Nick Davies, Brown Rudnick

Nick Davies was the lead associate on Brown Rudnick’s team advising international flooring company Victoria on an £175m preferred equity investment by Koch Equity Development last year.

Completing in November 2020, the deal was unique from a UK perspective, featuring a structure far more commonly found in US deal-making. For Davies, who qualified at Brown Rudnick in 2019, it was a chance to get a thorough insight into one of the firm’s key clients.

“It was a fantastic learning experience to work with such a pioneering management team that is so acquisitive”, he says.

That momentum was also affected by the pandemic, during which corporate lawyers were still adapting to the need to work completely remotely. “For me, a key limitation was that I missed out on the routine day-to day interaction with my colleagues”, Davies recalls. “I tried to mitigate this by arranging regular calls with colleagues but, as remote working means that you generally have less awareness of colleague availability than when working together in-person, colleague interactions were more limited.”

That said, Davies welcomed the time he saved on his commute, which meant navigating a time-consuming deal was less of a strain. “Although such benefit was offset by having fewer reasons to leave my home”, he quips. “In terms of future approaches to corporate deals, my remote working experience has proven that corporate lawyers can work well together remotely, providing that everyone is pulling in the same direction.”

The Koch Equity deal

The investment by Koch Equity Development consisted of an initial £75m of preferred shares, which have no voting rights, followed by up to £100m at Victoria’s option over 18 months.

Victoria is the UK’s largest carpet manufacturer and the second largest in Australia, as well as the largest manufacturer of underlay in both regions. Koch, founded in 1940, is one of the largest privately held companies in the US, with estimated annual revenues of $110bn and a presence in more than 70 countries.

For Davies, this was a deal to remember. “Being involved in a transaction that hasn’t been done before is always exciting because it is ground-breaking”, he says. “It was the first private investment in a public equity (PIPE) deal for a UK listed company structured using preferred shares, which is a more typical US-style structure – recent UK pipe deals have not involved the use of preferred shares. Preferred shares typically do not allow owners to vote but come with dividends that are paid out before common stock pay-outs and, crucially, they do not have a dilutive effect on other shareholders”.

Brown Rudnick’s corporate team’s understanding of the nuances of such a complex deal, thanks to their expertise within and knowledge of the US market, was crucial for the execution of this deal. Additionally, Brown Rudnick identified a shift as financial sponsors look to broaden their investment opportunity set beyond private growth companies and turnaround stories, to now include successful listed companies. The Victoria PIPE deal is an example of this shifting investor focus.

Brown Rudnick has advised Victoria for a number of years through several important transactions including its €274.1m acquisition of Keraben Grupo S.A from Tensile-Keraben Holdings and its acquisition of Interfloor Group for a total enterprise value of £65m using a vendor placing structure.

Challenges of a cross-border deal

But, despite the familiarity with the client, a deal of this complexity does not come without challenges. Lead partner Lena Hodge and the deal team had to work creatively and diligently to find solutions to a range of obstacles. As Davies explains, “some of the most important challenges involved the timing of various elements required to make the deal happen and ensuring that our client met all of its obligations under MAR [the Market Abuse Regulation]”.

“Ensuring that the rating agencies treated the preferred shares as equity as opposed to debt so as not to impact the ratings of our client’s bonds, which required considerable back and forth with Moody’s and Fitch”, he adds. “The cross-border nature of the transaction threw up several issues, with investors based in the US and the investee company headquartered in the UK”.

Brown Rudnick had to construct and draft a complex warrant instrument to capture all the commercial terms agreed between Victoria and Koch, which included technical warrant adjustments and exercise provisions that were heavily negotiated with Koch and their legal counsel. And, as Davies explains, “as the deal took place during the pandemic, deal management was less efficient, and this needed to be factored into timelines. For example, certificates of good standing – a completion deliverable – had to be ordered from Companies House many days in advance as their same-day order process was suspended as a result of lockdown restrictions.”

Alongside Koch’s preferred equity investment in Victoria, Koch entered discussions with Invesco Asset Management Limited to purchase off-market 12,500,000 ordinary shares while Victoria was seeking to conditionally buy-back off-market 8,546,095 ordinary shares.

Victoria’s £29.91m off-market share buy-back from Invesco Asset Management Limited and its associated funds, which were subsequently transferred into treasury, was also handled by Brown Rudnick.

Koch and Spruce House Partnership LLC also acquired certain shares from Invesco in connection with the transaction. Since the deal was first announced to the market on 22 October 2020, Victoria’s share price has increased by approximately 150 per cent to date, which has resulted in a considerable gain for Victoria, as well as its shareholders, in respect of the shares subject to the off-market share buy-back. While this is a complex deal structure, the example set by Brown Rudnick and Victoria in this deal demonstrates how PIPE deals can offer a solution to listed companies who have an investor wanting to exit, in a manner that protects the value of a listed company’s shares.

The concurrent nature of the deal demonstrates Brown Rudnick’s dexterity and ability to structure and negotiate complex and ground-breaking transactions for clients and their shareholders to the benefit of all parties.

It was imperative that the drafting of the transaction documents meant that the preferred shares would be treated as equity, and not as debt, from the perspective of the rating agencies of Victoria’s issued and traded bonds. This required extensive liaison with various parties, including Moody’s and Fitch. Brown Rudnick worked with Victoria’s accountants to see if, from an accounting perspective, the preferred equity could be treated as equity.

Brown Rudnick had to construct and draft a complex warrant instrument to capture all of the relevant commercial terms agreed between Victoria and Koch, which included technical warrant adjustment and exercise provisions that were heavily negotiated with Koch and their legal counsel.

Deal management was highly important in respect of understanding consequential limitations of third-party providers, for example certificates of good standing (a completion deliverable) had to be ordered from Companies House many days in advance as their same-day order process had been discontinued as a consequence of lockdown restrictions.

PIPE deals are already popular in the US but, as one of the first preferred share PIPE deals in the UK, it is expected that further deals of this type will follow. Brown Rudnick expects to see an uptick in private equity firms seeking out preferred equity investments in successful and well-managed UK listed companies that are acquisitive and operate in attractive growth markets.

These kinds of deals can be hugely beneficial for companies, particularly those listed on AIM, that are looking to raise growth capital or acquisition funding. Critically, preferred equity investments do not have a dilutive effect on shareholders by issuing ordinary shares on the basis that the preferred shares will be redeemed or converted at a share price greater than the current share price.

Nick Davies’ professional background

Davies has worked on a range of matters in the past, including the initial public offering and admission of the entire issued share capital of Trellus health plc to trading on AIM, the sale of RealVNC, a leading provider of remote access software, to Livingbridge, a mid-market private equity firm, and on various company-side share placings on AIM.

“I am really fortunate to have the opportunity to work across such an interesting variety of matters with different partners across the firm and the Victoria PIPE transaction was a real highlight’, he says.

“This deal presented me with fantastic experience in respect of working on matters at the forefront of the ECM industry and, given the anticipated increase in private equity firms seeking out preferred equity investments in UK listed companies operating in attractive growth markets, I believe that the experience from this deal will prove highly valuable for future work in this space. To be involved in such a ground-breaking deal with a great team is real privilege and I have learned a huge amount.”