Public to Private Transactions
Despite continued uncertainty in global debt markets and challenging economic and political conditions, we saw an increase in both the number of public bids made in the UK in 2023 and the number of bids made by buyers backed by private equity and other funds, driven in part by valuation mismatches in private M&A processes and ongoing low valuations in the public markets.
The total number of public bids announced in 2023 was 57, an increase of 24% from 2022. Of these bids, 36 were made by buyers backed by private equity and other funds (63%), compared to approximately one-third of bids made in 2022, reflecting again sponsors’ ability to creatively deploy capital through slower market conditions.
Technology, financial and healthcare listed companies remained popular with buyers, together accounting for 28 of the 57[1] bids (49%), and there was high profile consolidation in the UK investment banking and corporate broking market in the form of Deutsche Bank’s acquisition of Numis (now Deutsche Numis) and the merger of Cenkos and FinnCap (now Cavendish).
39 of the 57 companies subject to public bids were listed on AIM (68%), compared with 21 of the 46 in 2022 (46%). We also saw a greater number of public bids with a deal value under £250m (up 89% from 2022), and notably fewer with a deal value over £1bn (down 69% from 2022), a reflection of challenging debt markets, high interest rates and inflation, and the increased interest in AIM-listed companies.
A perceived undervaluation of UK public assets (relative to private sale expectations) may well account for the increased interest. As takeover activity continued through 2023, we saw a number of shareholders publicly or privately object to the price recommended by target boards, pushing them to seek higher or competitive offers. We also saw an increasing number of shareholder meetings have significant votes against: several bids ran close to the 75% support required – and behind closed doors we saw a greater number that required persuasion to convert votes. Despite this, only four of the 57 bids were subject to increased offers, with an average premium of 51%[2].
Looking further into 2024, we expect small and mid-cap listed companies to continue to be attractive to PE, aligning disenchanted management teams with comparatively low valuations, a wealth of unused capital and access to (relatively) liquid debt markets, albeit still at a reasonably large financing cost. As PE firms continue to look for attractive opportunities in which to deploy unused capital, large cap public bids may soon return.
The Travers Smith corporate team advised on just under 20% of all UK public bids in 2023. Our full 2023 UK Public M&A Trends brochure is available online now.
P2Ps: Key Knowhow
Management incentivisation
Bringing management on board – less straightforward than on a conventional buyout
The Code requires that all shareholders must be afforded equivalent treatment. This makes it harder to agree a management incentivisation package pre-completion, and means that advice must be taken before discussing any future equity incentive terms. The Code does provide a route to allow management incentivisation to be agreed pre-completion (including for a rollover of equity) but a fair and reasonable opinion from the target company’s advisers and target shareholder approval is likely to be required. Any longform documentation (e.g. investment agreement) will also need to be make publicly available. This may be a tactical disadvantage in a competitive situation.
Deal protections
Tying up the deal – how do you protect yourself against interlopers?
The Code does not allow break fee, exclusivity, non-solicit or conduct of business restrictions. Instead, bidders are expected to rely on the target company’s ongoing obligations to comply with regulatory disclosure requirements and restrictions in the Code aimed at preventing the target company taking action to frustrate the bid. A recommendation from the target’s board will help to tie up the deal, but recommendations can change. Voting support from shareholders (or even buying their stake) can, if achievable, provide the best protection.
Concert parties
Don’t get caught out – actions taken by your ‘concert party’ can have consequences, including pricing implications for your bid
It is key to establish the scope of any concert party early on so that appropriate measures can be put in place to stop trading in target shares. Your portfolio companies, as well as any third party debt or equity funders of the bidding vehicle, will need to be considered. In relation to portfolio companies, a 30% or more equity or voting interest creates a presumption of concertedness.
Funding
Certain funds – showing you are good for the money
The Code will require your offer to be made on a ‘certain funds’ basis and your financial adviser to give confirmation that you are good for the cash. The cash confirmation process that underpins this will apply to both your equity and debt financing and, in respect of your equity funds, is more invasive/time-consuming than the conventional equity commitment letter process. Cash confirmation and the funding requirements of the Code need to be coordinated with the draw-down process for any fund equity bridge facility. Shareholders must be paid within 14 days of completion.
[1] Firm offers made in 2023, excluding three which lapsed.
[2] Peel Hunt, ‘2024: a coiled spring’, average LTM premium as at December 2023.
