UK M&A market rebounds from coronavirus crisis

Julian Stanier and Adam Cain of Pinsent Masons, the law firm behind Out-Law, were commenting after LexisNexis' latest market tracker trend report highlighted how the UK public M&A market recovered in the second half of last year following a sharp reduction in deal activity in the first six months (H1).

Across the whole of 2020, there were 100 transactions involving businesses listed on the London Stock Exchange's Main Market or AIM that were subject to the UK's Takeover Code. Of those, 42 transactions were firm offers to acquire companies, with 30 such offers made in the second half of the year (H2). The aggregate deal value of those offers was £32.7bn in H2 compared to just £2.6bn in H1.

More than three quarters of deal activity in 2020 occurred across just five sectors, with 26% of firm offers occurring in the technology, media and telecoms sector, 14% in healthcare, pharma and biotech, 14% in natural resources, 12% in real estate and 10% in financial services.

Stanier said that the growing level of deal activity can be linked to interest from consortiums of would-be buyers.

"Although consortium bids have historically been largely reserved for private equity purchasers, a number of examples in the market demonstrate that they can be used very effectively by trade buyers that are interested in acquiring different assets of the target business, notably the £7.2bn consortium bid for RSA Insurance," Stanier said.

"From a private equity perspective, factors such as the composition of the consortium are absolutely key, together with the allocation of control between the respective members of the consortium. Bidders also need to be acutely aware of potential regulatory or antitrust issues at a very early stage and to try and ensure a favourable recommendation from the target and support from its key institutional shareholders," he said.

According to the LexisNexis report, there were 13 announcements of 'formal sale processes' (FSPs) by businesses during 2020, eight of which came in the first half of 2020 as listed companies sought to adjust to the challenging trading conditions resulting from the Covid-19 pandemic.

An FSP is not formally defined in the Takeover Code but, in short, it enables a target company to announce, before it receives an offer, that it is actively seeking one or more potential bidders. Cain said FSPs are likely to remain a feature of the UK’s public M&A market in 2021.

"There are tangible benefits for companies wishing to undertake an FSP, particularly in the context of seeking to conduct a competitive process in circumstances where they have received a great deal of interest from prospective bidders," Cain said. "Given the challenges posed by Covid-19 to large swathes of the UK economy, we consider that companies will continue to explore the FSP route, particularly because an FSP can provide target companies with much greater control over the wider process before the timetable prescribed by the Code applies."

Stanier predicted that the resilience in the levels of public-to-private (P2P) transactions would be sustained into 2021 too. According to the LexisNexis report, 67% of all firm offers made in the market during 2020 were P2P transactions – those involving PE-backed bid consortia or financial investors.

"Market conditions still appear fertile for prospective private equity purchasers and we see take-private bids backed by investment funds and infrastructure funds being particularly prevalent," Stanier said.

"The attractive multiples that a number of publicly listed companies are currently trading at, together with a perception that certain companies in unfashionable sectors are undervalued, means that the private equity community will continue to actively explore strategic public M&A opportunities throughout 2021. We consider that further opportunistic public M&A activity is likely given the level of funds that private equity bidders have to deploy," he said.

The end of the Brexit transition period and commencement of new trading arrangements between the UK and EU will not quell continued interest in the UK public M&A market in 2021, Stanier said. In 2020, overseas bidders were involved in 26 of the 42 firm offers announced, according to LexisNexis, including in eight of the 10 largest transactions – those valued at over £1bn each.

"The continued conditions for sustained public M&A activity by overseas bidders appear to be in place, with a number of corporates seeking to utilise their strong balance sheets to fuel growth through strategic M&A as well as taking advantage of the ready availability of cheap debt and depressed share prices in certain sectors of the UK economy," Stanier said.

Cain said that while most firm offers for UK-listed companies in 2020 were made in cash, there is potential for more deals to be structured around 'all share' offers in 2021 as many buyers seek to preserve cash reserves in light of the continuing financial challenges posed by the Covid-19 pandemic.

He said: "Although these transactions add an additional degree of complexity to a public M&A process, from the thorny issues of valuation and corporate governance for the enlarged group, they can ultimately create long-term value for shareholders. Shareholders do, however, need to be convinced of the perceived synergies of the merger."