The flotation of Telefónica Deutschland threw trainees in at the deep end…
In October 2012, Telefónica Deutschland Holding AG, the German unit of Spain’s biggest phone company, which is itself one of the world’s largest global telecoms companies, successfully floated on the Frankfurt Stock Exchange.
In the midst of volatile European market conditions and the sovereign debt crisis, which saw parts of the EU teeter on the brink of collapse, the €1.5bn (£1.3bn) deal was big news – it was the biggest flotation for five years in Germany and, if successful, was viewed as opening up the German markets again.
In case you’re not an avid reader of the financial and business pages a flotation is the launch, also known as an initial public offering (IPO), of a company’s shares on the stock exchange so that investors can buy and sell them.
CMS lawyers played a pivotal role, advising Telefónica on the fundraising through the IPO, an IPO that was crucial to Telefónica’s Spanish parent company, which needed to raise funds to reduce its debt level and unlock value from the profitable German company.
“When you do an IPO, you transform a private company into a public one and that causes a transformation in the business itself – it makes it more independent. When a company gets to a certain size and level it is a natural evolution to make it a public company,” says Daniel Winterfeldt, CMS head of international capital markets and lead partner on the deal.
Off the starting blocks
Work on the deal began at the end of June 2012 with a big kick-off meeting at Telefónica’s Munich headquarters, where CMS met with investment banks JP Morgan and UBS, which would be financial advisers to the company and liaising with the investors, and their lawyers Latham & Watkins.
Much of the early work on the deal was looking at questions such as the best place to put the public entity, the best place to put the holding company and where the company should be incorporated.
The deal was to have a huge cross-border element involving the Spanish parent company, the German company, investment bank teams sitting in London, Germany and Spain, and the UK holding company for the shares in the German company.
To project-manage work on the deal, lawyers were divided into various work streams to deal with matters including: pre-IPO restructuring; corporate governance and IPO preparation; prospectus drafting and disclosure; IPO documentation; and a complex cash-pooling arrangement.
Stressed for success
“As lead lawyer one of the things you have got to do is know what is going on in all areas,” Winterfeldt says. “It is a bit of a challenge as in all the work streams you are more or less involved but you are responsible for knowing what is going on in all of them.”
This was particularly important in this deal as CMS was operating on a flat-fee basis with an uplift for success so cost efficiencies were important. Completing the deal successfully would also be seen as an important badge of honour for CMS’s capital markets practice and its focus on the technology, media and telecoms (TMT) sector.
Charlie Anderson was a corporate trainee on the deal. “It was a baptism of fire” he laughs. “I had just started my second seat when I got pulled onto a due diligence task, basically reading through contracts flagging up any potentially onerous or unfamiliar information and making sure everything is completely accurate and that when we write the prospectus all the material information is listed within it.”
“There were thousands of documents,” says Anderson. “There were four trainees on it at this point, working through weekends for four weeks. In terms of man-hours it was a huge process.”
The prospectus – in this case a densely written document of about 275 pages – is effectively a marketing brochure for the share issue, and is sent out to see whether or not people want to buy the shares. Its accuracy, comprehensiveness and compliance are, therefore, essential.
To begin the process of putting together the prospectus, a virtual data room is set up in which all the company’s documents – such as those relating to its corporate affairs, banking, property and insurance – are uploaded in pdf form onto password-protected files to which trainees are given log-in details.
Explaining the process, Anderson says: “You have a read-through to check what the contract was about so you can file it with other similar ones.
You then enter who the parties were, whether they were still solvent, you look at their past and predictions for the future to see if the contract would still be viable after the IPO, and you then check the contract for any ongoing obligations that would still be going through after the IPO.”
Because of the sheer number of contracts, trainees need to make many judgements themselves and have to be selective over what they bring out and what is pertinent enough to go into the prospectus.
So what are they looking for? “Generally you are looking for unusual costs and problematic or uncommercial provisions in agreements.
“If, for example, there have been libel cases against a company or a company has brought any cases against other companies, you need to look back at the contracts and see how that fits in. You also need to go through the company charter to make sure the structure of the company is correct and if, for example, everyone has fully paid up their shares.”
This is where the commercial awareness that law firms always refer to comes in, because it requires particular skill to understand what is normal and what may be an issue.
“When you are looking through contracts you are thinking from an investor point of view and also Telefónica’s, ‘is this information pertinent in a business way?’” says Anderson.
Once any issues have been clarified with the client, the drafting of the prospectus starts, which, overseen by more experienced associates, trainees are very involved in.
“I was also involved in drafting part of the risk section,” says Anderson, “which is very commercial and involved looking at risks to the industry over the next 20 years and to specific projects that Telefónica was bringing out.
“Investors want to know the impact if a product is unsuccessful or whether markets are going to be completely saturated in this area in five years time.
“It was particularly interesting in terms of the industry as well as the technology aspect of it. You are trying to predict the future and talking to clients because it is very client-driven and they are the experts. I got a lot more client contact than I thought I would.
