Takeover Talks: Another One Bites the Dust

Jade Jack:

Hello and welcome to our second podcast on UK public M&A. My name is Jade Jack and I'm an advisor on public company matters here at Ashurst. I'm delighted to be joined once again by London partner Harry Thimont and also by James Fletcher, another of our London partners who specialises in public company M&A. We recently published our quarterly review of the UK public M&A market, in which we looked at the state of the market, picked out some trends we are seeing, and discussed the key legal and regulatory developments during the quarter. As before, this podcast is intended to sit alongside that. And in it, we'll focus on the state of the market in particular and also cover some of the recent publications released by The Takeover Panel. So, James, there was a real flurry of activity in the UK public market in May and June of this year. What do you think was driving this?

James Fletcher:

Thanks, Jade. It's good to be here. And thank you to those joining us. I think economists across the globe are finding forecasting a fairly difficult task at the moment, so I'm not sure I can authoritatively unpick the market. But what has become clear, I think, is that the wave of M&A, which we forecast at the start of the year, has finally broken through, despite some fairly interesting geopolitical activity. A late rush of offers in May and June in particular led to H1 2025, being one of the busiest in recent years. And we saw this reflected in one of the longest disclosure tables we've had in a while. Much of the focus has been on mid-cap deals, and the average deal value has fallen, but we are seeing interest and competition for larger assets as well. For example, Spectris at the moment, with UK corporates far more active too. Interest from the US has been significant as well, both behind the scenes and also in terms of announced deals. We think this is being driven not just by the perennial mantra that UK stocks are undervalued, but also by a wider move to diversify away from the US. So, there are a number of factors influencing volumes.

Jade Jack:

And you mentioned competition for assets. I think we've definitely witnessed an increase in competitive bid processes this year. Are there any trends coming out of that that you would pull out, Harry?

Harry Thimont:

Thanks, Jade. And good to be back. I think one of the more obvious trends and one that our listeners will no doubt have alighted on is the choice of offer structure. So, schemes have for a number of years been by far the structure of choice from recommended deals. And I think if I were to go back through our quarterly publications in recent years, I'm pretty sure that the statistics would generally show X number of recommended deals per quarter with X minus one, X minus two on average implemented by way of a scheme. And one of the reasons for that is the key benefit of a scheme, which is that it delivers the entire shareholder register if it becomes effective. However, schemes are obviously target-led processes and therefore not always suitable for transactions which may be or become competitive.

On the flip side, one of the downsides to an offer has always been the risk of being stuck with minorities, or worse, an inability to delist a company. And I think that's the reason why going back a couple of years we actually saw competing schemes emerge as a bit of a trend. That sentiment seems to have shifted slightly. And I think we are seeing an increase in the use of an offer structure, with both the Assura and the Inspired bids being good recent examples of this. Another factor that I think might be relevant, albeit I don't have an awful lot of hard data to back this up, is that I think bidders can increasingly take an informed view of the likelihood of getting to key thresholds on an offer, e.g., 75% where you can delist, 90%, where you can commence a squeeze out process.

And I think one of the reasons for that is that there's obviously an awful lot of data out there on UK takeovers, including a lot of historic data. And I think there are certain shareholder engagement outfits that are harnessing that data and using it to advise bidders on what a likely route through to a sufficient number of acceptances, to get them to 75%, to get them to 90%, even factoring in that a shareholder register obviously shifts to a good degree on an offer being announced. And so, I think the net effect of all of that is that whilst there's clearly not the same level of certainty that you get on a scheme, it's not a binary outcome, I think that can sometimes be enough, particularly if it's combined with a good number of irrevocables, to get bidders more comfortable in proceeding with an offer structure.

Just as a final point, I think the other caveat to the use of offer structures generally is how a bid is being financed. And I think it's fair to say that it remains the case that lenders are generally fairly wary of providing consent to waive down an acceptance condition, particularly to below 75% on the basis that, as I mentioned, that's not only the threshold of which a company can be delisted, but it's also the threshold to enable the company to be re-registered as a private company, which is particularly relevant to lenders.

Jade Jack:

Thanks, Harry. That's very interesting. Now, although they technically fell outside of the quarter, I would just like to touch on the recent publications from The Takeover Panel. Though there was a flurry of activity on the 3rd of July, with the panel publishing a consultation paper and two new practice statements in quick succession. The consultation paper proposed a new framework for the application of the code to dual-class share structures and the practice statements provided guidance on a number of areas.

