pwc deal talk - news.pwc.ch · pdf filepwc’s deal talk is a series of guides for swiss...

PwC Deal TalkDoing Deals abroad from a Swiss Investor’s Perspective

2017 year-end summary

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2 | PwC Deal Talk

PwC Deal Talk | 3

Editorial

Hello!

It’s been a very eventful year, with stock valuations breaking one record after another and Swiss companies active on the international transaction front. Accompanying these developments were the first six issues of PwC’s Deal Talk. Every two months our publication looks at a different country from a Swiss investor’s point of view, and describes the peculiarities anyone doing deals there should take into account.

This sort of knowledge can only come from actually doing deals and working locally in all these differ-ent countries. That’s why PwC Switzerland places such great emphasis on international exchange, sending employees on secondments abroad, and welcoming colleagues from all over the world to our offices here. The launch of PwC’s Deal Talk series was prompted by our desire to share this rich pool of know-how with you.

In 2017 we covered Australia, Brazil, Canada, France, India and the United States, six of the most important countries for the Swiss industry, and further exciting issues of Deal Talk will follow in 2018.

This handy booklet is designed as a guide to help you do deals, be aware of the specific local and cultural challenges, and incorporate these insights into your plans. It’s also an opportunity to show you where PwC can share its first-hand transaction experiences to help make your deals abroad a success.

We wish you stimulating reading and a relaxing festive season

Sascha Beer Nico Psarras

4 | PwC Deal Talk

Australia Brazil Canada France India US Switzer-land

Area (km2) 7,692 k 8,516 k 9,985 k 644 k 3,287 k 9,834 k 41 k

Population (m) 24.4 206.1 36.3 66.9 1,311.0 325.6 8.4

Capital Canberra Brasília Ottawa Paris New Delhi Washington Berne

Primary languages

E POR E, F FHindi, E

(+21 others)

E GER, F, IT

GDP ($ trillion) 1.21 1.80 1.79 2.42 2.45 18.04 0.67

GDP per capita ($)

49,930 8,730 49,900 36,200 1,850 56,116 80,400

Economic ranking

14th 9th 10th 6th 7th 1st 19th

Exports to CH ($ bn)

0.8 1.7 1.0 13.8 1.0 24.0 n/a

Key facts about some of Switzerland’s important trade partners

The world’s a big and fascinating place, and it’s the differences that make travel abroad such a rich and rewarding experience. Smart travellers buy a travel guide before setting off for a new country. For investors venturing into unfamiliar territory there is even more at stake, and it makes even more sense to find out not only what the local attractions are, but how to negotiate the potential pitfalls.

PwC’s Deal Talk is a series of guides for Swiss investors with their sights on opportunities beyond our borders. In 2017 we covered six major investment destinations at two-month intervals – Australia, Brazil, Canada, France, India and the United States – and there will be more in 2018. Each issue of Deal Talk focuses on the peculiarities of doing deals in a particular country. It’s a great way to start your preparations.

Of course there’s nothing like an experienced travel guide or a person with local knowledge. Within PwC’s global network we actively foster exchange across borders, allowing us to amass a rich pool of global know-how and local savvy from people who have experienced business in all these countries first-hand – and share it with you.

We hope you enjoy reading Deal Talk – and that when the time comes to start planning your transaction in earnest you’ll feel free to call us for more in-depth support and guidance.

PwC Deal Talk | 5

How do these countries compare to Switzerland?

Australia Brazil

Canada France

India US

Characteristics relative to Switzerland -2 -1 0 1 2

Regulatory environment Loose Tight

Complexity of taxation system Straightforward Complex

Labor market flexibility High Low

Union power Low High

Accounting standards Market value driven Tax driven

Property rights Weak Strong

Regulatoryenvironment

Complexityof taxation

Labor marketflexibility

Union power

Accountingstandards

Propertyrights




Union power

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Union power

Accountingstandards

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Switzerland

6 | PwC Deal Talk

Australia’s a big country with big opportunities, but beware: complex taxation and the government’s right to veto inbound investment deemed to be out of line with national interests can make life tricky for the uninitiated.

PwC Deal Talk | 7

What’s the deal in Australia?

RegulationThe government can block certain significant proposals that are deemed not to be in line with national interests.

The Foreign Investment Review Board (FIRB) is a non-statutory body that assesses proposed inbound investments. The FIRB makes recommendations to the Treasurer on whether proposals are suitable for approval under the Government’s Foreign Investment Policy, and whether they are in compliance with the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA).

