Cash Management Guide to M&A for the Natural Resources and Utilities Sector

ContentsForeword ______________________________________________________________________________________________ 3

Global Overview ________________________________________________________________________________________ 4

Cepsa: Network, trust, integration, client service ____________________________________________________________ 7

Asia – Oil and Gas: Interesting Times for Treasury __________________________________________________________ 11

MENA – Oil and Gas: Something Different _________________________________________________________________ 13

Europe – Natural Resources & Utilities: Europe - Plentiful Opportunities _______________________________________ 15

United States – Natural Resources & Utilities: US - High Activity, Hard Currency and Technology _________________ 18

Liquidity – NRU M&A Liquidity Management: Making a Smooth Transition ____________________________________ 21

Present and Future______________________________________________________________________________________ 24

Natural Resources & Utilities M&A landscape ______________________________________________________________ 27

M&A Regional Viewpoint _______________________________________________________________________________ 28

Conclusion _____________________________________________________________________________________________ 29

3

ForewordWelcome to HSBC’s Cash Management Guidebook to M&A for the Natural Resources and Utilities (NRU) sector. Certain parts of

the world are currently experiencing exceptional M&A activity in the NRU sector, so we hope that you will find the information in this

Guidebook both timely and valuable.

As you will see from the following pages, while there are some regional nuances in NRU M&A, there are also some common

themes. One of the most dominant is that NRU corporate treasuries are having to do more with less. Low oil prices have increased

the pressure for efficiencies and cost savings, yet fewer resources are available to treasury with which to achieve these.

In addition, generally high levels of sector M&A activity mean that while trying to streamline the existing corporate financial

infrastructure, treasuries are also having to on board and integrate new acquisitions. Typically these acquisitions will be using differing

financial technology and processes from the acquirer, creating a further headache for treasury.

An additional obstacle is that it is increasingly common for these acquisitions to be from outside the corporation’s existing geographic

footprint. Therefore, this often involves treasury in having to get to grips with a financial environment that is entirely alien, with

unfamiliar financial infrastructure, regulations and business practices.

As a result, at HSBC we increasingly find ourselves involved in a consultative role supporting corporate treasury clients through this

sort of situation. (For an example of this, see the Cepsa case study on page 7.) It is a critical necessity to have the right banking

partner with a global physical network with in-country sector expertise and qualified technology consultants, but the key requirement

many NRU treasurers appear to have at present is simply the reduction of their day to day workload. So they value a trusted partner

that can share its geographic, network and sector expertise while assisting them with this sort of task.

Lance Kawaguchi

Global Sector Head, Global Banking Corporates,

Global Liquidity and Cash Management, HSBC

4

Despite a slight slowdown in 2015 versus 2014, M&A activity in the resources and energy sector is still running at exceptional

levels. Looking ahead, there is expectation in the industry that these activity levels will continue to increase over the next few

years. This inevitably raises considerable challenges in terms of post-M&A corporate treasury reorganisation, for both acquirers and

disposers of assets. Lance Kawaguchi, Global Sector Head, Global Banking Corporates, Global Liquidity and Cash Management,

HSBC examines these challenges and how best they can be addressed.

While M&A presents opportunity, it also begets substantial

workload for corporate treasury. Potentially hundreds of

bank accounts have to be opened and closed, data from

differing ERP and treasury systems have to be consolidated/

normalised, numerous authorised signatories have to be

changed, liquidity structures need to be revised, these are

just some of the adjustments that are required post M&A.

The long history of M&A activity in the Natural Resources

and Utilities sector means that most participants are well

aware of this workload. Nevertheless, while they may plan

and budget accordingly, it is still a painful challenge that must

be overcome - especially if there has been an accumulation of

legacy systems from earlier M&A activity.

In common with many other sectors, Natural Resources and

Utility treasuries typically have very low headcount. Even

if additional M&A integration budget has been allocated,

there will therefore still be considerable pressure on treasury

personnel who will have to on-board the acquisition in

addition to their existing day to day workload. A similar

situation applies to the treasury of the company disposing of

the asset. For instance, the bank accounts of disposed assets

may have been integral to a liquidity structure that will now

require revision.

This combination of high integration workload and limited

treasury personnel leads many corporations to look to

their banking partners for solutions and assistance. One

popular approach is ‘lift and shift’, whereby processes and

bank relationships are aligned with the existing global or

regional bank that is already servicing the acquiring entity.

If the acquirer’s existing treasury processes are already

efficient and highly automated, then this is probably the

ideal approach. However, in order for it to work effectively,

much will depend upon the capabilities and resources of the

acquirer’s bank. As a minimum, they should be able to match

(or better still exceed) the functionality already available to the

acquired business. They should also have dedicated teams

capable of working up and implementing detailed project

plans, while also minimising any business impact during the

transition period. Product-specific technological capability is

becoming increasingly important in this space, so formally-

qualified in-country specialists in major ERP and treasury

systems should also ideally be available, as should specialists

experienced in migrating legacy technology.

The Implications of Global M&A on Corporate Treasury Teams

Lance Kawaguchi

Global Sector Head,

Global Banking Corporates,

Global Liquidity and

Cash Management, HSBC

Global O

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1 http://blog.ihs.com/upstream-oil-and-gas-ma-deal-count-and-asset-transaction-value-plunged-in-2015

2 http://www.pwc.com/us/en/industrial-products/publications/forging-ahead.html

However, in order to add real value, any bank involved in

this transition should also be able to suggest and implement

additional improvements and efficiencies. This would be

important at any time, but has become even more so given

the increasing involvement of financial buyers in M&A related

to the Natural Resources and Utilities sector. According to IHS

Markit1, in the oil and gas sector during 2015, financial buyers

spent more than USD25bn investing in acquisitions, joint

ventures, and funding private exploration and production (E&P)

companies. In metals and mining, financial buyers accounted

for 56% of the M&A deal activity in Q2 2016, according to

PWC2. These financial buyers do not typically have in-house

cash management or treasury expertise, so in order to make

the necessary efficiency improvements they look to suitably

skilled banking partners.

Geography

Another important angle on post-merger M&A integration is

geography. Much of the current activity in oil and gas M&A

has involved acquirers buying assets that are in locations new

and remote to them, such as Asia. One important historical

factor driving this trend is the spin offs that a number of major

integrated oil and gas players conducted in 2012-2013. Activist

shareholders pressured these corporations to focus on E&P

and divest downstream assets, such as refineries and petrol

stations, as at the time they were perceived as an inefficient

use of capital that generated sub-optimal returns. However,

the decline in the oil price has boosted the profitability of the

spin offs, while leaving the corporations that divested them

exposed. These pure E&P players have had to respond by

acquiring new assets that are already in production in new

locations, often in Asia.

This adds a further challenge for acquirers’ treasuries, as

they find themselves having to integrate assets in unfamiliar

locations in remote time zones. This consequently places a

premium on the services of banks that have the necessary

network footprint and global co-ordination skills to support this

remote integration.

Time

Time is also an important factor to post-M&A integration, given

that acquisitions are often funded by capital markets or bridge

financing activity. This creates pressure to realise as much

internal liquidity as possible from any new acquisition quickly in

order to reduce funding costs. There are a number of ways in

which banks can add value in this respect.

In a world where notional pooling is decreasing in popularity

as a result of tax and regulatory changes such as Basel III and

potentially IRS Rule 385, and cash concentration is becoming

increasingly popular. The ability to manage intercompany loans

is key specifically in an environment where the structuring

and record keeping for these can be extremely demanding for

corporate treasury, especially when multiple bank accounts

Glo

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6

Global O

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and new loans may be involved. If the partner bank has a

comprehensive intercompany loan management solution, this

will considerably reduce the management overhead

and streamline the incorporation of new entities, as well

as helping to avoid any inadvertent errors relating to thin

capitalisation rules.

The quality of internal co-ordination within the bank can also

heavily influence integration speed, particularly if the same

bank is providing advisory and/or funding for an M&A deal

(subject to appropriate observance of Chinese walls and

related governance procedures). In this situation, considerable

time can be saved by efficient internal handover, as integration

planning can begin quickly, minimising any post-M&A hiatus

and delays in accessing internal liquidity.

Cyclicality and the future

One of the distinctive characteristics of resources and energy

M&A activity is its cyclical nature - periods of high merger

activity are typically followed by periods of divestment, before

the cycle then repeats. There is currently no evidence to

suggest that this will not be the case again. Therefore, while

acquisition integration is currently front of mind for many

resources and energy treasuries, it is worth remembering that

the process of asset divestment can be equally painful from

their perspective.

For instance, if a US-based corporation is divesting some

of its Asian assets to a European corporation, it may have

multiple changes to make post-divestment. Signatories

on the remaining bank accounts may need to be changed,

intercompany loan documentation may need to be amended

and structural or other changes may be required to any liquidity

management structures (e.g. one of the divested assets may

have been a major contributor to net liquidity).

