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Largest Reverse Break-up Fees in M&A History
Practical Law Legal Update 9-541-0785 (Approx. 7 pages)
Largest Reverse Break-up Fees in M&A History
by Practical Law Corporate & Securities
| Published on 12 Sep 2013 • USA (National/Federal) |
In light of the $10 billion reverse break-up fee provided for in the Verizon Wireless purchase agreement, a discussion of the largest reverse break-up fees by dollar value ever agreed to.
On September 2, Verizon Communications, Inc. and Vodafone Group Plc entered into a purchase agreement for Verizon to acquire the 45% interest in their Verizon Wireless joint venture that it did not already own. For a summary of the purchase agreement, see What's Market, Verizon Communications Inc. Acquisition of Stock of Vodafone Americas Finance 1 Inc. Purchase Agreement Summary. The deal, valued at $130 billion in cash and stock consideration, is the third largest deal by dollar value ever recorded and the largest since the deal between AOL and Time Warner in 2000. The Verizon Wireless purchase agreement has also set a record for the largest reverse break-up fee by dollar value ever agreed to. Although many other transactions have contemplated larger reverse break-up fees by percentage of deal value, none have ever come close to the $10 billion figure agreed to in this deal.
This Update looks back at the largest reverse break-up fees ever agreed to in both private and public M&A history, both in the aggregate and on the basis of the conditions for payment of the fee.
History of Reverse Break-up Fees
Reverse break-up fees are frequently thought of as an innovation of the private equity industry, created to allocate the risk of financing failure in a leveraged buyout (LBO) to the seller. In fact, this is only partially true. Reverse break-up fees had long been used by strategic buyers to limit their liability in the event of a regulatory failure. Before the 2005-2007 deal boom, private equity buyers had yet to adopt the reverse break-up fee as a risk-allocation method for financing failures. Previously, private equity buyers typically demanded financing outs in their acquisition agreements to protect against the possibility of having to close the transaction in spite of a financing failure. But as private equity buyers began pursuing opportunities for ever larger transactions in competition with strategic buyers, sellers began pushing private equity buyers to omit these financing conditions from their agreements. As a result, the buyers sought ways to retain the flexibility to walk away from deals without explicitly exercising a financing out.
Private equity firms found that they could strike this balance, and shield their other funds and portfolio companies from the risk of damages claims by the seller, by introducing limited guaranties into the LBO structure. In this structure, the seller (in the case of a stock or asset sale) or the target company (in the case of a merger) enters into an acquisition agreement with a newly formed shell company and at the same time receives a limited guaranty of the buyer's obligations from the parent fund. Sellers agreed to this arrangement because private equity buyers offered reverse break-up fees if they failed to close the transaction and because they offered higher premiums than strategic buyers. The trade-off was that the guaranty only covered the reverse break-up fee and the acquisition agreement provided no other remedies, often even if the buyer willfully breached the agreement.
This confluence of factors helped create the "pure option" form of the reverse break-up fee, in which the buyer is never subject to a remedy of specific performance and knows that its entire liability is capped at the amount of the reverse break-up fee. Sellers initially agreed to this deal structure in the belief that a private equity firm's fear of harm to its reputation and future deal-making prospects provided sufficient protection against the risk that it would back out of the transaction. When this expectation proved somewhat unfounded in the early stages of the 2007 credit crisis, sellers began demanding pre-termination remedies that would allow them to enforce the buyer's obligations to draw down on the financing and close as long as the financing was available. This effectively turned the reverse break-up fee into a remedy for financing failure, a form of remedy that soon became far more common in M&A deals than the pure-option fee.
At the same time, strategic buyers did not miss these developments and soon began negotiating for reverse break-up fees of their own in debt-financed deals. While strategic buyers still agree to uncapped damages more often than not (as demonstrated most recently in What's Market, Reverse Break-up Fees and Specific Performance: A Survey of Remedies in Leveraged Public Deals (2013 Edition)), they still negotiate caps on damages through reverse break-up fees in over 20% of leveraged deals.
Because the advent of reverse break-up fees for financing failure is only a few years old, the largest reverse break-up fees ever recorded are all observed in relatively recent deals and are all captured in Practical Law's What's Market.
Largest Reverse Break-up Fees
The following table sets out the deals with largest reverse break-up fees by dollar value, in descending order on the basis of the size of the fee.
