UK Public M&A Update – 2018 Review

Introduction

Happy New Year and welcome to Ashurst’s annual Public M&A Update – 2018 Review.

As with our previous Updates, the overview provides an analysis of trends in the public M&A market in the UK during the year. Appendix 1 contains a summary of the key features of the firm offer announcements we have reviewed in 2018.

The Q4 2018 Digest summarises recent news and developments from the UK Takeover Panel (the Panel) and any relevant court cases.

In the last quarter, Ashurst mandates have included advising (i) Faroe Petroleum plc on the £607.8 million hostile cash offer made by DNO ASA; (ii) Netscientific plc on its formal sale process; and (iii) Goldman Sachs as financial adviser to Visa in relation to its £198 million recommended offer for Earthport plc.

We hope you enjoy reading this Update and, as always, we would welcome your feedback.

Best wishes

The Ashurst Public M&A Team

Overview

* This includes takeovers in respect of which a firm intention to make an offer has been announced under Rule 2.7 of the Code. It excludes offers by existing majority shareholders for minority positions.

Deal volume

Of the deals we review (which excludes minority offers by existing majority shareholders), 2018 saw a small reduction in the level of UK public bid activity in terms of deal volume as compared to 2017 with 45 firm offers (in excess of £1m) having been announced. There were 22 firm offers for Main Market targets (a 12% reduction on the 25 Main Market bids in 2017), 17 firm bids for AIM targets (a 19% decrease compared to 21 in 2017). There were also five firm bids for unquoted targets and one firm bid for a target quoted on Euronext Brussels.

A summary of the key features of these announced offers in 2018 is set out in the table in the Appendix.

Deal values

In contrast to deal volumes, deal values significantly increased from a total of £44.3bn in 2017 to a total of £120.4bn in 2018. This is explicable in part by the increased number of offers which exceeded £1bn and two "mega deals" which were announced in Q2 2018: Takeda Pharmaceutical Company Limited's £46bn acquisition of Shire plc and Comcast Corporation's £30.6bn acquisition of Sky plc. This is in contrast to 2017, during which the highest value bid was Vantiv, Inc.'s £8bn acquisition of Worldpay Group.

27 (29) firm offers had a deal value in excess of £100m, of which 16 (12) offers exceeded £1bn, representing an increase from 2017.

Bid Consideration

Again, cash was king in 2018, reflecting healthy cash balances held by corporate buyers and the availability of relatively strong credit lines for debt financing. 31 of the 45 firm offers announced were solely in cash. One bid offered an alternative comprising cash, shares and loan notes consideration to the full cash consideration (Promethean Investments' acquisition of Produce Investments plc), and one bid offered an interest in the limited partnership bidding entity as an alternative to the cash consideration (Further Global Capital Management's offer for GBGI Limited). Several bids saw a special dividend in respect of the financial year form part of the offer (for example, Informa PLC's offer for UBM plc and ION Investment Group Limited's offer for Fidessa Group plc).

11 bids included a share component, with two offering a mix and match facility.

Two bids included a CVR (GBT III B.V.'s acquisition of Hogg Robinson Group plc and Business Control Solutions Group Trustees Limited's acquisition of Business Control Solutions Limited).

The table below sets out the composition of bid consideration.

Board recommendation

38 of the 45 offers were recommended by the target board at the time of the initial Rule 2.7 announcement (as compared to 39 of the 46 offers in 2017).

Seven bids were announced without the recommendation of the target board. These were DNO ASA's hostile offer for Faroe Petroleum plc, Congra Software Sàrl's mandatory offer for Global Graphics plc, Stafford Capital Partners Limited's offer for Phaunos Timber Fund Limited, Comcast Corporation's offer for Sky plc, David King's mandatory offer for Rangers International Football Club plc, M&G Investment Management's offer for Gigaclear plc and Melrose Industries PLC's hostile offer for GKN plc.

Bid premia

Bid premia (on an unweighted basis) on all announced deals was up in 2018 to 57% from 33% in 2017. Unweighted premia for bids in excess of £250m was also up in 2018 to 46% from 27% in 2017.

