UK Public M&A Update - 2017 Review

Overview 

As with our previous Updates, the Overview provides an analysis of trends in the public M&A market in the UK during the year. The Appendix in the PDF contains a summary of the key features of the firm offer announcements we have reviewed in 2017.

The Q4 2017 Digest summarises recent news and developments from the UK Takeover Panel (the Panel), including a number of amendments to the Takeover Code.

Ashurst had a busy quarter during Q4 with 4 mandates:

• advising Ladbrokes Coral on its £4 billion takeover by GVC Holdings;
• advising Credit Suisse on FirstRand’s £1.1 billion takeover of Aldermore Group;
• advising Rothschild on Bain Capital’s recommended cash offer for Zenith Hygiene Group; and
• advising Lazard on Blackstone’s €260 million offer for Taliesin Property Fund.

	2017	2016	2015
Announced bids	46	53	53
Recommended	39	43	49
Schemes of arrangement	29	30	34
Average of bid premia (% unweighted)	32.1	52.5	42.6

Deal volume

Of the deals we review, 2017 saw a reduction in the level of UK public bid activity in terms of deal volume as compared to 2016 with 46 firm offers (in excess of £1 million) having been announced. There were 25 firm offers for Main Market targets (a 3.8% reduction on the 26 Main Market bids in 2016), 21 firm bids for AIM targets (a 12.5% decrease compared to 24 in 2016).

A summary of the key features of these announced offers in 2017 is set out in the table in the Appendix in the PDF.

Deal values

In another year of uncertainty, it is no surprise that deal values in the UK declined from £67.14 billion in 2016 to just £44.5 billion in 2017. That is explicable in part by the lack of any “mega deals”, with the highest value bid of 2017 being Vantiv, Inc.’s £8 billion acquisition of Worldpay Group, which contrasts with SoftBank Group’s £24.4bn acquisition of ARM Holdings in 2016 and the £78.4 billion combination of AB InBev-SAB Miller in 2015.

29 (26) firm offers have had a deal value in excess of £100 million, of which 12 (5) offers exceeded £1 billion, a moderate increase from 2016.

Bid consideration

Again, cash was king in 2017, reflecting healthy cash balances held by corporate buyers and the availability of strong credit lines for debt financing. 29 of the 46 firm offers announced were solely in cash. One bid offered a traditional loan note alternative to the cash consideration (the management team’s acquisition of InterQuest Group plc). Several bids saw a special dividend in respect of the financial year form part of the offer (for example: Tesco’s acquisition of Booker Group; Elis’ acquisition of Berendsen; and GVC’s bid for Ladbrokes Coral).

17 bids included a share component, with four offering a mix and match facility.

GVC’s bid for Ladbrokes Coral included the largest CVR in UK public M&A history, at up to £800 million.

The table below sets out the composition of bid consideration.

Board recommendation

39 of the 46 offers were recommended by the target board at the time of the Rule 2.7 announcement (as compared to 48 of the 53 offers in 2016).

Seven bids were announced without the recommendation of the target board. These were Hailiang Group’s £35.5 million offer for ASA Resource Group, the management team’s £15.8 million offer for InterQuest Group, Pallinghurst Resources Limited’s £227.2 million offer for Gemfields, Dragon Capital Holding’s £16.4 million (revised offer, with an original offer of £14.22 million) offer for Dragon-Ukrainian Properties and Development (subsequently recommended), IP Group’s £489.9 million revised offer (original offer of £466 million) for Touchstone Innovations (subsequently recommended), Phoenix Fund’s £27.4 million offer for Hornby and Pollen Street Capital’s and BC Partners’ £861 million revised offer (original offer of £842.4 million) for Shawbrook Group (subsequently recommended).

Bid premia

Bid premia (on an unweighted basis) on all announced deals was down in 2017 to 32.1% from 52.5% in 2016. Unweighted premia in 2017 for bids in excess of £250 million was down from 49.4% in 2016 to 25.6%.

Bid structure

Schemes of arrangement have remained the structure of choice for recommended bids in 2017. 29 of the firm offers announced in 2017 were structured as schemes of arrangement and 16 as contractual takeover offers, compared to 30 schemes and 23 offers in 2016. In 2017, one contractual takeover offer was a partial offer (Beinhaker Design Services and 1895 Management Holdings Company’s £28.4 million offer for Sutton Harbour Holdings).

This underlines the view that there are still significant benefits to using a scheme, for example, the greater certainty of obtaining 100% control and the greater flexibility around timetable.

Competing bids

We have seen one competing bid in 2017 (as compared to six in 2016). Pallinghurst Resources succeeded in its offer for Gemfields, whilst Fosun International’s offer lapsed.

