March 2, 2020 / 3:13 AM / a month ago

Breakingviews - Virus could give dealmakers a new big MAC attack

A customer enters the E*Trade offices in New York November 12, 2007. E*Trade Financial Corp told customers on Monday it can absorb a write-down of as much as $1 billion and is well capitalized, after an analyst said credit woes put the online brokerage at risk of bankruptcy, sending its shares down a whopping 58 percent. REUTERS/Lucas Jackson (UNITED STATES)

HONG KONG (Reuters Breakingviews) - The coronavirus is making dealmakers a little queasy. Macau casino operator Melco Resorts and Entertainment already called off a plan to invest another $600 million in Australia’s Crown Resorts, blaming the outbreak. Other acquirers also will be revisiting their contracts, most significantly the “material adverse change” clauses, or MACs. They are notoriously hard to trigger, but billions of dollars of Asian M&A hangs in the balance.

An epidemic that hits sales and supply chains will give buyers pause. Efforts to invoke MACs following the Kobe earthquake in 1995 and the 9/11 attacks were unsuccessful, however. And lawyers have tightened their wording even more since the global financial crisis, when the likes of KKR and Goldman Sachs used them as an escape hatch. Some contracts even rule out infectious diseases as a scapegoat. Morgan Stanley and E*Trade specifically carved out Covid-19, in what may be a first.

Broadly speaking, a notable change in financial performance or prospects can be cause for consideration. At the very least, the threat of a MAC is sometimes used as negotiating leverage. Verizon, for example, shaved $350 million off a 2017 deal with Yahoo following a costly data breach. Companies in Asia can be more reluctant to risk relationships or reputations with legal action, but presumably the consequences of an epidemic could also prompt a call for fresh deal talks.

MAC clauses are not yet as ubiquitous in China as in other markets, but lawyers say they do appear regularly in domestic mergers and are common in cross-border transactions. In this case, takeover targets with assets or customers in the People’s Republic are especially exposed. There are more than $80 billion worth of such pending deals, according to data provider Dealogic.

They include Chubb’s investment into Huatai Insurance and Allianz’s plans to buy a stake in Taikang Life Insurance. Given the economic backdrop was already weakening, the virus also could add enough extra doubt for suitors to consider wriggling out of deals. For example, Tencent’s joint investment into car comparison website Bitauto may be looking even less appealing as the auto sector struggles to navigate a downturn. None of these companies has indicated publicly that they are reconsidering their deals, but investors may want to brace for at least one big MAC attack. 


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