Takeover Talks: What A Difference A Day Makes

Jade:
Hello and welcome to our inaugural podcast on UK public M&A. I suspect there will be fewer fireworks and hopefully less dancing to YMCA than in other recent inaugurations but I hope it will be of interest to you all nonetheless. So my name is Jade Jack and I'm an advisor on public company matters here at Ashurst. I'm delighted to be joined today by two of our London partners, Tom Mercer, head of public M&A for EMEA and Harry Thimont, a partner in our corporate transactions practice, both of whom are specialists on all things takeover related. Earlier today we published our quarterly review of the UK public M&A for Q1 in which we looked at a number of things including the state of the market. We picked out some trends we are seeing in the market and discussed the key legal and regulatory developments during the quarter. So this podcast is intended to sit alongside that and in it we'll focus in particular on the state of the market that we see. So Tom, it's been quite an interesting year so far. What are your thoughts on 2025?

Tom:
Thanks, Jade. I think we're all past getting what it's like to operate in an M&A market, which is anything other than interesting. I think we started this year hoping that some of the animal spirits that were intended to be unleashed in the US might loosen M&A conditions and allow for greater levels of activity, but that optimism quickly fell away with the advent of the Trump administration's tariffs and the volatility that that caused in the market. It's interesting in our experience that M&A tends to flourish in good markets and bad markets alike, but the one thing that will result in subdued levels of activity is volatility, uncertainty, and unpredictability. And of course those are all the hallmarks of the Trump administration's approach to tariffs in recent weeks.

Interestingly, at this time of year, around Easter time and shortly thereafter, we tend to be really busy with people wanting to get deals done before summer breaks. And whilst there's a lot of activity levels around in terms of possible transactions, we still see conversion rates being particularly challenging, whether it's parties agreeing price or even deals getting over the line with significant dislocation between bidder valuations and target shareholder valuations.

In terms of predictions for the rest of the year, that's a hard one. You'd have to know what's inside the mind of the man himself to know what Trump's going to do next. But it's fair to say that there is a lot of appetite for M&A in the market, and if conditions do stabilise, we expect it to be busy. But for the time being, it remains the case, we think, that, particularly with larger cross border and global transactions reliant on stable capital markets, there will be somewhat of a hiatus.

Jade:
Thank you. It's certainly been a dramatic start to the year. Harry, moving closer to home, how are you seeing the UK market responding?

Harry:
Thanks, Jade. And also to say it's a pleasure to join you on this podcast. Before I address your question on the state of the UK market, I should say, we've been producing our quarterly review of the UK public M&A market for the best part of 15 years. It's great to add something new to that offering and to assuage any possible concerns that listeners have that the podcast may at some point come to replace our publication. I can assure you that we'll continue to produce our quarterly updates with the usual insights and analysis, and the podcast really serves an opportunity for those of us involved in producing the publication to delve a little bit deeper into some of the topics that we discuss.

So what have we seen in the UK market? I think it is clear that the FTSE was impacted much in the same way as many global stock markets with some significant gyrations over a number of days. And I think it's also fair to say that various people of all political and other stripes have been predicting to varying degrees of, sorry, I'll say that again ... Have been predicting with varying degrees of doom and gloom for want of a better phrase. And there continues to be an awful lot of pressure on Rachel Reeves, the UK's Chancellor who I think finds herself in an increasingly difficult position between pre-election promises on tax rises and a country that is largely mired in stagnation. So all in all, it's not been a great period and I think as Tom has alluded to, we expect this uncertainty will continue to weigh on the UK public markets even as the immediate threat of the trade war has partly retreated.

Jade:
Thanks, Harry. And as you said, Tom's briefly alluded to the impact that this is having on M&A globally and in the UK, but perhaps if you could just touch on the UK public M&A market a little more.

Harry:
Yeah, absolutely. So interestingly, the first quarter of the year was actually not a bad quarter in the sense of the number of announced deals, so the volume of deals was pretty much in line with what we saw in the latter part of 2024, and in fact deal volume saw a bit of an acceleration towards the end of the quarter. So there were 12 announced bids during January through March of this year, of which seven were in March. However, I think there is a key point to all of this, which was that there's been a pretty significant drop in deal value for the first quarter from an average of close to 1 billion in 2024 to just 264 million in the first quarter of this year. Now in January we did have a couple of the more significant deals announced. So the offer for Dowlais, which is over a billion in cash and shares, bid for Alliance Pharma for 360-odd million, and in February we had the Renewi bid, in which we're advising Renewi, which the deal value over 700 million. Albeit it's worth bearing in mind in the context of that transaction that the terms were effectively agreed in the latter part of 2024. However, since those deals in January / February, there has been a marked drop in deal value with five out of the seven bids that were announced in March having a value of under 100 million.

