When the Bottom Falls Out

In the summer of 2014, with Brent Crude hovering around US$110 a barrel, the Spanish energy giant Repsol approached Talisman Energy with the beginnings of an acquisition offer. It was right around then that the price of oil began its precipitous descent, falling a gut-wrenching 40 per cent by May 2015, when the deal, miraculously, closed. How does a transaction survive ...
In the summer of 2014, with Brent Crude hovering around US$110 a barrel, the Spanish energy giant Repsol approached Talisman Energy with the beginnings of an acquisition offer. It was right around then that the price of oil began its precipitous descent, falling a gut-wrenching 40 per cent by May 2015, when the deal, miraculously, closed. How does a transaction survive such drama? The real question, according to the lawyers on the deal, is whether the Repsol-Talisman tie-up could have happened without the collapse in oil prices.



Lexpert:
 This was a mammoth deal, with apparently a lot at stake. How did the teams first get together on this?
David Spencer (Bennett Jones LLP, for Repsol SA): Kevin and I have known each other for many years. We’re very good friends and, coincidentally, we both have summer cottages on Lake of the Woods. So when Repsol made its first approach in July 2014, Talisman called Kevin and let him know that we were acting for Repsol. Kevin’s first email to me on this deal read: “So, negotiations on your dock or mine?”
Kevin Johnson (Norton Rose Fulbright Canada LLP, for Talisman Energy Inc.): Yes, it was unique. David and I got started on the project from our summer cottages, not far from each other in northwestern Ontario.

Lexpert: That must have taken some of the edge off. But the economy wasn’t exactly flourishing, in either country. Did the economy come into play in any way?
Johnson: I don’t think the economic conditions had any impact. Both companies were affected more by the changes in commodity prices. Discussions between the parties started in July 2014, before oil prices began to decline precipitously. The deteriorating conditions did increase the importance to Talisman of doing the deal.

Lexpert:
 So how did the dynamics of the negotiation change as oil prices fell?
Spencer: The two companies came close to making a deal in mid-2014, but Repsol backed away. Discussions resumed in the fall of 2014, and again Repsol backed away. From Talisman’s perspective, ongoing viability became an issue as prices declined. From Repsol’s perspective, the issue was whether waiting longer might lower the price further, or might result in another buyer making a deal.

Lexpert:
 Were there any cultural or language barriers between the Canadian and Spanish entities?
Don Tse (Norton Rose): Repsol and Talisman had negotiated deals around the world before, so there was an awareness of culture and this didn’t really present any problems. Of course, Repsol did have to get up the curve with regard to Canadian law and the method for acquiring a Canadian public company.
Spencer: All of our discussions were conducted in English, and the Repsol team all speak English well. But Spanish is, of course, their mother tongue. Sometimes minor interpretation issues would come up. I remember receiving an email from Madrid saying that they had read my memo and wanted to have a call, because they had doubts about my advice. I was probably a little defensive, until I realized that by “doubts” they meant questions.
Tse: There was another amusing language moment when some Repsol representatives started talking among themselves in Spanish, on the assumption that nobody from the Talisman team could understand them. We’ll just say that assumption was not correct.

Lexpert:
 This wasn’t just a Spanish-Canadian deal, though. There were lots of jurisdictions to deal with.
Spencer: Yes, Talisman has a very international footprint. In fact, its Canadian operations are relatively minor — less than 20 per cent by most measures.  Consequently, due diligence, regulatory approvals and contractual approvals involved multiple jurisdictions. This provided much of the challenge and fun for our team. Places where Repsol already operates, such as Algeria, were easier to handle. They know their way around, have relationships with the local authorities and understand the business and regulatory environment. In countries where Repsol had no presence, such as Malaysia, we needed to climb the learning curve as quickly as possible. Local firms were of course retained, but we were also able to lean on the prior experience of the partners in our energy group who have done deals around the world.
Tse: The parties essentially compared notes and came to an agreement on which approvals would be conditions to closing, which approvals could be obtained afterward and who would take the lead in making the necessary filings and dealing with the applicable authorities. It was all handled in a very co-operative manner.

Lexpert: But there were a few hiccups, right? Negotiations broke off on a couple of occasions. Was it just about price?
Spencer: Transaction price was huge, with the price of oil falling quickly. In addition, Repsol took time to become comfortable with Talisman’s North Sea business, which has challenges. It faced falling production from mature fields and large decommissioning liabilities. By mid-2014, the bottom line was Repsol was unwilling to take on those challenges at prices being discussed.
Johnson: Repsol initially had some difficulty getting comfortable with some of Talisman’s assets, which led to the initial breakdown in the summer.
Spencer: Eventually, with the benefit of more time to understand the business, and a $5-billion-lower transaction price, a deal could be done.
Johnson: The combination of the two companies was too compelling to resist.

Lexpert
: Some Talisman shareholders didn’t see it that way, though. Carl Icahn’s group stood to lose a lot of money. Was he trying to scuttle the deal?
Johnson: At the outset there was uncertainty as to whether Icahn would oppose the transaction, and that was a concern. Talisman knew that Icahn would not agree to a lock-up, so there was the potential to be in the highly unusual situation, at least in Canada, of having a proxy fight over an M&A transaction.
Spencer: Repsol was not willing to proceed with anything less than full support of management and the Talisman board. We left it to Talisman to dialogue with Icahn’s group and had no direct contact ourselves.
Johnson: I can’t disclose specifics on how the situation was managed, but in the end Icahn voted in favour of the transaction, which is a testament to the great job the Talisman team did in a difficult situation.

Lexpert
: And then oil really began to fall, and ultimately collapse, late in the year. Was there concern that the downward spiral would kill the deal?
Johnson: By the fall I was concerned about the impact of the drop in oil prices on Talisman’s prospects for doing any transaction. After Repsol made its November proposal, I thought the continuing drop had the potential to derail the deal, since it caused Talisman’s share price to continue to drop and increased the premium of the proposed price over the trading price.
Spencer: Actually, I don’t think the deal would have happened at all if the price of oil did not fall. The lower price emboldened Repsol and, I suspect, put Talisman in a position where other options were no longer feasible.
Johnson: The drop increased the importance to Talisman of doing the deal, but it didn’t result in any renegotiations from the time the proposal was made to the time the definitive agreement was signed.

Lexpert
: In the end, you managed to strike a deal worth $16.5 billion — certainly one of the biggest of the year. Was it a memorable one?
Spencer: It was difficult and complex, and took nearly a year from start to finish. Witnessing the negotiations as oil prices fell was interesting. Investment Canada was also a more difficult process than it is normally. Business circumstances were forcing a reduction in the Talisman head count and capital commitments could not be made lightly. What makes the deal memorable, however, is the people. I both made new friends, such as Repsol lawyers Miguel Klingenberg and Pablo Blanco in Madrid, and worked with old friends here in Calgary.
Johnson: Absolutely this was a memorable deal. Any large, complex or precedent-setting transaction is exciting to be involved with. This deal was special for me due to my long history with Talisman and the great working relationship we had with the Talisman team. The people on the Repsol and Bennett Jones teams were also very enjoyable to work with and I thought that our two firms worked well with each other.

Lawyer(s)

David A. Spencer Kevin E. Johnson Don Tse