Bid structure

Schemes of arrangement have remained the structure of choice for recommended bids in 2018. 33 of the firm offers announced in 2018 were structured as schemes of arrangement and 12 as contractual takeover offers, compared to 29 schemes and 16 offers in 2017.

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

Competing bids

We have seen two competing bid in 2018 (as compared to one in 2017):

• ION Investment Group succeeded in its offer for Fidessa, whilst Temenos Group's offer lapsed.

• Following the conclusion of the auction process conducted by the Panel, Comcast Corporation succeeded in its revised offer for Sky, whilst Twenty-First Century Fox announced it intended to lapse its offer.

Private-equity backed bids

There was a slight increase in the number of private-equity backed bids (10) in 2018 compared to 2017 (7). Notably, three of private-equity backed bids had a deal value of £1bn or more (Silver Lake Management's £2.2bn bid for ZPG, Advent International Corporation's £1bn bid for Laird PLC, and Dalmore Capital and Equitix Investment Management's £1.45bn bid for John Laing Infrastructure Fund). 

Break fees

Break fees

2018 saw the Panel consent to a target break fee in relation to Ligand Pharmaceutical's offer for Vernalis as part of Vernalis' formal sale process. 

Reverse break fees

In contrast to six bids with an agreed reverse break fee in 2017, in 2018 we saw five bids which included reverse break fees. For example, in relation to Takeda's bid for Shire plc, Takeda entered into a reverse break fee arrangement under which, among other things, if the Takeda board withdrew its recommendation to its shareholders, it would be required to pay to Shire the US dollar equivalent of approximately £903 million. 

Irrevocable undertakings

Irrevocable commitments were obtained on 37 bids. On 28 of those deals, the bidder obtained irrevocable undertakings from non-director shareholders.

Matching or topping rights: non-director shareholders

Matching and/or topping rights were included in 12 of the 28 bids with irrevocables sought from non-director shareholders. This equates to approximately 26.7% of all firm offers announced in 2018, similar to the 27.5% in 2017.

Non-solicitation and notification undertakings: non-director shareholders

Of the 28 deals on which non-director shareholder irrevocables were obtained, seven (25%) included a non-solicitation undertaking. Of these seven deals, only one contained notification undertakings. There were two deals on which the non-director shareholder irrevocables contained notification undertakings but no non-solicitation 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 2018, of the 11 companies which announced formal sale processes, to date, three (27%) subsequently resulted in firm offers being made (Kerridge Commercial Systems Group Limited's offer for Electronic Data Processing PLC, Ligand Pharmaceuticals Incorporated's offer for Vernalis plc and Stobart Group, Virgin Atlantic and Cyrus Capital Partners offer for Flybe Group plc). This represents an increase from the 11 companies which announced formal sale processes in 2017 of which two (18%) subsequently resulted in a firm offer. 

News digest

During Q4 2018, the Code Committee published two Panel Consultation Papers (PCP):

• PCP 2018/1 ("Asset Valuations"); and
• PCP 2018/2 ("The United Kingdom's Withdrawal from the European Union").

Both consultations closed in December 2018 and no response statement has yet been published.

Asset Valuations

On 17 October 2018, the Code Committee published PCP 2018/1 regarding asset valuations following a review of the purpose and operation of Rule 29 of the Takeover Code (the Code). As PCP 2018/1 says, the principle underlying Rule 29 is that, if a valuation of assets is provided in connection with an offer, it is likely to be of such fundamental importance to target shareholders' decision on whether to accept the offer that they should have the benefit of an opinion on the valuation from an expert of appropriate independence and competence. Prior to publication of PCP 2018/1, the Panel Executive (the Executive) undertook an informal pre-consultation on a confidential basis to ascertain their views on Rule 29 and current market practice. The Code Committee proposes to replace the current Rule 29 with a new Rule 29, which is intended to reflect better current practice and provide more clarity on specific requirements.

