M&A and Energy – Seven Tips for Israeli Energy Companies Who Wish to Expand Overseas

Barnea Jaffa Lande & Co.
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In 2020, clean energy companies led over 25% of all IPOs in Israel. With such monetary amounts being raised on the TASE, many clean energy entrepreneurs have turned their eyes to foreign markets to develop and expand their industry, especially in Europe and the United States.

In the US, the trend is all the more strengthened by President Joseph Biden’s new policy, including a USD 2.3 trillion plan to invest, among other things, in clean energy. Experts frequently cite the plan for its potential to increase M&A activity in the clean energy sector.

Here are seven tips for Israeli companies who wish to plan their entry into new energy markets overseas.

  1. Choose your strategy.

Picking the right targeted entity will depend on your investment and/or acquisition strategy.

You may choose to acquire a well-established local company with up-and-running projects, at a high valuation. In that case, the M&A deal may entail lesser risks, but the price will certainly be more expensive.

On the other hand, Israeli companies may decide to fund or invest in earlier stage companies, with a pipeline of projects under development, either in the form of convertible loans, credit line facilities, or investment in joint projects. This may entail additional risks of failure, but the valuation of the local company will be lower. 

  1. Pick the right people.

It may sound obvious, but choosing the right local partners is critical for the success of your enterprise. Acquiring a company abroad will require a great deal of trust in the founders of the entity who may become your employees and keep the target running for a few years after the transaction’s closing. Making sure your local partners are trustworthy and professional, and maintaining smooth communication with them on a daily basis, will be critical to succeeding in your market entry.

  1. Do your due diligence.

Performing due diligence on energy companies requires a deep understanding of both projects and M&A disciplines. The process will require the screening of dozens of EPC, O&M, co-development, and finance agreements. Picking the right firm with the right expertise is critical to avoid any painful blunders.  

  1. Understand tax incentives.

In the US particularly, any buyer wishing to enter the energy market must be well versed in the applicable tax frameworks that often structure every project deal. Any mistake at this level may trigger recapture events and tax credit losses, and cause you and/or the local target to indemnify tax equity investors.

  1. Prepare for regulatory routes and obstacles.

Clean energy sectors are always highly regulated. When starting your due diligence, consider the necessary regulatory routes (FERC, CFIUS, and HSR in the US) sufficiently in advance to avoid surprises and guarantee a timely and smooth completion of the deal. 

  1. Do not underestimate COVID-19 effects.

While the effects of COVID have not yet completely disappeared overseas, anticipate strong negotiations around material adverse effect (MAE) clauses. Also, beware of local regulations (such as the CARES Act in the US) that limit the chances of forgiveness of PPP loans when, for example, the relevant escrow mechanisms are not well put in place.

  1. Choose your advisors wisely.

Too often, Israeli companies choose their foreign advisors based on blind recommendations, without getting the chance to test such advisors beforehand.

You may wish to keep your Israeli counsel handy, to lead and supervise the deal for you, thus ensuring the best quality of service and (not less importantly) lower legal fees. Besides, every international law firm in Israel has its network of best friends. Relying on your well-established Israeli law firm will definitely save you from painful mistakes.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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