In our first UK Public Markets Snapshot, we cover the most important market trends in the first half of 2021 and share our forecasts for H2.
Headlines in the first half of 2021
- Increase in consortium bids – big goals that attract sponsors as well as strategic or LP consortia.
- Increased challenges for investors in deals – Institutions as well as activists defend themselves against opportunism – “bumpers and grinders”.
- “Providing shade”” Controversy – appears misguided.
- “Stub capital”” back in fashion – new “liberated document” alternative to the prospectus.
- Last change of the transfer codeso – should be adopted quickly, including new terms and conditions, although the dynamics of competition and hostility will change. The new national security and investment law may have less predictable effects.
The UK and international M&A markets are booming, with a wave of takeover bids including P2Ps, competitive and hostile deals, and some areas where there is heightened controversy due to some regulatory changes:
- Get on Consortium offers, including what we do for CPI Property Group on their joint offer with Aroundtown for Globalworth (as the only recently successfully completed hostile offer) – requires passing the various “glick tests” required to achieve “joint bidder” status by the takeover body for control, governance, exit horizon, participation, financial and other contributions are. Many larger goals are pursued by a financial sponsor who works with either a strategic partner or a financial investor, usually one of its cornerstones.
- Our prediction: This trend in Consortium’s bids is likely to continue and grow, as are the most recent bids and potential offers for Morrisons supermarkets.
- Once the complications of consortium offers are overcome, key benefits include maximizing efficiency and pooling capabilities / synergy potential, sharing transaction risk and funding, which enables offers for larger goals, and
- It can be particularly important for certain key shareholders to maintain a continuing interest in Target through such structures (as in the most recent Signature aviation and Proactis Commandments). PE sponsors are likely to continue to seek out suitable trade buyers to work with on complementary prospects, assets, and expertise.
- Increase in Challenges for Investors on deals perceived as opportunistic of little value (including bids for Real estate in St. Modwen, Telit and Globalworth).
- Our prediction: Both open activists and long-only institutions will continue to oppose relevant offers (both publicly and behind the scenes, with regard to lobbying the board of directors, other shareholders and other interest groups) and strive for higher value in the medium term (“” Bringing a Deal to a Standstill “) or improved bid terms (” bumping the price “).
- Challenging a proposal can backfire, whether it be by triggering an auction process, destabilizing the target, its business and its stakeholders, or anchoring the original proposal so that it isn’t improved. Often times, the most effective challenges are preventive discussions about a manageable exit price prior to bidding, conversations with bidders, and behind-the-scenes goals – we’re seeing more of this activity.
- The latest controversy about “Providing shade“And certain target shareholders (who were sold out prior to an offer being announced) who complained that approaches to a target were not publicly announced earlier.
- Our prediction: the relevant rules in this area (including Rule 2 of the Takeover Act and the DTRs / Market Abuse Regulation) are already sophisticated and strict enough – any further tinkering could paradoxically lead to some offers not being made or given to shareholders and / or a worse one and the situation with regard to disclosure requirements and the orderly functioning of the market is more uncertain than at present. In our view, the rules are as mature and balanced as any other regime when it comes to private negotiation to some extent. Leaks seem to be the real problem.
- Recent trend (including recent PE bids for Telit, TalkTalk, and Proactis) the offer “Short capital”” (ie the chance for target shareholders to “roll over” and stay invested in the private bidding vehicle). Almost a quarter of company listings in the first half of 2021 included stub equity listings, a new high.
- Our prediction: “Stub Equity” will likely continue to be seen as a good option for PE bidders (who typically cannot offer conventional publicly traded equity) who want to attract all target shareholders interested in some form of ongoing participation in the target’s business and upside opportunities are :
- Although this may require a lot of preparatory work (possibly an assessment of the Takeover Act “Rule 24.11” as well as tax and other structuring required), it can be worthwhile for the target shareholders and bidders alike.
- The exact terms of the holdings may vary significantly depending on the preferences of the bidder and the target shareholder, including restrictions on transferability. The restriction on transferability can enable the bidder to avoid burdensome full prospectus requirements – the exception regulation introduced in 2019 by the Prospectus Ordinance, which provides for publication instead of a simpler “exempted document”, has only been applied in practice and has not yet been implemented. Key terms also include dividends and voting rights, appointments of directors, limiting ownership, and possibly adding debt-like features or twin-debt securities. We expect greater use of exempt documents in transactions where most of the target shareholders are UK residents, but the use of prospectuses when there are many international shareholders.
- The takeover code changes in terms of the terms of the offer and the schedule (summarized here) are now “live”:
- Our prediction: The changes are logical and welcome, so they should be “embedded” and quickly and easily accepted by the market. They will change the dynamics of competitive and hostile situations in which the levers available to bidders are handled differently, but have the same options as before (except that bidders will be less able to leave early in the process). The combination of the new National Security and Investment Act and the new code is less predictable. We have worked closely with:
- the City of London Law Society on sample adoption documents (and instructions, if any) relating to these changes, which are available here (including updated terms and conditions of the offer, an “accelerated notice” form, and guidance on cash confirmations and funding arrangements beyond the life of an offer – stop date) .
- key officials and other stakeholders about the scope, implementation and practical implementation of the preparation for the National Security and Investment Law, and ensuring that our customers are best placed to clarify the complexities that arise – and one particular area to watch will be how it interacts with the Takeover Code in practice.
Our recent experiences with public markets
- CPI property group on its initial investment in and subsequent joint hostile takeover (with Aroundtown) of Globalworth Real Estate Investments for € 1.57 billion.
- DBAY consultant on the £ 307 million acquisition of Telit Communications.
- Houlihan Lokey in connection with the £ 75 million acquisition of Proactis by Pollen Street Capital and DBAY Advisors.
- Innospec Inc. on the potential acquisition of Elementis worth $ 1 billion
- Numis securities in connection with Waterfall Asset Management’s £ 639m acquisition of Alternative Credit Investments (formerly Pollen Street Secured Lending).
- Marathon group on the US $ 8.3 billion initial public offering of FixPrice Group Ltd on the Main Market of the London Stock Exchange and the Moscow Exchange.
- PerkinElmer on the acquisition of Oxford Immunotec Global plc for US $ 591 million, the acquisition of Immunodiagnostic Systems Holdings for £ 110 million and the acquisition of Horizon Discovery Group for £ 296 million.
- SoftBank on its £ 1.6 billion investment in online retailer The Hut Group, the UK’s largest strategic technology investment this year.