Private-equity backed bids

There has been a decrease in the number of private-equity backed bids in 2017 (7) compared to 2016 (15). Notable private-equity backed bids included Pollen Street Capital and BC Partners’ £861 million (revised) bid for Shawbrook, and Blackstone and CVC’s £2.96 billion bid for Paysafe.

Break fees

Break fees

2017 saw the Panel consent to a target break fee in relation to Canyon Bridge Capital Partners’ offer for Imagination Technologies Group and in relation to Michael Kors’ offer for Jimmy Choo as part of the respective target’s formal sale process.

Reverse break fees

In stark contrast to only one bid with an agreed reverse break fee in 2016 (Twenty-First Century Fox’s bid for Sky), in 2017 we saw six bids which included reverse break fees, including John Wood Group’s £25 million break fee arrangement in relation to its bid for Amec Foster Wheeler.

Irrevocable undertakings

Irrevocable commitments were obtained on 40 bids. On 24 of those deals, the bidder obtained irrevocables from non-director shareholders.

Matching or topping rights: non-director shareholders

Matching and/or topping rights were included in 11 of the 24 bids with irrevocables sought from non-director shareholders. This equates to nearly 27.5% of all firm offers announced in 2017, which contrasts with 34% in 2016.

Non-solicitation and notification undertakings: non-director shareholders

Of the 24 deals on which non-director shareholder irrevocables were obtained, three included a non-solicitation undertaking (12.5%). Of these three deals, only two contained notification undertakings. Before agreeing notification undertakings, shareholders would be well advised to consider whether the information required to be notified constitutes inside information and therefore whether such an undertaking can be given in practice.

Formal sale processes

In 2017, two companies announced a formal sale process which subsequently resulted in a firm offer being made (Canyon Bridge’s £550 million acquisition of Imagination Technologies Group and Michael Kors’ £896 million acquisition of Jimmy Choo). This represents a significant reduction from the 11 companies which announced formal sales processes in 2016, of which three resulted in firm offers.

News digest

Q4 2017 saw a number of regulatory developments, including the publication by the UK Takeover Panel (the Panel) of a number of amendments to the Takeover Code (the Code).

In our forthcoming Q1 update, we will cover the new Practice Statement 32 and certain other updates published by the Panel on 8 January.

Amendments to the Code

During Q4, the Panel published a number of amendments to the Code:

• Response Statement 2017/1 and Instrument 2017/4 following PCP 2017/1 (“Asset sales in competition with an offer and other matters”);
• Response Statement 2017/2 and Instrument 2017/5 following PCP 2017/2 (“Statements of intention and related matters”);
• Instrument 2017/6; and
• Instrument 2017/7.

Asset sales in competition with an offer and other matters:

On 11 December 2017, the Panel published Response Statement 2017/1 and Instrument 2017/4 following PCP 2017/1 (“Asset sales in competition with an offer and other matters”).

For more background, see our UK Public M&A Update – Q3 2017 Review.

The Code Committee’s original proposals in PCP 2017/1 were incorporated into the Code, subject to certain modifications, including, in particular, the following changes:

• Preventing a bidder from circumventing the Code by purchasing significant assets of a target company:
• Amending the new Note 5 on Rule 2.8 so that, in assessing whether assets are significant in relation to the target company, relative values of 75%, instead of 50% as proposed in the PCP, will usually be regarded as significant.
• Amending new Note 2(d) on Rule 2.8 to add the caveat “except with the consent of the Panel”. This is to provide the Panel with flexibility to permit a purchase of assets in circumstances where a potential bidder has made a statement to which Rule 2.5(a) applies and did not include a reservation that the bidder could set-aside that statement with the agreement of the target board, and, following that, the potential bidder made a Rule 2.8 statement, which included a reservation that the bidder could set-aside that statement with the agreement of the target board.
• Asset sales and other transactions subject to Rule 21.1:
• The Panel has amended the proposed new obligation for target companies to send a circular to shareholders in certain circumstances under Rule 21.1 such that:
• where a general meeting is to be held to approve the proposed action under Rule 21.1(a), the target board must send a circular to target shareholders containing the information set out in new Note 1 on Rule 21.1; and
• where a general meeting is not to be held because the proposed action is conditional upon the offer being withdrawn or lapsing, the target board must make an announcement containing the information set out in new Note 1 on Rule 21.1, rather than send a circular to target shareholders as had been proposed in PCP 2017/1.

Response Statement 2017/1 also includes:

• at Appendix C, a summary of how the restrictions in the new paragraphs (f)/(F) of Rules 2.8, 12.2(b) and 35.1 will operate; and
• at Appendix D, examples of “no intention to bid” statements which might be made under the amended Rule 2.8.

