The merger of T-Mobile UK and Orange UK earlier this year created the UK's largest mobile phone network. You may not know the name, but Everything Everywhere, the company born out of this merger, is responsible for one in three mobile phone contracts in the UK. Clifford Chance acted for Deutsche Telekom, T-Mobile UK's owner, as the company sought to address its strategic challenges.
Why do this deal?
Joachim Fleury, a corporate partner at Clifford Chance who heads the firm's telecoms, media and technology (TMT) sector and who led the firm's deal team, outlines the issues faced by his client. He explains that T-Mobile UK was being squeezed in the market by its competitors at the same time as struggling to keep up with technological advances: "Fourth generation mobile technology requires massive investment and for T-Mobile UK, a smaller company already in some difficulty, making that investment on its own was not economically viable."
Deutsche Telekom, advised by the team at Clifford Chance, examined a range of options before deciding to enter into a joint venture with France Telecom, which owns Orange UK, to create the brand new umbrella company for the two UK businesses, Everything Everywhere. Sharing a network would mean "more revenue, lesser costs and better profitability" says Joachim.
How did the lawyers get involved?
The Clifford Chance team worked on the deal from the outset, looking at a number of possible solutions. "Initially we ran an auction process for three potential buyers", says Mark Storrie, an associate in the corporate department and another member of the team. However, concerns about the potential impact of antitrust regulation dominated the early stages of the project. "We helped by analysing how difficult it might be to get each of these three potential deals past the competition authorities", continued Joachim. Ultimately, it was the likely delays and conditions that might be imposed on any deal that made the joint venture the only viable option.
Once Orange UK had been selected as a merger partner, the team began work on due diligence - an in-depth review of all legal documents relevant to a deal to expose any potential problems. This stage required specialist telecoms knowledge and so Louise Campbell, an associate in the corporate department who specialises in this sector, stepped in: "We had meetings with Deutsche Telekom and T-Mobile UK to understand the issues that they wanted us to look out for in the documents. It's not the contracts with customers for their mobile phones that we're interested in - they're generally fairly standard - but the infrastructure agreements to do with the network build and the equipment the operator uses."
How did trainees contribute?
Due diligence is a great way for junior lawyers to use their research skills, and so Louise brought trainees into the team: "I explained what the key drivers were for the client and the key issues that they should be looking for, and also gave some technical background. And then the trainees went away and read the contracts thoroughly and reported back on any issues."
Jack Hardman, a trainee in the corporate department who worked on the deal, explains how due diligence can help junior lawyers develop: "We get a real chance to understand the issues a client faces - and we're responsible for drawing these out. A mistake made early on in due diligence could be crucial for the whole transaction. That level of responsibility is very motivating."
How were the terms of the deal finalised?
After due diligence, the team began the important process of drafting the deal agreements. Philip Li, an experienced senior associate in the corporate department, played a big part here: "We gave legal advice, but also offered contractual solutions. One of the important tasks for Clifford Chance is to not let a negotiation impasse sabotage an otherwise viable transaction. We do many deals in a year, so we know what the potential compromises or contractual solutions are with which both parties may feel comfortable, and can offer these to the clients."
The organisational challenges thrown up by a big deal can be significant - and here trainees can make an essential contribution, says Joachim: "T-Mobile and Orange are both complex organisations with lots of companies and different businesses. Jack played an important role in getting the necessary internal organisation to happen."
"Deutsche Telekom used to be a state-owned entity and is huge," explains Jack. "It took a lot of time, and negotiations with a lot of people, to get the different documents that we needed. All the assets that T-Mobile contributed to the deal had to be structured so that they could be owned by the new joint venture vehicle, and Orange had to do a similar reorganisation with the assets that it was putting in."
Not surprisingly for a deal of this scale and complexity, some tricky challenges arose. The Clifford Chance team faced the problem that, in what was meant to be a cashless merger of equals, T-Mobile UK was actually worth less than Orange UK. An innovative solution was required. "We ended up using an instrument called a rebalancing loan," says Philip, "as part of an arrangement to compensate Orange shareholders."
Competition matters continued to be a major issue on the deal, particularly on the question of the two parties, competitors until now, pooling commercially sensitive information during negotiations. The Clifford Chance team called on specialists to assist, including partners Jenine Hulsmann and Joachim SchÃƒÂ¼tze, who created a timetable for the release of information and sometimes advised the withholding of documents because of competition law.
What was the completion of the deal like?
Mark describes the excitement of the final stages of the transaction: "The parties from the two parent companies came to our offices to sign the documents, which sounds like a simple process but they were still being negotiated by each of the principals and their lawyers when they were about to jump on the plane from Germany and Paris. Eventually, after everyone got to London, the documents were ready, and at half-past eight in the morning on the following day, the deal completed - and the champagne trolley arrived!" Joachim adds: "There was a great sense of relief - we were all happy that the deal had happened."
What were the results of the deal?
How do the team see the deal? First, Joachim emphasises its commercial significance: "If you have a phone and are a T-Mobile or Orange customer, you, along with one in three other mobile phone users in the UK, are actually a customer of the new joint venture entity."
Reflecting on what the deal had meant to him professionally, trainee Jack says: "I gained a great deal of knowledge about corporate work and a sense of the role that the firm plays in large transactions." Louise agrees that the trainees involved had developed: "There were interesting legal and regulatory aspects to this deal, and so it was excellent exposure for the trainees. They had challenging deadlines and had to get used to working under pressure, but in a supportive environment." Finally, partner Joachim reminded everyone that in the complex and fast-moving field of M&A, no-one knows it all - "This deal was the first major merger of its kind in the UK mobile phone industry, and so we all learnt a lot!
To see a video about the transaction, visit: cliffordchance.cityandlaw.com/orange-uktmobile-uk--deal-insight-video.html