“It also opens your eyes to the sector as I not only got to know the client in-depth but also got to know the industry.”
Once the prospectus is drafted and all the comments from the investment banks and Telefónica in Spain, Germany and the UK have been incorporated, the next fundamental trainee task comes into play – verification. And on a 275-page prospectus, it is a massive task.
“We have to go through everything line by line,” says Anderson. “As soon as one chapter is written a trainee goes through it. There were four trainees working on this – a lot when you consider there were only eleven trainees in the department.”
“After you’ve spent so many hours and weeks looking at a document it’s fulfilling when it is bound and you have a copy on your desk. To know this is going out to market and something you have been working on is reported in national and international newspapers. It gives you a buzz.”
Another added complication was the tight timetable, explains Winterfeldt. “When we were doing this we were not moving along at a leisurely pace,” he says. “We were really under the gun – this was the fastest deal of this type I have ever done and we are paid to make sure everything is still accurate.”
So what was the need for the tight timetable? “At the time of this deal the equity markets were delicate and we needed to get to that window after the August shutdown and while markets were performing. You are competing with other deals and you need to get to the market when the investors are there.
“If other people beat you, two things can happen. Either other companies issue before you and take up all the money investors have available or something bad happens in the wider economic context, such as another EU country starting to go under, and the whole market shuts down. So you can’t go out to do your deal.”
As Winterfeldt notes, success is not just dependent on the lawyers. “Telefónica is an amazing client, incredibly well managed and well run. A big part of the deal succeeding is not just having a good management team but also excellent presenters and speakers to sell the company and an excellent team of investment banks working with them at JP Morgan and UBS. Investors do not just invest in the company but also the management.”
On the front line
What does working on this type of deal mean for trainees? “To be involved in a deal of this size and working with Latham & Watkins, JP Morgan and UBS, you are seeing high-level work in one of the most complex deals you can work on,” says Winterfeldt. “The level of work Charlie was doing was work that associates would usually do.
“While not everything is glamorous, if you pay attention to language and what you are reading then this can be a learning experience. The art of drafting and disclosure is a huge part of being a lawyer – drafting skills and attention to detail are what we are paid the big bucks for.”
Attitude is key, advises Winterfeldt. “You could get a document to check for consistency and think it is the most boring thing in the world,” he says, “or you can take it as an opportunity because it is all part of the puzzle that you can put together to tell you how a giant multinational corporation functions and runs.
“It is really important for trainees to keep an eye on the big picture when doing the work as each piece is really key.”
And it isn’t all work, work, work. “When the company floated we went to a nice restaurant where we had bottles of champagne and lovely food – it was a good reward,” says Anderson. “There were also other little perks – Daniel bought us a lot of chocolate throughout the deal to say well done, it wasn’t just a hard slog it was a really nice atmosphere.”
Sponsor’s comment: Simon Pilcher, graduate recruitment partner, CMS
I have been graduate recruitment partner at CMS for the past six years and co-ordinate the attraction and selection of future trainees and act as training principal for all of our trainees.
I spend a lot of time talking to future trainees and one of the most difficult things for them to understand is quite how soon after joining us they will be doing meaningful, important and at times quite challenging work.
It can all appear a bit daunting and I suspect that most applicants really struggle to see what they can contribute.
When I was applying for a training contract just over 20 years ago, the joke was always about how much time a trainee spent photocopying. Trust me, it just does not happen any more. Maybe that’s because the photocopying machines are much easier to use.
The reality is that when working on a deal, there are many different things that need to be done. Some are time-consuming, some are challenging, some can be done quickly and some are more process-driven.
When we put a team together to work on a deal, we need people at all levels to give clients the overall service they need.
The important first step for any trainee is to build a strong relationship with their supervisor, who will be the most likely source of work, at least initially, during their seat in a team.
Part of this involves showing a genuine interest in whatever work the team does. This can seem quite daunting but in reality, once you are working with a highly motivated team of gifted individuals, it is relatively easy to be inspired by them and to find yourself being interested by something that you had never considered before.
Having shown an interest and become involved in a deal, the golden rule is to make sure that all the work you do is completed with the same level of care and attention.
The first piece of work you are asked to do might seem quite dull or even easy. The point is that you may not be trusted with more challenging work if you do not complete the easier work to a good standard.
Now more than ever it is important for trainees to make the most of their two years before they qualify and the best way of doing this is to get involved in as wide a variety of work as possible.
This does not always involve high-profile work. Sometimes, you can learn the most from being involved in something that at first seems quite mundane.
Certainly, it is the case that trainees get much greater exposure to work than they used to and much greater exposure to clients.
This is fantastic because as a trainee you are likely to learn as much from clients as you do from your colleagues in the firm. This is particularly the case if you are selected to go on a client secondment.
Of course, workloads can be unpredictable, but if you are hoping to spend lots of your time photocopying, then you need not apply.