A public-to-private transaction ("P2P") is one in which a publicly listed company is acquired and taken into private ownership. Because they involve changes in ownership of public companies, P2Ps are subject to various regulations that govern the process by which the acquisition can occur, the financing of the transaction, and information about the transaction that must be publicly disclosed. The below summary aims to serve as a resource for those looking to better understand each stage of a typical UK P2P transaction and the important financing considerations to keep in mind.1 For those interested in P2P financings in other European jurisdictions, we have highlighted certain additional considerations at the end of this client alert.
The Key Elements
The key parties to a P2P transaction are: (1) the target (company being acquired); (2) the bidder (acquirer/borrower/sponsor), directly or through a special purpose company formed by the sponsor; (3) the banks (lenders/arrangers/underwriters); and (4) the financial adviser.
The Four Stages of P2P Financing
To understand UK P2P financing, with a focus on the financing aspects, it can help to split the transaction timeline into four key stages: the pre-bid, the offer announcement, the certain funds period and the acquisition closing.
In the "pre-bid" stage, the bidder conducts due diligence on the target, considers the type of bid it will pursue, and negotiates the structure and terms of its financing to fund the acquisition. In the subsequent "offer announcement" stage, the bidder announces the terms of its offer and the details of the financing agreements that it has executed and any cash consideration for the acquisition. The availability of such funding is confirmed by the financial adviser to the buyer at the time of the formal announcement of the offer, as well as later in the offer document or scheme document. Assuming the buyer submitted the winning bid, after the announcement but before the acquisition closes during the "certain funds period" stage the banks become significantly limited in their ability to cancel or terminate the financing commitments. Lastly, in the "acquisition closing" stage, the bidder draws on the short-term or permanent financing it has secured to fund the acquisition, and the acquisition is completed. Please see below for more detail of each stage.
- Performing Due Diligence on the Target Company — In a P2P, due diligence by the bidder is generally more limited than other types of acquisitions due to a number of factors. Firstly, most of the material information about the target will already be public because of the UK's Listing Rules on public company disclosure and given that bidders may be competitors of the target in a P2P transaction, there is no incentive for the target to disclose information beyond what is already public. Secondly, under Rule 21.3 of the UK Takeover Code, the target must provide the same information to all bidders. Finally, a shorter due diligence process helps the target avoid any leaks of the potential offer prior to the bid announcement.
- Structure —
- In general, there are two types of P2P structures in the UK—an offer or scheme of arrangement. The bidder can make an offer, whereby the target's board of directors approve of the acquisition offer and recommend that shareholders vote to approve it. In some circumstances, a bidder make an offer on a hostile basis, whereby it undertakes the acquisition without the consent of the target's board of directors and instead approaches the target's shareholders directly with an offer to purchase their shares, usually through a tender offer. On the other hand, the acquisition can be completed through a scheme of arrangement, in which the target's board of directors puts forward the takeover bid for approval by its shareholders through a court-sanctioned process. In more rare circumstances, a scheme of arrangement can also be done on a hostile basis.
- It is important to note that in the UK, a public company usually cannot give direct or indirect financial assistance—including incurring debt financing or providing security over its assets—for the acquisition of its shares. As a result, in a P2P transaction the target may only provide financial assistance to the bidder after it has re-registered as a private company. While in a recommended or a hostile bid the re-registration can take up to six months, under a scheme this can occur on the same day as the transaction is sanctioned. For that reason, lenders supporting a P2P generally prefer an acquisition by scheme of arrangement. To learn more about financial assistance in P2P transactions, please visit our alert on factors for lenders to consider in connection with a P2P.
- Arranging the Financing —
- The Certain Funds Requirement – The common financing structure for P2P acquisitions is a by-product of the "certain funds" requirement of the UK Takeover Code. The requirement states that a bidder should only announce a bid after ensuring that it can fulfil in full the acquisition consideration. Consideration from the bidder may include a combination of equity and debt (loans and/or bonds). In furtherance to the certain funds requirement, the UK Takeover Panel requires the financial adviser to provide a "cash confirmation", setting out that sufficient cash is available to the bidder to satisfy full acceptance of the acquisition offer. Financial advisers will usually satisfy themselves through due diligence with detailed comments on both the financing documentation and borrower's creditworthiness. In connection with the requirement to provide the relevant cash confirmation, the financial adviser will require that any debt financing for the acquisition is made available on a "certain funds" basis, meaning that it must not be subject to any financing condition outside the bidder's control (other than regulatory clearances or if it becomes illegal to perform the commitment due to a change in the law).