Deal Description | Signing Date | Transaction Value at Signing | Reverse Break-up Fee | Conditions for Payment of Fee |
Verizon Communications Inc. acquisition of stock of Vodafone Americas Finance 1 Inc. (the indirect owner all of Vodafone's equity interests in Cellco Partnership d/b/a Verizon Wireless) from Vodafone Group Plc | September 2, 2013 | $130 billion | Variable: $1.55 billion (1.19% of deal value), $4.65 billion (3.58%), $10 billion (7.69%) or an expense reimbursement of up to $1.55 billion. | Verizon pays the $1.55 billion fee if its own stockholders reject the deal. Verizon pays the $4.65 billion fee under circumstances of a change in recommendation for the deal. Verizon pays the $10 billion fee if Vodafone terminates the agreement because the full proceeds of any debt financing are unavailable to Verizon and Vodafone was ready, willing and able to close. The $10 billion fee is the exclusive remedy to Vodafone for financing failure only if it does not result from Verizon's willful and material breach of its financing covenant. Verizon must pay the expense reimbursement if Vodafone terminates the agreement due to a breach by Verizon that causes a failure of a closing condition. |
Pfizer Inc. acquisition of Wyeth via merger | January 25, 2009 | $68 billion | $4.5 billion (6.62% of deal value) | Pfizer pays the fee if all conditions (other than the financing condition) to the merger agreement are satisfied and Pfizer fails to close within the specified period. |
AT&T Inc. acquisition of stock of T-Mobile USA, Inc. from Deutsche Telekom AG | March 20, 2011 | $39 billion | $3 billion cash (7.69% of deal value), plus an obligation to enter into a roaming agreement and transfer certain wireless spectrum. | AT&T pays the fee and carries out the other obligations if either:
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Merck & Co., Inc. acquisition of Schering-Plough Corporation via merger | March 8, 2009 | $41.1 billion | Variable: $1.25 billion (3.04% of deal value) or $2.5 billion (6.08%) and an expense reimbursement of up to $150 million. | Merck pays the $1.25 billion fee and expense reimbursement under circumstances of a recommendation change and competing acquisition proposal. Merck pays the $2.5 billion fee and expense reimbursement if it fails to close due to a financing failure. Merck pays the expense reimbursement alone when it is not otherwise payable and Merck has breached, failed to close by the drop dead date or failed to obtain stockholder approval. |
Google Inc. acquisition of Motorola Mobility Holdings, Inc. via merger | August 15, 2011 | $12.5 billion | $2.5 billion (25% of deal value) | Google pays the fee if the merger agreement is terminated because a restraining order is issued on the basis of antitrust law or the merger does not close by the drop dead date when any antitrust-related closing condition has not been satisfied. |
Berkshire Hathaway and 3G Capital acquisition of H.J. Heinz Company via merger | February 13, 2013 | $28 billion, including the assumption of debt | $1.4 billion (5.00% of deal value) | The buyers pay the fee if they fail to close when the closing conditions have been satisfied. If the failure to close is due to a financing failure, the buyers first have four months to litigate against the lenders. |
Mars, Incorporated acquisition of Wm. Wrigley Jr. Company via merger | April 28, 2008 | $23 billion | $1 billion (4.35% of deal value) | Mars pays the fee if its breach causes a failure of a closing condition, if it fails to close the merger by the end of the marketing period when other closing conditions have been satisfied, or if the drop dead date passes and certain closing conditions, including antitrust approval, have not been satisfied. |
Exelon Corporation acquisition of Constellation Energy Group, Inc. via merger | April 28, 2011 | $7.9 billion | $800 million (10.13% of deal value) | Exelon pays the fee under circumstances involving a recommendation change and competing acquisition proposal. |
Equity Residential and AvalonBay Communities, Inc. acquisition of portfolio of apartment properties from Archstone Enterprise LP | November 26, 2012 | $16 billion, including the assumption of $9.5 billion of debt | $650 million (4.06% of deal value), increasing to $800 million (5.00%) if the initial closing does not occur by an initial 60-day extension of the initial closing date. | The buyers pay the fee for failure to close or a breach that causes failure of a closing condition. |
The Dow Chemical Company acquisition of Rohm and Haas Company via merger | July 10, 2008 | $15.3 billion | $750 million (4.90% of deal value) | The Dow Chemical Company pays the fee if the merger does not close before the drop dead date or a regulatory injunction prohibits the transaction once the other closing conditions have been met. |
IntercontinentalExchange, Inc. acquisition of NYSE Euronext via merger | December 20, 2012 (amended and restated on March 19, 2013) | $8.2 billion | Variable: $100 million (1.22% of deal value), $300 million (3.66%), $450 million (5.49%) or $750 million (9.15%). | ICE pays the $100 million fee if it fails to obtain its own stockholder approval and no other reverse break-up fee is then payable. Unless the $750 million reverse break-up fee is payable, ICE pays the $300 million fee, less any of the $100 million fee previously paid or payable, under circumstances involving a recommendation change and competing acquisition proposal. ICE pays the $450 million reverse if it makes a recommendation change to its stockholders in response to an intervening event. ICE pays the $750 million fee if there is a failure to obtain required antitrust clearances or regulatory approval and the merger does not close by the drop dead date, there is a final, non-appealable order permanently restraining the merger or ICE's willful and material failure to perform any of its covenants or agreements is the primary cause of the failure to obtain required antitrust clearances or regulatory approval. |
Largest Reverse Break-up Fees by Category
Of these 11 transactions, looking at only the largest fees payable under the respective agreements, the reverse break-up fees can be categorized as follows:
- Four are payable for financing failure (Verizon Wireless, Pfizer/Wyeth, Merck/Schering-Plough and the Heinz LBO).
- Three are payable for antitrust or other regulatory failure (AT&T's ultimately terminated acquisition of T-Mobile, Google/Motorola Mobility and ICE/NYSE).
- Three are payable by reason of any breach that causes a failure to close (Mars/Wrigley, the Archstone Enterprise real estate sale and Dow Chemical/Rohm and Haas).
- One is payable under circumstances akin to those that trigger payment of an ordinary, fiduciary break-up fee (Exelon/Constellation Energy).
Of all these fees, only one is structured as a "pure option" fee, the fee payable in the Mars/Wrigley deal. Although the reverse break-up fee in that deal received a great deal of attention, with the passage of time it turned out to be an outlier. Most target companies and sellers retain some right of specific performance before allowing the buyer to walk away from the deal.
For more information on the remedies for buyer breach, see Practice Note, Reverse Break-up Fees and Specific Performance.