UK public M&A market favours bidders going into 2022

Julian Stanier and Adam Cain of Pinsent Masons made the predictions in a new report by Thomson Reuters’ Practical Law Company (PLC) which looks at the trends and highlights from the UK public M&A market in 2021.

According to the report, the number of firm offers made under the UK’s Takeover Code, for companies listed on either the London Stock Exchange’s Main Market or AIM, rose to 55 in 2021 compared to 40 in 2020. Private equity houses or other investment companies or funds accounted for 33 of those offers, with 21 of the offers being valued at over £1 billion.

Of the firm offers made during 2021 that had not lapsed or been withdrawn by the end of the year, 28% were from UK incorporated bidders and 63% from non-UK bidders. Four bids involved both a UK incorporated bidder and a non-UK bidder. In 2020, 34% of firm offers came from UK incorporated bidders. US bidders made 21 firm offers for UK public companies in 2021, with the total value of those offers exceeding £34bn. Last year also saw an increase in the number of UK public companies subject to multiple bids, according to the report.

Both Stanier and Cain said they expect activity levels in the UK public M&A market to be “strong” throughout 2022.

Stanier said: “We are seeing sustained levels of confidence from prospective purchasers that have managed to adapt successfully to the significant operational and strategic challenges that the Covid-19 pandemic has created for them. The CEOs of these prospective purchasers are seeking to execute transformational public M&A transactions in order to ensure that they remain firmly on a strong growth trajectory. There is significant demand for well-managed UK listed companies that have demonstrated resilience over the course of the Covid-19 pandemic and I don’t see that situation changing during the course of 2022.”

Cain said: “I am seeing a number of potential purchasers that are seeking to take advantage of the market dislocation and the low multiples that a number of UK listed companies are trading at by successfully executing Takeover Code governed transactions in order to implement their stated strategy and deliver on their growth agenda. Market conditions are favourable for potential bidders at the moment in terms of inexpensive access to capital. Whilst differences in valuation persist and the impact of the Omicron variant could have an impact on certain potential transactions, I consider that market participants will continue to adapt to the ‘new normal’ and demonstrate their resilience by executing strategically important public M&A transactions.”

Stanier said that the mismatch between the perceived underlying value of a company and their prevailing share price will continue to attract private equity funds to the UK public M&A market in 2022, and that he anticipates continued strong activity in the real estate sector, where 13% of the firm offers made in 2021 were recorded – the joint highest of any sector.

“Listed real estate vehicles are continuing to present a significant value proposition for prospective purchasers as the sector seeks to adjust to the changing circumstances that have been heralded by the Covid-19 pandemic,” Stanier said. “There is a strong level of demand from existing listed companies for well managed assets in the real estate sector and we see the continued interest from private equity funds in the sector being a longer-term trend given the significant amounts of capital that they have at their disposal.”

“Given the potential for a widening gap in the price expectations of potential bidders and target companies, there may be an additional degree of hostile activity in the sector,” he said.

Cain said he expects activity levels involving UK listed oil and gas companies to be “extremely buoyant” in 2022 too.

“I am seeing sustained levels of interest from prospective purchasers in companies in the sector as they seek to take advantage of depressed share prices,” Cain said. “The sector appears ripe for consolidation as companies are seeking to increase operational efficiencies and drive down overall costs.”

“I expect a number of AIM listed companies in the sector to be subject to sustained levels of interest as prospective purchasers are actively seeking meaningful synergies in order to add the necessary scale to their existing businesses. As oil and gas companies attempt to navigate the energy transition, those listed companies that have invested in new technologies and lower carbon energies such as renewables and hydrogen will be of interest to potential bidders,” he said.

According to the PLC report, there was a rise in the number of bidders reliant on debt financing for deals in 2021. It said debt facilities were used by bidders in 30 of the 55 firm offers to fund or part-fund bids, up from 18 in 2020.

Stanier said: “Debt finance has been utilised by a large number of bidders in the UK public M&A deals that we have seen during the course of 2021. This continues a trend that we have seen over the course of the last four years as a number of private equity funds in particular have used debt finance to consummate their proposed transactions. Debt syndication has been a staple feature of the UK public M&A market for a number of years and we may see a larger group of prospective participants in the syndication process as those lenders that may be perceived as ‘non-traditional’ seek to extract value from the UK public M&A process.”

The PLC report also detailed a decrease in the formal sale processes announced in 2021 compared to 2020. The formal sale process (FSP) allows target companies to announce that they are actively seeking one or more potential bidders prior to receiving an offer. The number of formal sale processes announced dropped from 13 in 2020 to five in 2021, PLC said, and the report also highlighted that more than 75% of formal sale processes announced between 19 September 2011 and 31 December 2021 have been terminated without an offer, with around a fifth having resulted in firm offers during that period.

However, Cain said there remains a lot of interest in formal sale processes across the market.

Cain said: “When considering a company’s long-term direction, the directors of a target company can plan flexibly using the key dispensations from the Code that the FSP regime enables both bidders and target companies to take advantage of. The importance of these dispensations should not be underestimated.”

“There is also a sustained level of interest in FSPs from companies that want to extract maximum shareholder value and facilitate a degree of competition between potential bidders. The value gap between the expectations of a management team and a sophisticated prospective purchaser is still very significant given the subdued nature of the share prices of companies in certain sectors. A natural consequence of these differences may well be that indicative offers are made which management teams consider to be at a material undervalue compared with the underlying growth potential of the company,” he said.