- "Arranging" More Than Lending – The debt financing is usually structured, arranged and administered by one or more commercial or investment banks. Because banks generally do not want to hold the debt on their books, the aim is to sell the debt to institutional investors through the process of syndication (in the case of term loans) or underwriting (in the case of bonds). However, in a P2P transaction, banks are required under the certain funds requirement to commit to provide the financing and ensure funding is available at the acquisition closing. In a P2P transaction, it is challenging to immediately on-sell the debt to investors because (i) marketing the debt prior to the offer announcement may be limited, as bidders need to limit the spread of knowledge about the offer before it is announced, (ii) there may be limited due diligence, which makes it difficult for the banks to provide sufficient information on the target to potential lenders or bondholders before the bidder has taken control, and (iii) there may be limited cooperation of the target company's board until after the acquisition is closed. As a result, in P2Ps it is more challenging to fully syndicate loans or issue bonds before the acquisition closing date, when the funding is required.2
- Permanent Financing: The Goal of All Parties – In a P2P transaction, all parties seek to secure permanent financing by closing of the acquisition (or as soon as possible after closing to repay any drawn short-term financing). Rather than relying on a single source, a combination of sources is typically used, as each type offers different financing terms and levels of flexibility to the parties. Below are the typical forms:
- Term Loan – Term loans are key sources of permanent financing in P2P acquisitions. These typically consist of Term Loan B's ("TLBs"), in which the full commitment is drawn, interest is paid at regular intervals over the maturity of the loan, and the principal is only repaid at maturity. Maturity is typically between five and seven years and interest rates are typically floating. While disclosure is minimal when compared to high yield bonds (which is a securities offering and subject to various disclosure requirements), TLBs will often in the current market include high yield style incurrence covenants. Although term loans are typically syndicated, in recent market conditions borrowers have also secured such loans through private debt or club3 financing structures or through a term loan A4;
- High Yield Bonds – Issuing high yield bonds can also be a key source of securing funds for a P2P acquisition. High yield bonds usually have a maturity of between five and ten years, and can offer fixed or floating interest rates. Because they are considered to be lighter on covenants as compared to bank loans, high yield bonds can offer greater flexibility to the issuer. However, high yield bonds generally come with greater documentation and disclosure requirements than compared with loans, introducing an additional consideration for parties in the P2P context because of the extra time and preparation that it requires; and
- Revolving Credit Facilities ("RCFs") – RCFs are credit facilities in which the borrower may draw down on the facility (up to a certain amount), repay the outstanding balance, and continue to draw down on the facility as needed. RCFs typically include "springing" leverage financial covenants, which will often be based on a senior secured leverage ratio and will usually be tested only when the RCF is drawn to a certain level. RCFs are typically not the main source of financing for a P2P acquisition but are aimed at providing working capital for the target group at closing.
Fundable Documents at Closing – It is necessary to have fully fundable documentation at closing so that at the required time, the available funds can be drawn down to pay the completion amounts to close the P2P. For both term loans and/or high yield bonds in connection with a P2P transaction, bidders typically negotiate a fully fundable short-term financing in the form of interim facility loans ("IFLs"). In addition, for a high yield transaction, to offer more timing flexibility to launch the high yield bond after the P2P acquisition closing date, bidders also often agree to another form of short-term financing, bridge loans (also called "bridge-to-bond" loans).
IFLs will be prepared in fully agreed form before the P2P bid is announced so that the fundable IFL is in place, with term loan and bridge loan negotiated prior to the closing. Because borrowers want to avoid the higher interest rates and fees associated with these short-term financings and the banks prefer to act as underwriters to full-form financings in the form of the term loan or the bridge loan (rather than hold onto a large balance sheet liability with short-term financing), the intent of all parties is that the short-term financing only serves as back up in the event permanent financing is not available at closing. Therefore, the parties work to replace it with permanent financing as soon as possible. Below are descriptions of IFLs and bridge loans in greater detail:
- Interim Facility Loans – IFLs have a typical maturity of between 90 and 120 days. Generally speaking, IFLs agreements are not as fulsome as long-form facility agreements and their main purpose is to provide "certainty of funds" to meet the requirements of the UK Takeover Code. The commercial intention is not to fund under the IFL, but rather to enter and fund under long form documentation. However, unlike certain bridge loans, IFLs do not extend or convert into longer forms of financing; and
- Bridge Loans – Bridge loans are temporary loans with an initial maturity of one year or less used to "bridge" a potential gap between the acquisition announcement and when permanent financing is secured. The fee and interest rate structure of a bridge loan is set up to incentivise the borrower to launch a high yield bond offering or other permanent financing transaction ahead of the acquisition closing rather than funding the bridge, or if funding is necessary, to refinance the bridge as quickly as possible following the acquisition closing. For a more full discussion on bridge loans, please visit our recent alert on the topic.
2. Offer Announcement
Once the parties have agreed to the financing terms and have a commitment in place, the bidder announces the offer or firm intention to make an offer.
