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Andrew Hart

Private equity goes public


Andrew Hart from Bryan Cave writes on UK private equity firms switching to public companies.

Public company M&A in the UK requires a brave heart and a deep pocket. A target friendly regulatory landscape coupled with the need to incur significant transaction costs without any guarantee of success means that a public company acquisition may not be option A for most private equity firms. However, after years of subdued activity since the financial crisis, and with a lack of supply at the top end of the private company market, it appears that PE firms are starting to look to the public markets once more. 

Regulatory landscape

The City Code on Takeovers and Mergers (“Code”) provides the regulatory framework for most takeovers of companies listed on the Main Market or AIM. In 2011, following the contentious takeover of Cadbury by Kraft in 2010, a range of changes was made to the Code. The changes were intended to redress the balance of power between bidders and targets, especially in the context of hostile takeovers. The key changes were as follows: 

• The obligation to identify potential bidders: The target company is obliged to make a public announcement identifying all known potential bidders if there is a leak or speculation regarding a potential bidder. As such as soon as a PE bidder makes any sort of approach to a target company (however informal) they run the risk of being named as a potential bidder at an early stage; 

• Put up or shut up: A public announcement identifying a potential bidder triggers a 28 day deadline at the end of which the bidder must either announce its intention to make an offer or that it no longer intends to do so (in which case it will be precluded from bidding for six months). This gives only a short window for a PE houses to achieve the level of funding certainty required before an intention to make an offer can be announced;

• Banning deal protection measures: A ban on entering into any “offer-related arrangement” was also introduced. This included any type of implementation agreement designed to place obligations on the bidder and target to proceed with the takeover in an agreed manner and, more significantly, placed an outright prohibition on break fees. Therefore, there is no way for a bidder to recover their costs in the event that their bid is defeated, often at an advanced stage, by a rival bidder; 

• Disclosure of offer financing: The new rules oblige bidders to only announce a bid after ensuring that it can fulfil in full any cash consideration which may be offered. In addition, the offer document (which must be posted to shareholders within 28 days of the announcement of a firm intention to make an offer) must contain a detailed description of such funding arrangements (including repayment terms, interest rates, security, a summary of key covenants, etc.). Copies of executed financing documents must also be available from the bidder’s website.

The resurgence of PE

Notwithstanding the changes made to the Code, private equity interest in publicly-traded targets picked up in 2015, not only in terms of the number of deals but also in terms of deal size (over half of the private equity backed firm offers in 2015 had a deal value of over GBP100 million). In 2015, 13 firm offers for Main Market and AIM traded targets out of 52 announced were backed by private equity bidders representing 25 per cent of the total figure (a marked increase on the equivalent numbers for 2014). There was also a shift in private equity bidders targeting Main Market: in 2014, only two firms’ offers were for Main Market companies, however, in 2015 this number rose to six.*

Reasons for the change

So why is private equity interest in public targets increasing? There are a number of possible reasons: 

• As global economies generally recover from the financial crisis a return to health of M&A activity has resulted in more deals in all areas (both public and private); 

• With the passage of time bidders have become used to the new Code rules and have been able to refine their tactics accordingly. For example, conducting as much preliminary due diligence as possible before making any sort of approach to the target and taking greater steps to limit those with knowledge that such an approach may even be under consideration; 

• The flexibility shown by the Takeover Panel by showing a willingness to grant extensions to the put up or shut up deadline beyond the initial 28 day period (thus providing more time to complete due diligence and arrange financing); and 

• Using creative ways to increase the potential of success, like reverse break fees, which are not currently prohibited and can be structured such that they are payable only if, for example, directors do not change their recommendation to shareholders. 

Conclusion

It is too early to tell whether 2016 will follow the upward trend in public to private M&A, but the recent closing of a private equity backed MBO of InternetQ plc for a value of GBP72.2 million suggests that appetite for these types of deal remains strong. Whilst it could never be said that a public company takeover will be easy (particularly when compared to a private deal) if valuations of publicly-traded companies (or the quality of the underlying assets) are more favourable than those in the private sector you can be sure that the appetite of PE to do the deals will remain. As they say, where there’s a will (or in this case a large pool of PE funds making marginal or no returns from the debt markets) there’s a way…
 


*Figures taken from ‘Public M&A Trends and Highlights 2015: A review of takeover offers for Main Market and AIM companies in 2015’, published by Practical Law.

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