s reputation. Previously, TikTok has worked with US law firm K&L Gates on censorship, child safety, hate speech, misinformation, and bullying.
     

    Jaysen

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    Drive for Jaguar Land Rover to Secure Support Package


    By @Flora R

    The Story

    It has been announced that Jaguar Land Rover (‘JLR’) has entered talks with the UK government to receive a £1bn loan, the largest sought during the COVID-19 crisis, to date. JLR has publicly stated that the pandemic has significantly impacted the company, causing the closure of facilities at the end of March and a more than 30% fall in Q4 sales.

    Additionally, rating agency, Standard & Poor, recently downgraded JLR’s rating and estimated the company is losing £1bn a month. The carmaker are unable to secure financial support through the government’s Covid Corporate Financing Facility, aimed at supporting liquidity of larger businesses, as their credit rating does not meet the “investment grade” rating required – this rating shows a company’s credit worthiness and weighs up the risk of defaulting on repayments. JLR are deemed excessively risky for state-backed funding. However, the carmaker is already receiving some financial relief from the government, as 20,000 of their 38,000 staff are currently being paid under the furlough scheme.

    What It Means For Businesses and Law Firms

    The automotive industry on the whole has been hit hard by the pandemic; in April, new car registrations hit their lowest monthly level since 1946. The Society for Motor Manufacturers and Traders estimated there will be only 1.68m new car registrations in 2020, compared to 2.3m last year. Pre-crisis, the car industry was already experiencing difficulties and struggling with the decreased demand for diesel vehicles and the costs of meeting new emissions targets.

    As JLR is the UK’s largest carmaker, it will be interesting to see how the government handles this request and the response may reflect their willingness to support other carmakers in financial difficulty. Several UK carmakers have similarly been affected by the present crisis; Aston Martin recently suffered a 94% decline in share price. Likewise, McLaren was forced to cut 1,200 jobs last week due to a decline in order numbers. Yesterday, France unveiled a US$8.8bn plan to save their ailing car industry; it seems unlikely that the UK government will allow this key sector to collapse.

    If a deal is agreed, the government may provide JLR with a loan in return for equity in the company. This would echo the approach taken by other European countries, including France and Germany; both governments provided loans in exchange for significant equity stakes in their largest carmakers. Renault’s €5bn rescue deal was also dependent upon the preservation of jobs and factories in France. Such a move would make strategic sense for the UK government, given legislators had existing plans to ramp up the UK automotive sector post-Brexit, and JLR is an attractive funding recipient, given their plans to invest £4bn on UK research and development.

    Failing to Tap into Cybersecurity: easyJet Pays the Price

    By @Lauren2

    The Story

    Last week, easyJet announced that the airline had fallen victim to a major cybersecurity attack. The personal details of around 9m customers, including 2,208 customers’ credit card details were obtained by hackers, in a breach which they became aware of in January.

    Following an internal investigation, easyJet confirmed it was possible to close off hackers’ unauthorised access to their systems and insisted there was "no evidence that any personal information of any nature has been misused". Despite this, on 26th May it was announced that a class-action lawsuit worth £18m had been filed at the High Court on behalf of affected customers.

    What It Means For Businesses and Law Firms

    The airline industry has become a prime target for data breaches, given the plethora of sensitive information they hold for customers, including contact details, passport information, personal travel plans and payment methods. Airlines Cathay Pacific and British Airways have also fallen victim to large-scale attacks in recent years.

    IBM found that the average time taken to detect a data breach is 206 days – significant damage can occur in this time. The after-effects of data breaches are both reputational and financial. Consumer confidence in the airline industry is already at an all-time low and this breach will truly put confidence in easyJet to the test. A 2018 survey found that 41% of consumers would not return to a business which has experienced a security breach or hack (PCI Pal).

    Data breaches also have severe financial repercussions. On top of the class-action lawsuit, experts have predicted that the Information Commissioner's Office (ICO) will likely issue a heavy penalty. If the ICO’s investigations reveal that easyJet failed to take the appropriate data protection measures, the company may be fined up to 4% of its annual turnover. The owner of British Airways, IAG, received a record £183m fine for a similar breach involving 500,000 customers’ data in 2018.

    Cyberattacks represent an increasing threat, with easyJet’s Chief Executive Officer, Johan Lundgren, acknowledging an “evolving threat as cyberattackers get ever more sophisticated”, which is making it both more difficult and costly for companies to secure data. A recent EY Global Information Security Survey found that two thirds of companies fail to consider cybersecurity and subsequently do not implement ways of combatting threats at an early stage. EY identified the core issue is that senior management are often out-of-touch with the work of cybersecurity teams and fail to understand and appreciate the cybersecurity risks associated with new technology ventures.

    Given the increase in remote working has accelerated the pace at which many law firms and other businesses are digitalising their operations, with many undertaking new technology and innovation projects, cybersecurity should be a high priority. Lawyers are likely to experience increased demand for cybersecurity and cybercrime advice, especially as many clients may be ‘spooked’ by the current fallout easyJet is experiencing.

    Cybersecurity is a distinct and emerging legal specialism and in future, there will be a greater need for lawyers with technical understanding and expertise in this area, given increased digitalisation and the associated financial repercussions of companies making a wrong move in this area.

