PE-backed possible offers driving uptick in UK takeover activity

Although 2022 was a comparatively quiet year for private equity-backed takeovers of UK-listed companies, 2023 has seen an uptick in activity (in Q1 of this year, 55% of binding bids announced for UK public companies were from PE-backed bidders).

Of the PE-backed binding offers which have been announced year to date, the deals have tended to be smaller (the largest being a bid by a consortium consisting of Providence Equity Partners and Searchlight Capital Partners for UK events company Hyve for an enterprise value of £524 million / c. $660 million). However, it is clear that sponsors have also been expending meaningful time and effort in the early part of 2023 looking at potential larger cap targets. In particular:

• Network International, which has received approaches from a consortium of CVC Capital Partners and Francisco Partners and from Brookfield Asset Management, valuing the equity of that business at between £2.06 billion / c. $2.59 billion and £2.13 billion / c. $2.68 billion.
• Dechra Pharmaceuticals, which announced it was in early discussions with EQT regarding a potential offer that would value the equity of the company at c. £4.6 billion / $5.79 billion.

This week, after an extended period of engagement with John Wood Group, Apollo Global Management has announced it no longer intends to make a binding offer for the engineering services company. Coming so soon after Apollo’s talks about a potential takeover with The Hut Group also stalled, this is another reminder that whilst listed targets are receiving a lot of attention, getting through diligence to a firm offer can be difficult.

Whilst we see some PE sponsors wary of the UK market – largely driven by (i) the inability to impose deal protections that they may otherwise be used to (such as exclusivity or inducement or break fees) and (ii) a lack of familiarity with what can seem an unusual process - there is a sustained uptick from a range of investors considering UK public targets. UK-listed companies continue to trade at an attractive valuation – at least relative to equivalent businesses in the US – and after a year of subdued deal flow, sponsors are looking to find ways to get deals done. 

For sponsors with non-GBP denominated funds, the still weak pound (compared to long-term historical trends) provides an interesting opportunity (especially for those listed companies whose majority revenue is non-UK). Special situations and opportunities funds have also started to re-focus on the public markets – targeting capital constrained companies who are looking for a shift in strategy and are perhaps no longer wanting to continue down the path originally supported by their institutional shareholder base.

Approach with caution (and legal counsel!)…

We have set out below some of the high-level considerations we often talk to our PE sponsor clients about at the outset of the process:

Secrecy – The importance of secrecy when undertaking UK takeover transactions cannot be overstated. The UK Panel on Takeovers and Mergers (the 'Panel') is concerned about secrecy at all times until the earlier of: (i) an announcement being made (whether by the target or the bidder) of a potential offer for the target; or (ii) a binding offer being formally announced by the bidder for the target. 

A leak relating to a possible offer (including press articles or market speculation) or an "untoward movement" in the target’s share price (5% in a single day or 10% in total since the bidder first considered an approach, save where such movement is not as a result of actions relating to any potential bid) will trigger a mandatory requirement to consult with the Panel and the Panel is likely to require a ‘leak’ announcement to the market, which names the bidder.   Within 28 days of any such announcement, (unless an extension is agreed between the bidder, the target and the Panel), the bidder will be required to either: (i) announce a binding bid for the target or (ii) announce that it has no intention to make a bid for the target (which will generally prevent the bidder from making a bid for the target for six months following the announcement date).

This risk can often be managed and secrecy preserved if appropriate steps are taken, although a bidder cannot prevent the target board from making an announcement relating to a possible offer, or publicly identifying a potential bidder, at any time the target board considers appropriate – any preservation of confidentiality requires target cooperation.

Financial advisers – Even though a deal may have been sourced directly, bidders are required to appoint a financial adviser in the UK as the Panel places specific responsibilities on financial advisers to ensure compliance by bidders with the UK Takeover Code. One of the advantages of appointing a financial adviser early in the process is that it has the necessary systems in place to monitor a target’s share price movements and to monitor all relevant media for leaks or rumours relating to the target. 

The Panel also recommends that a bidder appoint a financial adviser early in the process, particularly so when a bidder is not itself resident in the UK. For example, if an announcement is required to be made to the market, it must be made immediately and the Panel will not be sympathetic to delay because of time zones. Before appointing a financial adviser, it is advised that a bidder ensures that such financial adviser has appropriate UK takeover expertise and most importantly, is able to provide the necessary ‘certain funds’ confirmation statement (see below). We can make appropriate introductions if helpful.

Management incentivisation – Often locking in management at the time of announcing a binding bid is seen as integral to the value proposition. Whilst the principle is exactly the same in the UK, in practice management team arrangements are often deferred until after the deal has completed and the target has been taken private.

Under the UK Takeover Code, ‘special deals’ are prohibited. A special deal is an arrangement afforded to one shareholder that is not afforded to all. As key management are often shareholders and/or optionholders in the target, albeit usually with pretty small holdings, they are caught by this rule, and in theory an equity alternative would need to be provided to all shareholders if offered to management.

The UK Takeover Code does recognise P2P transactions as an exception to the general prohibition, but with conditions. Depending on the significance and structure of the incentive arrangements, conditions can include disclosure, fair and reasonable opinions from the target’s financial adviser, independent target shareholder consent and/or Panel consent.

As bidders typically do not want to introduce additional conditionality into the deal and equity incentive arrangements are often sensitive to the managers concerned, parties generally avoid being in a position where compliance with this rule is triggered. Instead, discussions are postponed until after the deal completes and management get comfortable in the interim on the back of public statements by the bidder in the takeover documents to the effect that incentive arrangements will be put in place.

Intentions statements – Statements made by bidders regarding their intentions for the target’s business and employees going forward are likely the area currently subject to the most regulatory scrutiny. Generic statements of intentions were once the norm, but now much more precise language is required. Rules requiring disclosure of intentions have always been part of the UK Takeover Code, but as a result of the Kraft/Cadbury deal (where a manufacturing facility was closed and assets relocated following closing without any prior disclosure having been made) and increased national interest sensitivity, the Panel now takes a heightened interest in intension statements in advance of a binding bid announcement and continues to monitor compliance for a 12 month period following closing.

Financing – At the time of announcing a binding bid which is in cash or which includes a cash element, the bidder is required to have sufficient cash resources available to it to satisfy its obligations to pay target security holders in full on an (to all intents and purposes) unconditional basis. This is often referred to as the ‘certain funds’ requirement. Any financing - including any proposed debt financing – will need to be available on that basis and a bidder’s financial adviser will need to make a public statement to that effect. Where possible on mid-market transactions, funds often look to equity underwrite (and put debt finance in place before closing or immediately post-closing) to avoid the timetable impact of using debt financing for the underlying offer.

Where debt finance is required, as with private M&A, we are seeing PE sponsors turn more frequently to credit funds given the current state of the bank lending markets. On larger deals, a pool of credit funds is likely required to obtain sufficient debt commitments. A bidder should be mindful that this is likely to mean a more elongated diligence process in connection with the financial adviser’s ‘certain funds’ confirmation than a bank underwrite and seek to fast track this workstream.

Approaches to multiple potential finance parties (including debt providers and potential equity co-investors) also need to be carefully managed by your advisers as the Panel can require a public announcement to be made when discussions extend to more than a very restricted number of people (the ‘Rule of 6’) without their consent. Irrespective of the governing law or nature of the debt instrument for the proposed long term debt financing arrangements, an offeror would be well advised to append an agreed form English law governed ‘interim facility agreement’ to its commitment papers to fast track the ‘certain funds’ confirmation process.

Representative UK take private experience

Recent examples of UK take private deals that the team has advised on include: