H1 2021 headlines 

1. Uptick in consortium bids – large targets attracting sponsor plus strategic or LP consortia.

2. Increase in investor challenges to deals – institutions as well as activists push back against opportunism – “bumpers and grinders”.

3. “Shadow bidding” controversy - appears misguided.

4. “Stub equity” back in fashion – new “exempted document” alternative to prospectus.

5. Recent Takeover Code changes – should be accepted quickly, including new Ts&Cs, though dynamics of competitive and hostile situations will change. New National Security and Investment Act may have less predictable impact.

Our view

The UK and international M&A markets are booming, with a wave of takeover offers, including P2Ps, competitive and hostile deals and some areas of heightened controversy amidst some regulatory changes:

1. Uptick in consortium bids, including our having acted for CPI Property Group on its joint bid with Aroundtown for Globalworth (being the only recent hostile bid to have completed successfully) – requires jumping through the various “Glick tests” involved in obtaining “joint offeror” status from the Takeover Panel regarding control, governance, exit horizon, shareholding, financial and other contributions.  Many larger targets are being pursued by a financial sponsor working with either a strategic partner or a financial investor, typically one of its cornerstone LPs.

• Our prediction: this consortium bidding trend will likely continue and grow, as indeed shown by the recent bids and possible offers for Morrisons Supermarkets.

• Once complications of consortium bids are navigated, key advantages include maximising efficiencies and pooling capabilities/synergy potential, sharing deal risk as well as funding enabling bids for larger targets, and

• May be particularly important for certain key shareholders to retain an ongoing interest in target through such structures (as shown on the recent Signature Aviation and Proactis bids). PE sponsors will also likely continue to seek out suitable trade buyers to partner with in terms of complementary outlook, assets and expertise.

2. Increase in investor challenges to deals perceived as opportunistically low in value (including on the bids for St Modwen Properties, Telit and Globalworth).

• Our prediction: both overt activists and long-only institutions will continue to push back against relevant bids (both publicly and behind the scenes, in terms of lobbying the board, other shareholders and other stakeholders) and hold out for higher value in the medium term (“grinding” a deal to a halt) or improved offer terms (“bumping” the price).

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• Challenging a proposal can backfire, whether triggering an auction process, destabilising the target, its business and stakeholders or entrenching the original proposal such that it is not improved. The most effective challenges are often pre-emptive discussions on a supportable exit price before an offer is tabled, in discussions with bidders as well as targets behind the scenes – we are seeing more of this activity.

3. Recent controversy around “shadow bidding” and certain target shareholders (who sold out prior to announcement of a bid) complaining about approaches to a target not having been publicly announced sooner.

• Our prediction: the relevant rules in this area (including Rule 2 of the Takeover Code, and the DTRs/Market Abuse Regulation) are already  sophisticated and strict enough – any further tinkering could paradoxically lead to some bids not being made or put to shareholders and/or a worse and more uncertain position in terms of disclosure obligations and proper functioning of the market than exists at present. In our view the rules are as sophisticated and balanced as any regime in allowing private negotiations up to a point.  Leaks appear to be the real problem.

4. Recent trend (including on the recent PE bids for Telit, TalkTalk, and Proactis) of offering “stub equity” (i.e., the chance for target shareholders to “rollover” and remain invested in the private bidding vehicle). Almost a quarter of firm offers in H1 2021 included stub equity offers, a recent high. 

• Our prediction: “stub equity” is likely to continue to be considered a good option for PE bidders (who can’t usually offer conventional listed equity) looking to win over any target shareholders keen on some form of ongoing participation in the target’s business and upside opportunities:

• Although it can involve a lot of up-front work (potentially requiring a Takeover Code “Rule 24.11” valuation, and tax and other structuring), it can be worth the subsequent rewards for target shareholders and bidder alike.

• The precise terms of the equity interests can vary significantly depending on both bidder and target shareholder preferences, including restrictions on transferability.  Limiting transferability can allow the bidder to avoid onerous full prospectus requirements – the exemption introduced in 2019 by the Prospectus Regulation, involving publication instead of a simpler “Exempted Document”, has only been used occasionally in practice and not yet gained widespread traction. Key terms also include dividends and voting rights, director appointments, putting a cap on participation, and potentially adding debt–like features or twinned debt instruments.  We expect more use of exempted documents on deals where most target shareholders are in the UK, but use of prospectuses where there are many international shareholders.

5. The Takeover Code changes on offer conditionality and timetable (summarised here) are now “live”:

• Our prediction: the changes are logical and welcome, so should “bed-in” and be accepted by the market quickly and easily. They will change the dynamics of competitive and hostile situations, where the levers available to bidders will be operated differently but amount to the same options in substance as were previously available (save that bidders will be less able to walk away early in the process). The combination of the new National Security and Investment Act and the new Code is less predictable. We’ve been working closely with:

• the City of London Law Society on specimen takeover documentation (and guidance where relevant) in respect of these changes, available here (including updated offer terms and conditions, form of “acceleration statement” and guidance on cash confirmations and financing arrangements beyond an offer’s long-stop date).

• key officials and other stakeholders on the scope, implementation and operation in practice of/gearing up for the National Security and Investment Act, and ensuring our clients are best placed to clear the complexities that arise – and one area to watch in particular will be how it interacts in practice with the Takeover Code.

Our recent public markets experience

• CPI Property Group on its initial investment in, and subsequent €1.57bn joint hostile takeover (with Aroundtown) of, Globalworth Real Estate Investments.

• DBAY Advisors on its £307m takeover of Telit Communications.

• Houlihan Lokey in connection with the £75m takeover of Proactis by Pollen Street Capital and DBAY Advisors.

• Innospec Inc. on its potential £1bn takeover of Elementis.

• Numis Securities in connection with the £639m takeover of Alternative Credit Investments (formerly Pollen Street Secured Lending) by Waterfall Asset Management.

• Marathon Group on the US$8.3bn IPO of FixPrice Group Ltd on the Main Market of the London Stock Exchange and the Moscow Exchange.

• PerkinElmer on its US$591m takeover of Oxford Immunotec Global plc, its £110m takeover of Immunodiagnostic Systems Holdings and its £296m takeover of Horizon Discovery Group.

• SoftBank on its £1.6bn investment in the online retail group The Hut Group, the largest strategic tech investment in the UK market this year.

Authored by Patrick Sarch and John Holme