I think the other point that I'd add to the overall dynamics is that most of the deals that we've seen in this quarter have involved strategic purchasers, and I think it's probably fair to say that strategics can be a little bit less sensitive to the economic uncertainty that puts pressure on financing terms on the basis that they may be more likely to realise synergies that are perhaps not available to a financial investor. And that gives them a little bit more scope to accept some risk of doing a deal in these uncertain times, particularly if the overall deal value as we've seen is relatively low.

One other trend, and TBC whether this is a particular feature for an uncertain market, is we have noticed more takeovers by major shareholders. I think there were two of note in the last quarter and we are seeing some outfits acquiring quite substantial stakes, albeit below the 30% Code control threshold in listed companies and subsequently making offers under the Code for those companies. Now clearly there are pros and cons to this approach. On the one hand, acquiring shares outside of an offer period means that a bidder would ultimately be left with a potentially illiquid stock in a public company if an offer never materialises. And it is also fair to say that liquidity generally, particularly in the small and mid-cap companies, is a challenge at the moment. So emphasis there on illiquid. Likewise, a bidder which already has a stake in a listed company would not be able to vote those shares on a scheme of arrangement, which is the preferred structure in many takeovers these days, particularly where they're recommended, and therefore those shares won't count towards the 75% threshold that's required to get that deal structure through.

However, there are benefits. Building a stake in a company over time outside an offer period can ultimately reduce the overall acquisition cost on the basis that the purchaser will quite likely acquire those shares at a price which is below any offer price on the basis that there wouldn't be a control premium attaching to the acquisition outside of the offer price. And likewise, they can also provide a useful blocking state to any potential interloper, particularly if that interloper is looking to do a takeover by way of a scheme on the basis that it's not so much that 25% blocks a scheme, in reality, when you look at voter turnout or many deals at the moment, voter turnout is significantly below 100%, so a stake of between 15 to 20% can likely be pretty effective at blocking any potential competing bidder.

Jade:
Interesting. Thank you Harry. I guess one other reason we might be seeing this trend, or might be able to link this trend to uncertain markets, might be that where shareholders have actually been involved in the business for some time and they've built up a stake and perhaps been involved in board meetings or joined the board, they'll be more likely to understand the target company and perhaps be able to take advantage of any share price falls that have been caused by various statements or global developments. So that might be why we're seeing a little bit more of that here.

One thing I wanted to talk to you guys about is we've seen a lot more in the last 12 months about tactical leaks and I've got a statistic here, love a statistic, and it says around 70% of offer periods in Q1 2025 started via possible offers. Now some of those will be voluntary announcements, but a large number of them were because of leaks. We've also seen the FCA publish primary bulletin 54, which focused on strategic leaks and unlawful disclosure. And in that they actually note that they've seen an increase in cases where material information on live M&A transactions appears to have been deliberately leaked to the press. So they specifically call that out. And alongside that, we actually saw the London Stock Exchange host a session with panelists from both the FCA and also the Takeover Panel, which was dedicated to a review of market abuse. So what's my question here? Well really what are the key takeaways for players in the market from this clear increased interest?

Tom:
Jade, I can pick that one up if you'd like. I mean it's an interesting statistic you give there. I mean it is certainly true that transactions which we're involved in where the first announcement of a deal that's going to go ahead is the Rule 2.7 announcement are sadly in the minority and it's much more common that at some point before the deal launches, the target company will go into an offer period. I mean before we talk about leaking, the markets we operate in at the moment definitely create potential incentive for parties to legitimately want transactions to be publicised before the point at which a bit of formula launches under Rule 2.7. And that may be because of the need to discuss valuation concerns with a wider group of shareholders than is permitted under the panel's rule of six, particularly where there is a potential delta in valuation expectations. It may be because it's necessary to put foreign exchange hedging in place and that can't be done privately without the possibility of a transaction in place if a party's looking at deal contingent hedging. It might just be because credit market conditions are such that a bidder needs to speak to a broader group of lenders than is permissible under that panel rule of six. And those are all legitimate reasons for considering a voluntary announcement of a possible offer.

What of course is not okay, is tactical leaking. And whilst the purpose of this podcast isn't necessarily to lecture everyone on the requirements of the Code or UK MAR in relation to minimising the risk of an inadvertent disclosure of inside information, I think it's fair to say that what seems to be antagonising regulators at the moment is this sort of tactical leaking, not where a clever journalist may have triangulated bits of information and come up with the right answer, but where it's quite evident that someone has given a journalist verbatim a copy of an announcement, sometimes a Rule 2.7 announcement on an early sight basis. And clearly that's not okay. And just by way of reminder, if it's required, journalists themselves are broadly exempt from any regulatory consequence from publishing that sort of information under MAR provided they're doing it in accordance with their profession and their own ethical guidelines, but it is unlawful to provide inside information to a journalist. There is no exemption from MAR on that, and it's something that the FCA and the Panel, as you say, are taking very seriously indeed and have upped their efforts to stamp out the practice in recent months.

