Out-Law Analysis 3 min. read
13 Jun 2023, 10:36 am
Historically, UK listed companies have struggled to remain competitive with financial buyers in the UK mergers and acquisitions (M&A) market.
In the good times, ready access to cash and debt has given financial sponsors the upper hand in sales processes. Listed corporates, particularly those on the main market, have had to compete in the context of the Financial Conduct Authority’s (FCA) listing rules, which require significant transactions to be sanctioned by shareholder approval.
When evaluating their options, sellers have understandably viewed those requirements as adding delay and process, additional public scrutiny of the transaction and therefore an increased execution risk. Financial sponsors have offered a more straightforward proposition and, often, a shorter route to completion. But all that could be about to change, through a combination of shorter term general economic conditions and longer-term regulatory reform.
The current global economic headwinds are much publicised. One key impact of these is on the availability of debt, which has become scarcer and more costly. Financial sponsors’ cost of capital has been more impacted by these factors than that of listed companies. This, combined with a listed company’s ability to realise cost synergies from M&A activity could, in the short term, put UK listed companies on the front foot in sales processes during the remainder of 2023. This is particularly the case for those with existing debt facilities locked-in or cash on balance sheet ready to be deployed.
The scope for potential change in listed company regulation has rarely been so great
Regarding the longer-term and regulatory environment, the scope for potential change in listed company regulation has rarely been so great. In May 2023, the FCA published a consultation paper (53 pages / 671KB PDF) setting out some proposed listing rule reforms. The background and context to this paper is a clear downward trend in the number of companies looking to list in the UK.
The Hill Review started the process of analysing the UK’s equity markets for competitiveness and the FCA issued a discussion paper last year indicating the direction of travel was towards a single listing segment. In addition, the Secondary Capital Raising Review is seen as a “once-in-a-generation opportunity for meaningful reform” of the rules around listed companies raising secondary capital, and the FCA is starting the process of streamlining those rules.
Many of the changes in the FCA’s recent consultation paper are aimed at making the eligibility requirements for listing less restrictive to attract a wider pool of companies to list. Others are aimed at reducing the perceived burden of being listed, and it is these changes that could bring listed companies back into contention in the M&A market in the longer term.
If the FCA’s proposals are implemented, the significant transactions regime in the listing rules will be radically re-written. The principal change will see the requirement for a mandatory shareholder approval and shareholder circular for Class 1 transactions removed. Listed companies will have to make an announcement of the key terms of a transaction, but only where the Class 1 thresholds are hit – rather than the current Class 2 thresholds. Shareholder votes and circulars in relation to reverse takeovers will remain.
In addition, there will be a reduced role – and therefore reduced cost to listed companies – for a sponsor, which will no longer have to submit a private declaration to the FCA or ‘sign-off’ on broader compliance with the listing rules.
The requirement for the thresholds at which a prospectus is triggered are also under review. Again, the driver for this change is a desire to reduce the time taken and costs incurred by listed companies when raising capital at scale. There is some way to go on this process: specific rule changes won’t be consulted on before 2024. But it is highly likely that in the future listed companies will have considerably more flexibility to issue shares without the requirement to issue a prospectus than the current 20% of issued share capital threshold that exists today.
So where does this leave listed companies in the M&A market? In the shorter term, those that have cash resources or committed facilities should find themselves more competitive with financial sponsors simply by virtue of being less impacted by general economic trends. This is particularly the case in consolidation plays where there are cost synergies available to a corporate buyer.
In the shorter term, listed companies will still be hamstrung by the listing rule requirements for significant transactions. However, the direction of travel on the regulatory front is towards an environment in which being listed will not, in and of itself, add additional regulatory hurdles to an M&A process. The challenge for corporates and their business development teams is to make sure that internal governance structures and decision-making processes are capable of operating at pace, ready to take advantage of the new environment.