UK Public M and A Update - 2021 Review

Introduction

Happy new year and welcome to Ashurst’s Annual UK Public M&A Review - 2021.

As with our previous annual reviews, the 2021 Review covers developments specific to Q4 2021 as well as a round-up on UK public M&A activity seen throughout the year.

The Overview section provides an analysis of trends in the UK public M&A market during the course of 2021 in comparison with previous years. In addition, a summary of the key features of the firm offer announcements we have reviewed in 2021 that formed the basis of this analysis can be found at the Appendix when downloading the PDF version of the publication.

The News Digest section summarises recent news and developments from the Takeover Panel and any noteworthy court cases and regulatory updates from Q4 2021. We also take a brief look back at some key points from the rest of the year. Further details of Panel updates in 2021 are set out in the Practice & Panel Statements section.

In the last quarter of 2021, Ashurst’s UK public M&A mandates included advising:

(i) National Express Group PLC in connection with its £467 million recommended share offer for Stagecoach Group plc;

(ii) Clinigen Group plc in connection with the £1.2 billion recommended cash offer from Triton Funds;

(iii) Lazard & Co., Limited as financial adviser to Rothermere Continuation Limited on its £389.1 million recommended acquisition of the A ordinary shares in Daily Mail and General Trust plc;

(iv) Tasheel Holding Group LLC as a joint offeror with IHC Industrial Holding LLC (together, the Consortium) in relation to the £71 million recommended cash offer for Arena Events Group PLC; and

(v) Goldman Sachs as financial adviser to Aristocrat Leisure on its £2.1 billion recommended cash offer for Playtech plc.

In addition, in 2021 Ashurst’s UK public M&A team advised on two Panel auctions for Morrisons and Augean respectively.

We hope you enjoy reading this year’s review and, as always, we would welcome any feedback you may have.

With our very best wishes for 2022, 

The Ashurst Public M&A Team

Overview

Deal volume

Of the deals we review (which excludes minority offers by existing majority shareholders), 2021 saw a significant increase in UK public M&A deal volume relative to what, for obvious reasons, was a less busy year in 2020. That being said, the impact of the COVID-19 pandemic is still prevalent and after a busy 2021, momentum began to slow down marginally in Q4 2021.

61 firm offers were announced in 2021. This is more closely aligned with deal volumes in 2019, which saw 74 firm offers announced as opposed to 2020 when only 41 firm offers were announced. Of the 61 announced firm offers in 2021, the vast majority were for Main Market (28) or AIM (26) targets. Outside of the Main Market and AIM, there were two offers for companies on the AQSE Growth Market, one offer for a Frankfurt Stock Exchange target and four offers for unquoted companies.

Deal values

The aggregate value of deals in 2021 is approximately £61.4 billion. This represents an increase of around 74% from the £35.2 billion seen in 2020 (when the impact of the COVID-19 pandemic was felt most strongly) and an increase of around 13% from £54.2 billion seen in 2019. In 2021, there were 22 offers in excess of £1 billion and Q3 saw an increase in large (i.e. £1 billion plus) announced bids, with 7 of the 18 offers in that quarter falling into that category. The highest value deal was the £7.1 billion offer from Clayton Dubilier & Rice, for Wm Morrison Supermarkets PLC, on which Ashurst advised Morrisons.

Bid consideration

Cash was king in 2021, with 48 out of 61 firm offers being solely in cash. Among the minority of non-cash only bids, there were:

• two cash and share offers (The Property Franchise Group plc offer for Hunters Property plc and the NortonLifeLock Inc. offer for Avast plc);
• two offers with consideration in the form of a loan note alternative (the Raymond James Financial, Inc offer for Charles Stanley Group plc and the DBAY Advisors Limited offer for Telit Communications plc); and
• five offers with consideration in the form of an unlisted share alternative.

The balance of the remaining bids comprised bidder shares as consideration (such as the offer by National Express for Stagecoach) and, similarly to 2020, there were no offers with a mix and match facility in 2021.

Board recommendation

Although the vast majority of bids were recommended by the target board at the time of the Rule 2.7 announcement, the following offers were not recommended:

• Ecotricity Group Limited’s offer for Good Energy Group PLC;
• Polygon Global Partners LLP’s offer for Watchstone Group plc, which subsequently lapsed;
• Virgata Holdings SA offer for Walls & Futures REIT plc; and
• CPI Property Group S.A.’s and Aroundtown SA’s offer for Globalworth Real Estate Investments Limited.