As with integrating an acquisition, for thinly staffed corporate

treasuries the success of these changes can be heavily

influenced by choice of banking partner. One that has all the

necessary technical and relationship qualifications, plus long

experience of industry M&A cyclicality is clearly desirable.

Conclusion

One thing of which treasuries of natural resources and utilities

companies can be reasonably assured is ongoing change

driven by corporate M&A and divestment activity. Therefore,

with treasury headcount in the sector typically very low, the

need for effective external support from the right banking

partner is paramount. There is a growing appreciation among

corporate treasurers that high-quality liquidity and cash

management advisory from their banking partner is of strategic

importance in M&A/divestment situations, especially if it is

efficiently co-ordinated internally with other services, such as

M&A advisory and structured funding.

These skills can make a material difference to the success of a

merger, acquisition or divestment, by streamlining processes,

increasing automation and reducing the time needed to access

available liquidity. Furthermore, assuming the bank concerned

has a truly global network, it will be able to deliver this

consistently across multiple locations that are remote from the

acquiring/disposing corporation.

7

Cepsa: Network, trust, integration, client serviceWhen a corporation makes an acquisition, one of the

most urgent tasks for corporate treasury is obtaining

visibility and control of the acquired company’s bank

balances before incorporating those balances into existing

corporate liquidity management structures. So when

Spanish oil major Cepsa acquired Coastal Energy, Fernando

González Romero, Head of Treasury at Cepsa, immediately

called HSBC.

Integrating a new acquisition is demanding enough for

any corporate treasurer, but when the acquired entity

largely operates in a region of the world unfamiliar to the

acquirer, the challenges are of an altogether higher order

of magnitude. This was precisely the situation confronting

Fernando González Romero, Head of Treasury of Cepsa,

in March 2014. Cepsa was acquiring Coastal Energy,

which had its principal assets in Asia, where Cepsa

had little previous presence. The immediate need was

to gain visibility and control of Coastal bank accounts

held in Thailand, Malaysia, Singapore, Canada, US, UK,

Mauritius,the Cayman Islands and Bermuda, while the

longer term need was to assimilate Coastal’s balances into

Cepsa’s liquidity management scheme.

While this task was exacting, it is rapidly becoming

commonplace in the oil and gas industry. A straw poll of

223 oil and gas treasurers conducted by HSBC in Q1 2016

revealed that ~65% regarded dealing with M & A activity

as their top priority. The remedy is to partner with a

global bank that has the physical network and niche

expertise to handle the most complex global M & A

integrations efficiently.

Visibility and control

As mentioned, the first priority for Cepsa’s treasury in

Madrid was to obtain visibility and control of all Coastal’s

HSBC bank accounts worldwide in a very short time

frame. In order to do this, new transaction authorisers had

to be appointed for these accounts, which would involve

such tasks as providing proof of ID plus complying with

other bank Know Your Customer (KYC) and Anti Money

Laundering (AML) measures. By early 2014 Cepsa had

already made progress with this process itself on a country

by country basis, but the demands of communicating

with multiple third parties in several languages around

the globe in various different time zones, plus differing

documentation and legal requirements, were causing

delays. In order to expedite the transition, the task needed

to be tackled differently.

Cep

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“It seemed clear that we needed to take a different approach

and ask HSBC to manage the process on our behalf,” says

Fernando González Romero. “Ideally, they would handle all

the international communications with their offices internally,

while providing us with a single point of contact and

coordination here in Madrid. They would express our needs

to their colleagues elsewhere, filter any requests to us for

information to minimise our workload and keep us updated

on progress.”

The account transition represented a considerable challenge,

as it involved more than 20 bank accounts, in different

currencies and in seven different countries belonging to

various Coastal entities. Furthermore, several key Coastal

personnel were due to be leaving the company post-

acquisition. Therefore, the whole transition process had to be

completed with new transaction authorisers in place within

three weeks if disruption to the Coastal businesses was to

be avoided.

Cepsa’s Treasury HO was assigned the task of managing

the account transition on Friday March 28th, 2014. Fernando

González Romero immediately called HSBC’s Madrid office

requesting a meeting at the bank that afternoon. At the

meeting, Fernando and two of his colleagues outlined the

challenge to Blanca Goñi Gonzalez, HSBC’s Head of Global

Liquidity & Cash Management in Madrid, and her team.

“Going into the meeting I had some concerns as to whether

it could be done. We had a three week deadline to turn

around an increasingly demanding task. Additionally, the

team dealing with it until then, regardless of their efforts, felt

the degree of achievement of it’s goals was not satisfactory.

During the meeting, it became clear that the HSBC team

understood the challenge exactly, as well as how to deal with

it. By the end of the meeting I knew the target would be hit

on time, the building blocks of a plan had been drawn up by

HSBC during the conversation and a fully committed team

had taken a tight grip on the challenge”

The HSBC team started work immediately over the

weekend. A project plan was produced identifying which

documentation was needed in each country and daily

conference calls were organised to update Cepsa on

progress. An important part of the project was co-ordinating

requirements globally to avoid asking Cepsa for

unnecessary information.

“For instance, a particular jurisdiction might require a certain

form of ID for a new authoriser, but another jurisdiction might

already have that ID on file,” says Blanca Goñi Gonzalez.

“Rather than unnecessarily request the ID again from Cepsa

we could simply supply it internally. As quite a few of the

authorisers were already known to us here in Madrid, we

were able to speed things up significantly in this way.”

Despite the very tight deadline, the project was completed

within the required three weeks and Coastal’s day to day

operations were not affected. Cepsa was already using

HSBCnet, so the Coastal bank balance information was

immediately available to Cepsa in Madrid via that.

Cepsa

9

“We were extremely impressed with how HSBC resolved

this important challenge on our behalf,” says Fernando

González Romero. “By having a single point of contact, our

needs were consistently explained globally and our workload

was kept to the absolute minimum. At the same time, we

were briefed daily so we could clearly see how things were

progressing, identify any bottlenecks and tackle them.”

Relationship Expansion and Liquidity

The success of the project prompted Cepsa to expand its

relationship with HSBC. The company was using another

bank for the bulk of its international business, but for its

more remote locations it was keen to add another network

of accounts for resilience. It awarded this business to HSBC

and asked the bank to open new accounts for Coastal

entities in locations such as Malaysia and Singapore. In

addition, it asked the bank to develop a suitable regional

liquidity structure incorporating these new accounts along

with existing Coastal accounts in Asia.

A statement of work, itemising all the necessary steps, was

prepared by HSBC and agreed by Cepsa. The statement of

work was then developed into a formal project plan, that was

also agreed, and a dedicated HSBC implementation manager

was appointed based in Singapore working with the team in

Madrid. Once work started, the implementation team was

largely working in parallel with Cepsa’s legal advisers who

were guiding the company on the most tax efficient legal

structure. Accounts were migrated/opened in accordance

with this, which included accounts for a new Singaporean

holding company.

Sensitivity to cultural differences between Cepsa and

Coastal personnel was an important part of the project.

Cepsa was keen that Coastal staff did not feel alienated in

any way and that HSBC should also be aware of country-

specific cultural nuances during the implementation. The

bank’s substantial physical network presence and local

awareness meant that it was able to deliver on this, both

generally and specifically. An important specific example

was that the bank has teams of experienced and qualified

ERP specialists that operate in individual countries rather

than just regionally. In Cepsa’s case, the need was for SAP

specialists and the bank already had these in place in both

Thailand and Malaysia. This meant that the risk of anything

being lost in translation between a regional specialist based

in, say, Singapore and in country teams was negated.

Liquidity management structure

The fact that Cepsa previously had limited exposure to

Thailand and Malaysia meant that it needed a banking

partner who fully understood all the local business practices

and regulatory requirements. This was particularly important

in the case of liquidity management, because of the

regulatory challenges of some of Coastal’s primary markets,

especially Thailand.

The bulk of Coastal’s revenue in Thailand was in Thai baht

(THB), in the form of a contract with PTT - the national oil

company. Thai baht is a restricted currency and cannot be

freely moved out of the country. Coastal’s PTT contract was

initially for exploration and prospecting, but once oil started

to pump, the scale of its baht income increased significantly.

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In view of the currency controls on Thai baht, this would

over time result in a major accumulation of currency that

could not directly participate in Cepsa’s global liquidity

management structure.

HSBC devised a bespoke hybrid solution to this problem.

