Out-Law News | 19 Jul 2021 | 8:26 am | 6 min. read
UK public takeover experts are anticipating an increase in mergers and acquisitions (M&A) activity in the second half of this year, as both listed and unlisted companies pursue strategic growth opportunities.
According to the latest PLC What’s Market Public M&A trends report, public M&A activity continued to increase in the first six months of 2021, following the drop in such activity when the Covid-19 pandemic first hit. There were 24 firm offers announced for listed companies subject to the Takeover Code during this period, double the number announced in the first six months of 2020. Of these, 11 involved main market companies, and 13 AIM-listed companies.
Public M&A expert Adam Cain of Pinsent Masons, the law firm behind Out-Law, who contributed to the report, said that companies “now appear much more prepared to deploy capital” than at earlier stages of the pandemic, with strategic M&A transactions offering a route to tangible growth. He also anticipated an increase in private equity bidders, particularly those based overseas, seeking to take advantage of favourable market conditions, with ‘robust’ levels of activity expected during the second half of the year.
“Brexit uncertainty impacted underlying equity valuations and depressed the value of sterling over the course of 2020,” he said. “Despite the possibility of a ‘no deal’ Brexit being avoided, a number of UK stocks still appear to be undervalued, presenting the chance for sophisticated market participants to explore opportunistic bids.”
“Although the value of sterling has recovered somewhat, conditions still appear to be extremely fertile for overseas purchasers and, in particular, I see the trend of US bidders seeking to acquire UK publicly-listed companies continuing throughout the remainder of 2021. It is clear that private equity funds are continuing to seek potential opportunities to acquire UK companies that are subject to the Code, given the perception in the market that the depressed share price of certain companies does not adequately reflect the opportunities presented by the inherent value of their underlying assets,” he said.
Despite the possibility of a ‘no deal’ Brexit being avoided, a number of UK stocks still appear to be undervalued, presenting the chance for sophisticated market participants to explore opportunistic bids
Commenting on the sustained interest of private equity funds in UK public M&A activity, Cain added: “Private equity funds are now much more comfortable operating within the particular regulatory architecture that the Code imposes and they are able to execute transactions in a sophisticated fashion, whilst demonstrating the ability to move quickly to secure high quality assets, particularly in the context of competitive situations”.
“Given the high level of competition between prospective purchasers in a private M&A context, particularly for highly coveted assets, I expect to see private equity funds continuing to explore potential bids for public companies across a variety of different sectors,” he said. “The ease of access that private equity funds have to capital means that they are well placed to successfully implement their acquisition strategy.”
Cain also considered that public M&A activity had been “characterised by cheap debt” and that he “expected that trend to continue, given that low interest rates are expected to continue in the medium term, which will continue to drive market activity”.
Two thirds of the bids tracked by PLC in the first half of this year were by private equity or other fund-backed bidders, and over half of those involved a US-based bidder.
In Adam Cain’s view, the UK oil and gas sector is one that “appears primed for further public M&A activity”, given current market conditions. He cited “the major changes that have taken place in the UK energy market in the recent past and the continuing influence of private equity funds in the sector, coupled with the fact that a large number of oil and gas companies have underperformed over the longer-term by trading significantly below their core net asset value”.
Likely potential target companies for takeover activity include “a large number of smaller AIM listed companies that have been adversely impacted by their continued exposure to the inherent volatility in oil prices”. These smaller listed companies “may face opportunistic bids from interested suitors that may be perceived by target management as significantly undervaluing their longer-term prospects, despite the subdued nature of that company’s share price in the medium-term,” Cain said.
Changes to the Takeover Code, which governs bids for UK public companies and some private companies, came into force on 5 July 2021. These changes, a number of which relate to conditions to offers and the offer timetable, will “fundamentally change” the way in which contractual offers are undertaken, particularly in respect of regulatory clearances and official authorisations, Cain said.
“The fact that all conditions to an offer now need to be satisfied by a date known as the ‘unconditional date’, coupled with the fact that the acceptance condition can only be satisfied once all other conditions to the offer have been either satisfied or waived, signals quite a significant shift in prevailing market practice relating to the conduct of contractual offers,” he said.
“One helpful element of the changes to the Code is the fact that a bidder may wish to stipulate an unconditional date that is earlier than day 60 by making an acceleration statement in their offer document that is sent to the target company’s shareholders or during the period of the offer. The usage of such a statement may well prove to be a popular option for certain bidders to pursue if they wish to expedite the offer timetable. Those bidders that want to ensure from a tactical perspective that target company shareholders accept their offer in advance of Day 60 in order to ward off the threat of interlopers in the context of a potentially competitive situation may decide to issue an acceleration statement during the course of the offer period – I await the use of such tactics with interest,” he said.
Among the changes to the Code, Cain said that the decision by the Takeover Panel to allow target company shareholders who have accepted an offer to withdraw that acceptance at any time before the acceptance condition is satisfied was one of the most significant. This would have “practical ramifications” throughout the offer period, he said.
“This arguably removes the tactical advantage that a bidder has had previously, given that if a bidder’s first closing date was stipulated as day 39, then withdrawal rights could never be exercised – which is a tool that we utilised during IP Group’s hostile takeover of Touchstone Innovations,” he said.
“A hostile bidder in particular may see its acceptance levels fluctuate considerably during the course of an offer period, although significant emphasis will continue to be placed on ensuring that irrevocable undertakings are obtained from key institutional shareholders and that they contain robust provisions such that those institutions will not seek to exercise withdrawal rights throughout the course of the offer period,” he said.
The fact that all conditions to an offer now need to be satisfied by a date known as the ‘unconditional date’, coupled with the fact that the acceptance condition can only be satisfied once all other conditions to the offer have been either satisfied or waived, signals quite a significant shift in prevailing market practice relating to the conduct of contractual offers
Among the trends Cain expected to continue into the second half of this year are the use of ‘all-share’ offers, particularly for highly valued companies, along with formal sale processes (FSPs), which allow target companies to announce that they are actively seeking one or more potential bidders prior to receiving an offer.
“Certain bidders which have a strong strategic rationale for executing a particular transaction may consider that an all-share merger offers them the most compelling deal structure to consummate a transaction which can be transformative for the shareholders of both the target and the bidder, enabling them to avoid the depletion of cash reserves whilst achieving significant synergies,” he said.
The use of FSPs has steadily increased in recent years after a slow start with 15 announced in 2020, up from 13 in 2019 and 11 in 2018, according to research by Pinsent Masons.
“The wider economic uncertainty in 2021 could well mean that the FSP becomes a more prominent feature of the UK public M&A landscape over the medium term. There are tangible benefits for companies wishing to undertake an FSP, particularly in the context of seeking to conduct a process which is competitive, in circumstances where the target company has received a great deal of interest from prospective bidders,” he said.
Cain said that the traditional prevailing market view of FSPs as “effectively an option of last resort” was beginning to change following the use of the procedure by engineering firm Renishaw. The company’s majority shareholders ultimately decided not to proceed with the sale, announcing that the bids that they had received were not in the best interests of the business.
“Over the remainder of 2021, a number of listed companies will face funding pressures which could lead to a greater use of the FSP,” Cain said.
“It will be interesting to see the approach that sophisticated bidders adopt in this type of scenario. I suspect there will be a number of interested parties that seek to launch an opportunistic bid upon the commencement of an FSP, which may not be met favourably by the board of a target company – who may consider that such an offer price is wholly inadequate by reference to their own views on what is an appropriate valuation,” he said.
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