WHAT BID-SIDE TRENDS ARE WE CURRENTLY SEEING?
Who are the players...?
Corporate-to-corporate activity
- 2024 has seen a huge uptick in corporate-to-corporate activity, as corporates continue to search for growth and business confidence returns
- Bidders with strong cash balances and / or the ability to offer their own shares as consideration have been well placed to meet target boards’ value expectations
- We have been at the forefront of this uptick,with lead roles on high-profile takeover situations including Barratt / Redrow, International Paper and Mondi / DS Smith, Ageas/ Direct Line, Nationwide / Virgin Money, BHP / Anglo American, Bellway / Crest Nicholson, and others
US bidders?
- There have been some examples of US bidders this year – e.g., International Paper’s offer for DS Smith plc (after a contested bid, on which we advised DS Smith) and Keysight Technologies’ offer for Spirent Communications plc (again contested)
- However, and despite predictions that the undervaluation of UK businesses compared to their US peers would result in an influx of US bidders for UK targets, the more prominent trend this year has been Europe-UK (e.g., Ageas/ Direct Line, Carlsberg / Britvic) and UK-UK offers
PE remains active in private
- Whilst we have seen the return of some highvalue PE bids (e.g., Thoma Bravo / Darktrace and the bid for Hargreaves Lansdown by a CVC-led consortium), the untold stories of 2024 are the private negotiations occurring behind the scenes – PE activity is higher than what is public
- We are seeing bidders talking to targets in private, often downing tools when there is a valuation gap between their offer and target management expectation – albeit with some exceptions, PE remains broadly unable to offer the large premiums we saw when interest rates were at their lowest during the pandemic
- We expect to see an uptick of high-value PE bids as debt conditions are improving and PE is keen to use its “dry powder”
...and what are their key tactics, considerations and associated challenges?
Public "bear hugs"
- A public bear hug is where a bidder publicly puts out an indicative offer and price for the target, without target board consent
- Under the Takeover Code, the bidder then has 28 days to agree a deal with the target or to walk away (known as the “put up or shut up” / “PUSU” period), unless the target agrees to extend that period
What we're seeing
- We are seeing more deals becoming public before firm offer announcements are made (e.g., Carlsberg / Britvic, Ageas/ Direct Line, BHP / Anglo American and Sidara / John Wood Group)
- Bidders are also increasingly wall-crossing shareholders privately before formally approaching target boards
- This is perhaps a sign that, with lower premia, bidders want to put their price to target shareholders directly
Deal impact
- Bidder: Should consider the consequences of proceeding without target board co-operation – e.g., the potential lack of access to due diligence materials and shorter timelines if the target does not agree to PUSU extension
- Target: Advance preparation for a possible bear hug is key
Competitive situations
What we're seeing
- We continue to see interlopers responding to existing offers announced to the market – for example:
- Wincanton plc - competing offers from CMA CGM S.A. and GXO Logistics, Inc.
- DS Smith plc - competing offers from Mondi plc and International Paper Company
- Spirent Communications plc - competing offers from Viavi Solutions Inc. and Keysight Technologies Inc.
- Hipgnosis Songs Fund Limited - competing offers from
Alchemy Copyrights, LLC’s bid vehicle, Concord Chorus Limited, and Blackstone Europe LLP
Deal impact
These situations add considerable deal complexity. Maintaining competitive tension will be key for the target when running a dual process – strategic questions, including around (1) timing, (2) extent (and equality of) information-sharing, and (3) the granting of board recommendation and irrevocable undertakings, are all key to scenario planning and wargaming in these contexts. The ongoing contested bid for Trinity Exploration & Production shows the importance of getting irrevocable undertakings right
Regulatory considerations
What we're seeing
- Regulatory scrutiny of deals continues to increase, bringing a focus on deal certainty and deliverability to the forefront
Deal impact
- Strategy for filings: Bidders need to think carefully about strategy for regulatory filings and engagement with different regulatory bodies (with potentially diverging outcomes) – especially in sensitive industries (e.g., the Royal Mail takeover – see page 6)
- Deal timeline: Forethought as to the impact of this on deal timeline is key. We are seeing long-stop dates getting longer as extended regulatory review periods are built in, and examples of long-stop dates being extended due to unexpected regulatory intervention or longer-than-anticipated clearance periods (e.g., Brookfield / Network International) – this is a commercial point to land up-front. This is particularly important to bear in mind for a cash bidder needing to keep their financing in place for the whole period until completion
- Protection risk: Target boards are increasingly seeking protection risk as a price for their recommendation, including regulatory undertakings and bidder “hell or high water” commitments to take all necessary steps to obtain regulatory approvals
SPOTLIGHT ON CONSIDERATION
All-share (or at least part-share) deals take centre stage
What are we seeing?