Key Proposals

• Applicable Valuations: Rule 29 currently applies when a valuation of assets is given "in connection with an offer". The Code Committee proposes to clarify that Rule 29 should apply to an asset valuation published by an offeree or a securities exchange offeror (a) during the offer period; (b) in the 12 months prior to the commencement of the offer period; or (c) more than 12 months prior to the commencement of the offer period, but only if attention is drawn to that valuation in the context of the offer. The proposed new Rule 29.1(a) will not apply to a valuation which is not considered by the Panel to be material to the offeree shareholders in making a properly informed decision regarding the offer.
• Types of assets: the proposed new Rule 29.1(b) codifies the specific types of assets to which Rule 29 has principally been applied to date, being valuations of (a) land, buildings, plant or equipment; (b) mineral, oil or gas reserves; and (c) unquoted investments. The Panel will also have discretion to apply Rule 29 to valuations of other assets or liabilities and the Panel would continue to need to be consulted.
• Net asset values and adjusted net asset values: the proposed new Rule 29.1(d) provides that where an offeree or a securities exchange offeror publishes, or has published, a NAV or adjusted NAV figure in circumstances where Rule 29 would apply if a valuation had been published in respect of the underlying assets, it must publish a valuation of the underlying assets and set out any adjustments which have been made to allow offeree shareholders to reconcile differences between the underlying assets and the NAV or adjusted NAV figure.
• Requirement for valuation report: the proposed new Rule 29.2 provides that a valuation published during the offer period should be in the form of, or accompanied by, a valuation report. Historical valuations to which Rule 29 applies must either be confirmed in, or updated by, a valuation report contained in the offer document (or defence circular) or, if earlier, the first announcement or document published during the offer period that refers to the valuation.
• Valuer: the proposed new Rule 29.3 sets out the requirements as to a valuer's independence and qualifications. It also seeks to remove the current emphasis on property valuations and property valuation practices.
• No material difference statement: the proposed new Rule 29.5 removes the current requirement for a valuation to be "current" and introduces a requirement that if the date of valuation of the assets is different from the date of the announcement or document in which the valuation report is published, the directors must make a statement that the valuer has confirmed that an updated valuation would not be materially different. An updated valuation will need to be published if such statement cannot be made. 
• Profit forecasts: the proposed new Rule 29.7 introduces a requirement to consult the Panel in advance if information in a valuation report could constitute a profit forecast for the purposes of Rule 28.
• Other proposals: PCP 2018/1 also proposes to retain the current requirement to include in a valuation report a statement as to the tax consequences of a sale of assets and clarifies that, in line with current practice, an estimate of any potential tax liability should be included. PCP 2018/1 also retains the current Rule 29.1(d) that a party to an offer is not normally permitted to publish a valuation of assets of another party unless supported by an unqualified valuation report. However, the Code Committee proposes to remove the wording which provides that comments by one party about another party's valuation may be permitted in exceptional circumstances.

The deadline for responses was 7 December 2018. We will report on the Code Committee's Response Statement once published.

The full PCP can be viewed at: http://www.thetakeoverpanel.org.uk/wp-content/uploads/2018/10/PCP2018-1.pdf.

The United Kingdom's Withdrawal from the European Union

On 5 November 2018, the Code Committee published PCP 2018/2 proposing amendments to the Code in relation to the UK's withdrawal from the European Union. 
A draft of The Takeovers (Amendment) (EU Exit) Regulations 2019, which proposes certain changes to Part 28 of the Companies Act 2006 has also been published and is discussed in further detail below.

Implementation

The draft withdrawal agreement sets out the basis on which UK will leave the EU, including a transition period until 31 December 2020 during which EU law would continue to be applicable to and in the UK. If, ultimately, the withdrawal agreement (or something equivalent) and transition period receives the necessary Parliamentary approvals, then the amendments to the Code set out in PCP 2018/2 will come into effect following the end of the transition period (subject to any other arrangements agreed between the EU and the UK during the transition period).

However, if the UK leaves the EU with "no deal", then the proposed amendments will come into effect at 11.00 p.m. on 29 March 2019. The Code Committee intends to publish the final amendments to the Code ahead of that date.

Overall, the proposed changes are not material, save for the removal of the shared jurisdiction regime.