So, the first on profit forecasts, including QFBS or quantified financial benefit statements, and the second on list-unlisted share alternatives. We've set out our key takeaways from those in our publications, in our recent corporate updates, links of which can be found on the website. But I thought it would just be helpful to touch on these briefly now. So, looking at the consultation paper on dual class share structures first, what do you think the background and purpose behind the consultation paper was?

James Fletcher:

Let me take that one, Jade. So, as our listeners will be aware, of course, dual class share structures enable founders and other major shareholders to list their companies whilst retaining majority or enhanced voting rights, or control, and have historically been very popular in the US. The recent reforms to the UK listing rules have relaxed regulations around these structures, as they're looking to attract founder-led high growth companies to list in the UK. The Panel has previously taken a fairly ad hoc approach to queries regarding these companies, but it's now seeking to formalise guidance in the expectation that more companies may list with these structures in the future in the UK.

So, the PCP proposes a new framework for the application of the code to these structures, in anticipation of a long awaited resurgence of the IPO market. At a high level, where a third party may be concentrated through a mandatory offer threshold, following a collapse of a DCS structure, the PCP proposes that such third party shareholder should be treated in substantially the same way as a so-called innocent bystander might be under Rule 37.1, in the context of share buybacks. This means that the third party shareholder should not normally be required to make a mandatory offer at this time, unless, of course, the trigger was a foreseeable event, such as a time sunset where the shareholder always knew really that it would end up in a controlling position at some point in the future. Or where the Panel considers that at the time the shareholder acquired its ordinary shares, that shareholder had reason to believe that a trigger event would take place.

Now, the logic behind all this, of course, is that the shareholder has acquired control as a consequence of events outside of its control, and therefore it's not really fair to punish it for this.

Another point coming out from the paper that it's worth flagging, is the proposed treatment of the acceptance condition for these structures. The principles applied are pretty similar to those being used in the Inspired deal that Harry mentioned before. So, specifically, the acceptance condition should only be satisfied where both immediately before and after a collapse of the DCS structure, the bidder will hold 50% plus one share.

Jade Jack:

Thanks, James. The consultation certainly looks to be trying to future-proof the Code, and I think the proposals are logical. It's helpful they're applying existing technology. And I think it's important that they're preserving some flexibility on it as well, as I think it's an area we'll see develop over the coming years. Or at least we hope we will see develop with the resurgence of IPOs. So, in terms of new practice statements then, what would you draw out of the new guidance provided in those, Harry?

Harry Thimont:

So, if we take Practice Statement 35 first, now that covers Rule 28. So, Rule 28 has always had a degree of complexity, and so the new guidance of how particular situations are interpreted by the Panel is very welcome. And I think in some respects codifies what has been recent market practice. For me, one of the aspects of the new practice statement, which I can see as being a helpful development, is the ability for a QFBS, quantified financial benefit statement, to be published in a possible offer announcement, but without the requisite reports also being published at the same time. And I think that's not dissimilar to the Panel's practice on asset valuations, for example, in the energy and resources sector, where it's become relatively common for targets and securities exchange bidders alike to be permitted to delay the publication of an asset valuation. Now in some cases, beyond the 2.7 announcement actually until the scheme or offer document is published.

That's obviously not exactly what's proposed here, I think there are good reasons for that, but the added flexibility in terms of timing of publication of QFBS should be helpful in certain situations.

But I might just spend a bit of time on picking this, because it's not carte blanche for bidders to publish a QFBS as they see fit. I think the starting point is that an all-share or a cash and share offer by a strategic acquirer typically factors in to some extent synergies in the offer consideration or exchange ratio. Now, in an ideal world, where the first the market hears of a deal is a firm offer announcement, shareholders are informed of the expected quantum of synergies, which are supported by an accountant's and financial advisor reports, and are able to factor that in effectively when assessing whether or not they like the offer - at a very high level.

I think the challenge can arise where a possible offer announcement is required, e.g. because of a leak, particularly one which includes terms, and it's not practically possible for the QFBS to be included because the reports just aren't ready. Now, while shareholders are not being asked to decide on an offer at that stage, so it's not really a case of an offer being rejected per se, the impact of the possible offer on typically the bidder's share price can be such that it can derail the process. So, the helpful development here in the scenario that I've just described is that it may well be possible for the QFBS to be published with the corresponding risk of potential deal derailment hopefully going down.