Bid premia

The average bid premia (unweighted) across all firm offers decreased from 59.7% in 2020 to 41.8% in 2021. This is not unsurprising given the impact of depressing share prices that the COVID-19 pandemic had in 2020. It is noteworthy that the 2020 average bid premia (unweighted) represents the highest figure in the last five years.

For offers above £250 million, the unweighted average for 2021 was 39.6%.

On a weighted basis, the average of the bid premia on announced bids in 2021 was 37.4%, down from 43.7% in 2020. For offers above £250 million in 2021, the weighted average was 42%.

Bid structure

Consistent with other years, schemes of arrangement continue to be the structure of choice in 2021. 48 of the 61 announced bids were structured as schemes of arrangement, with the remaining 13 being takeover offers.

Competing bids

There were four competing bids in 2021, two of which led to Panel auctions in consecutive weeks. Ashurst advised the target companies (Morrisons and Augean) on both auction processes.

Morrisons was subject to competing bids from Fortress Investments and CD&R, which ultimately resulted in an auction that took place on Saturday 2 October 2021. Following the completion of the auction procedure, CD&R was the higher bidder with its offer of 287 pence per share, one penny higher than the 286 pence per share from Fortress Investments. The Morrisons board subsequently recommended the higher offer from CD&R.

Augean was also subject to competing bids, in this case from Morgan Stanley Infrastructure and a consortium comprising Ancala Partners and Fiera Infrastructure. After a series of bids and counter-bids, on the evening of 22 September 2021 the Panel held an auction which resulted in final offers from MSI of 361 pence per share and the Ancala/Fiera consortium of 372 pence per share, with the Augean board recommending the latter higher offer.

Panel auctions have traditionally been relatively rare occurrences and for there to have been two in short succession is very uncommon. Prior to that, another auction was also due to have been held as both Carlyle and Philip Morris International fought to acquire Vectura. However, prior to its commencement, Carlyle announced that it would not increase its offer thereby resulting in PMI being the higher bidder and its offer subsequently proceeding with the recommendation of the Vectura board.

Blue Prism was also subject to a competing bid from SS&C Technologies, having first announced a recommended offer from Vista Equity Partners. On 1 December 2021, SS&C announced a recommended cash offer for Blue Prism at 1,275 pence per Blue Prism share, resulting in the Blue Prism board withdrawing its recommendation of the Vista Equity Partner offer.

Private-equity backed bids

Similarly to 2020, private equity-backed bids constituted around half of all announced bids in 2021 (49%). There was an overall increase in private equity-backed bids in 2021 in comparison to 2020, from 21 to 28 (though this small increase is not altogether unexpected given the higher deal volume in 2021 compared to 2020).

Break fees

Break fees

In addition to being decided by an auction, the competitive process for Augean also resulted in one of Augean’s major shareholders, Harwood Capital, offering both bidders cost cover in the event that it were the lower bidder in the auction. Whilst break fees from target companies are heavily restricted by the Code, there is more flexibility for shareholders to offer such arrangements though shareholder break fee arrangements also remain relatively uncommon in the market.

Reverse break fees

Unlike 2020 and 2019, this year saw only one bid with a reverse break fee. The NortonLifeLock Inc. offer for Avast plc included a reverse break fee payable to Avast plc of up to £300 million in certain specified circumstances.

Irrevocable undertakings

Irrevocable undertakings were given on 53 bids. Of those 53 bids, 33 included irrevocable undertakings from non-director shareholders.

Matching or topping rights: non-director shareholders

There were matching and/or topping rights in thirteen bids, which represents approximately 21% of all firms offers announced in 2021. This is a higher percentage than the one for 2020.

Formal sale processes

In 2021, there were ten formal sale processes announced of which only two resulted in bids (noting that the ADVANZ PHARMA bid was technically the result of an FSP announced in late 2020 with the firm offer announcement being released in 2021). The first was the offer in Q1 by Nordic Capital Epsilon SCA, SICAV-RAIF for ADVANZ Pharma Corp. Limited and the second one was the offer in Q4 by Apinder Singh Ghura, Amarjit Singh Grewal and KJR Brothers Limited for French Connection Group plc.