Key proposals

• Shared Jurisdiction: The Code Committee proposes to delete Section 3(a)(iii) of the Introduction to the Code, which sets out the rules in respect of the shared jurisdiction regime. As a result, the Code would no longer apply to an offer for:

• a company with its registered office in the UK and whose securities are admitted to trading on a regulated market in an EEA Member State (but not in the UK) and which does not satisfy the "residency test"; or
• a company with its registered office in an EEA Member State and whose securities are admitted to trading on a regulated market in the UK but not in that EEA Member State.

The Code would, however, apply in full to an offer for a company which has its registered office in the UK and whose securities are admitted to trading on a regulated market in an EEA Member State (but not in the UK) and which satisfies the "residency test".

In the case of offers for shared jurisdiction companies which straddle the implementation date, the Code Committee expects that the changes will take place immediately following the implementation date and that the position should be made clear in the relevant offer documentation. In respect of offers to which the Code will apply in full following the implementation date, the requirements in respect of disclosure of interests and dealings in securities under Rule 8 will also apply as from the implementation date.

• Introduction to the Code: PCP 2018/2 also sets out various other consequential amendments to the Introduction to the Code and certain definitions as a result of the Takeovers Directive ceasing to apply in the UK. In addition, the Executive will withdraw Practice Statement No 18 (Cross-Border Mergers) once it will no longer be possible to effect a statutory merger between a UK company and an EEA Member State company under the Cross-Border Mergers Regulations 2007.

• General Principles: It is expected that the general principles will remain substantially the same and the PCP 2018/2 sets out some minor drafting and formatting changes.

• Rules and Appendices: PCP 2018/2 confirms that certain rules and practices currently applied will be retained following the UK's withdrawal from the EU, including:

• references in the Code to "Phase 2 European Commission proceedings", although the Code Committee intends to keep this under review; and
• the bid documentation offences set out in section 953 of the Companies Act 2006.

In addition, it is proposed that references to the EEA in Rule 30.4 (Making Documents, Announcements and Information Available to Shareholders, Persons with Information Rights and Employee Representatives (or Employees)) will be amended to refer to the UK, the Channel Islands and the Isle of Man only. Accordingly, it will be possible to seek dispensation from the requirements of Rule 20.4 in respect of shareholders located in the EEA. However, the Code Committee considers that it is unlikely in the short term. However, the Code Committee commented that, following the amendment and the UK's withdrawal from the EU and if law in the UK and law in the EEA diverges, it may become more likely over time for a dispensation to be granted. 

The deadline for responses was 17 December 2018. We will report on the Code Committee's Response Statement once published.

The full PCP can be viewed at: http://www.thetakeoverpanel.org.uk/wp-content/uploads/2018/11/BREXIT-PCP-5-November-2018.pdf.

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

Background

We previously reported on the various developments relating to Mr King's offer for Rangers International Football Club Plc (Rangers). Please see our Public M&A Update for Q1 2017, Q2 2018 and Q3 2018 and our 2017 Review for further details of these updates. By way of reminder, the latest background to the offer is as follows:

• On 28 April 2018, the Panel obtained an interim interdict from the Court of Session preventing Mr King from publishing an offer document that did not contain a cash confirmation in accordance with Rule 24.8 of the Code.
• On 4 July 2018, the Panel published Panel Statement 2018/8, setting out the Committee's ruling rejecting a request by Mr King (made on 11 June 2018) that the Committee be convened to review the refusal by the Executive to grant Mr King an extension of time to send the offer document.

Latest developments

In the most recent developments:

• The Outer House of the Court of Session rejected a challenge brought by Mr King against the contempt of court proceedings issued against him by the Panel.

• The Hearings Committee of the Panel (the Committee) rejected Mr King's request that the Committee be convened to review the Executive's ruling that Mr King's obligation to procure a mandatory bid for Rangers should extend to the holders of new shares issued pursuant to a placing.

• Mr King gave an undertaking to the Court of Session that he would take certain actions, including ensuring Mr King's bid vehicle, Laird Investments (Pty) Limited (Laird), makes an offer for Rangers in full compliance with the Code by 25 January 2019.