The changes took effect on 8 January 2018.

View the full Response Statement.

Statements of intention and related matters:

On 11 December 2017, the Panel published Response Statement 2017/2 and Instrument 2017/5 following PCP 2017/2 (“Statements of intention and related matters”).

For more background, including a summary of the key changes to the Code, see our UK Public M&A Update – Q3 2017 Review.

The Code Committee’s original proposals in PCP 2017/2 were incorporated into the Code, subject to certain minor modifications.

The changes took effect on 8 January 2018.

View the full Response Statement.

Instrument 2017/6: On 11 December 2017, the Panel announced amendments to the Code, effective as of 3 January 2018, pursuant to Instrument 2017/6. The changes are to the definitions of “multilateral trading facility” and “regulated market” as a result of changes to legislation, in both cases to update the cross-reference in the definition to the relevant definition in MiFID II (2014/65/EU).

Instrument 2017/7: On 11 December 2017, the Panel announced amendments to the Code, effective as of 8 January 2018, pursuant to Instrument 2017/7. The Instrument makes a consequential change to the Document Charges section of the Code to reflect the changes made by Instrument 2017/7.

Panel Checklists

On 14 December 2017, the Panel released Panel Statement No. 23 in which it noted The Walt Disney Company’s announcement of its acquisition of Twenty-First Century Fox, after a spin-off of certain Twenty-First Century Fox businesses.

The statement highlights that Disney’s announcement does not alter Twenty-First Century Fox’s obligations under the Code regarding its existing pre-conditional offer for Sky.

In addition, the statement notes that:

• Disney has informed the Executive that it does not believe that completion of the Twenty-First Century Fox acquisition should trigger a mandatory bid obligation under Note 8 on Rule 9.1 of the Code (known as the “chain principle”) upon Disney as a result of Twenty-First Century Fox’s stake of approximately 39% in Sky; and
• the Executive is seeking the views of Sky’s independent directors before reaching a decision.

We will report on any update, once announced.

Other Panel News

On 2 November 2017, the Panel announced:

• the resignation of Guy Elliott from the Panel;
• the appointment of Liv Garfield (who is the CEO of Severn Trent plc) as a member designated to sit on its Hearings Committee; and
• the appointment of Richard Murley to serve as Chairman of the Code Committee in place of Guy Elliott.

UK Government consults on measures to protect national security in context of foreign investment

On 17 October 2017, the UK Government announced proposals to amend the UK merger control regime, aimed at improving protection of national security interests, including in the context of foreign investment.

Key Points

The proposals are set out in a Green Paper entitled “National Security and Infrastructure Investment Review”, and are split into two stages:

• “Short term” proposals: proposed amendments to the UK mergers regime lowering the jurisdictional thresholds for review of mergers in two sectors (the military and dual-use sector, and parts of the advanced technology sector); and
• “Long term” proposals: wider reforms intended to allow for better scrutiny of transactions that may raise national security concerns. This may include a wider “call-in” power to allow the Government to scrutinise a broader range of transactions on national security grounds, and/or a mandatory notification regime for foreign investment in certain parts of the economy which are considered critical for national security. This would include parts of the defence, civil nuclear, energy, communications and transport sectors.

Please read our full briefing UK Government consults on measures to protect national security in context of foreign investment on the subject.

Requirement for Mr King to announce a mandatory offer for Rangers International Football Club Plc

In March 2017, the Panel published Panel Statement 2017/4 and the TAB published Statement 2017/1 setting out their decisions to dismiss appeals by Mr King and requiring him to launch a Rule 9 mandatory bid for Rangers International Football Club Plc (Rangers) by 12 April 2017. Please see our Q1 2017 Public M&A Update for further details of these decisions.

On 13 April 2017, the Panel announced that, Mr King having failed to make a Rule 9 mandatory bid by the 12 April deadline, it had initiated proceedings in the Court of Session, Edinburgh (under section 955 of the Companies Act 2006) seeking an order requiring Mr King to comply with the Panel’s rulings.

Background

In January 2015, Mr King acquired shares representing 14.57% of Rangers share capital from three institutional investors via a family trust vehicle, New Oasis Asset Limited, at a price of 20p per share two days after his alleged concert party (Mr Letham and his associates) acquired a 19.48% stake. The acquisitions produced an aggregate holding of 34.05%, exceeding the 30% control threshold and thereby triggering a Rule 9 mandatory bid obligation.

After the purchase of the shares in Rangers, the existing directors of Rangers were removed by shareholder vote at a general meeting in March 2015 and Mr King’s nominees were appointed as directors of Rangers. In May 2015 Mr King was appointed chairman of Rangers.