The bank would provide a back to back loan in USD, secured

against Cepsa’s Thai baht balance onshore. HSBC Thailand

explained how the regulations would impact such a structure

and provided guidelines to Cepsa on any approvals that

would be required. The available USD balance, generated

through the loan, could then be moved to Singapore where

the regional header account was held by the Cepsa, and from

there could be combined with Cepsa’s liquidity globally. In

addition to the back to back loan, HSBC applied preferential

interest rates to all Cepsa’s USD (the corporation’s functional

currency) credit and debit balances globally, as well as any

THB balance that remained in Thailand. The solution is now

ready to go live, but has not yet done so because low global

oil prices have for the time being reduced the flow of baht

accumulating in Thailand.

This solution was only possible because of HSBC Global

Markets’ substantial activity and liquidity in Asia, combined

with its expertise in devising sophisticated liquidity

management solutions that are also fully-compliant with local

regulation. In addition, the bank’s ability to take a global view

on a client relationship meant that it was able to offer far

more attractive interest rates than were previously available

to Coastal on a per account basis.

A similar arrangement was deployed for Coastal’s businesses

in Malaysia and Mauritius, the only difference being that

the bulk of activity in these countries was already USD-

denominated, so there was no need for a back to back

structured loan. Balances across USD accounts in these

countries will be swept on a daily basis to the regional header

account in Singapore. The associated solution to manage the

resulting intercompany loans is provided by HSBC through its

Global Liquidity Solutions.

“When the structure is fully live, we will concentrate US

dollars from across Asia into the header account held by the

new Singapore entity,” says Fernando González Romero.

“From there they will be routed to our global USD pool

header held by a Dutch company in the Netherlands. Once

the oil price recovers - and unless HSBC have come up with

an even better solution for Thailand in the meantime - this

USD concentration will include the back to back USD/THB

loan arrangement.”

Conclusion

Cepsa was facing a situation that is becoming increasingly

commonplace for oil and gas companies. M & A activity

results in an acquisition that must be integrated as

efficiently as possible, as quickly as possible. Successfully

accomplishing this requires a banking partner armed with

the right people, client focus, network, local knowledge,

expertise and global solutions. “I am delighted that we were

able to assist Cepsa in meeting a very demanding deadline

that was operationally critical for them, plus devise an

effective liquidity management structure for the company

in the challenging environment of Asia,” says Lance

Kawaguchi, Managing Director, Global Head of Natural

Resources & Utilities Group – Global Liquidity & Cash

Management at HSBC.

The integration of Coastal Energy has also marked a further

stage in the relationship between Cepsa and HSBC.

“Before we started the initial transition of authorisers for the

Coastal Energy accounts, Cepsa felt operationally close to

HSBC on an international basis,” says Fernando González

Romero. “Overcoming this challenge has proven the value

of the HSBC Cash Management team. While it exposed

its members (and HSBC) to an uncertain outcome with a

very demanding goal, the excellent results achieved with

the transition and the subsequent liquidity structure solution

for Asia have further cemented and expanded Cepsa’s

relationship with HSBC.”

Client profile

Cepsa (Compañía Española de Petróleos, S.A.U.) is

an integrated energy company with more than 10,000

employees around the globe. Cepsa operates at every stage

of the oil value chain: petroleum and natural gas exploration

and production, refining, the transport and sale of crude oil

derivatives, plus petrochemicals, gas and electricity.

The company was established in 1929 as Spain’s first private

oil company and is now the country’s fourth largest industrial

group in terms of turnover. As a result of its flexibility and

ability to adapt, Cepsa has become a benchmark company

in its sector in Spain. Progressive internationalisation of

its activities means that the company now has significant

business interests in more than fifteen countries around the

world, including Algeria, Brazil, Canada, China, Colombia,

Germany, Malaysia, Panama, Peru, Portugal, Thailand and

UAE, and sells its products worldwide. Cepsa is wholly-

owned by International Petroleum Investment Company

(IPIC), which is the Abu Dhabi government’s vehicle for

making investments in the energy sector.

Cepsa

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In common with other regions, the decline in oil prices has been a major factor driving extensive M&A activity in Asia. While

post-M&A integration planning is clearly desirable anywhere, in Asia the sheer diversity of regulation and business practices adds

additional complexity.

Perhaps unsurprisingly, the upstream oil business in Asia has

been heavily impacted by the substantial fall in crude prices.

Many capital intensive projects in the region began when oil

was above $100 per barrel, but at current price levels are not

viable. This has triggered a spate of divestments of assets

now considered non-core. According to a report by law firm

Eversheds and Mergermarket1 56% of Q1 2016 divestment

activity was motivated by this. The decline in prices has also

severely hit demand for oilfield services, so this is another

subsector seeing appreciable M&A activity.

This rationalisation and streamlining extends beyond just

business operations into areas such as corporate treasury.

Here, there is now heavy emphasis on reducing working

capital requirements and adapting to an environment

where financing is far more limited than previously. As the

prospect of oil prices remaining lower for longer gathers

credence, there is also a growing realisation that quick fixes

are insufficient. Making process improvements that will

deliver savings in the long term is therefore becoming a

greater priority.

1 Searching for solutions: Energy asset sales in Asia Pacific’ June 23, 2016

The key differences

Nevertheless, achieving these improvements immediately

post-M&A is no easy task in Asia. For a multinational acquiring

assets in Asia is very different from elsewhere given the

multiplicity and probable unfamiliarity of regulations, currencies

and business practices.

Furthermore, much Asian M&A activity currently consists of

large non-Asian multinationals acquiring smaller assets in the

region. Therefore, the business being acquired typically has

treasury operations that are considerably less sophisticated

than the acquirer’s. Instead of an ERP or treasury management

system (TMS), spreadsheets and manual processes are a

distinct possibility. Smaller acquisition will commonly have

their primary banking relationships with local banks.

This poses a number of problems for the treasuries of large

multinational acquirers. Apart from the technology mismatch,

treasury personnel will be accustomed to very different

working practices. Plus, a multinational acquirer is likely to

have treasury policy specifying that only a relatively small

number of global banks may be used. None of these points

are particularly easy to deal with, but there is the additional

complication that the acquirer is unlikely to have personnel

with the necessary in-depth expertise to address them.

Oil and Gas M&A in Asia: Interesting Times for Treasury

Asi

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Partners and planning

As a result, this is a situation where a combination of a

partner bank with global coverage and scrupulous planning

can win the day. In this regard, the importance of the

extent and granularity of the bank’s network cannot be

overemphasised: coverage from just a few major centres

in Asia will not be sufficient. The nuances that can be lost

in translation between someone sitting in Singapore or

Hong Kong and someone in Thailand can prove extremely

expensive. A bank that can offer first-hand knowledge and

presence within each country can prove invaluable in avoiding

unpleasant surprises. Blithely insisting that one size can fit

all when it comes to treasury is a strategy very unlikely to

succeed in Asia.

Before any implementation begins, it is prudent to conduct a

thorough survey of the acquiree’s current treasury practices.

What sort of bank connectivity is in place? How do they

handle FX, payments, collections and liquidity management?

Then there is also the local financial infrastructure to consider

in terms of clearing system functionality, costs and cut offs.

This discovery phase will help to inform transition planning

that is both appropriate and more likely to be successful. For

instance, a major post-acquisition priority for

many treasuries will be obtaining visibility of the acquiree’s

flows,

but while global best practice might be to stream data from

MT940 bank statements, the banks the acquiree is using may

not be connected to SWIFT.

Strategies and tools

Once the decision to integrate financial processes is taken,

there are three broad categories of implementation strategy

currently being used in Asia:

• Simple integration: effectively just cloning existing processes.

This is probably the easiest of the three options and minimises

any business impact. Apart from centralised visibility and

account mandates, everything continues as before.

• Simple integration with improvement: similar to simple

improvement, but also incorporating quick fixes, such as

process alignment. Perhaps also introducing payment

initiation and bank statement reporting via SWIFT. Currently

this is probably the most commonly used integration strategy

employed in Asia.

• Lift and shift: complete transformation. Ultimately the

most desirable end state for many multinationals, but

typically the most complex and costly option. Also has

broader implications such as tax and optimum choice of

incorporation structure. Not much in evidence in Asia at

present, as the current environment makes it difficult to

cost-justify to the boardroom.

The right choice and implementation of strategy depends

heavily upon the early involvement of corporate treasury and

banking partner; this point is increasingly appreciated at the

most senior management levels. Another important potential

success factor is the availability of cloud based treasury

systems. These can be extremely valuable as an interim

solution for M&A integration, as they incur none of the capital

and risk overheads of a major ERP or TMS implementation,

while providing similar functionality and a far shorter timeline.

The best cloud treasury solutions also support multiple

connectivity options.

Conclusion

All the signs are that Asian oil and gas M&A activity is likely

to remain strong for the foreseeable future. Even for the

largest multinationals, this may create a resource stretch for

their treasuries. Support from a suitably qualified bank can

help in alleviating this burden, as well as mitigating any issues

around time zone differences. But in Asia, the core point

remains access to local experience and expertise. Combining

that with early treasury involvement and careful planning will

significantly increase the chances of a successful outcome.