TaxationAustralia’s taxation system is complex and we recommend undertaking a detailed assessment of potential tax risks and exposure prior to any investment. Some considerations are as follows:

• Tax losses of target companies can only be carried forward if they pass the Same Business Test (SBT) or Continuity of Ownership Test (COT).

• Fully franked dividends (i.e. dividends paid out of profits subject to Australian corporate tax) paid by an Australian subsidiary to its foreign parent do not attract dividend withholding tax.

• A Swiss-Australian tax treaty exists for the avoidance of double taxation.

VisaAustralia has a successful track record of attracting skilled labor. The migration programme targets specific professions which are maintained as part of the Skilled Occupation List (SOL).

Companies typically sponsor individuals on a Subclass 457 Temporary Work (Skilled) visa. Individuals sponsored on these visas are able to work in a specified position within the company or associated company as defined under the Corporations Act.

Accounting standardsThe Australian Accounting Standards (AAC) are almost identical to IFRS. Contrary to Switzerland and other parts of the EU, the majority of Australian companies use 30 June as their financial and tax year-end. However, the fiscal year end can be aligned to a Swiss parent company by notifying the Australian Securities and Investments Commission (ASIC).

Locked box and W&I insuranceLocked box mechanisms and warranty & indemnity insurance have gained traction in Australia over the recent years as domestic deal parties and advisors are becoming more comfortable with these concepts, closing the gap to major international M&A markets in Europe and the US. Traditionally being concepts for PE exits, they have now also become a common feature in corporate transactions.

Selected transactions

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8 | PwC Deal Talk

Brazil, with a population of over 200 million and an economy rated ninth in the world, is a great destination for investment – as long as you take time to negotiate complex taxation, tricky transfer pricing rules and fast-changing legislation.

PwC Deal Talk | 9

What’s the deal in Brazil?

The main investment challengesDespite significant progress, investors still face numerous challenges when they approach Brazil. There is a complex regulatory environment with regard to tax and labour, as well as high taxes and social charges on payroll, sales and income. Multiple taxes and fast-changing legislation can affect business plans and increase risks on contingent liabilities, potentially blocking the success of both asset and stock acquisitions. Brazil also has complex transfer pricing and foreign capital registration rules. It is important not to underestimate the time needed for a deal execution.

Quality of the financial informationThe quality of historical financial information of businesses in Brazil varies considerably and does not always fully adhere to generally accepted accounting principles (i.e. extensive use of cash accounting). A significant number of small and/or family-owned businesses may require post-deal investment in areas such as corporate governance, internal systems, integration of IT platforms, and HR related matters, among others.

Labor reform Aiming at leading to the creation of new jobs and reducing unemployment rates, through the implementation of less restrictive rules, law n 13,467/2017 amended the Brazilian Labor Code (Consolidação das Leis do Trabalho – CLT) and related regulations.

Anti-bribery and corruption regulationBrazil implemented an anti-bribery and corruption act (Law n.12.846/2013) that came into force in January 29, 2014 better known as the “Clean Company Act”. The law does not have a criminal perspective for companies, as the FCPA or the UK Bribery Act, but provides for severe civil and administrative responsibility and consequences for a company who is found to have committed or been involved in acts of fraud or corruption involving a public official in Brazil or abroad. Additionally, the law includes a successor liability clause in which an acquiring company can be responsible for the misdeeds of an acquired company.

The futureDespite the recent lack of growth, Brazil is still a significant market for foreign companies to be present in, due to its more than 200 million population and its fast-growing consumer market with high growth potential, especially among the middle-class. Many local companies are undervalued and in need of restructuring, capital and technology.

Once Brazil closes the chapter on corruption and consequently improves governance at all levels and, on a broader level, it will resume its growth trajectory.





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10 | PwC Deal Talk

Canada’s a big deal in almost every sense of the word. But make sure you’re prepared for rules that vary from province to province and the fact that while some ways of doing things are distinctly European, others most definitely are not.

PwC Deal Talk | 11

What’s the deal in Canada?

Review regimeUnder the Investment Canada Act, non-Canadian purchasers must file either a notification or an application for review prior to acquiring a Canadian business, depending on certain financial thresholds.

RegulationCanadian deals are regulated under provincial and federal corporate laws, provincial securities laws, and stock exchange rules.

R&W insuranceThe use of R&W insurance has recently gained traction in the Canadian market following widespread use by financial investors in the US and Europe.

Key deal termsCompared to the US, indemnity caps in Canada are typically higher and R&W survival periods longer and therefore closer to terms seen in Europe. Holdbacks in support of claims are less common in Canada.

Private equityPE exits generally have lower indemnity caps and shorter R&W survival periods, combined with an insurance solution, permitting the fund to disburse proceeds to investors with low or no claw back risk.

