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A round up of key developments in corporate transactions covered by Lexis®PSL Corporate and Market Tracker this week, including the competing offers for cross-border payment specialist Earthport plc by Visa and Mastercard, the post-listing performance of investment platform AJ Bell, and an analysis of the status of the UK merger regime by the Lexis®PSL Competition team.
On 27 December 2018, cross-border payments specialist Earthport plc (Earthport) announced it had received a recommended all-cash offer from Visa International Service Association, a wholly owned subsidiary of Visa Inc. (Visa) for the entire issued and to be issued share capital of Earthport, structured by way of a scheme of arrangement. The offer was valued at £198 million at 30 pence per Earthport share.
After Visa published its scheme document on 25 January 2019, Mastercard International, Inc. (Mastercard) announced a competing recommended cash offer for the entire issued and to be issued share capital of Earthport, structured by a contractual offer. The offer is valued at £233 million at 33 pence per Earthport share, a premium of 10% to the offer price of 30 pence per Earthport share from Visa. The higher competing offer is an increase of 17.7% on the offer made by Visa.
Earthport withdrew its recommendation of the Visa offer and unanimously recommended that Earthport shareholders should accept the Mastercard offer. Earthport proposes to adjourn the shareholder meetings convened for 21 February 2019 to consider the Visa offer.
Visa has noted the competing offer and an announcement considering the new developments is expected soon.
In 2018, we saw a number of targets withdrawing their initial recommendations of an offer and recommending a higher competing offer they received. Market Tracker will continue to monitor this trend to see if more targets are withdrawing their recommendations in pursuit of higher offers in 2019.
On 23 January, investment platform AJ Bell published its first trading update since the company went public in December last year. The company announced that platform customer numbers had grown by 4% from 7,285 to 190,498. Underlying platform inflows increased 20% to £1.2 billion, compared to £1.0 billion at the same time last year.
The company stated that ‘negative market movements’ of £2.7bn resulted in total closing assets under administration of £44.2bn, a 4% decline since 30 September 2018. However, CEO Andy Bell commented ‘the growth story we outlined ahead of our IPO remains on track’.
The company raised £651 million through its initial public offering on the London Stock Exchange’s Main Market. Upon listing, shares in AJ Bell were oversubscribed and prices rose to 215 pence per share in early trading, following a more conservative initial share price of 160 pence. Since listing, the company’s shares have risen almost 80% from 160 pence to a peak of 289 pence per share.
AJ Bell are one of the largest investment platforms in the UK. The company operates in both the advised and direct to customer segments of the platform market.
Following recent developments impacting the UK merger control regime, Simon Dodd, Head of Lexis®PSL Competition, asks - are the burdens being placed on merging parties and the CMA meaning that the regime is getting close to breaking point?
The fine tuning and honing of the UK merger control regime that resulted from the 2013 reforms was widely welcomed as implementing a sensible and measured streamlining and strengthening of an already successful and well-functioning regime. The Competition and Markets Authority (CMA) in its 2017 Annual Plan stated that it was targeting an improvement of the process and procedure for merger control investigations, with a focus on ‘efficient, effective and targeted merger enforcement process across both phase 1 and phase 2’ (para [4.9]).
However, despite such developments, there still remain challenges. The recent judgment of the CAT in J Sainsbury plc and Asda Group Limited v CMA has brought into sharp focus the burden that CMA merger investigations and its decision making process places on merging parties, especially during phase 2 investigations. This case highlights the procedural pressures parties and the CMA are under when reviewing high-profile mergers with potentially significant competition issues, and the CAT allowed a challenge to the CMA’s deadline for responding to working papers and the timing of hearings.
It must be noted that the CMA’s total investigation timetable is longer than most other ‘mature’ merger control regimes—for example, the CMA’s phase 1 and phase 2 deadlines are both significantly longer that the European Commission’s deadlines under the EU Merger Regulation, (EC) No 139/2004. The CMA does have the power to extend phase 2 deadlines by an additional eight weeks; and this power has been used more frequently in recent years.
In addition to timing pressures, the CMA has also potentially increased the burden on merging parties through its recent publication of guidance relating to requests for internal documents (ie those documents generated internally by an organization during the ordinary course of business such as e-mails, internal analyses and handwritten notes) in UK merger investigations. While the clarity provided by this new guidance is welcomed, the increasing burden on merging parties in relation to requested documents—as highlighted by a number of responses to the CMA’s prior consultation—has not been addressed. Therefore, it is expected that the trend towards more burdensome requests for internal documents—and hence more detailed and time-consuming merger investigations—will continue.