At that stage, transaction documentation is subject to disclosure requirements that are especially strict in the UK. The UK Takeover Code states that the financing documents must be published online, unredacted, no later than noon on the business day after the offer announcement. This also applies to syndication and fee letters, which include sensitive information such as market flex terms, if they exist. Because of this disclosure, when investors are approached during syndication or bookbuilding, they will already have full knowledge of the lender's economics and backstop positions.
Flex provisions are particularly sensitive for the purposes of syndication because they give underwriters some flexibility as to the terms of a financing after the facility agreement has been signed. Therefore, the UK Takeover Panel has granted several dispensations allowing disclosure of flex terms to be delayed from announcement until the time of offer or lodgement of the scheme document. During this—albeit short—period, the debt can be syndicated before flex terms are disclosed. However, in practice, many arranging banks choose to forgo flex altogether on P2P transactions. To learn more about disclosure of financing documents, please visit our alert on factors for lenders to consider in connection with a P2P.
3. Certain Funds Period
The certain funds period generally runs from the date that the commitment letter or facilities agreements are executed until the last possible day that the bid is either capable of being accepted by a seller (in a bid) or the bidder is to meet payments due under a scheme (in a scheme of arrangement).
Because of the obligation to have cash certainty during this period, banks cannot cancel, terminate, or refuse to make the facilities available, except for very limited circumstances. Therefore, many of the drawstop events under a typical debt financing that usually allow lenders to refuse to fund are disapplied during the certain funds period. Examples of disapplied drawstops include:
- Breaches of financial covenants;
- A material adverse change;
- Default by the target company;
- Cross-default provisions; and
- Breaches of covenants and/or representations beyond the bidder's control.
Many of the lenders' other rights, remedies and entitlements, such as the right to accelerate any drawn loans following an event of default, are also suspended during the certain funds period. These rights, remedies and entitlements are not waived, but will only become exercisable upon the expiry of the certain funds period.
In contrast, there are a handful of key drawstops that will still apply during the certain funds period, and thus allow the lender to cancel or terminate the facility. These include:
- Any "major events of default" by the bidder, such as
- Failure to pay principal/interest (i.e. payment default);
- Insolvency; and
- Repudiation/rescission/unlawfulness of the agreements.
- All "major representations" by the bidder must be true in all material respects, which often cover representations regarding:
- Status of the bidder (i.e. duly incorporated and validly existing under the law of its jurisdiction of incorporated and has the power to own its assets and carry on its business);
- Legality and validity of obligations related to the transaction;
- Power and authority of the borrower to enter into the financing documents;
- Validity and admissibility in evidence of the financing documents;
- Acquisition documents contain all material terms of the acquisition and no representation or warranty given in them is untrue or misleading in any material respect; and
- Holding company (if applicable);
- A change of control of the borrower and/or special purpose company in which the sponsor ceases to control the borrower and/or special purpose company; and
- When it becomes illegal to perform under the financing documents.
Generally speaking, the above "change of control", "major representations" and "major defaults" drawstops concern matters that are either within the control of the bidder or its parent or relate to matters, such as insolvency of the bidder, where the financial adviser providing the cash confirmation has performed sufficient due diligence on the bidder to be comfortable that such an event cannot occur. These "major representations" and "major defaults" are limited to the bidder and do not apply to the target, reflecting the commercial reality that the bidder is not yet in control of the target.
4. Acquisition Closing
As mentioned earlier, it is the goal of both acquirers and banks to roll over any bridge loans into permanent financing by the acquisition closing or as soon as possible thereafter. If market conditions do not make it possible to avoid drawing down on the bridge loan and/or quickly refinance it after drawing, then banks will need to weigh up whether to wait and stay in the loan or potentially price the high yield bonds at a level in which they may ultimately lose expected fees (or more) from the transaction. If the banks cannot place the high yield bonds at an acceptable price, a hung bridge loan occurs.
Under securities demand provisions, banks have the right to demand that the borrower issue a high yield bond to refinance an unpaid hung bridge loan. Such right is typically exercisable upon the expiry of a holiday period following the closing of the acquisition. If the borrower does not comply, then a "securities demand failure" occurs. In absence of a securities demand, a hung bridge loan may instead result in the bridge loan reaching its one-year maturity.
In the case of either a bridge loan reaching its one-year maturity (without having been refinanced) or a securities demand failure, the bridge loan is automatically refinanced/converted into an extended term loan with a maturity date equivalent to what was proposed for the permanent financing. At certain regular intervals and subject to minimum issuance amounts, lenders under the extended term loans can exchange their extended term loans for an equivalent amount of exchange notes, which are privately held securities that have typical features of long-term financing. The exchange notes may be cleared through clearing systems and are freely tradeable, unlike extended term loans, which may be less liquid and subject to certain transfer restrictions. To learn more about securities demand provisions, extended term loans and exchange notes, please visit our recent alert on bridge loans.
