Selling state assets: some key issues
With the Government committed to raising €2 billion from selling state owned companies, Stephen Keogh, Partner at William Fry, highlights some structural, legal and commercial issues to be considered in respect of such transactions.
It is probably fair to say that the Irish experience of selling State owned companies has not always been a happy one. From the sale of Greencore in 1991, through the sale of Eircom in 1999, right up to the most recent major sale, the listing of Aer Lingus in 2006, many of these transactions have attracted some degree of controversy. This is not surprising due to the policy and political issues inherent in any decision to sell State assets, coupled with the normal commercial tensions between a buyer and a seller. The political and economic backdrop to the current proposals for the sale of State assets would suggest that the process today is not going to be any easier.
One of the first issues to consider in relation to any State company that is earmarked for sale is what exactly is to be sold. Options include (1) selling the existing State company (2) selling some or all of the assets of the State company and (3) transferring some or all of its assets to a special purpose vehicle and selling or listing the SPV (or selling a majority or a minority interest only). Any of the foregoing will require specific new laws to be drafted and enacted in each case (with a consequent effect on the transaction timetable), amongst other things in order to empower the relevant Minister to effect the sale and, if relevant, to give warranties and indemnities to the buyer.
In additional to selecting the optimum structure for the sale, it is likely that other elements of pre-sale reorganisation will be required, including in relation to the company’s existing debt finance, employees and pensions arrangements. For a period of time after the sale, some transitional services arrangements may need to be maintained between the State (as seller) and the buyer. If the State retains a minority interest (as in the case of Aer Lingus) this gives rise to additional considerations (both legal and political) and complexity.
In a sale to a trade or financial buyer the key commercial issues will include price (and the manner and timing of payment of the purchase price) and risk allocation – the extent to which the State as seller is prepared to provide warranties and indemnities in respect of the business being sold. The recent experience of the State in attempting to secure private finance for Irish banks suggests that potential buyers in the current climate may even seek some element of State loss-sharing post-sale.
Another key issue will be the proposed treatment of employees and the positions adopted by their trade unions. Most focus will likely be on the maintenance of pension entitlements and the creation of Employee Share Ownerships Trusts, in returning for securing the co-operation of the workforce.
Whether and how the Government delivers on its €2b commitment to the EU-ECB-IMF troika remains to be seen. It might be considered unfortunate to conduct a “fire-sale” in the next six to twelve months while global market sentiment is at a low point, debt finance to fund potential bidders is limited and, as a consequence, valuations are likely to be low. Given the structural, legal and commercial issues highlighted above, there is a relatively long lead-in time for the sale of State companies. If the process is not begun this calendar year it is difficult to see transactions concluding before the second half of 2012 and perhaps improved market conditions can be hoped for by then.
William Fry,
Fitzwilton House, Wilton Place, Dublin 2
Website: www.williamfry.ie
Email: info@williamfry.ie
Tel: +353 1 639 5000