There are some other considerations there, though. I think, one, it's likely to be most helpful where a decent amount of work has already been undertaken on the QFBS work stream at the time of the possible offer. And I think that's for two reasons. One, clearly any offer announcement possible or otherwise needs to be prepared with the highest standards of care and accuracy, i.e., the Rule 19 standard. I think secondly, the Panel has indicated that it would not consent to a delay of more than 21 days or if earlier the proposed date of the firm offer announcement, meaning that a bidder effectively has 21 days at most to publish the reports if a dispensation is granted. And I suspect that could be difficult to achieve from a standing start.

I think, secondly, even if a decent amount of work has been done on the QFBS work stream, it will invariably require a judgement call from the board on how aggressive they want to be. And no doubt, they'll want a bit of a steer from the accounting firm that's doing the verification of the QFBS, to avoid a situation where a number is put into the market as part of a possible offer that is in excess of the number that is subsequently published and supported by the reports. So as I said, not necessarily a carte blanche for the publication of QFBSs, but I do think it's a helpful development in specific situations.

And with a possible increase in strategic acquirers, I think we may see some of them look to take advantage of this in upcoming transactions.

I've obviously only highlighted one aspect of the guidance. There are a number of others: treatment of aspirational targets, for example. Profit forecasts for financial periods ending more than 15 months in the future, all of which I think are helpful, because Rule 28 can be somewhat unwieldly at times. Even though it obviously does generally operate to ensure among other matters, the avoidance of false markets and ensuring that shareholders are not denied the opportunity to decide on the merits of a bid.

James Fletcher:

Thanks, Harry. Why don't I take Practice Statement 36, which provides guidance on how the executive normally interprets and applies the relevant provisions of the Code in respect of an unlisted share alternative to a cash offer, commonly referred to as stub-equity. Alternative forms of consideration are increasingly being used in our view in the market at the moment to secure shareholder support, where there's a valuation gap or where shareholders wish to remain invested in the target or the sector. And we think this trend will continue. So, the additional guidance is definitely welcome. The focus of the practice statement is really a reconfirmation of GP1, that all shareholders must be treated equally, albeit that it is permissible for shareholders with a specified shareholding to benefit from certain governance rights, such as board representation or information rights. The Panel's also taken the opportunity to remind bidders and targets that they should be able to provide a valuation and recommendation of the unlisted consideration to shareholders respectively.

Jade Jack:

Thanks, both. As you say, some complex areas. So, panel guidance is always welcome, particularly I think given how we've seen the market practice develop over the last 12 months. So, just to finish off, always the difficult final question. Is there anything you think we should be looking out for in H2?

Harry Thimont:

I think I was probably asked this last time we published the podcast, and I suspect what I said has been proven to be completely wrong. So I think there are certain sectors where we'll continue to see activity. Real estate, for example, particularly REITs. I think also the FIG space. I think, secondly, and to be fair, not strictly public M&A, but I do think that we might see an increase in divestments or carve-outs by listed companies of divisions. And one of the reasons why I think that might be a bit of a trend is because there's been a lot said and a lot has continued to be said about UK corporates, UK-listed corporates being undervalued.

And so, I think some thought is being given to whether or not greater value for shareholders can be extracted by divesting certain divisions and returning that money to shareholders, as opposed to a sale of the company outright. It's something we've seen a little bit of in recent months, but it is an area where I think we might see a little bit more, particularly if the sentiment remains that listed companies are undervalued.

James Fletcher:

I completely agree, Harry. I think we're definitely seeing plenty of corporates carving out non-core businesses and helping realise value for their shareholders through doing that. I also think that organic growth for corporates isn't easy at the moment, and so there are plenty of strategics who are quite keen to accelerate growth through M&A deals and material M&A deals, rather than bolt-on. Naturally, though, that level of investment requires the macros to be more stable, both from a valuation perspective. But also, if that company's going to borrow some money to fund it or try and raise some money in the capital markets, then stability and clarity are absolutely key.

So, I think it's hard to predict what's going to happen next. I think there is definitely some pent-up demand in boardrooms, but I don't think anyone is going to try and guess about what might happen to the macros in the coming months. And we definitely need those to be reasonably stable for that pent-up demand to unlock. So, interesting times ahead.

Jade Jack:

Thanks very much, both. Well, I think that's probably our time up, so thank you to James and Harry for your time and to our listeners for joining us. We hope you found it interesting. For the full quarterly report, updates on the recent publications, and for more information generally on our public M&A group, please do take a look at our website. And of course, it goes without saying, but if you'd like to discuss any of the points raised in the materials or have more general questions around UK public M&A, please do get in touch. You'll be able to find all of the team's details on the website. Thanks again for your time. And please do share the podcast with interested colleagues. Bye for now. Until next time.