The Work

October 1, 2008 6:26 PM

Big Deals Go Belly Up Amidst Market Crisis

Posted by Brian Baxter

Whether it's M&A, project finance and infrastructure, or real estate, several big deals announced in the past few months have collapsed within the past 24 hours due to concerns about the increasingly unruly capital markets.

On Tuesday Pennsylvania Governor Edward Rendell, a former partner with Philadelphia's Ballard Spahr Andrews & Ingersoll, announced that a consortium seeking to privatize the Pennsylvania Turnpike had withdrawn its $12.8 billion privatization bid after legislators were unable to pass legislation approving a deal announced in May.

"Your team has worked very hard over the last year to prepare your offer and make the case for it," said Rendell at a press conference yesterday to members of the winning consortium, which included Spanish toll operator Abertis Infraestructuras, Barcelona-based investment firm and Abertis shareholder Criteria CaixaCorp, and Citigroup's Citi Infrastructure Investors. "I want you to know how much I appreciate your hard work, and how much I look forward to the day that we can become true partners in financing and managing Pennsylvania's transportation network."

The words were of little consolation to Debevoise & Plimpton project finance cochair Ivan Mattei, who represented the consortium on the proposed privatization of the roughly 535-mile turnpike.

"We had a fully-financed letter of credit, so the financing was there," says Mattei, adding that the consortium had twice extended the deadline for approving the deal. "Things just got bogged down in the state legislature and the appropriate legislation was never put into place [allowing the transaction to go forward]."

Faced with legislative delays, Mattei says it was no surprise that his clients, warily eyeing the growing global economic downturn, chose to withdraw their bid.

"Asset valuations can only go down, so [the state legislature's delay in expediting a deal] was a bit of a surprising outcome," says Mattei, noting that Governor Rendell has stated publicly that he'd like to pursue a deal next legislative term with his clients given the amount of "time and money" they've sunk into the bid process.

The opposition to the privatization deal in the Pennsylvania legislature bears a striking similarity to congressional delays on a federal economic rescue package.

"Republicans in the [state] Senate want to wait until next year to take this deal under consideration, but it appears it would have passed in the House," says John Schmidt, a transportation and infrastructure partner with Mayer Brown who led a team of lawyers from his firm and Ballard Spahr advising Pennsylvania on the deal. "The consortium couldn't hold out forever, so they withdrew their offer, and the Pennsylvania Turnpike Commission has also been quite successful in intervening and making its opposition to this deal known." (Don't feel too bad for Schmidt. He's leading a Mayer team advising the City of Chicago on its proposed $2.5 billion privatization of Midway International Airport, the first major airport privatization in U.S. history.)

Opposition is something that executives of Xstrata are all too familiar with. Represented by Freshfields Bruckhaus Deringer capital markets partner Julian Makin, the Zug, Switzerland-based mining giant announced a hostile $10 billion bid in August for London-based Lonmin, the world's third-largest producer of platinum.

The unsolicited bid for Lonmin, which turned to Herbert Smith corporate head Michael Walter for counsel, was seen by some as a growing trend whereby cash-rich companies moved to acquire strategic assets at bargain rates because of falling share prices. According to The Times of London, Xstrata sought to raise $10 billion to finance the acquisition, plus an additional $5 billion to refinance debt.

That plan changed when Xstrata announced on Wednesday that it was abandoning its bid, citing the rapidly deteriorating condition of the debt markets. (Xstrata did buy 22.2 million Lonmin shares to establish a blocking position against other bidders; neither Makin nor Walter were immediately available for comment.)

Whether other large proposed deals announced in months past follow fates similar to these stalled deals remains to be seen. But corporate transactional lawyers looking to Congress over the next two days might heed Schmidt's words, who muses about the cost of legislative inaction in Pennsylvania.

"Every legislature I've dealt with is different," he says. "But why wait?"

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