During 2014, Mr King and Mr Letham had acted together on two unsuccessful proposals, one to acquire control through an equity fundraising and the other to acquire a blocking stake. Emails in December 2014 between Mr King and Mr Letham evidenced that each was aware of the other’s intention to acquire Rangers shares at the same time and that the purchases had been co-ordinated.

Panel on Takeovers and Mergers v King judgment

The court found in favour of the Panel and granted the order sought under section 955 of the Companies Act 2006 ordering Mr King to announce in accordance with Code, within 30 days of the date of the court’s order, and thereafter make in accordance with the Code, a mandatory offer at a price of 20p per share for all the issued ordinary share capital of Rangers not already controlled by him and three others.

In the court’s view, Mr King had intentionally brought about a situation where 30% of the shares in Rangers were held by him and his concert party and that Mr King knew that this would require him to comply with Rule 9. The court rejected Mr King’s alleged impecuniosity and argued that not to make an order on the basis of Mr King’s alleged impecuniosity would materially undermine the working of the Panel by allowing parties to circumvent Rule 9 by arranging their financial affairs in such a way that, when they were required to comply with their obligations under Rule 9, they could plead insufficient funds to do so and, if that were the case, it would not enable the Panel to fulfil one of its principal functions of achieving fairness of treatment amongst shareholders.

The court highlighted the observation made by Sir John Donaldson MR in Ex Parte Datafin plc [1987] QB 815 that the public has a very strong interest in the proper operation of the Panel. The court considered that anything which tended to undermine the Panel’s ability to police takeovers properly would be contrary to the public interest.

Finally, the court rejected the argument that the offer price of 20p per share (which is below the current market value for Rangers shares) was so low that it would mean that shareholders in Rangers would not take up the offer in any event, and that, therefore, there would be no use in making such an order. The court highlighted that Rule 9 requires an offer should be made at a price determined to achieve fair treatment and thereafter it is a matter for the shareholders to decide if they wish to accept an offer at that price.

Practice & Panel Statements

The following Practice and Panel Statements were issued by the Panel during 2017 – in reverse chronological order: 

Practice Statements

31 – 07/07/17 – Strategic reviews, formal sale processes and other circumstances in which a company is seeking potential offers

Panel Statements

2017/23 – 14/12/17 – Panel Statement regarding determination of application of a chain principle offer

2017/22 – 11/12/17 – Publication of RS 2017/1 (Asset sales and other matters and RS 2017/2 (Statements of intention and related matters) and amendments to the Takeover Code

2017/21 – 02/11/17 – Panel appointments

2017/20 – 20/10/17 – Guy Elliot

2017/19 – 29/09/17 – New checklists for use where certain announcement are made and distributed

2017/18 – 21/09/17 – Requirement for potential offeror to make Rule 2.7 announcement or announce no intention to bid by 10 October 2017

2017/17 – 19/09/17 – Issue of Public Consultation Paper 2017/2

2017/16 – 25/08/17 – Offer timetable extended

2017/15 – 19/07/17 – Publication of the Panel's Annual Report

2017/14 – 13/07/17 – Replacement of the WMA by PIMFA and the BBA by UK Finance

2017/13 – 12/07/17 – Issue of Public Consultation Paper 2017/1

2017/12 – 07/07/17 – Publication of new Practice Statement No 31, withdrawal of Practice Statements Nos 3 and 6 and amendment of Practice Statement No 20

2017/11 – 04/07/17 – Panel Executive appointment

2017/10 – 15/06/17 – Ruling of the Executive in relation to the application of Note 2 on Rule 9.1

2017/9 – 15/05/17 – Requirement for potential offerors to make Rule 2.7 announcement or announce no intention to bid by 2 June 2017

2017/8 – 13/04/17 – Rangers International Football Club plc

2017/7 – 13/04/17 – Summary of amendments to the Code

2017/6 – 13/04/17 – Amendment of Practice Statement No 20

2017/5 – 13/04/17 – Secondment of Director General extended

2017/4 – 13/03/17 – Hearings Committee dismissal of appeal by Mr King and requirement for Mr King to announce an offer pursuant to Rule 9 of the Takeover Code. In addition, see Statement 2017/1 issued by the Takeover Appeal Board

2017/3 – 17/02/17 – Rule 8.3 disclosure procedures for Unilever and Kraft Heinz

2017/2 – 19/01/17 – Appointment of new Panel member

2017/1 – 10/01/17 – Decision by the Hearings Committee to cold-shoulder Mr Bob Morton and Mr John Garner