With a spate of energy supply chain mergers probed by the UK’s competition regulator in recent years, does more consolidation inevitably mean more intervention?
Helicopters, floatels, rigs, wells. All are vital services in the energy supply chain – and all the subject of merger probes in recent months.
Whether it’s the protracted investigation into CHC Helicopter’s acquisition of Babcock International, or the quickly resolved probe into Baker Hughes’ takeover of Altus Intervention, the North Sea has seen more than its fair share of interventions by the Competitions and Markets Authority (CMA).
Such a warning was made in these very pages early in the wake of the Covid-19 pandemic, after a merger between accommodation providers Floatel and Prosafe was aborted due the regulator’s worries over its detrimental impact on competition.
At the time, Brodies partner Damien Ryan noted that pandemic-hit companies would likely look to shed costs and increase revenues wherever they could – but should bear in mind the limitations set by competition law.
Certainly, that prediction has come to pass, as fewer players now fight for business in what is already a mature North Sea market.
Even with the increased financial headwinds faced by energy firms in the wake of the pandemic, the regulator at least appears to be more willing to intervene in M&A deals, according to Jonathan Ford and Natura Gracia, partners at law firm Linklaters.
“I think it’s fair to say in the last few years that dealing with the CMA has been somewhat trickier for advisors and for merging parties, and they have been adopting – at least in terms of outcomes – what has looked like a more interventionist stance,” Mr Ford told Energy Voice.
“Their view is that they haven’t changed their policies or their analytical framework and there’s been some statements from CMA officials that some deals shouldn’t have left the boardroom.
“But the stats would suggest that it has been harder to go through a CMA process and we’ve seen that in some cases.”
The ‘failing firm’
Some companies may attempt to justify mergers using what Mr Ford and Ms Gracia called a ‘failing firm defence’, whereby they emphasise the limited prospects for the company’s continued trading and the small pool of potential buyers.
“Whilst there is a framework…it’s a really high bar to overcome,” explained Mr Ford. “Even if the industry is struggling, that’s not carte blanche for consolidation and it remains very difficult to get those kind of ‘failing firm’ deals through.”
Indeed, as Brodies’ Mr Ryan noted way back in 2020: “An economic slowdown creates incentives to merge but does not change the test for obtaining clearance.”
It’s for this reason that even deals with a willing seller and buyer – such as in the case of CHC and Babcock – are falling foul of regulator oversight.
Neither is a historic lack of competition – as seen in the UK helicopter market during the 1990s – viewed as an appropriate rationale for letting a merger case proceed.
Yet Ms Gracia observes there are also new market dynamics at play in some of these arguments, particularly against the backdrop of a wider energy transition. She recalls some parties putting forward the argument that a firm is not ‘failing’, but the scope of competition in the market is time-limited because of a wider phase-out of oil and gas.
“The CMA doesn’t seem to like these arguments much, but they cannot ignore the fact that government is issuing policies and phasing out, for example, gas boilers in new homes in 2025,” she said.
And while big tech continues to garner competition headlines, Mr Ford says regulators remain concerned about ensuring there remains a number sufficient volume of competitors in so-called “traditional industries” like oil and gas.
“Oil and gas and energy is an important priority across government and authorities at the minute and so they want to make sure that every level of the supply chain remains sufficiently competitive,” he notes – a standpoint that is likely to persist even as the outlook for North Sea production dwindles.
Ms Gracia says parties will increasingly have to prepare these kinds of solutions as part of their early due diligence if they want their deal to progress in good time.
“In deals that lead to a four-to-three market, or three-to-two, we are currently giving the advice that this is quite challenging from a CMA perspective,” she adds.
“You have to think very carefully about what remedies you would give potentially to fix it first – where you fix the problem of removing the problematic business or overlap upfront before you even engage with the CMA – or you just go in with your eyes wide open that you’re in for a wild ride.”
Selling locally, thinking globally
As in the case of Noble and Maersk Drilling last year, investigations are enough to halt progress on multi-billion-dollar global deals with the UK seen as something of a “global policeman” in certain respects, according to Mr Ford.
The CMA opened an investigation into the £2.6 billion merger in February 2022, warning that it could increase costs and reduce service quality for jack-up supplies in the UK North Sea – a probe that held up completion of a merger that spanned several global exchanges.
In response, Noble volunteered to offload several “remedy” units to a new division of Shelf Drilling – an approach that was ultimately accepted by the regulator.
A similar approach was taken by Baker Hughes, which sold off its local coiled tubing and pumping division to Archer in order to pursue a merger with Altus Intervention. In both cases, this was enough to head off referral to a deeper “Phase 2” investigation, as was seen in the CHC case.
Adding difficulty is the fact that the UK may diverge from the opinion of other regulators.
“In global deals we have seen a difference in approach, for example in acceptance of remedies by the European Commission and the CMA,” Ms Gracia explains.
“We’ve seen the European Commission be more willing to accept remedies which we class as behavioural remedies – more about conduct of the business or access remedies – where the CMA would not accept those.”
“That presents another challenge for this type of global mergers, because you have two regulators with a different approach and then the remedies are going to have to be different.”
In some cases, Mr Ford said companies have chosen to adopt a “fast track remedies process” where merging parties may simply choose to offload a UK business before or during the deal, rather than face a protracted competitions investigation.
However, it has also meant a greater emphasis on due diligence in advance of any potential transaction, with many parties appearing to heed the CMA’s suggestion that some particularly challenging deals should not leave the boardroom.
National security risks
Meanwhile the current political environment, where national and energy security have become foremost principles, also adds potential challenges particularly where mergers, takeover or even investment deals may now face increased pressure or scrutiny.
“Increasingly we’re advising on foreign investment issues in the UK, which has a new foreign investment regime, and the control of the energy supply chain is an important consideration for government,” added Mr Ford. “I think they will have potential reservations about important critical infrastructure falling into the hands of foreign governments.”
This again may restrict the pool of potential suitors should a company wish to sell, or add hurdles into deals that would see a shift in majority interests.
Ms Gracia says that most government interventions so far have been limited to defence, with many related to the involvement of Chinese state-owned companies in particular. But it’s not out of the question that mergers of energy firms, or indeed the associated energy supply chain, may too attract the attention of increasingly hawkish administrations.
“It’s a bit of a black box,” she notes. “It is highly political, so it’s quite difficult for us to advise clients.”
Such challenges are all par for the course in major corporate transactions. But with billions of pounds of investment now required to ensure the UK hits its net zero targets, and consolidation a surety in a maturing oil and gas market, oversight of competition in UK energy is only set to get trickier in the years ahead.