12

13

MENA M&A activity has gained traction over the years, with performance primarily driven by the favourable demographic profile of

the region. Oil and gas is leading this regional M&A activity, with USD 3.6 billion recorded in 2015 alone1. However, there are some

differences in the nature of the activity and the way in which post-M&A treasury integration is being handled.

The first quarter of the year in MENA saw overall M&A

deals totalling USD6.99bn, well above the USD5.99bn and

USD4.52bn seen in the corresponding quarters of 2015 and

20142.The Government of Abu Dhabi alone has announced

three consolidations over the past 3 months, two involving Oil

& Gas companies. The latest has been Abu Dhabi National

Oil Company (ADNOC) to integrate two of its offshore oil

firms amid the drop in oil prices; Abu Dhabi Marine Operating

Company (Adma-Opco) and Zakum Development Company

(Zadco) will be merging to form a new entity, Prior to that,

the merger of National Bank of Abu Dhabi (NBAD) with

First Gulf Bank (FGB) was announced, as well as Mubadala

with International Petroleum Investment Company (IPIC).

Distressed asset sales constituted a significant part of the

activity driven by a tightening of capital availability in many

countries, where governments are getting priority access

to available capital, thus leaving less for private enterprises.

While this is in line with some other regions, an important

difference is that the bulk of M&A activity is intra-regional,

with some 80% of deals being within MENA3.

Most active countries

Much of the M&A in MENA is concentrated in just a few

countries, with UAE being the clear leader, as it has been

for the past couple of years, while Kuwait is not far behind4.

Despite its size, Saudi Arabia is less active in M&A, as

the focus there is currently more on social and economic

reforms and reducing reliance on oil in the wake of the Saudi

Vision 2030 announced earlier this year. Other countries in

MENA such as Oman and Bahrain are far less active, with

Bahrain still dealing with uncertainty in the aftermath of its

credit rating downgrade. Political instability and struggling

economies makes North Africa an unattractive option for

foreign investors, particularly in Egypt with the difficulty

of securing USD funding and continuous devaluation of

the Egyptian Pound. Many have already planned their exit

strategy out of Africa, with those remaining deciding to invest

in more politically stable countries such as Tanzania.

Asia

While intra-regional activity may represent the bulk of current

MENA M&A deals, there is a clear desire among National

Oil Companies (NOCs) in the region to acquire assets in Asia

that will enable them to tap into the potential demand growth

there. As these national oil companies already have ample

crude resources, their primary interest is in acquiring Asian

Oil and Gas M&A in MENA: Something Different

MEN

A

1 http://www.khaleejtimes.com/region/mena/gcc-entities-dominate-ma-activity-in-mena2 Gulf News (04/04/2016) http://gulfnews.com/business/sectors/banking/kuwait-uae-lead-gcc-acquisition-deals-in-2016-first-quarter-1.17037043 Emirates Business (16/05/2016) http://emirates-business.ae/mena-ma-market-to-remain-steady-in-2016/4 Gulf News (04/04/2016) http://gulfnews.com/business/sectors/banking/kuwait-uae-lead-gcc-acquisition-deals-in-2016-first-quarter-1.1703704

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refining and processing assets that can be used to satisfy

demand in the region. Typically policy and regulation in many

Asian countries does not allow majority control of this type

of asset by foreign entities, so in practice any acquisition

will only be partial, with an Asian government-owned entity

holding a majority stake in most cases.

Treasury integration in MENA

A common intention among those acquiring assets within

MENA is to improve their technology when doing so.

This particularly applies to areas such as oilfield services

technology, but also in other areas such as treasury.

In general, treasury technology in MENA lags behind global

standards, but in some areas this is changing rapidly in a

tight liquidity environment. While certain countries remain

wedded to manual processes and spreadsheets or are still

in the early stages of ERP integration, NOCs across the Gulf

Cooperation Council (GCC) countries are moving quickly to

close the gap, with RFPs for activities such as SWIFTNet

implementations and liquidity management becoming

increasingly commonplace. Among these more forward

looking organisations, there is a degree of competition to

catch up with global best practices.

However, despite this thirst for best treasury practice and

technology, when it comes to the treasury integration of

acquired assets, the general approach among acquirers in

MENA is more cautious. This applies both to intra-regional

M&A and to NOCs acquiring assets in Asia. A major concern

here is reputational risk. Especially among government

entities, punctual payment of vendors and employee

salaries is an extremely high priority. Therefore transitioning

banks and/or treasury technology and processes is often

perceived as highly risky in this context. As a result, it is not

uncommon for an acquisition’s treasury to continue with

its existing banks, technology, personnel and processes for

some considerable time after it is acquired. While this incurs

duplicate costs for the acquirer and may be sub-optimal in

terms of efficiency, this is often seen as preferable to the

reputational damage of possible late payments, at least for

the first 12 - 24 months post acquisition.

Treasury integration in Asia

In the case of NOCs from MENA integrating the treasury

operations of Asian acquisitions, there are additional practical

concerns. Differences in treasury practices, unfamiliar

currencies and regulation, as well as timezone differences

(cut-off times) are seen as further reasons for caution.

Therefore, the more common practice in this regard is to

acquire a stake in an entity, but retain the existing treasury

operation completely unchanged and leave the day to day

treasury operations to the equity partner (typically an Asian

National Oil Company or Government Related Entity). The

extent of involvement may be limited to quarterly repatriation

of funds and monthly reporting. However, in some countries

in MENA (such as UAE and Qatar) this is starting to change

with daily reporting being provided via SWIFT MT940s either

directly to the company’s own SWIFT address or centralised

via a third party service provider.

Conclusion

In view of the anticipated high volumes of M&A activity

in MENA, the question of integrating acquisitions’

treasury operations is not going to disappear. Despite the

reputational concerns, this is driving a growing appreciation

that the inefficiencies and costs of maintaining duplicate

treasury functions can and should be addressed, especially

during the current economic slow-down and low oil price

environment. In practice, the risks of treasury integration

could be minimised with the support of a partner bank

that has extensive cross border integration experience and

the necessary network to provide sufficient depth of local

support.

1http://www.bakermckenzie.com/en/newsroom/2015/06/global-ma-and-ipo-activity-to-accelerate-until-2__2 http://www2.deloitte.com/content/dam/Deloitte/cn/Documents/international-business-support/deloitte-cn-csg-2015-china-outbound-ma-spotlight-brochure-en-151111.pdf

3http://www.kwm.com/en/knowledge/downloads/china-oil-gas-shale-market-opportunities-challenges-201511124https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-energy-and-resources-oil-and-gas-m-n-a-report-2016.pdf

The Natural Resources and Utilities (NRU) sector in Europe is approaching a tipping point. Conditions for certain buyers appear

ideal and there is no shortage of distressed assets looking for a new home. Yet a variety of factors have so far delayed what

seemed to many an inevitable rush of M&A activity. It seems increasingly likely that this situation will change in the coming year

and M&A levels will rise substantially1. This in turn will create an intense period of activity for corporate treasuries. Many of these

will find that while some of the treasury consequences of European M&A activity are similar to those applying elsewhere, others

are rather different.

Opportunities abounding...

From a macro economic standpoint, Europe currently looks

particularly attractive to those from outside the region

seeking to acquire Natural Resources and Utilities (NRU)

assets. This is especially true of US buyers, who have

benefited from the Euro’s slide against the US dollar since

early 2014. At the start of that period, EUR / USD stood at

~1.40, while for much of the past two years it has oscillated

around ~1.10. The recent rise in US interest rates has more

recently provided additional USD support. Therefore, EUR-

denominated NRU assets appear relatively cheap to US

buyers.

Elsewhere, while the EUR / RMB exchange rate has been

less favourable to Chinese buyers, this does not appear to

be damping China’s outbound M&A activity. Total Chinese

outbound M&A by value in the first six months of 2016

almost exceeded total M&A for the whole of 2015. By

the end of August 2016, China had completed 173 global

outbound deals totalling USD128.7bn. While these figures

relate to M&A across all sectors, leading Chinese oil

companies CNPC, Sinopec and CNOOC have all publicly

indicated that they are considering global M&A23.

...but not yet taken

Yet despite these favourable conditions, actual European

M&A activity has been far below the levels many

predicted for 2014 and 2015, with several factors likely

to be influencing this situation4. Continued weakness in

commodity prices appears to have created a situation where

buyers are waiting for the bottom of the market, but there is

ongoing uncertainty as to whether that point has yet been

reached. At the same time, sellers seem to have been basing

their desired sale prices more on internal expectations rather

than external realities. However, as pressure continues to

mount, it seems credible that this gap between buyers and

sellers will close and that perhaps just one major European

acquisition will be sufficient to trigger a cascade of others.