Vendor due diligenceOn cross border auction transactions, the provision of vendor due diligence reports to bidders is becoming more common. Unlike Europe, these reports are on a non-reliance basis.

Accounting standardsAs of January 1, 2011, all Canadian public companies have switched from local GAAP to IFRS. Privately held companies had the option of adopting IFRS or a new set of standards called Accounting Standard for Private Enterprises (ASPE).

Labour unionsNearly 30% of Canadian workers in both goods and services industries belong to unions. Although there are strikes and lockouts in Canada, over 95% of all negotiations end in a settlement without a work stoppage.

Quebec is distinctUnlike the rest of Canada, Quebec is governed by a civil law system, which can differ significantly from the rest of Canada and needs to be taken into account when acquiring or selling a Quebec based business.





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12 | PwC Deal Talk

France is a great neighbour, closely entwined with the Swiss economy and a huge buyer of our exports. But don’t underestimate the role of employees, even in mergers and acquisitions, and the non-negotiable power of the taxman.

PwC Deal Talk | 13

What’s the deal in France?

Private equityFrance enjoys a well-developed private equity market from seed capital to LBOs. 298 active members are registered at the “Association Française des Investisseurs pour la Croissance” AFIC (the French SECA). In addition, French authorities also enhance private equity through the Banque Publique d’Investissement (BPI). The market is mature, with transactions such as secondary, tertiary and even quaternary buyouts today.

Vendor due diligenceVendor due diligence is extremely common in France regardless of the size of a deal. Furthermore, this type of service is often required by banks and private lenders in order to finance the deal.

Accounting standardsThe French “Plan Comptable General” (PCG) defines a common and mandatory accountancy framework for all French companies. French GAAP has its own characteristics and is tax-oriented. Buyers will have to adapt their analysis when looking at the reported profitability and valuation.

Labour unionsLabour unions still have a prominent influence on the French workforce and have to be considered during deal negotiations. Since 2014, in the case of a sale of a company, the employees have to be notified ahead of the process. Companies with more than 50 employees have to request company committee (“Comité d’entreprise”) approval.

Legal characteristicsFrance has made deep changes in labour law in 2016. Agreements at a company level between the manage- ment and the employees will now prevail on agreements by industry (working hours and conditions).

TaxesFrench authorities are very strict regarding tax payments and do not leave any room for negotiations. Fraud usually results in severe penalties. There is a unique tax rate for companies in France which amounts to 33.33%.

Salaries and benefits Personnel costs include more than 25 different items for the employer (versus 10+ in Switzerland): URSAAF which notably regroups the accident and pension insurances, social security contributions, unemployment benefits, tax financing, professional training, etc. Employees are also entitled to a profit sharing scheme which involves specific accounting treatment.





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14 | PwC Deal Talk

India’s aspirations and billion-plus population make it an obvious candidate for investment. While there’s plenty in the regulatory framework to facilitate transactions, be aware of the crucial importance of trust and the absolute necessity of due diligence.

PwC Deal Talk | 15

What’s the deal in India?

Significant exchange control regulationsForeign exchange transactions that alter the assets or liabilities outside India of an Indian resident, or the assets or liabilities in India of a person residing outside of India, are classified as capital account transactions and are generally not permitted (with a few exceptions). Transactions other than capital account transactions are classified as current account transactions and are subject to a lower level of restrictions. The Indian rupee (₹) is fully convertible for current account transactions.

The right deal structureIndia’s regulatory framework facilitates M&A through several legal modes, each different in its tax implications and ease of deal implementation. Common modes include direct/indirect transfer of shares, asset transfers (itemised or as a slump sale) and amalgamations/demergers. Foreign buyers typically use entities in jurisdictions which have a favourable tax arrangement with India to execute a transaction.

Taxation can be a minefieldWithholding tax resulting from capital gains on the sale of an Indian business by a non-resident Indian entity or individual has been the object of heated controversies in the past, especially the topic of retrospective taxation. Over the years, the government has tried to temper down such harsh interpretation of laws by the tax authorities in order to improve foreign investor confidence. On a positive note, the recent roll-out of the long anticipated Goods and Services Tax (GST) has been hailed as a landmark event in Indian history. GST aims at eliminating the nightmarish indirect tax structures prevalent on a state by state level to create a seamless pan-India tax regime.

Due diligence is keyBusinesses in India hinge a lot upon trust. However, a foreign buyer does not have this advantage upfront, and therefore a thorough due diligence procedure is mission critical. Indian companies have also begun to address this need in the M&A process, a consequence of which has been more and more vendor due diligence reports being made available over the years.