Part of the issue it seems to me is that in recent years the incentive and the tactical advantage to leaking has gone up, whereas there was a period, particularly after the push-up or shut-up regime was introduced 13 / 14 years ago, when it was really disadvantageous to leak relative to the upside. So I think it's partly a function of the markets we're in, but also perhaps because of bad practice creeping in and bad actors. But, as you've pointed out, it's an area where we know regulators are very focused and are talking to each other. And I wouldn't be surprised if at some point in the coming months an example is made of someone for that sort of behaviour if it persists.

Harry:
Interesting, Tom. I think it's an interesting point you mentioned there around the fact that these days there being, or rather a deal coming into the market pre 2.7 announcement is not necessarily viewed a bad thing on the buy side. One of the features I think we've seen of numerous deals lately has been possible offers also accompanied by statements of support or even undertakings from share shareholders. And I think that's potentially a trend that we might see a little bit more of or at least bidders trying to put themselves in that position a little bit more frequently, not least because it obviously serves as a means of de-risking the outcome. But because in this sort of market we may find some shareholders a little bit more willing to provide that support if it is ultimately as a means of getting an announcement on the screens at some point.

Jade:
Thanks guys. It's certainly one that we're seeing more of, isn't it Harry? And the broader point is one for our listeners to be aware of, I'm sure you all are, but this unity between the Panel and the FCA and this close relationship and these public statements show that the regulators are very concerned and focusing on leaks.
So, to end the podcast on perhaps a rather unfair question for both of you, how is M&A likely to shape up for the rest of the year?

Harry:
Shall I go first and then Tom can correct me where I go wrong?

Jade:
Perfect!

Harry:
So look, clearly it's a very difficult question to answer, but we've obviously had quite a lot of uncertainty in recent years. Five years ago we were probably all sitting at home while people were talking about COVID and pandemics. And yes, that situation did impact quite significantly on deal flow, but equally people did also ultimately get across that situation and deals did come back. And in fact, if I look back to 2021, that was a year of huge amounts of activity. So I think ultimately we will find ourselves in a similar position.

It's quite hard to predict when exactly deals will come back, so to speak, particularly the large cap ones. But I do think that at some point everyone will feel comfortable enough with the new normal, with the fact that there is uncertainty, with the fact that there is volatility but will nonetheless decide to take the plunge so to speak, and we'll say, right, we are going to pick up tools again, we are going to look at those matters that have gone on hold because we've got a number of years of the current US administration and everything else which is going with that and we do need to continue to grow the business or whatever it might be. I think it will come back. I think we'll probably see things later on this year, but certainly I do think that all parties will familiarise themselves with the new normal and will be willing to do M&A. It's a matter of when not if.

Tom:
Yeah, look, I completely agree with Harry. It's interesting when we've had these periods in the last few years of intense dislocation in markets and big change, it's nearly always followed that we've been quite busy once people have got their head around the new dynamics. That was absolutely the case with COVID where we had an initial period where things were slightly in stasis followed by a really rollercoaster of M&A for a period of around 18 months. Clearly this will be dependent here on what the US administration does next in terms of its international tariff agenda and its relationship geopolitically with the rest of the world more generally. However, if things do stabilise, I think it's going to be a very busy year, particularly in the UK with public M&A. And I say that on a slightly depressing note because I think the challenge still remains for a lot of UK companies outside the FTSE 100 that are listed that life as a listed company is not everything it was cracked up to be. And therefore there is a certain amount of softness in terms of boards' positions when it comes to potential bid approaches, which in a sense is reflective of the fact that a lot of institutional shareholders are still experiencing significant redemptions and outflows of investment.

So, subject to the geopolitical situation stabilising, I think, particularly in the UK mid-market, it's going to be a potentially busy time ahead for M&A. And the real question is, will the IPO markets also stabilise such that we can start restocking UK equity markets? Because at the current rate of depopulation, I slightly fear for the UK mid-market in terms of the number of companies left.

Jade:
So a hopeful note for M&A, but perhaps a less hopeful note for the UK markets unless the IPO market comes back.

Well, thank you both very much for your time and to our listeners for joining us as well. We hope you found it interesting. For the full quarterly report and for more information on our public M&A group, please take a look at our webpage and of course it goes without saying, but if you would like to discuss any of the points raised in the materials or on the podcast today, or you 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 webpage. Thanks again for your time. Please do share the podcast with any interested colleagues and bye for now. Until next time.