Similarities and Differences among Jurisdictions
There are similarities and differences between the UK rules on P2P transactions and those of other European jurisdictions. Below are a few of the key UK rules and how they compare to other jurisdictions:
- Equality of Information as Between Bidders — Under the UK Takeover Code, the target company must provide the same information to all bidders;
- Certainty of Funds Regulation — The UK Takeover Panel requires that the financial adviser has to provide a "cash confirmation" before a bidder can announce a bid, setting out that sufficient cash is available to the bidder to complete the acquisition in compliance with the UK Takeover Code; and
- Disclosure Requirements — Under the UK Takeover Code, financing documents must be published online, unredacted, no later than noon on the business day after the offer announcement. This also applies to syndication and fee letters, which include sensitive information such as market flex terms, if they exist.
|Jurisdiction||UK Rule||Similar to the UK Rule?|
|Germany||1. Equality of Information as Between Bidders||No. In Germany, there is no clear legal obligation to provide due diligence information equally to bidders.|
|2. Certainty of Funds Regulation||Yes.|
|3. Disclosure Requirements||Yes.|
|France||1. Equality of Information as Between Bidders||Yes.|
|2. Certainty of Funds Regulation||Yes. The offer needs to be irrevocably guaranteed by a sponsoring bank, which will in turn require guarantees from the bidder.|
|3. Disclosure Requirements||No, it is less onerous in France and the financing documents do not need to be disclosed.|
|Spain||1. Equality of Information as Between Bidders||Yes.|
|2. Certainty of Funds Regulation||Yes. However, in Spain, a bank guarantee (aval) provided by a credit entity is required, subject to regulatory limitations and that such entity cannot form part of the offeror’s group, or a cash bank deposit in a credit entity.|
|3. Disclosure Requirements||No. However, the form of guarantee (aval) (or the relevant related documentation in case a cash bank deposit is offered) is a schedule of the takeover prospectus.|
|Italy||1. Equality of Information as Between Bidders||Yes.|
|2. Certainty of Funds Regulation||Yes. However, in Italy, a first demand bank guarantee (or similar) is required.|
|3. Disclosure Requirements||No, it is less onerous in Italy and the financing documents do not need to be published (but described in summary in the offer document).|
|Poland||1. Equality of Information as Between Bidders||Yes.|
|2. Certainty of Funds Regulation||Yes. However, in Poland, a bank guarantee (or similar) is required.|
|3. Disclosure Requirements||No, it is less onerous in Poland and the financing documents do not need to be disclosed.|
|Finland||1. Equality of Information as Between Biddersders||Yes.|
|2. Certainty of Funds Regulation||No, it is less onerous in Finland. There is no requirement for a financial adviser to provide cash confirmation for an offer. Bidders need to ensure the availability of financing but the documentation necessary to ensure the availability of financing may vary depending on, for example, the financial position of the bidder and the potential finance provider. The financing can be conditional, as long as the bidder discloses the key terms and conditions for such financing in sufficient detail. Invoking the availability of financing requires that it has been explicitly stated as a condition for the completion of the bid.|
|3. Disclosure Requirements||No, it is less onerous in Finland and the financing documents do not need to be disclosed.|
|Sweden||1. Equality of Information as Between Bidders||Yes, unless there are grounds not to treat two bidders equal—such as one of them being a competitor or one offer evidently not being of interest to the shareholders.|
|2. Certainty of Funds Regulation||No, it is less onerous in Sweden. There is no requirement for a financial adviser to provide cash confirmation for an offer, although the bidder is required to have financing available from announcement. In addition, tender offers can be made conditional on external financing, as long as the bidder discloses the conditions for such financing in the announcement of the tender offer and it is possible to objectively determine whether such conditions have been satisfied.|
|3. Disclosure Requirements||No, it is less onerous in Sweden and the financing documents do not need to be disclosed.|
1 We frequently refer to the UK Takeover Code issued and administered by the UK Takeover Panel, which regulates the conduct of public company takeovers in the UK.
2 Further requirements can cause complications and delays if potential syndicate members hold shares in the target. For example, this could result in a potential syndicate member receiving information not available to the other target shareholders (or the public at large). In addition, the UK Takeover Code restricts a bidder from making any arrangements with a target shareholder if there are favourable conditions attached which are not being offered to all shareholders. Issues arise if lender-friendly debt terms provide additional value to a potential syndicate member via its shareholding in the target. To learn more about issues relating to a potential syndicate member with a shareholding in the target, please visit our alert on factors for lenders to consider in connection with a P2P.
3 Like syndication, club loans involve a number of lenders. However, club loans differ in that they consist of a small set of lenders who intend to hold the loan rather than on-sell to investors (as is done in syndication).
4 To learn more about term loan A debt, please visit our recent article on the subject.
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