Accounting standardsAs of April 1st, 2017, all listed companies, and all un-listed companies with a net worth of more than ₹ 2.5 bn (about USD 38 mn) need to apply the Indian Accounting Standards (Ind-AS). Ind-AS is closely aligned to IFRS with minor differences for some industry-specific topics. In addition, companies need to comply with the provisions under The Companies Act 2013, which regulates the incorporation of a company, the responsibilities of a company and its directors, and the dissolution of a company.

Labour unionsAlthough there are more than 15,000 labour unions across the country, about 12 of these (categorised as Central Trade Union Organisations – CTUO) represent labour at the national level. Labour unions are closely aligned with political ideologies. The situation with respect to strikes and shutdowns has improved over the decades, though occasional flare-ups do happen in certain parts of the country. India has long been trying to reform its labour laws, which currently shift the balance towards labour unions in some sectors, and allow for exploitation of temporary labour in others. But stiff resistance from CTUOs and public sector enterprises has dampened the pace of any such reforms.





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16 | PwC Deal Talk

The United States remains the land of opportunity. But there’s plenty to keep an eye on: for example potential antitrust issues, your target’s state tax footprint and the special rules applying to certain sensitive sectors.

PwC Deal Talk | 17

What’s the deal in US?

Review regimeThe Committee on Foreign Investment in the United States (CFIUS) reviews transactions where non-US acquirers are involved and holds according veto rights.

LitigationEven though only a small number of acquisitions are blocked due to shareholder litigations, acquirers of public companies should at all time be aware of stockholder litigation.

Tax considerationsIt is important to understand the target’s state tax footprint, as all 50 states have separate income tax and non-income tax regimes. Potential US corporate and international tax reforms should be considered in the context of deal evaluation, including the potential reduction in the US corporate income tax rate, adoption of a territorial system of taxation and elimination of interest deductions.

Antitrust and competition regulationHSR (Hart-Scott-Rodino Act) filing with the US department of Justice and the federal trade commission is required in order to rule out antitrust issues. Regulators have the authority to prevent deals if antitrust issues are confirmed. In 2015, the Federal Trade Commission and the Department of Justice blocked seven proposed deals and required remedies in 23 more.

Industry specific regulationsIn certain sensitive sectors, industry-specific federal and state regulatory rules might apply. Heavily regulated industries are aviation, banking, communications and broadcasting, defense, insurance, maritime and mineral leases and resources.

Key deal termsPurchase price adjustments are very common in the US compared to Europe, as are earn-out clauses. Indemnity caps are typically lower than in Europe and the use of R&W insurance is more prevalent. Limitation periods for warranty claims are also shorter than in most European countries.

Due diligenceBidders have to follow US due diligence standards and are advised to channel requests through professional advisors familiar with domestic due diligence procedures.

Labor unionsAs of 2015, only 11% of workers from all industries in the US are part of a union. However, the number of strikes is low, especially compared to other countries.





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18 | PwC Deal Talk

Contacts

Key contacts Sascha Beer Partner, Corporate Finance/M&A +41 58 792 15 39 [email protected]

Nico Psarras Partner, Head of Transaction Services +41 58 792 15 72 [email protected]

Australia Roshan Emmanuel Senior Manager, Transaction Services +41 58 792 42 60 [email protected]

Marc Huber Senior Manager, Transaction Services +41 58 792 14 16 [email protected]

Brazil John Tavares Director, Transaction Services +41 58 792 93 86 [email protected]

Grasiele Neves Senior Manager, ITS – Brazilian desk +41 79 350 5138 [email protected]

Canada Michael Huber Senior Manager, Corporate Finance/M&A +41 58 792 15 42 [email protected]

Vincent Luescher Manager, Transaction Services +41 58 792 14 83 [email protected]

France Maxime Dubouloz Director, Corporate Finance/M&A +41 58 792 90 58 [email protected]

Mathieu Gravier Senior Manager, Transaction Services +41 58 792 93 00 [email protected]

India Devinder Singh Director, Transaction Services +41 58 792 14 32 [email protected]

United States Andreas Plattner Director, Corporate Finance/M&A +41 58 792 44 10 [email protected]

Patrick Amstutz Director, Transaction Services +41 58 792 14 12 [email protected]

PwC Deal Talk | 19

Visit us online at:

www.pwc.ch/pwc-deal-talk

© 2017 PwC. All rights reserved. “PwC” refers to PricewaterhouseCoopers AG, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

pwc deal talk - news.pwc.ch · pdf filepwc’s deal talk is a series of guides for swiss...

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