Nevertheless, despite no shortage of private equity and other

investors looking to acquire inexpensive European assets,

debt financing of such assets has become more challenging.

Several banks have reduced or stopped providing financing

for businesses in the oil and gas sector. In addition, a major

focus across the sector at present is the reduction of debt

ratios. This is partly being driven by the current emphasis of

rating agencies on ensuring that companies are well balanced

from a debt standpoint.

Natural Resources and Utilities: Europe - Plentiful Opportunities

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Consequences for treasury

Changing operating models

NRU company treasuries globally have had to make significant

changes to their operating models as commodity prices have

fallen. In a sense, these treasuries have been encountering

the same cost cutting pressures that their counterparts in

other sectors encountered immediately post 2008. Quite

apart from the consequences of any M&A activity, there has

been a more general need to streamline processes, increase

automation and improve efficiency. In the case of any merger

or acquisition activity, this need is even more pressing as

there will be considerable duplication of processes, personnel

and technology that needs to be quickly rationalised. Apart

from cost reduction, this situation also creates considerable

operational risks that need to be rapidly mitigated.

Dealing with this situation successfully requires careful

planning and swift execution. It is also an area where

the right banking partner can significantly alleviate the

workload by sharing industry best practice, as well as with

practical implementation support. This would apply in any

circumstance, but is especially germane in the case of

companies from outside Europe acquiring European assets.

While European business and treasury practices may be

relatively familiar to US corporate treasuries, the same may

be rather less true of many Chinese NRU companies. Co-

ordinated support from a banking partner at local level in both

China and Europe that also leverages global expertise and

network can appreciably enhance outcomes.

Visibility, liquidity and funding

One of the most time-critical tasks post-acquisition is gaining

visibility and control of cash across the acquired entity. There

are various ways in which this can be achieved and the

strategy chosen will be driven by a mixture of corporate policy

and what is actually practicable. One useful solution is to use

a suitable cloud-based treasury management system (TMS).

The best of these already have extensive integration built in

for a wide range of ERP, accounting and treasury systems.

This makes quick access to a new acquisition’s bank account

and financial information both possible, scalable and relatively

painless. In some cases, the advantages of such a cloud-

based TMS may mean it is also acceptable as a permanent

solution for additional tasks such as automated cash flow

forecasting and providing equity and debt instrument

information.

While on the subject of debt, this is an area that is likely to

require attention after any M&A activity in the context of

liquidity management. The acquirer may have been strongly

cash-positive pre-acquisition, but the costs of the acquisition

may have significantly changed this situation and/or added

external debt. This makes not just cash visibility, but also cash

mobilisation and robust liquidity management an imperative -

especially in view of the importance rating agencies are attach

to debt/equity ratios5.

Any review of liquidity management may also need to

examine the acquirer’s currency mix, which may have

changed and need rebalancing. In the case of Europe,

standardisation of regulation relating to cross border

flows within the region and initiatives such as SEPA may

make regional liquidity management less challenging

from a technical perspective than regions such as Asia.

Nevertheless, the acquirer may still have to make significant

structural changes in order to balance its debt position with

the need to ensure that the acquired entity retains sufficient

cash to fund day to day operations.

Banking relationships

Acquiring an asset may also involve acquiring (at least in the

short term) new banking relationships, which given the long-

term consequences of 2008 for many banks in Europe may

5https://www2.deloitte.com/content/dam/Deloitte/ro/Documents/energy-resources/us-er-crude-downturn-2016.pdf

16

Europe

have important treasury policy implications. Many larger

acquirers are likely to have minimum credit quality criteria for

banking relationships as part of their treasury policy that may

not be met by newly-acquired assets’ existing banks.

Transitioning all accounts to a new bank will typically take

at least several weeks, which creates a need for more

immediate interim measures. One tactic is to set maximum

acceptable balance levels for the acquired asset’s existing

bank relationships and automatically sweep all cash above

those levels to the acquirer’s preferred partner bank until a

more permanent solution can be established.

Early engagement with your existing banking partner can

add significant value during this time of change. Given the

commonality of event driven change your bank can be a key

source of ideas on how to address other challenges, what

other companies have done to address certain points and

also connect you with these companies if appropriate. Your

existing partner can then provide guidance on a more formal

future by way of a tender. Not only will this help frame the

alternatives available, it will ensure competitive fees and

charges apply to your business.

Conclusion

It seems increasingly likely that a new wave of NRU M&A

activity will soon arrive in Europe. The weakness of the Euro

versus the US dollar plus the quantity of distressed assets

available make that almost inevitable. If this flurry of activity

occurs, NRU corporate treasuries will become even busier

and resource-pressured than usual. That will result in many

such treasuries looking for banks capable of supporting

them in quickly integrating assets in potentially unfamiliar

locations that are using equally unfamiliar technology and

processes.

17

Euro

pe

In comparison with regions such as Europe, the Natural Resources and Utilities (NRU) sector in the US has been a hive of M&A

activity. Outbound deals have been aided by a strong dollar, while apparently domestic activity has actually often also involved

the acquisition of global assets outside the US. Another strong US M&A theme has been NRU companies acquiring upstream

shale assets, which contributed to 45% of deals in the upstream segment in the second quarter of 2016. From a treasury

perspective, these trends have had various challenging implications, including the need to manage new regions, types of

business and currencies.

Plenty happening

North America was the leading region for M&A across the

NRU sector during H1 20161. 72 out of 136 upstream deals

(representing 45% of total value) involved assets located in

the US, with Canada in second place on 29 deals (worth 21%

of total value). Midstream deals have also been dominated by

the US and Canada, while 9 of the 11 downstream deals in

2015 were in the US and the largest by value in Canada.

US NRU companies have also enjoyed the advantage of a

strong dollar when making acquisitions outside the US. Since

the downturn in oil and natural gas prices started more than

two years ago, there is no shortage of distressed assets

available for such acquisition. This is reflected in the statistic

that there have been a number of NRU bankruptcy filings

around the globe during 2016, with more expected to follow.

The US has also seen an appreciable amount of nominally

domestic acquisition, where both parties are US-

headquartered, but where the bulk of the assets actually

being acquired are distributed globally. However, in view

of the reduced appetite of some of the banks that have

historically funded larger mergers, a more commonplace

activity - especially among oilfield services companies - is

smaller-scale consolidation, with companies cherry picking

assets more for bolt-on acquisition. The intention is that this

sort of acquisition will make the acquirer more competitive as

the current down cycle shifts into growth.

US oilfield services companies have also been acquiring

technology assets. This is a reflection of continuing low oil

prices, which is driving a need to reduce the production costs

for upstream assets that will otherwise be uncompetitive

in comparison with some major Middle Eastern producers.

Examples of these also include technology companies expert

in areas such as video and geological analysis that can reduce

exploration costs.

Treasury strategies

Unfamiliar territory

US NRU treasuries face broadly similar challenges to NRU

treasuries elsewhere, but there are some unique points

of emphasis. The strength of the US dollar is encouraging

international acquisition in addition to the global assets

acquired through domestic takeover mentioned earlier. As a

result, there is an increasing likelihood that US NRU treasuries

will have to deal with acquired assets in unfamiliar countries,

plus contend with similarly unfamiliar currencies, business

practices and regulation.

Dealing efficiently with this type of situation is considerably

easier if the treasury can depend upon the support of a

banking partner with a global network and commensurate

experience and expertise. This can smooth the post-

acquisition path considerably, particularly with regard to

matters such as cash visibility, liquidity management and

de-risking acquired bank relationships.

Natural Resources and Utilities: US – High Activity, Hard Currency and Technology

1 http://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-energy-and-resources-oil-and-gas-m-n-a-report-2016.pdf

18

United S

tates

19

Uni

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Sta

tes

Cash visibility and liquidity

Obtaining visibility and control of the acquired entity’s

cash and bank accounts as quickly as possible is critical

for a number of reasons. Probably the most obvious

is operational risk. Authorised signatories may be

leaving post-acquisition and if they are not replaced

in time, serious disruption can result. There are also

more generic fraud and control risks to consider, plus of

course treasury policy compliance.

Apart from these operational risks, cash visibility is

also essential for identifying any accessible pockets of

surplus liquidity within the acquired entity. The

acquiring entity will have either assumed debt or used

existing internal liquidity (or both) to fund the acquisition

and it is therefore imperative to pay down debt as

quickly as possible and/or restore a previously cash-

positive position.

Cloud-based treasury management systems can prove

invaluable here, as the best of them will already have

built in connectivity to myriad ERP, accounting and

treasury systems. Particularly where an experienced

primary banking partner is involved, these systems can

provide a very quick interim route to cash visibility and

in some cases may be also be appropriate for more

permanent adoption.

