PORTUGAL: An Introduction to Corporate/M&A: The Elite

General Overview of the Market and Trends

Portugal’s M&A market experienced a slowdown in 2024. Publicly available databases evidence a significant decrease in M&A deals, both in terms of volume and value. The number of deals, at 602, was 17% less than that of 2023, and had a total value of EUR12.6 billion, corresponding to a decrease of approximately 16% vis-à-vis 2023.

Factors such as economic uncertainty, geopolitical tensions and political instability at national level contributed to a more cautious environment for deal-making and to the deceleration of M&A activity.

Macroeconomic conditions, notably inflation and interest rates, also played a critical role. Persistent inflation in the Eurozone eroded purchasing power and increased operating costs for businesses. Consequently, there was a greater scrutiny of deal valuations, with buyers factoring in higher discount rates to account for increased financial risk. Despite the decrease in interest rates that began to be felt at the beginning of the second half of the year, they were still high, leading to a preference for equity financing over debt, which in turn affected deal structuring.

In terms of foreign investment in Portugal, M&A databases show a slight decrease in terms of the number of deals and the continued dominance of Spanish investors, followed by UK, France and the USA.

The most attractive/dynamic M&A sectors were real estate/tourism, renewable energy, infrastructure, and technology.

Looking ahead to 2025 from a broad perspective, we expect the Portuguese M&A market to rebound and initiate an upward trajectory, notwithstanding the still unstable international landscape.

Technology and renewable energy sectors are likely to remain at the forefront, driven by continued digital transformation and a global push towards sustainability.

Additionally, the healthcare sector is expected to be subject to further consolidation, as companies seek to capitalise on economies of scale and enhance their competitive positioning.

The increasing interest from private equity investors, both domestic and international, is also expected to play a significant role in driving M&A activity in 2025. With ample dry powder and a growing appetite for Portuguese assets, private equity firms are likely to be key players in the market, particularly in mid-market deals.

Technology-enabled M&A processes

Technology plays a transformative role in enabling and streamlining M&A processes. By leveraging these technologies, companies can enhance the efficiency, accuracy, and success of their M&A processes, from deal-sourcing, to virtual data rooms, AI-powered due diligence tools or post-merger integration solutions.

(Re)allocation of risk: W&I insurance

Warranty and Indemnity (W&I) insurance has become an increasingly important tool in the M&A process, providing buyers with protection against potential liabilities arising from breaches of warranties and indemnities. In Portugal, the use of W&I insurance has grown significantly in recent years, driven by the increasing complexity of deals and the desire to mitigate risk.

The advantages of W&I insurance are manifold. For buyers, it provides a safety net, allowing them to proceed with confidence even in the face of potential risks. For sellers, it can facilitate a smoother transaction process, as the presence of W&I insurance can reduce the need for protracted negotiations over liability issues. Overall, the growing adoption of W&I insurance and other risk protection products, such as tax insurance or litigation insurance, is expected to continue to enhance M&A activity in Portugal, making deals more attractive and manageable for all parties involved.

New Regulations impacting M&A deals

At the national level, Portugal has introduced several regulatory changes aimed at streamlining the M&A process and enhancing the attractiveness of the country as an investment destination. These include reforms to the corporate tax regime, which have reduced the tax burden on companies, and changes to the insolvency framework, which have made it easier for distressed companies to restructure and attract new investment.

At the European Union level, the implementation of the Digital Markets Act (DMA) and the Digital Services Act (DSA) is expected to have a significant impact on M&A activity, particularly in the technology sector. These regulations aim to promote competition and curb the dominance of large tech companies, potentially leading to increased M&A activity as smaller players seek to consolidate and compete more effectively.

Additionally, the EU’s Green Deal and associated regulations are likely to drive further M&A activity in the renewable energy sector, as companies seek to align with the bloc’s ambitious climate targets and capitalise on the growing demand for green energy solutions.

Decoding cross-border M&A

Effective 12 October 2023, the EU Foreign Subsidies Regulation (FSR), set forth in Regulation (EU) 2022/2560, introduced a mandatory concentration control framework aimed at addressing the impact of subsidies from non-EU countries, thereby adding an additional key element to cross-border M&A. Dealmakers must now incorporate the FSR regime into their considerations for cross-border M&A, alongside existing merger control and foreign direct investment (FDI) regimes.

Under this new regime, notification is mandatory whenever:

• there is a concentration (as defined in EU Law for merger control purposes);
• at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate turnover therein of at least EUR 500 million; and
• the transaction involves aggregated foreign financial contributions of more than EUR50 million to any of the concerned undertakings in the last three years.

For the purposes of FSR, there is a "foreign financial contribution" whenever a third country provides, directly or indirectly, a financial contribution providing a benefit to an undertaking engaging in an economic activity in the EU internal market. "Foreign financial contribution" is thus a very broad concept, in line with the concept of "state aid" for EU member states, which goes beyond subsidies, rather encompasses any advantage (including transfers of funds, tax exemptions, debt forgiveness, provision or purchase of goods or services, just to name a few) coming from public authorities, the central government and even private entities whose actions can be attributed to the third country.

Navigating the intricacies of the FSR regime shall continue to pose a formidable challenge for dealmakers, demanding extensive background work, information gathering on foreign financial contributions, and the implementation of tracking systems. Taking the FSR lightly is, however, not an option, for failure to notify or await clearance may attract fines of up to 10% of the parties’ global turnover.

As regards Foreign Direct Investment (FDI) rules, Portugal operates under Decree-Law 138/2014, of 15 September 2014, which established a system for safeguarding strategic assets.

The Portuguese government retains the power to block transactions that could jeopardise national defence, national security or the provision of essential services in energy, transport and communications sectors whenever control over companies or assets is being acquired by entities from non-EEA countries. In case the government opposes the operation, all legal acts and deals related thereto are null.

For the sake of legal certainty, acquirers can request in advance confirmation from the government that it will not oppose the projected deal, though such notification is left to the discretion of the parties.

Despite being in force for over a decade, there are still no public decisions regarding FDI in Portugal. Considering the significantly negative impact of an FDI rejection and growing EU-wide harmonisation in the field, dealmakers must be mindful of the FDI framework whenever non-EEA entities are acquiring parties.

Dealmakers must strategically weave the FSR regime into the intricate tapestry of cross-border M&A, aligning it with both merger control and foreign direct investment (FDI) regimes. These regimes collectively shape the regulatory landscape, requiring astute navigation for successful cross-border transactions.