News digest

Panel consultation on proposed changes to the Takeover Code (PCP 2021/1)

In addition to the changes to the Takeover Code that came into effect earlier in the year (further details of which are summarised in the section below entitled ‘The year in review: looking back at Q1-Q3 2021’), on 2 December 2021, the Code Committee of the Panel published a public consultation paper (referred to as the PCP 2021/1), which proposes amendments to various provisions of the Takeover Code. These are summarised below. The Code Committee has invited comments by 18 February 2022 and expected to publish a response statement setting out the final amendments to the Code in Spring 2022. The Code Committee also anticipates that the amendments to the Code would come into effect approximately one month after the publication of the response statement.

1.  Requirement to disclose a Rule 6 or Rule 11 obligation

It is proposed that a publicly identified possible offeror would need to disclose at the commencement of an offer period whether any offer it were to make would need to be subject either to a minimum level and/or particular form of consideration. In addition, any acquisition of shares that would result in a minimum level and/or particular form of consideration obligation being triggered during an offer period would require an immediate announcement of the same by the relevant possible offeror.

Although the Panel has some discretion to make an adjustment (under Rules 6 and 11) to these obligations, it is generally expected that a resolution to any issue over whether such an obligation is triggered will be found prior to an announcement being required. If not, the Panel should be consulted as regards to what, if anything, such an announcement should include.

2.  Restriction on acquisitions of shares at the end of an offer timetable

It is proposed that a mandatory bidder will be prevented from acquiring target shares in the 14 days prior to Day 60 or the expiry of an acceptance condition invocation notice. This is designed to freeze the control position of the bidder at that point in time as any further acquisitions of target shares during that period may be relevant to a shareholder’s decision as to whether to accept or reject the offer.

3.  Clarification of the “look-back” period for a mandatory

It is proposed to clarify Rule 9.5 such that, where a Rule 9 obligation is triggered, but an immediate announcement is not made, if a mandatory offer is subsequently announced, the “look-back” period will start from the date on which the immediate announcement ought to have been made (and not on the date on which it was actually made).

4.  Amendment to the chain principle test

It is proposed to amend the chain principle test (1) so that the principle would only apply if the interest in shares that company A has in company B is significant in relation to company A and (2) to reduce the threshold for determining whether the interest is significant from 50% to 30%. This would result in the removal of the current limb (b) of the test, which refers to the acquisition being for “a significant purpose” in order to reduce the element of subjectivity that is inherent in the chain principle test as a result of limb (b) being the ‘dominant’ limb of the test. The reduction from 50% to 30% is proposed to maintain the historic strengthening of the chain principle test over the years.

5.  Restrictions following the lapse of an offer

In addition to a conforming change, it is proposed to make two other changes to the current rules.

It is understood that, following the lapse of an offer which was declared final, existing Panel practice is to give consent to a new offer being made by the previous bidder within the three month freeze period following the lapse of the previous offer, provided that (a) the target board agrees to the new offer being made and (b) the new offer is on more favourable terms than the previous offer. This is on the basis that market participants who have relied upon the previous no increase statement have not traded under a false premise.

The restricted periods in Rules 31.5, 2.5 and 2.8 are also proposed to be amended to take account of competitive situations. It is possible under the current rules for the restricted period for a bidder whose offer previously lapsed to come to an end but for the offer period in respect of a liv competing offer not to have come to an end (e.g. as a result of the time required to obtain any regulatory clearances). This would mean that the first bidder whose offer had lapsed could in theory make a second offer at that point. Therefore, it is proposed that the restricted period will end on (a) the later of the relevant time period in the Rule 31.5/2.5/2.8 (as applicable) and (b) the end of the offer period (i.e. the one in respect of the competing bidder).

6.   Other changes

Various other changes are proposed including: (a) changing all references to “whitewash” to “rule 9 waiver”; (b) clarifying that requirements of Rule 26.1 apply (including in circumstances where not expressly stated) such that documents should be published promptly and by no later than 12 noon on the following business day (in some sections of the Code the requirement is simply prompt publication); (c) removing the requirement to send hard copy documents to the Panel; and (d) amending the default auction procedure in circumstances in which one bidder declares an offer final shortly prior to the commencement of an auction.