The information that can be derived from such systems

is integral to effective liquidity management. It will

quickly become apparent which liquidity from within

the acquired business can be centralised with existing

corporate liquidity and which needs to be retained

within the business for day to day working capital.

A useful additional source of working capital alleviation

post-acquisition is the merging of procurement

card programs. These programs are increasingly

commonplace in the NRU sector and apart from their

individual cash flow benefits, attractive rebates are

available in the market based on total spend. Hence the

added value of merging programs wherever possible.

United S

tates

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Banking relationships and treasury models

As mentioned earlier, the strength of the US dollar makes

overseas acquisitions increasingly cost-effective for US

NRU companies, increasing the chances that their corporate

treasuries will have to cope with unfamiliar currencies,

business practices and regulation. In addition, there is the

question of how to handle the existing banking relationships

of any acquired entity post-acquisition. In some regions,

there is a reasonable likelihood that these banks may not

satisfy the credit criteria of the acquirer’s corporate treasury

policy or risk appetite more generally. In view of the time it

will take to transition bank accounts to a new provider and

for the acquired entity’s customers to update their vendor

list bank details, some form of short term remedy may be

required. One possibility is to enable automated sweeps of

all funds above a certain level to one of the acquirer’s existing

relationship banks.

In the longer term, it may be advisable to consolidate all the

accounts and cash/liquidity business with an existing cash

management bank. However, some form of post-acquisition

review of banking arrangements may be advisable, as the

changed corporate structure might warrant an additional

banking partner for contingency, lending, or other reasons.

The current protracted down cycle in oil and commodity

prices already warrants a re-evaluation of existing NRU

treasury models. However, this need for review becomes

even more pressing post-M&A, as there may have been

major changes in liquidity, funding needs, currency mix, tax

structure and geographical coverage, plus many other factors.

There is also the consideration that the combined organisation

now has dual treasuries, policies/process

and costs. Rationalising this situation is important for cost

and operational risk reasons, but needs careful planning and

execution to ensure success. Again, this is an area where

a suitably qualified banking partner can provide invaluable

support.

Conclusion

US NRU companies currently benefit from US dollar strength

that reduces the effective cost of overseas acquisitions at

a time when a large number of distressed NRU assets are

available. However, the challenge for US NRU treasuries (in

addition to the generic challenges applicable to many NRU

treasuries elsewhere) is the unfamiliarity of the environment

in which some of these potential acquisitions operate. In this

situation, being able to count upon a global network bank that

can support any integration, irrespective of time zone and

geography, can represent the difference between success

and failure.

While the number of M&A deals in the natural resources and utility (NRU) sector has been slightly lower than previous years, it is

expected to increase in the coming year1. This anticipated increase makes it more likely that post-M&A integration challenges will

also become an increasingly common issue, as NRU treasuries are more likely to find their organisation involved in some form of

M&A activity. If so, how well they address the resulting liquidity management challenges - both pre- and post-M&A - will be a major

element in determining the overall success of the transaction.

Getting your own house in order

Perhaps one of the biggest priorities for treasury when there

is a higher probability of their company being involved in M&A

activity is ensuring that existing cash and liquidity management

is as good as possible. An acquisition may already have

excellent cash and liquidity management techniques, or it may

be entirely at the other end of the spectrum. If the latter, then

the acquirer’s treasury will have a major project on its hands

that will be exponentially harder if it also has to put its own

house in order at the same time. Therefore, the more efficient

and scalable your own structure and the sooner you can

understand your acquisition the better.

There is additional pressure to review and optimise existing

liquidity management arrangements now, because in addition

to higher levels of sector M&A activity, NRU treasuries have

only comparatively recently been affected by tighter liquidity

conditions. Treasuries in most other sectors felt the liquidity

impact of the 2008 financial crisis almost immediately and had

to respond equally immediately by improving cash visibility,

control and centralisation. At the time, the NRU sector was

under much less pressure as a period of relatively high oil and

commodity prices had left many companies with sufficient

internal liquidity. Since the decline in oil prices began in early

2014, this situation has changed, as witnessed by the number

of oil and gas business failures, with more than 100 oil and

gas companies around the globe filed for bankruptcy during

Q4 2014-Q2 20162.

Increasingly, treasuries are turning to their banking providers

to help ensure that they have the most effective solutions and

technology available in place, both generally and as prelude

to possible M&A activity. A suitably-qualified banking partner

will not only be able to provide context on what is considered

industry best practice and systems, but also do so in a global

context. This benefits the immediate situation, but may

also prove invaluable if the acquired asset has operations in

unfamiliar locations.

Natural Resources and Utilities M&A Liquidity Management: Making a Smooth Transition

1http://www.bloomberg.com/news/articles/2016-04-24/low-crude-prices-to-spur-more-m-a-deals-in-oil-gas-after-slump2http://www.researchandmarkets.com/research/wk4xk8/global_bankruptcy

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Settling the transaction

Given cost/availability constraints on external funding sources (see

“funding and cost reduction” below), there is considerable onus on

treasuries to maximise the usage of trapped cash pre-M&A so it

can be used as an internal funding source. Given the right banking

partner, treasuries may find that even cash in demanding locations is

actually more legitimately accessible than they realise. The obvious

corollary to this that invisible cash is unusable cash and so there is a

concomitant need to maximise the visibility of available funds (both

‘trapped’ and otherwise). Again, the right banking partner can do

much to assist here to provide a single window view of cash, even

where some balances are with third party banks in remote locations.

If an acquirer is partly or completely funding M&A with internal

resources, then an important consideration when it comes to

completing the transaction is the location and availability of the

necessary cash. Where does the company have its off balance

sheet cash invested? How liquid are the assets? What call times or

formal notices are involved when redeeming assets? In a department

typically as lightly-resourced as treasury, checking and double-

checking all these points in the run up to an acquisition (in addition to

day to day treasury tasks) can be extremely demanding. The obvious

concern is reaching the point of remitting the funds for an acquisition

and discovering that a significant proportion requires notice that hasn’t

been given, or some similar hitch.

Apart from pulling together all the required cash to pay for an

acquisition, there are various other elements that could potentially

cause last minute problems, such as unfamiliar cut-off times or

correspondent bank capabilities. Remember, there are no SLA’s

for receiving International money transfers. Ensuring funds arrive

on the correct value date is also extremely important given the

quantum. Closer to home, the funds paid are often required to flow

through different legal entities for tax and ownership purposes in

a sequential order, particularly if an in-house bank is maintained by

the acquirer. An experienced bank that has assisted with multiple

M&A transactions in the past is ideally placed to help avoid these

types of issues. It is therefore advisable to ensure that key banking

partners are fully briefed and that communication lines are continually

open in the run-up to any M&A settlement, particularly as a delay in

settlement can have considerable consequences.

Funding and cost reduction

Another strand to the recent liquidity pressure on NRU treasuries

is the reduced availability of external financing from financial

institutions. Some banks have reduced their exposure to the sector,

or withdrawn from the market altogether. The consequent supply/

demand impact has increased the need to maximise the use of

existing internal liquidity to fund M&A activity. This might require

additional refinements to existing liquidity structures, as effort/benefit

ratios may well have changed. An untapped pocket of liquidity might

previously have been considered not worth the labour of centralising.

That may no longer be the case if the cost gap between internal and

external liquidity sources has widened.

Liquidity

22

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y

Even if external financing is available, the net result post-

M&A is much the same. External debt needs to be serviced

and ultimately repaid as quickly as possible, plus there is also

pressure from the current emphasis by rating agencies on

corporate debt/equity ratios. This means that an acquirer’s

treasury needs to obtain visibility and control of an acquired

asset’s cash as quickly as possible post-M&A, partly to

minimise operational risk, but also so that any available cash

can be rapidly identified and centralised.

Two important steps in this centralisation process are the

possible development of new regional structures for an

acquisition and the merging of those (or existing) structures

with any liquidity structures the acquirer already has. If the

acquisition currently has fragmented regional cash, then there

is an obvious opportunity to centralise this cash regionally

with a suitable structure. Cash in this can then be merged as

desired with any existing regional or global structure via cash

concentration.

Planning for the unknown

Prior to M&A, the acquirer’s treasury has only limited

information on the liquidity situation it will be inheriting. The

accounts of the entity being acquired/merged will give some

idea of overall liquidity, but not where it is actually located,

how accessible it is, or the quality of the processes and

technology currently used to manage it.

However, if treasury has just conducted a rigorous review

of its own liquidity management pre-M&A, it will already

have a comprehensive check list and investigative process

to hand that it can immediately re-deploy post-M&A with

the acquired asset. This will assist in quickly gathering all the

required information to inform any decisions around migration

and implementation. It will also add considerable value when

it comes to any project planning with banking partners. A

suitable bank will also be able to add value in this context by

filling in certain gaps. This is especially useful if the acquired

asset operates in unfamiliar locations - especially if those

locations have unfamiliar regulation that also impacts possible

liquidity management strategies.

