Private equity and family offices are exerting increasing influence over public takeovers in the UK, with public to private transactions ("P2Ps") making up more than 2/3 of all bids in H1 2021 and contributing strongly to Q3. It is not surprising that PE gained first mover advantage following the pandemic and US PE funds have been particularly active, drawn by attractive deal metrics in the UK. The total value of P2Ps announced YTD in 2021 is circa £38bn, with average deal values close to £1.5bn.
A common perception of take privates is that PE and management are buying the company "on the cheap". This is an argument that has been voiced in the press over the last 18 months, sensitised in particular by the rise of national interest concerns. However, so far in 2021, average premia paid by PE bidders has been higher than that paid by corporates. This doesn't tell the whole story, of course: there are a number of factors which influence premia, but it does reflect a trend towards fuller value being paid. More active institutional shareholder engagement has reinforced and encouraged this.
The other driver of valuation has been competition for assets. Of the 6 competitive offers announced YTD in 2021, all but 1 involved a PE bidder, and in most cases involved PE bidders competing against each other. As PE bidders identify value pockets in the market, there will be increased competition for these assets. Whilst Philip Morris' successful competing bid for Vectura illustrated the commonly held view that strategics can extract synergies and so pay more, this is no longer as clear-cut, especially where PE bidders have portfolio companies in similar/same sectors and can also extract synergies. The ongoing availability of cheap debt and the rise of consortium offers has helped to de-risk bids and allowed PE bidders to compete more regularly and for larger value targets.
Management incentivisation and disclosure
Management incentivisation and financing disclosure requirements are typically front of mind for PE bidders in a P2P. Management incentivisation is permitted where a majority of independent shareholders approve the deal. However, discussions need to be publicly disclosed and so PE bidders must make a decision – engage but face disclosure and an independent shareholder vote (with additional execution risk) or proceed without locking the target management in post-closing. Disclosure of financing is another source of sensitivity for PE. There is little flexibility permitted under the Takeover Code so sources of finance and timing of equity and debt syndication need to be considered carefully early on.
The word "barbarian" has often been used pejoratively in history to refer to outsiders. The phrase "barbarians at the gate" was immortalised in Bryan Burrough and John Helyar's book about the leveraged buyout of RJR Nabisco, where the PE bidders were referred to as "barbarians", a description which has been re-used countless times since. But being a barbarian isn't necessarily a bad thing. In an oyster bar in Bradford, back in 1890, William Percy Carpmael had the idea to collect a touring side of "outsiders" to play rugby against a few of the leading clubs in the area. With the motto "Rugby Football is a game for gentlemen in all classes, but for no bad sportsman in any class", the Barbarians rugby team was conceived and it has become one of the most well respected teams across the world. Indeed Gareth Edwards' try against the All Blacks in 1973 is enough to cheer anyone up on a dreary morning.
With close to 600 M&A lawyers around the world, White & Case is an M&A powerhouse and one of the most active M&A practices among global law firms. We are equally adept at advising on big ticket, complex M&A deals as well as on mid-sized and smaller deals for strategic clients in EMEA and the rest of the world. We have a deep bench of public M&A and PE specialists with an established record advising targets and bidders on takeover offers and schemes. We have developed a unique understanding of Board and shareholder engagement through our dedicated shareholder activism and public company advisory teams, and have market-leading debt and equity capital markets capabilities. We provide expert advice to help navigate complex situations, offering innovative financing solutions for both bidders and targets (including advice on PIPEs, high yield and structured finance).
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