- We have seen an increase in the number of deals where shares are offered as part (or all) of the consideration - recent high-profile share-for-share deals we advised on include Barratt / Redrow, Ageas/ Direct Line, BHP / Anglo American, International Paper/ DS Smith and Bellway / Crest Nicholson
Why offer shares?
- Whilst debt availability has improved, it remains a restraint - including shares as part of the consideration offered reduces the cost of financing for the bidder
- Offering shares can also play a part in “selling” the deal to reluctant target shareholders, offering shareholders a means of staying in the business under new ownership - in share-for-share deals, bidder and target can present shareholders with an attractive, synergic equity story
In light of these advantages, how can an equity offering be structured?
- All-share offer – the entire offer consideration takes the form of shares in the bidder
- “Mix and match” facility – the offer consideration is made up of both cash and shares, with target shareholders able to elect to vary the proportions of the form of consideration they would like to receive, subject to offsetting elections of other shareholders
- Alternative “stub equity” offer – starting to see a bit more frequently in PE bids, this involves a default, full cash consideration offer, but with an alternative offer of unlisted securities available for election by eligible target shareholders. Stub equity offers have become increasingly common in recent years, helping to bridge valuation gaps and, whilst offered to all shareholders, incentivising key shareholders to accept an offer and remain invested in the business
Any offer must be made to all target shareholders on equal terms
Stub under scrutiny?
- The terms and eligibility criteria of a stub equity offering are traditionally tailored to attract, and address the concerns/ demands of, key target shareholder(s) - albeit the offer is made open to all shareholders to accept
- However, when Hargreaves Lansdown confirmed that it was considering a non-binding proposal from a CVC-led consortium, shareholder Lancaster Investment Management questioned the fairness of the stub equity component of the potential offer - given that “only a small number of shareholders” would meet the acceptance eligibility criteria
WHAT ARE TARGETS THINKING ABOUT?
Deal price alone is not a high enough price for target recommendation
1. Valuation
- Price / valuation remains the key focus of target boards – particularly against the backdrop of the well-publicised undervaluation of UK companies compared to their listed US peers, and the lower premia being offered by sponsors in particular
- In a more promising market, approaches are often appearing opportunistic, and bidders are failing to meet target valuation expectations
- The disconnect between the valuation of target boards and strategic bidders has also resulted in more possible offers that have been announced but not subsequently translated into firm offers - we have seen target boards resisting bear hugs (e.g., Direct Line and Anglo American)
- In a PUSU period defence, the strategy regarding disclosure of information (including how much to disclose) is a key part of the defence
2. Deliverability
- In a difficult regulatory environment, we are seeing target readiness to reject proposals where deliverability is uncertain
- Deal deliverability is increasingly considered as part of the price for securing target recommendation – we are seeing more up-front negotiation not just of price, but of other key commercial points - such as level of commitments on regulatory undertakings, and length of long-stop dates
- This was front of mind during the takeover of IDS (formerly Royal Mail) by EP Group, on which we advised IDS - a package of legally binding undertakings and commitments was negotiated to (1) protect the unique role of the Royal Mail as part of the UK’s national infrastructure, and (2) improve deal deliverability, particularly with respect to the UK Government and National Security Investment Act approval
- We are also seeing instances of targets asking for up-front break fees prior to granting any access to due diligence materials
3. Shareholder reaction
- Target boards are often engaging earlier with shareholders following receipt of an approach (although the Takeover Code’s “Rule of Six” restrictions are a factor here)
- We are also seeing target boards making “minded to recommend” announcements before their recommendation appears on the screen – this is a further opportunity to test shareholder reaction
- There have been some examples of investor discontent towards recommended deals, which target boards and bidders will be mindful of – shareholders rejected Custodian Property Income REIT plc’s recommended offer for abrdn Property Income Trust Limited, and there have been recent instances where the 75% threshold of shareholder votes has been met, but not by huge margins (e.g., Regent Acquisitions Limited’s offer for TClarke plc (77.86%) and DBAY Advisors Limited’s offer for Finsbury Food Group plc (75.14%))
- We have also seen instances where shareholders are more willing to publicly oppose proposed deals (e.g., the bid for Hargreaves Lansdown – see page 5)
Granting (or denial) of (1) due diligence materials, and (2) PUSU deadline extensions are key components to the target board toolbox
"BE YOUR OWN ACTIVIST"
How potential targets can prepare for a takeover
This material is provided for general information only. It does not constitute legal or other professional advice.