Contempt of court proceedings

Mr King challenged the Panel's application for contempt of court on grounds of procedural irregularities. On 14 November 2018, the Outer House rejected Mr King's challenge as without merit.

It is understood that the contempt proceedings have been suspended, but would resume in the event that Mr King did not make an offer for Rangers in compliance with the Code by 25 January 2019.

Panel Statement 2018/19

On 29 November 2018, the Panel issued Panel Statement 2018/19 setting out the ruling of the Chairman of the Committee in respect of Mr King's request for the Committee to review a ruling of the Executive made on 2 October 2018. The Executive had confirmed that Mr King's mandatory bid for Rangers should extend to the holders of new shares issued pursuant to a non-pre-emptive placing which had received the consent of Rangers shareholders in August 2018. 

The request was rejected by the Chairman of the Committee on the basis that any attempt to persuade the Committee to waive the obligation to procure a Rule 9 offer to the holders of the new shares acquired in the placing would have no reasonable prospect of success:

• The Code is clear that an offer must extend to new shares issued during the relevant offer period. The Code provides that the acquisition of statutory control as the only condition which a Rule 9 offer may be subject. If the offer did not extend to holders of new shares issued during an offer period, this would mean that an offer could become unconditional without statutory control passing to the offeror, and the Committee commented that this is something which Rules 9 and 10 of the Code seek to avoid. In addition, in order to offer equivalent treatment to all shareholders of the same class (in line with General Principle 1 of the Code) a Rule 9 offer would be required to be extended to holders of new shares of the same class issued during an offer period.
• Laird's Rule 2.7 announcement stated that the offer would extend to any further Rangers shares issued or allotted while the offer remained open for acceptance.
• Mr King and the board of Rangers were made aware of this on several occasions before the new shares were issued and allotted. The Panel agreed to disapply Rule 21.1 of the Code, which would otherwise prevent Rangers from issuing new shares during an offer period, provided that, among other conditions, holders of shares carrying at least 50% of the voting rights approved the proposed placing and the shareholder circular should set out an explanation that (a) Mr King's mandatory offer obligation will extend to the enlarged share capital and (b) the placing would substantially increase the number of acceptances required and as such make the offer less likely to succeed.
• NOAL, the vehicle by which Mr King procured the purchase of Rangers shares, voted in favour of the relevant resolution, suggesting that the placing had proceeded with Mr King's consent. The Chairman of the Committee also noted that Mr King's concert parties were allotted a proportion of the new shares similar to the percentage of their shareholdings prior to the placing.

The Executive notes that placees who subscribed for the new Ranger Shares at 20 pence per share are unlikely to accept Mr King's offer at 20 pence per share and that, as a result of the increased share capital, the Rule 9 offer exceeds the cash resources currently at Laird's disposal. In view of this, the Executive has suggested to Mr King that if such placees were to give irrevocable undertakings that they would not accept Mr King's offer, then for the purposes of the cash confirmation under Rule 24.8 of the Code, the Executive may explore with the cash confirming party ways in which it could discharge its cash confirmation responsibilities by relying on the irrevocable undertakings.

Mr King's undertaking to the Court of Session

On 30 November 2018, Mr King gave an undertaking to the Court of Session to take or procure the certain actions, including to:

• instruct a third party cash confirming party considered appropriate by the Panel;

• obtain all consents and approvals necessary in South Africa to transfer the necessary funds for the offer to the United Kingdom;

• instruct the cash confirming party to provide advice as to how Laird/Mr King must comply with obligations under the Code and for the cash confirming party to liaise with the Panel on behalf of Laird/Mr King;

• ensure that Mr King's bid vehicle, Laird, makes an offer for Rangers in full compliance with the Code by no later than 17:30 GMT on 25 January 2019; and
• appoint a legal advisor to ensure that all necessary documentation complies with the Code and to liaise with the Panel in this respect.

The full text of the undertaking can be viewed at: https://media.rangers.co.uk/uploads/2018/12/20181130-King-Undertaking.pdf.

Practice & Panel Statements 

Practice Statements

Panel Statements