Recent years have also seen an increase in the number of merger investigations requiring a case review meeting (48% of the cases in 2017/18 gave rise to material competition concerns and went through this process—as of 18 December 2018, the figure is 43%) or being referred to phase 2 by the CMA (in 2017/18, 14% of cases were referred to phase 2—as of 18 December 2018, the figure is 18%). However, one noticeable difference between the CMA’s phase 2 outcomes and those of comparable jurisdictions (in particular the European Commission) is the relatively high proportion of CMA phase 2 investigations that result in unconditional clearance decisions. This does lead one to question the effectiveness of the CMA’s (lengthy) phase 1 investigations—despite the length of phase 1 and the requirement for detailed pre-notification discussions, the CMA’s case teams are apparently less comfortable clearing mergers with overlaps at phase 1 than their counterparts in other competition authorities.
The UK merger regime is an anomaly in that it is voluntary, and the ability to investigate transactions post-closing can lead to less pressure in relation to deal timetables. However, it does appear that the CMA process is becoming more burdensome for merger parties, with, in addition to the issues highlighted above, a more detailed pre-notification process being required.
All of this adds up to increasing burdens and costs on merger parties, and alongside the fact that the merger filing fees in the UK are amongst the highest in the world (up to £160,000).
It is recognised that the CMA is, in general, doing a good job, and robust decisions are being made. But how can the time pressures being created be alleviated? The statutory timetables cannot be changed without legislation–therefore, can we expect to see even longer pre-notification discussions, more deadline extensions and an increase in deadline suspensions, all of which will increase time and costs for merging parties?
Added to this is the spectre of Brexit. Indeed, in J Sainsbury plc and Asda Group Limited v CMA, the CAT suggests in a ‘postscript’ to the judgment, a rarity in itself, that as a matter of urgency consideration needs to be given to introducing more flexibility into the UK merger review timetable if Brexit happens, which would see the CMA investigating significantly more large-scale (and international) transactions. It is rare for a court or tribunal to ask for urgent consideration of procedural rules laid down in legislation. Adding this Brexit to the mix further risks the efficiency of the UK merger control process.
But what can be done? As mentioned above, it is recognised that the CMA are, in general, doing a good job in difficult circumstances. Therefore, alongside a review of the resources available to the CMA, is it time for a full-scale review of the UK merger control regime to ensure that it can be fit for purpose?
This article was originally published as a news analysis piece for Lexis®PSL Competition.
The Financial Conduct Authority (FCA) has published consultation paper CP 19/6 on changes required to align the Prospectus Rules sourcebook with the Prospectus Regulation. The majority of the changes proposed involve reproducing text from the Prospectus Regulation directly into the new sourcebook. The consultation assumes that an implementation period will be agreed on the UK leaving the EU and that EU law will continue to apply in the UK until the end of the implementation period. The FCA is asking for comments on the consultation paper by 28 March 2019. For more on this story see our news article: FCA consults on aligning the FCA Handbook with the Prospectus Regulation - (a subscription to Lexis®PSL Corporate is required).
The Pensions and Lifetime Savings Association (PLSA) has published its Corporate Governance Policy and Voting Guidelines 2019 (2019 Guidelines), which build upon the PLSA’s 2018 AGM Review and provide practical guidance for investors considering how to exercise their vote at AGMs in 2019. The 2019 Guidelines have been updated to mirror the new UK Corporate Governance Code (2018 Code) and highlight some of the key developments in UK corporate governance policy and practice. For the first time, the guidelines do not follow the format and order of a standard AGM agenda, but instead are arranged to highlight those issues and resolutions which the PLSA believes will be of particular interest to investors in 2019. For more on this story see our news article: Pensions and Lifetime Savings Association releases Corporate Governance Policy and Voting Guidelines 2019 - (a subscription to Lexis®PSL Corporate is required).
The UK Stewardship Code (the Code), first published in 2010, sets out how institutional investors and fund managers should hold the companies they invest in to account. The FRC announced earlier this month its intention to overhaul the Code and has issued a consultation paper setting out the FRC's proposed new Code (the 2019 Code) along with a summary of the changes from the existing Code.
The 2019 Code is intended to increase demand for more effective stewardship and investment decision-making, which is better aligned to the needs of institutional investors' clients and beneficiaries. The main changes proposed are:
The reporting requirements set out in the 2019 Code are more rigorous, focusing on how stewardship activities deliver outcomes against objectives, and the FRC will have greater oversight over this reporting to ensure the 2019 Code effectively raises the quality of stewardship across the investor community.
The consultation is open until 29 March 2019. For more on this story see our news article: FRC consultation on new UK Stewardship Code - (a subscription to Lexis®PSL Corporate is required).
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