A global network bank can also assist in working with the

acquired asset’s local finance personnel to obtain additional

information, as well as with any subsequent implementation.

This can make it far easier to target resources and effort

accurately to identify and centralise available liquidity in an

optimal manner - especially if there are factors such as local

regulation to consider. A key point here is how flexible and

sensitive the bank is to the specific situation. What is most

definitely not desirable is a bank that imposes its own project

plan and timeline on both acquirer and acquiree. Particularly

in the context of possible rationalisation, this sort of

insensitivity can be extremely counterproductive. By contrast,

a bank that adopts a consultative approach will help to ensure

a positive outcome.

Conclusion

The ongoing liquidity journey

Pre- and post-M&A liquidity planning and action are only part

of an ongoing iterative process. It is perfectly possible that a

step taken as a result of on-boarding an acquisition throws up

an opportunity at a higher level, perhaps such as the creation

of a new regional liquidity pool. Subsequent changes in the

business environment might also drive further changes as

effort/benefit ratios in relation to liquidity capture shift.

Whatever the specific circumstances, this evolutionary

process can be facilitated by a close working relationship

with a partner bank that can leverage a strong pedigree

in liquidity management and the NRU sector, plus global

network and expertise.

24

Natural Resources and Utilities (NRU) is currently one of the most dynamic sectors for M&A globally, with most regions

experiencing high deal levels. This has knock on implications for NRU treasuries that need to be addressed both now and in the

longer term. Lance Kawaguchi, Managing Director, Global Head of Natural Resources & Utilities Group – Global Liquidity & Cash

Management at HSBC examines these implications and some potential treasury strategies to address them.

Treasury PresentHow does M&A activity impact treasury?

M&A activity affects corporate treasury in multiple respects. In

the general sense, it results in a palpable increase in workload.

More specifically, it will involve handling a raft of bank

relationship and bank account management changes, such as

the opening/closing of potentially multiple accounts. One of

the consequences of this is the need to change signatories

and bank mandates in accordance with the new corporate

leadership structure, possibly to an extremely tight timeline.

The overall liquidity position of the corporation may also

change appreciably. Treasury may have to adapt rapidly to

a shift from the corporation being cash-positive to cash-

negative. Even if that is not the case, treasury may have to

manage the orderly release of off-balance sheet liquidity from

investment instruments with contractual notice periods in

order to partially or completely fund the acquisition up front.

Alternatively, if an acquisition is funded by external debt, there

will be time pressure to release as much surplus liquidity

as possible from the acquisition to pay down this debt and

minimise interest costs. More generally, existing liquidity

structures may need substantial adjustment to accommodate

new markets and currencies, or the removal of those markets

and currencies in the case of divestments.

On the technology front, treasury may find itself post-

acquisition having to contend with legacy systems and/

or multiple ERP systems (and versions thereof) plus

their integration with existing technology. In the case of

divestments, treasury technology may require cloning to

enable the independent operation of the divestment.

The importance of treasury involvement in M&A

Apart from the immediate consequences for treasury of

M&A activity, there are more general corporate reasons for

involving treasury as early as possible when such activity

is in prospect. One example is the need to ensure existing

financial operations are not disrupted during the M&A activity,

such as a divestment’s ability to pay suppliers and operate

normally from its first day post-divestment. By the same

token, an acquisition will have legacy bank accounts and

infrastructure, in which liquidity may remain trapped until

treasury has full visibility and control.

Many treasuries have also started to assume a broader risk

management role, beyond purely financial risk. Therefore,

early treasury involvement will also improve treasury’s ability

to advise on operational risks before, during and after M&A

activity.

Treasury Present and Future: Natural Resources and Utilities M&A

1http://www.bloomberg.com/news/articles/2016-04-24/low-crude-prices-to-spur-more-m-a-deals-in-oil-gas-after-slump2http://www.researchandmarkets.com/research/wk4xk8/global_bankruptcy

Present and Future

25

Treasury Present and Future: Natural Resources and Utilities M&A

Pres

ent a

nd F

utur

e

Natural Resources and Utilities M&A: Global Themes

The global M&A environment in which NRU treasuries

must execute is highly active at present, with the decline in

oil prices since early 2014 a major factor. One response to

weaker oil prices has been for companies to streamline their

operations wherever possible, such as through the sale of

non-core assets and operations. In several cases, buyers

of these assets are looking to use any acquisitions as also

an opportunity to diversify and access new markets. Two

examples of this would be Chinese NRU corporates investing

in Europe and US NRU corporates buying Asian assets.

Certain subsectors within NRU have had to adapt to

considerable financial changes. For instance, oil field services

companies have seen a major fall off in business due to low

oil prices and thus reduced exploration/production activity,

which has also resulted in an associated increase in their

working capital requirements.

More generally, the global NRU environment has placed

further liquidity performance pressure on treasuries as the

“lower for longer” outlook on oil prices has become more

widely accepted. This is an area that treasuries will typically

always seek to improve, but at present the pressure to do so

is particularly acute. However, at the same time, cost-cutting

is a major priority in the NRU sector so treasury teams are

lean and are very likely to remain so: doing more with less is

now the new normal.

Natural Resources and Utilities M&A: Regional Themes

In addition to the global themes outlined above there are also

a variety of region-specific themes that have a bearing on

regional M&A activity, as well as corporate treasury.

In Europe, the relative weakness of EUR versus USD makes

inward investment in NRU assets attractive. Nevertheless,

this has not as yet translated into greater M&A activity for a

number of reasons, such as the gap in perceived valuations

between buyers and sellers. Interesting, although EUR has

been relatively strong versus RMB, this has not depressed

interest from Chinese buyers.

For US NRU corporates, strong USD obviously makes

acquisitions more cost effective, and some are treating this

as an opportunity to diversify into Asia by acquiring assets

there. Other trends include a focus largely on upstream deals

(representing some 45% of all North American deals during

H1 20161) and the acquisition of technology assets.

By contrast, NRU M&A activity in MENA has been

largely intra-regional, with USD6.99bn of deals in Q1

20162, although there has also been a trend of national oil

companies acquiring assets in Asia. Much of the activity in

MENA has originated in UAE: for instance, the government

in Abu Dhabi saw three corporate consolidations in past

three months - two of them involving oil and gas. Kuwait

has not been far behind UAE in terms of NRU M&A volume,

while in Saudi Arabia the focus has been more upon reducing

reliance on the oil and gas sector. More treasury-specific

trends have been a drive for some NRU corporates in the

region to enhance their treasury technology, which typically

lags that seen outside MENA.

In Asia, Chinese national oil companies have made clear

their continued interest in outbound investment, with

the One Belt One Road initiative3 being a case in point.

Elsewhere, inward investment has seen a number of non-

Asian MNCs seeking to diversify by acquiring smaller assets

in Asia. From a non-Asian treasury viewpoint, the region

remains challenging, with diverse regulations, currencies and

business practices adding complexity to any onboarding and

integration of acquisitions.

Post-M&A treasury considerations

Once a merger or acquisition has closed, treasury will be

faced with a number of challenges. One of the highest

priorities is gaining visibility and control of bank accounts and

relationships. If this can be achieved, then the operational

risks associated with personnel movements are minimised.

In addition, treasury will then also be well-positioned to

access any surplus cash within the acquisition. This is crucial

when acquisitions are funded by capital markets or bridge

financing as it enables debt to be paid down faster and

interest costs minimised.

A further consideration for treasury is that a merger or

acquisition often does not stop there. It is not uncommon

for periods of M&A activity to be followed by periods of

divestment. This is a further reason for treasury to be well-

briefed on the detail of potential M&A activity. If a

business unit within an acquisition is already identified as

non-core for early disposal, treasury clearly does not want

to waste scarce time and resources on incorporating it into

liquidity structures.

Another potential issue for treasury post-M&A is unfamiliar

geography. An acquisition or merger may involve new

regions or countries where regulation, currencies, financial

infrastructure and business practices are unfamiliar. Under

these circumstances treasury will have to surmount a

steep learning curve if potential problems or errors are to

be averted.

Leveraging bank expertise

Unfamiliar geography is a classic example of where

partnering with a suitably qualified cash management

bank can prove invaluable. If the bank has a global network

presence, it will be able to provide detailed information and

solutions to accommodate local nuances. The challenges

1http://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-energy-and-resources-oil-and-gas-m-n-a-report-2016.pdf2Gulf News (04/04/2016) http://gulfnews.com/business/sectors/banking/kuwait-uae-lead-gcc-acquisition-deals-in-2016-first-quarter-1.17037043https://ig.ft.com/sites/special-reports/one-belt-one-road/

26

Present and Future

associated with understanding new markets and the rules

associated with managing bank accounts and liquidity therein

can thus be minimised.

