Commercial awareness: what a business lawyer thinks about a big deal

With the help of a senior associate at Ashurst, find out how to understand a big deal and the part lawyers played in it

Reading the finance and business news and learning how to understand it is a great way to become more commercially aware. We asked Ashurst senior associate Luke McDougall to talk us through a recent big deal - the sale of the Vue cinema chain.

VUE cinema chain sold for £935 million

The Vue cinema chain was sold this June to Canadian pension funds Alberta Investment Management Corporation (AIMCO) and OMERS Private Equity (OMERS). The seller was US-based private equity fund Doughty Hanson. Doughty Hanson bought Vue in 2010 for £450 million but received £935 million for the chain in this deal, making a solid profit on their investment.

Vue runs well over 1000 screens in the UK and also operates in Denmark, Germany, Ireland, Portugal and Taiwan. The company intends to continue to expand in the future through a combination of organic growth and strategic acquisitions.

Luke says...pension funds are increasingly active

"North American pension funds are becoming increasingly active in buying European assets - they've also acquired the UK section of the Channel Tunnel rail line and National Lottery owners Camelot in recent years.

This means that they must see something attractive in European assets like the Vue cinema chain. As a private company, Vue is a high-risk investment for a pension fund because its shares will be harder to sell on than publicly-traded shares. But because it's growing significantly, there's potential for significant profit. Also, unlike public companies, you can take full control of a private company's business' strategy."

...it's unusual that there's no debt

"A typical private acquisition by investment funds involves using some debt to make the purchase (referred to as "leverage"). However, AIMCO and OMERS have decided to initially use just their own money to fund the acquisition.

Doing so can provide a purchaser with a strategic edge over competitors bidding for the same asset by making their deal quicker and easier to complete (since banks providing finance don't need to be involved) and making it easier to maintain confidentiality. Buyers can usually then bring in debt to free up their own funds at a later stage."

...look at the wider market context

"At the moment, there are relatively few private acquisitions of this size happening in Europe compared to 5-6 years ago. This is because there's still some distance between the prices that sellers and buyers are prepared to accept.

But more debt is gradually becoming available. This means the terms on which debt is provided are becoming better, and buyers can therefore more closely match sellers' valuations."

...look at the industry context

"The acquisition of Vue shows that there's definitely an appetite for cinema assets. It's part of a niche in the retail industry that's done very well during the economic downturn - providers of small purchases with large margins representing an affordable luxury.

Also, some movies have come out over the past few years that have been extremely profitable for cinemas - for example, Skyfall, Toy Story 3 and Avatar, currently the highest-grossing film of all time. In addition, new technology and the blockbuster focus of the big Hollywood studios are also filling seats."

How commercial lawyers might get involved on an acquisition deal like this one?

Corporate lawyers will draft and negotiate the acquisition agreement, containing key terms such as price, conditions, and representations from the seller about the business. They also draft the agreement between the purchasers - AIMCO and OMERS on this deal.

Finance lawyers will draft and negotiate the agreement between the purchasers and the providers of any external finance - not used at the moment on this deal.

Property lawyers will review property assets - such as Vue's cinema buildings - from a legal perspective on behalf of the purchasers. A large part of the value of a business like Vue will be related to these, so it's important that there are no legal problems with them, such as onerous lease terms or potential high rent increases in the near future.

Lawyers in other jurisdictions will check that there are no legal problems in relation to foreign assets - for example, the cinemas Vue owns across Europe.

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