In the 6th edition of our joint webinar sessions held with the Food and Drink Federation, Aon’s Richard Fawcett, UK Industry Leader for Food, Agribusiness and Beverage (FAB), Dominic Rose, EMEA Head of Corporate Client M&A, and Sunneth Lawrence, Client Manager, Intellectual Property Risk and Structured Solutions, discussed how food and drink businesses could use insurance-backed solutions to support their M&A and general corporate strategy, as well as transfer Intellectual Property (IP) risks.
“Organic growth can be difficult to achieve in the current inflationary environment,” said Fawcett. “Companies are increasingly looking to leverage M&A and IP to accelerate growth and remain competitive.”
Supporting FAB Clients in Their M&A Strategy
Understanding how best to approach an M&A deal or standalone potential growth opportunity and create value requires clear vision across:
- Due diligence: developing an improved understanding of business-critical factors, including cybersecurity and technology, intellectual property, people-related issues (such as talent, pensions, benefits and culture), climate risk and commercial risk and insurance.
- Risk transfer: through improved diligence insights, addressing known and unknown risks in a deal to help create value upside.
- Capital efficiency: with access to risk capital, creating balance sheet flexibility by unlocking provisions or improving cashflow through a variety of insurance-backed solutions focused on IP, credit, tax and other forms of contingent risk.
Insurance markets provide an alternative capital source to de-risk, facilitate and enhance the returns from M&A transactions. Warranty and indemnity (W&I) insurance can cover inaccuracies in the seller’s statements of fact to the buyer as to the affairs of the business being sold, while a growing number of identified issues are being addressed through tax and contingent risk insurance. W&I insurance has grown significantly over the last 20 years, providing a multitude of benefits, not least allowing sellers to achieve clean exits from their disposals (thereby increasing their efficiency of capital allocation), while for instance allowing the buyer to maintain the integrity of ongoing commercial relationships with retained key management in the target as well as other business-critical trading partners.
But it is in the world of already-identified issues where the role of insurance has grown most significantly in recent times. “In the last 18 to 24 months, the single biggest development in the M&A insurance market is the very rapid expansion in the use of tax insurance and other forms of contingent risk insurance,” said Rose. “This has become an effective way of expediting and facilitating M&A negotiations.” While W&I insurance covers the ‘unknown unknowns’ in an M&A transaction, tax liability insurance, for example, helps companies reduce or eliminate identified exposures to losses arising from a successful challenge by a tax authority to the expected tax treatment of a proposed or historical transaction. Nor are such products limited to M&A transactions, and these are increasingly being used as balance sheet optimisation tools to address a wide array of concerns arising from business-as-usual activities such as restructurings, cross-border cash repatriation and availability of tax losses.
Contingent risk insurance, meanwhile, is an even broader concept to address similar, non-tax, situations, where clients seek certainty through an expert legal opinion back-stopped by insurance to cover the low-risk probability of an unexpected outcome having a catastrophic impact on their business.
IP Liability Insurance and Lending: From Downside Protection to Growth Encouragement
Intellectual property includes patents, trademarks, trade secrets, copyrights and software. Within the food and drink industry, intellectual property covers everything from branding to recipes – patents even extend as far as the packaging of products. Patent disputes within the food and beverage manufacturing space in the US are widespread: on average there are over 150 cases a year, with an average duration of close to 350 days and mean damages of over $13 million. Notably, 78% of cases result in settlement, showing the high likelihood of meaningful monetary costs being paid in the event of a dispute. Energy and sports drinks are areas witnessing high levels of disputes, seeing over 300 cases in the last 10 years in the US alone.
IP liability insurance protects companies by insuring against:
Direct infringement: Coverage for potentially catastrophic IP infringement claims including pre litigation claims; covering legal costs and expenses, settlements and damages; appeals and counterclaims.
Contractual indemnity: Coverage for IP-related contractual indemnities provided to a third party (customers, licensees, distributors etc.).
IP rights validity: Coverage for the legal costs and expenses to defend IP invalidity claims or IP ownership challenges.
Contract breach: Coverage for defined circumstances where the insured is alleged to be in breach of provisions of an IP agreement, including non-payment of royalties, breach of confidentiality, and use of IP outside agreed terms.
IP enforcement: Coverage for the legal costs and expenses to pursue a third party for IP infringement.
Collateral protection insurance, frequently referred to as IP lending, insures the value of the collateral in a transaction, which pays on failure to realise its value in the event of a default. “Everyone can agree that IP has value, but with early-stage businesses that have limited tangible assets, they often struggle to realise the value of their IP,” said Lawrence. IP lending is commonly used to complement equity finance, serving as a way to provide cashflow to support the growth of scale-up businesses.This has successfully opened a new source of competitively-priced debt financing for businesses that are IP-rich.
Watch the full webinar here
For further questions, please contact Richard Fawcett
These are the views of Aon. They do not necessarily reflect the views of The Food & Drink Federation.
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