At a strategic planning level, if engaged early, this type

of bank can also add value to the process of developing

objectives, such as any transformation/optimisation agenda.

The same global network expertise can be equally valuable in

project managing the integration of bank accounts.

Finally, if the bank concerned can also provide ERP and

treasury management system expertise, then there is also

the opportunity to maximise the planning and execution of

automation in the project. In a cost-pressured environment,

this can be a significant benefit.

Treasury FutureDigitisation

Looking to the future in the NRU treasury space, one theme

that stands out is greater digitisation. This has the potential

to transform M&A activity for the better, by compressing

timelines, reducing costs and minimising labour-intensive

paper processes. One obvious example of this is account

management, which is usually a major activity post-M&A. At

present, a lengthy manual process of onboarding with new

banking providers has to be undertaken. Digitisation of the

platforms and processes involved in onboarding, could go

a long towards remedying this. This could simply take the

form of electronic submission of documentation or enhanced

systems that can make more extensive use of information

already held in order to minimise duplication of effort.

Know Your Customer (KYC) processes are another area

that can prove a bottleneck post-M&A. Again digital

technology and data management can be used to improve

the experience from a corporate perspective. In addition,

regulatory changes can be more effectively incorporated

in modern technology platforms, ultimately simplifying

and improving the onboarding experience. Another recent

innovation that can assist here is collaborative KYC, with

KYC.com and the SWIFT KYC registry being two examples.

This can help to automate the KYC processes, including the

verification of companies, people and ID documents. A single

centralised secure database that maintains KYC profiles is

far more efficient than individually delivering documents to

various banking partners.

Nevertheless, taking maximum advantage of this sort of

innovation necessitates a willingness to change on the part

of banks. Only those banks that are genuinely committed

to innovation and change management will be in a position

to deliver the sort of streamlined digital experience that can

minimise corporate treasury’s workload post-M&A. That in

turn necessitates the elimination of legacy processes and

technology and the efficient redeployment of existing data

onto new technology.

Technology Integration

In addition to account management, another major area of

treasury activity post-M&A tends to be systems integration.

Especially when a larger corporate acquires a smaller

business or business unit, the likelihood of both entities

already running identical financial systems is low . This means

that some form of data exchange between the systems

must be established as quickly as possible if treasury is to

have the degree of financial visibility it needs for effective

risk, cash and liquidity management. The snag here is that

because treasury is still perceived in many corporations as a

cost centre, it tends to be near the back of the queue when it

comes to obtaining corporate IT resources, which in any

case may have limited knowledge of legacy financial

systems integration.

This is a task where having a banking partner that has both

the necessary experience and expertise can be critical. For

example, it will ideally have qualified ERP specialists deployed

on the ground in individual countries, not just at a regional

level. This ameliorates the risk of ‘lost in translation’ errors

when conveying important technical and financial concepts.

At a more granular level, such a bank may also have

already created a middleware adaptor that can translate

across the required financial systems for a previous

client implementation. Even if it hasn’t, it should have the

necessary skills in house to create such an adaptor. The

value of this should not be underestimated; in some regions

(MENA for instance) it is relatively commonplace for

financial systems to be home grown, so the data format

that requires translating may be proprietary. The manual

workarounds that might be required without a suitable

adaptor would be a severe impediment to effective post-

M&A treasury integration.

Conclusion

The NRU sector has historically seen appreciable levels of

M&A activity, but even by those standards current activity

levels in most regions are high . This would be challenging

for corporate treasury at any time, but at present the situation

is further exacerbated by cost-cutting pressures bearing

down on treasury resources. As a result, NRU treasuries are

increasingly looking to their banking partners for assistance in

managing pre- and post-M&A planning and activities.

The difficulty is that few banks can offer the necessary

combination of capabilities. This includes project

management and technological skills, plus a suitable range

of cash and liquidity management solutions, but these alone

are insufficient. A growing NRU M&A trend is geographic

diversification often into unfamiliar territory. Therefore, any

suitable banking partner also needs to be able to deliver a

global physical network to fully support this.

4 Even where entities of similar size are involved, while they may be running the same basic technology - a SAP ERP system for example - they may well not be running the same version.

FINANCIAL VS TRADE BUYERS – DEAL VOLUME1

0

5

10

15

20Financial Buyers

Trade BuyersUSDbn

QUALITY OF OUTCOME

Lift and shift

Simpleintegration

Simple integrationwith improvement

NATURAL RESOURCES & UTILITIES M&A LANDSCAPE

OIL & GAS – M&A VALUES2

0

100

200

300

400

500USDbn

GLOBAL M&A ACTIVITY

CONSEQUENCES OF NRU SECTOR LIQUIDITY SQUEEZE

TOP FIVE BIGGESTBANKRUPTCIES3

$2.8B

$3.9B

$2.9B

$4.3B

$5.3B

PACIFICEXPLORATION &PRODUCTION

SAMSON RESOURCES

ULTRAPETROLEUM

SABINEOIL & GAS

ENERGYXXI

DRIVERS FOR POST M&A FOCUS FOR TREASURY

Treasury policy compliance

CASHVISIBILITY

Access to liquidity

Operational risk Fraud/control risk

LIQUIDITY & CASH MANAGEMENT TREASURY INTEGRATION OPTIONS

28

CHINA INVESTMENTINTO EUROPE – 1H20158

LOWER THAN EXPECTED NRU M&A ACTIVITY

SELLERS’ PRICES BASED ON INTERNAL EXPECTATIONS

LACK OF BUYER/SELLERVALUE CONSENSUS

BUYERS WAITING FOR MARKET BOTTOM

LOW M&A ACTIVITY

40%Rest of world 60%

Europe

TOP 2 REASONS FOR DIVESTMENT7

56% 15%

RISE OF DOMESTIC DEALVOLUMES IN MENA5

MENA M&A TRENDS 2014-164

21Q1 2015

30

Q1 20160

3000

6000

9000

12000

15000

Q1 2016Q4 2015Q3 2015Q2 2015Q1 2015Q4 2014Q3 2014Q2 2014Q1 2014100

150

200

1214,529 10,880 6,287 12,850 5,997 6,498 10,572 10,238 6,998

117132

152 148

183 185

161 163

Deal Value (USDmn)Deal volume

ASIA

EUROPE

MENA

Sources include:1http://www.pwc.com/us/en/industrial-products/publications/assets/pwc-metals-industry-mergers-acquisitions-%20q2-2016.pdf 2http://www.bloomberg.com/news/articles/2016-04-24/low-crude-prices-to-spur-more-m-a-deals-in-oil-gas-after-slump3http://www.forbes.com/sites/christopherhelman/2016/05/09/the-15-biggest-oil-bankruptcies-so-far/#7b847f7b739b4http://gulfnews.com/business/sectors/banking/kuwait-uae-lead-gcc-acquisition-deals-in-2016-first-quarter-1.17037045http://emirates-business.ae/mena-ma-market-to-remain-steady-in-2016/6https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-energy-and-resources-oil-and-gas-m-n-a-report-2016.pdf7http://mergermarketgroup.com/wp-content/uploads/2016/06/Eversheds_Newsletter_Issue_02_Final.pdf 8http://www2.deloitte.com/content/dam/Deloitte/cn/Documents/international-business-support/deloitte-cn-csg-2015-china-outbound-ma-spotlight-brochure-en-151111.pdf

M&A REGIONAL VIEWPOINT

OIL & GAS UPSTREAM DEALS6

1H2016

Canada29 DEALS (21%)

Asia, Russia andSouth/Central America18 DEALS (26%)

US

US72 DEALS (45%)

Europe13 DEALS (7%)

For Professional Clients, Institutional Investors and Eligible Counterparties only. Not for Retail Customers. Approved for issue in the UK only by HSBC Bank plc, 8 Canada Square, London E14 5HQAuthorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Published: November 2016

56% were driven by the need to refocus on core business activities

15% were motivated by market changes

Conclusion:One of the points that has become increasingly apparent during the preparation of this Handbook

is that expectations about energy prices have changed. There now appears to be a much broader

acceptance that prices will be lower for longer than originally expected. From a corporate treasury

perspective, this means that doing more with less is also likely to remain the new normal for NRU

treasuries for some time to come.

That makes the opportunity to share some of the burden with a suitable partner appear

particularly attractive. All the necessary process improvements, technology consolidation and

acquisition onboarding required in the current environment become far more achievable if another

trusted organisation can share expertise and best practice, as well as dealing with some of the

operational tasks involved.

For more information on how HSBC can help meet your needs please contact your local

HSBC representative or visit hsbcnet.com

29

Published: December 2016

For Professional clients and Eligible Counterparties only. All information is subject to local regulations.

Issued by HSBC Bank plc.

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Registered in England No 14259

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