The year in review: looking back at Q1-Q3 2021

Panel response statement adopting changes to the Takeover Code (RS 2020/1)

Following the Q4 2020 Panel publication of a consultation paper (referred to as the “PCP 2020/1”) setting out the proposed amendments to the Takeover Code, Q1 2021 saw the publication of a response statement (referred to as the “RS 2020/1”) adopting the proposed amendments without substantive modification.

By way of reminder, the key changes to the Takeover Code were designed to simplify the operation of the offer timetable on a contractual offer and streamline the application of the Takeover Code rules and their respective timeframes to conditions dealing with official authorisations and regulatory clearances. There are also certain proposed changes relating specifically to schemes of arrangement and mandatory offers, as well as miscellaneous changes resulting from other proposals.

In summary, the changes related to the following areas:

• the ability to suspend the offer timetable;
• a single date for the satisfaction of all conditions;
• the approach to the CMA and European Commission clearances; and
• the application of the material significance test to invoking a condition to lapse an offer.

Following the consultation, the RS 2020/1 also identified the following matters as notable changes that would be made to the Takeover Code:

• a clarification relating to Rule 31.5 where the target board will be restricted from announcing material new information after Day 39 only if the acceleration statement is published prior to Day 39;
• an acceptance condition invocation notice is to be published via a RIS announcement in accordance with Rule 30.1 (as opposed to being sent to target shareholders), and the same requirement also applies to acceleration statements and no increase statements; and
• the standard required for a target board to invoke an offeree protection condition has been retained.

Re GW Pharmaceuticals plc – votes for a proposed scheme of arrangement for the purposes of the ‘headcount’ test

GW Pharmaceuticals plc made an application for an order convening a members’ meeting to consider and approve a scheme of arrangement, including a particular question as to how shareholders, and their appointed proxies, should be counted for the purposes of the “headcount” (otherwise referred to as the “majority in number”) test in s.899(1) of the Companies Act 2006.

The High Court (Snowden J) concluded that the appropriate approach in this situation, applicable whether such votes were cast directly by the member splitting its vote or by multiple proxies on its behalf, was:

(i) to treat a holder of scheme shares that casts a vote both for and against the scheme as voting in favour of the scheme if that holder casts more votes for the scheme than against the scheme; and

(ii) should be treated as voting against the scheme.

Re William Hill plc – sufficiency of information provided in the explanatory statement and non-shareholder opposition to a scheme of arrangement

William Hill plc made a successful application for an order to convene its members for the purposes of considering and approving a scheme of arrangement in connection with the acquisition of William Hill by Caesars Entertainment Inc.

In granting the application, the High Court rejected the opposition of HBK Investments and six other entities holding derivative interests in shares on the basis that the explanatory statement in the scheme document contained materially inaccurate and inadequate disclosure of the termination rights in a joint venture agreement between William Hill and Caesars. The High Court noted that the relevance of the information that HBK and other considered inaccurate would vary according to the class member, and that an ordinary shareholder would view the offer differently to the holder of a derivate interest hoping to elicit an increased offer. It was also noted that no shareholder (except one) aligned themselves with the objections raised or said that they cast their vote under a material misapprehension.

Publication of the Panel 2021 annual report

July 2021 saw the publication of the Panel annual report for the financial year 2020/21. The key points from the report include the following:

• Activity levels during Q1 of the financial year 2020/21 were very low. By the end of the year, however, activity levels had returned to a more normal level with November and December amongst the strongest months in recent years.
• As with previous years, there has been a continued prevalence of bids by private equity and similar investors. The Panel Executive is reviewing its practice in these areas to ensure a consistent and appropriate approach is provided to the issues that arise.
• The Panel issued nine educational/warning letters and no letters of private censure in the last year.
• There have been multiple personnel changes announced including the extension of Simon Lindsay’s term as Director General (he has now been replaced by Ian Hart of UBS) and the announced retirement of Tony Pullinger, one of the Deputy Director Generals, who will be replaced by James Arculus. Richard Murley also stepped down as Chair of the Code Committee and has been replaced by Chris Saul.

Practice Statements

There were no Practice Statements issued during 2021.

Panel Statements

The following Panel Statements were issued by the Panel during 2021 – in reverse chronological order: