Takeover Talks: Everything Must Go

Jade Jack:

Hello and welcome to our fifth podcast in our series 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 by colleagues, Harry Thimont and Maria McAlister, both of whom are specialists on public M&A and takeovers here at Ashurst.

Earlier today, we published our first quarter review of the UK public M&A market and in that, we considered some of the trends we're seeing so far this year, and looked back at the key legal and regulatory developments in the quarter. And I wanted to discuss a couple of those trends with you both today.

So if we start with the use of sale processes and strategic reviews by UK public companies, we're now almost two years on from when the Panel published updated guidance on this area, and we've seen a rise in target-led sale processes during that time.

In the first quarter alone, there were six processes announced, which took the form of either a formal sale process, a private sale process, a strategic review, or some sort of combination of those. And there were a further couple which announced a firm offer, but cited an earlier private sale process as well. So my question is, what do you think is driving this increase, and have the changes made by the Panel had an impact? And Harry, perhaps I'll give you this one to kick off.

Harry Thimont:

Thanks, Jade. So it's a good question. And I think there are probably two key drivers. One is market facing and the other is regulatory. I think on the market side of things, the now fairly persistent undervaluation of UK equities continues to mean that boards of directors at listed companies consider take privates as an option and I think on top of that, there's also a continual liquidity challenge, particularly in the small mid-cap space, meaning that there is just very limited liquidity in a lot of UK PLC stocks. The second and the regulatory side of this, essentially, target-led sale processes under the Code have been simplified by the changes that you alluded to, which has meant that these processes are a little bit easier to run, and therefore they are more attractive to target boards.

I won't continue to bang on about the perceived undervaluation of markets, but I will perhaps just briefly remind listeners of the changes made by the Panel to sale processes back in 2024. So the current guidance is set out in Practice Statement 31, and as I said, May 2024 is when the Panel published guidance on these processes. And in it, the Practice Statement contains four main options that the Panel considers to be available to listed companies, namely a formal sale process, so FSP, a private sale process, strategic review, or a public search for bidders. Now, prior to these changes coming in, I think it's fair to say that what we term buyer outreach programmes tended to be fairly challenging, often involving quite complex disclosure considerations, unless the company in question was willing to go down the FSP route. However, FSPs, which were first introduced back in 2011, had become and they have become associated with companies in financial distress or otherwise at the end of their cycle, which meant that most boards of directors are unwilling to use this as an exit route, certainly not initially.

And so what the Panel did, when it issued its revised guidance, was to extend various dispensations, which were previously limited to FSPs, to private sale processes and strategic reviews. So in the context of both private sale processes and a strategic review, target companies can now enter into discussions in private or announce that they're undertaking a sale process or strategic review without necessarily naming the parties with whom they may be in talks, provided that there is no leak which identifies one of these parties. Now, in the context of a leak, as with a formal sale process, the identified parties must be formally named in any leak announcement. So the net effect of all of this has been to make sale processes easier and to give target boards more flexibility in implementing them and that's partly driven by the informal application by the Panel of the "rule of six" to private sale processes, which has meant that a target company is able to test market appetite with a limited number of external potential purchases outside of a public sale process.

And I think the only other thing I'd add to this is obviously what I've described as the regime under the Code. Now that doesn't switch off the market abuse regulation, so target companies will still need to be mindful of their obligations under MAR in these situations and the two regimes, whilst generally harmonious, are not always entirely singing from the same hymn sheet. So it is something which companies need to consider at the outset of undertaking any sale process under the Code.

Jade Jack:

Thanks, Harry. And that's a really good point to bring it back to MAR as well. I think the success of some of these private sale processes over the last 18 or so months has also shown that it's been a step forward, I think, for target boards, which is great. Maria, do you agree with that analysis or is there anything else that you'd like to add on this?

Maria McAlister:

Thanks, Jade. Yes, I think I do. Unfortunately, I think a number of listed companies are evaluating the benefits of remaining listed, particularly those trading at a consistent discount to their net asset value. It's a difficult market, and for some clients it makes sense to consider a private setting.

Just to pick up on some of the changes Harry mentioned, I think it's also worth noting a couple of points of difference which remain between a formal sales process and a private sale process. If parties are leaked and named in a private sale process or a strategic review, the Code still requires those parties to be set a "put up or shut up" deadline. This is the 28-day deadline by which a bidder must either make a firm offer for the target or walk away. It's used to break the siege on targets and can be extended by the target with the consent of the Panel.

The distinction the Panel's trying to draw here between an FSP and a private sale process is, while a target initiating a formal sale process can control the participants that are in that process, the same isn't necessarily true for a private sale process or strategic review. Therefore, the Panel believes it's appropriate to protect targets undertaking a private sale process or strategic review from unwelcome siege. A recent example of this structure being used was the private sale process for Senior PLC, where multiple bidders were named over the course of a few days. PUSU deadlines were applied to each of the bidders that were named and the bidders were then required to clarify their positions publicly. It's possible that this type of structure may make things more difficult for strategic bidders who are more likely to be identified by reporters and analysts as a potential bidder following an announcement by a target of a sale process, even where they themselves have not been leaked.

I think in the main though, the benefits of this regime outweigh the concerns, and the flexibility the Panel has applied, has been beneficial to target companies looking to assess whether a sale might be in the interests of its shareholders.

Jade Jack:

Thanks, Maria. And that's a really interesting point you make on bidders. It seems inevitable that once a target announces a sale process, there's going to be speculation as to who might be part of that process. And as you say, it will be much easier for journalists to correctly identify strategic bidders rather than perhaps say a private equity bidder. And just to complete that analysis of the differences then, the other difference, of course, is that there's no exemption available on the prohibition of inducement fees for private sale processes or strategic reviews, which is unlike the formal sale process, where it's possible to seek a dispensation and to agree an inducement fee with bidders. So there may still be some benefit of a target opting for an FSP rather than a private sale process, despite the associations with that process.

Of course, on the flip side of this, where there is a perceived or real undervaluation of a company, hostile approaches are the other concern. And I know we've been working with a number of our clients on defence packs recently. Harry, what are we saying to clients concerned about hostile approaches in today's market?

Harry Thimont:

Yeah, so I suppose takeover defence is essentially the flip side to the target led sale process, albeit often driven by similar market dynamics. It is certainly the case that we have seen more and more approaches being made to target company boards over the last year, 18 months or so. Some of them have resulted in announced bids, but equally a number of them have also remained in private. I think as a result, boards of directors generally are very aware of this dynamic and also mindful of their duties to shareholders. And I think you're absolutely right, Jade, in saying that certainly a number of our listed company clients, and no doubt other listed companies more generally will have either received defence briefings or will otherwise have takeover defence fairly high up on the board agenda since the start of the year.

I mean, when we talk to clients about takeover defence strategies, yes, we talk about things like announcement obligations, sale processes, et cetera, but equally, we also obviously cover more than that. We think about the company's ordinary course of business and how we can future-proof that in the event of a takeover situation and, whilst the Code has been updated, partly in an attempt to balance the interests of companies in running their business on a daily basis with the risk of the corporate action frustrating a takeover, it is nevertheless the case that various corporate actions may and indeed are still restricted following a takeover approach. One often critical area is share issuances and the grant of employee share awards and actually it can also be relevant in the context of an M&A transaction involving share consideration, albeit in those situations, there is more scope to cure that by offering cash instead of shares on the basis that there is at least a materiality threshold that applies in that scenario. And obviously we work with our clients to identify what you might term an ordinary course track record for those sorts of activities or to identify activities which are already underway and which could be impacted by an unwelcome approach, and how we might deal with them if such an approach were to be received.

It's also really important to consider other stakeholders in the business out and how to approach those. So whether it's customers and suppliers, whether it's employees, the regulators, the government, again, depends a little bit on the sector in which the company operates, but invariably there'll be considerations for each of the other stakeholders and not just shareholders.

And, in conjunction with financial advisors, brokers, we also consider potential bidder landscape, preparing clients for unsolicited, what we term "bear hug" announcements, which is effectively an announcement by a bidder of a possible offer designed to put pressure on the board of a target company to engage in circumstances where it may have been reluctant to do so before that public statement by the potential bidder.

And obviously we always encourage clients carefully to consider their shareholder base. We've seen over a few years now that shareholder activism isn't limited to what we might term traditional activists. A broader range of investors have found their voices and are increasingly vocal in these situations.

Clearly macro-economic events and using global disruption, that can all have an impact on equity markets, it's made some of the valuation metrics a little bit more challenging. And in that regard, understanding shareholder views on value, value of the underlying business, is critically important. We're also seeing occasionally some shareholders who want to be brought inside a little bit earlier than they might otherwise have been, i.e. not necessarily leaving it to 24, 48 hours before the intended announcement of a takeover to solicit a commitment for the bid, but actually to be involved at an earlier stage, obviously the quid pro quo there is that if you do bring a shareholder inside, then they'll be restricted from dealing for that intervening period. But for some shareholders, that's not a problem, hence the desire to be brought inside a little bit earlier. But I think at its essence, for boards of directors, particularly in the current economic environment, understanding what their shareholders' views on price are and understanding that outside of a potential offer period on the basis that it's quite hard to solicit those insights when you're in an offer or when you're in receipt of an approach is really important as it enables boards to discharge their duties in considering an approach if it were to come in.

Maria McAlister:

And if I could just add to that, we've seen a real trend for recommended deals to be challenged by shareholders recently, both at the institutional and retail level. Just this quarter, for example, on the consortium offer for Inspecs and on the International Personal Finance transactions, the shareholder meetings to approve those bids needed to be adjourned given concerns around levels of shareholder support. In the Inspecs situation, the bidder switched to an offer structure with a 50% acceptance threshold and declared the offer unconditional as soon as that threshold was met.

Whereas, on International Personal Finance, the bidder increased its offer by permitting a special dividend payment and declared the offer final. That offer was then duly approved at the shareholder meetings, although regulatory conditions remain outstanding. And finally, in the case of TT Electronics, where a significant shareholder opposed the deal, the bid was ultimately voted down even though the bidder tried to switch consideration and declare the offer final.

So lots of activism to be seen across the board on recent transactions. These sorts of examples are leading target boards to be much more cautious with their recommendations, and we would always encourage target boards to have their ducks in a row ahead of an approach, meaning that getting to a recommendation is helpful for targets. For bidders, the continuing trend for vocal opposition is a reminder to ensure that a thorough analysis of the shareholder base of the target is completed before launching any offer.

Jade Jack:

Thanks both. A really interesting area and much food for thought there. I think, as we predicted would be the case, shareholder activism continues to impact public M&A and will continue to do so. What's interesting, I think, and has been picked up by you in these various situations, is that shareholder opposition is much more complex. It's not just about "bumpitrage", so it's so important to understand the motivations of those shareholders on a deal-by-deal basis, and it's so important to enable bidders and targets to get a deal done. Equally, being well-prepared for an approach will obviously help targets with an increasingly competitive and potentially hostile market.

So on that note, I think that's our time up. Thank you to both of you for your time and to our listeners for joining us, we hope you found it interesting. For the Q1 report and for more information on our public M&A group, please take a look at our website.

And of course it goes without saying, but if you would 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.