    It remains to be seen whether the group litigation will be successful; it could signal a new trend in cases of data breaches and litigators may increasingly find themselves defending clients against high-value class-actions brought by affected customers.

    Law Firms in the COVID-19 crisis

    Osborne Clarke made further reductions to partner and staff salaries this week. Staff pay will be reduced by 7% and 75% of partners profit distributions have been deferred. The measures will be in place from June and are anticipated to last for 11 months (The Lawyer).

    BCLP and Norton Rose Fulbright have both set out plans for phased returns to their London offices. NRF surveyed staff on their views towards returning to the workplace; the majority of respondents were found to prefer working remotely “most of the time” and only 12% felt “very relaxed” about returning to the office. The firm has planned a gradual, phased return to work, involving the implementation of social distancing arrangements, provision of face masks and temperature testing for staff. The firm plans to avoid face-to-face meetings and business travel for the foreseeable future (The Lawyer).

    BCLP assembled a UK ‘back to work taskforce’ which has set out a ‘five stage plan’ to return staff to their offices. The phases gradually increase the number of staff permitted to return to work, involving an initial rota to limit the number of staff at any one time. The rotas will gradually increase the number of staff brought back and the later stages envision a “new normal” which implements social distancing measures in the workplace (The Lawyer).

    ‘Business as usual’ – the deals which went ahead as usual this week:
    • Eversheds and Ashurst were instructed to act on the rescue deal to save financially distressed Italian restaurateurs, Carluccio’s. Boparan Restaurant Group are purchasing the chain out of administration. The deal saves 31 stores and 800 jobs; however, 40 other sites will be closed by Carluccio’s administrators, FRP Advisory.
    • DLA Piper and JMW are on call to advise the English Premier League’s “Project Restart” to test footballers for coronavirus, as part of plans to allow footballers to return to restricted training sessions. The Premier League are a long-standing client of DLA and the firm is also advising on their provision of emergency loans to several football clubs.
     
    • 🏆
    Reactions: Daniel Boden

    v123

    Valued Member
    Jan 16, 2019
    104
    55
    Hi All,

    This question related to session 2 of the TCLA virtual training programme on corporate insolvency/light touch administration:

    Do you think the introduction of the Corporate Governance and Insolvency Bill will make light touch administration less relevant in the coming months? I know the Bill only just had its second reading, but it sounds like the introduction of moratoriums overseen by "monitors" is quite similar to the light touch process?

    For an upcoming interview, do you think it's still ok to discuss light touch administration or do you think the proposed legislation is more relevant?

    Thanks in advance :)
     

    Jaysen

    Founder, TCLA
    Staff member
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  • Feb 17, 2018
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    Hi All,

    This question related to session 2 of the TCLA virtual training programme on corporate insolvency/light touch administration:

    Do you think the introduction of the Corporate Governance and Insolvency Bill will make light touch administration less relevant in the coming months? I know the Bill only just had its second reading, but it sounds like the introduction of moratoriums overseen by "monitors" is quite similar to the light touch process?

    For an upcoming interview, do you think it's still ok to discuss light touch administration or do you think the proposed legislation is more relevant?

    Thanks in advance :)

    It's a great question and I think you're right here. I'd say that the LTA is useful for the time being, but I imagine it'll be less relevant for many companies once the legislation is introduced (although there might still be some merit in opting for an LTA).

    That said, I still think it's fine to discuss the LTA if you'd prefer to. There are still enough discussions on this, including recently:
    • BDO being sued over its agreement to undertake an LTA (link)
    • Victoria Secret's use of the LTA (link)
    You just might want to keep in mind any follow up questions which might bring in the proposed legislation.
     
    • ℹ️
    Reactions: v123

    v123

    Valued Member
    Jan 16, 2019
    104
    55
    It's a great question and I think you're right here. I'd say that the LTA is useful for the time being, but I imagine it'll be less relevant for many companies once the legislation is introduced (although there might still be some merit in opting for an LTA).

    That said, I still think it's fine to discuss the LTA if you'd prefer to. There are still enough discussions on this, including recently:
    • BDO being sued over its agreement to undertake an LTA (link)
    • Victoria Secret's use of the LTA (link)
    You just might want to keep in mind any follow up questions which might bring in the proposed legislation.
    Great, thank you so much Jaysen!
     

    nymi

    Distinguished Member
    Nov 21, 2019
    67
    47
    Hello everyone,

    I hope you're all well. I came across an article about the change in Enterprise act 2002. Foreign firms that may be willing to take over the UK firms will have to face a big hurdle due to change in Enterprise Act 2002. The UK government, in response to the pandemic, will be able to intervene to protect the companies related to COVID-19 by adding a public interest consideration under the Enterprise Act 2002. They will make sure that these companies that are related to COVID-19 are not subject to mergers and acquisitions that are against the public interest.
    I have figured how this can be a challenge as law firms will now have to make sure that the buyer’s takeover is not undermining the capability of the target firm to mitigate the effects of COVID-19 or future public health emergencies
    However, I'm struggling to figure that how can a law firm turn this into an opportunity?
     

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