UK public M&A Trend Report update (1 January-30 April 2017)

Lexis®PSL Corporate and Market Tracker has conducted research to examine the current trends in UK public M&A for the period 1 January 2017 to 30 April 2017. 

Background and approach

Lexis®PSL Corporate and Market Tracker has conducted research to examine the current trends in respect of UK public M&A. Data for this report has been sourced from the Market Tracker transaction data analysis tool which allows users to access, analyse and compare the specific features of numerous corporate transactions. Click here to download this report as a PDF.

This is an update to our latest Market Tracker Trend Report which reviewed trends in UK public M&A in 2016. To read this Trend Report, click here.

For the purposes of this update we analysed the period between 1 January 2017 to 30 April 2017 (the Review Period). Whilst comparisons have been made to H1 2016 definitive conclusions can only be made on the completion of first half of 2017. The forthcoming Market Tracker Trend Report covering trends in UK public M&A activity in the first half of 2017 will be published this Summer.

We reviewed a total of 29 transactions that were subject to the Takeover Code (the Code): 14 firm offers (9 for Main Market companies, 5 for AIM) and 15 which were at the possible offer stage at 30 April 2017 (5 for AIM and 10 for Main Market companies).

The percentages included in this update have been rounded up or down to whole numbers, as appropriate.

Possible offers (made under Rule 2.4)

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Formal sale process and strategic review

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A total of 15 targets had an offer period begin with a possible offer announcement (including 4 FSPs).

  • 10 possible offers began with a Rule 2.4 announcement, of these:
    • 2 (20%) progressed to a firm offer during the Review Period (both within their initial 'put up or shut up' deadlines (PUSU deadline) (possible offers for WS Atkins plc by SNC-Lavalin Group Inc. and Exova Group plc by Element Materials Technology Group Limited);
    • 4 (40%) terminated prior to their initial PUSU deadlines (possible offers for Unilever plc and Unilever N.V. by The Kraft Heinz Company, FIH Group plc by Dolphin Fund Limited, Bovis Homes Group plc by Galliford Try plc and Bovis Homes Group plc by Redrow plc); and
    • 4 deals were ongoing as at 30 April 2017 (possible offers for Exova Group plc by Jacobs Holding AG, Exova Group plc by PAI Partners SAS, The Prospect Japan Fund Limited by Prospect, Co. Ltd and Hayward Tyler Group plc by Avingtrans plc). It is worth noting that all 4 were subject to at least one 'put up or shut up' deadline extension
  • 4 FSPs were announced, all remain ongoing as at 30 April 2017; and
  • the remaining deal was a commencement of offer period initiated by a target’s strategic review announcement (under Practice Statement No. 6 of the Code) confirming that it was exploring its options including a sale of the company (Bowleven plc)

Firm offers

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The aggregate deal value recorded in the 4 month Review Period was £16 billion, 36% lower than the aggregate deal value in H1 2016 (£24.94 billion).

Of the 14 firm offers recorded in the Review Period, 5 (36%) had a deal value of over £1 billion; a 150% increase over H1 2016 (2 deals). This data suggests that despite underlying Brexit uncertainty, bidders remain willing to participate in the larger transactions. It remains to be seen whether we will see a period akin to 2015 where 14 deals in excess of £1 billion were recorded.

There was a notable lack of mid-sized deals: no firm offers fell within the £200 and £600 million deal value range, compared to 11 such transactions in 2016. This suggests that mid-sized transactions have fallen out of favour amongst bidders who seek value in pursuing the smaller or larger businesses.

The average deal value was £1.14 billion, a small reduction on the average recorded in H1 2016 (£1.25 billion) and FY 2016 (£1.32 billion).

Standard Life plc's £3.8 billion offer for Aberdeen Asset Management plc represented the largest deal (by deal value) in the Review Period; Qatar-incorporated QInvest LLC and US-incorporated Atlas Merchant Capital LLC's £15.5 million offer for Panmure Gordon & Co. plc was the smallest deal.

Surprisingly the biggest deals were from UK-incorporated companies. Given the recent currency fluctuations we would expect foreign bidders to take advantage of the historically low Sterling value to acquire UK assets — as was the case in Softbank Group Corp's offer for ARM Holdings plc: Softbank's £24.3 billion offer was effectively made between £5.58 billion and £2.92 billion cheaper since the start of 2016 and since the Brexit vote (on 23 June 2016) respectively as a result of currency fluctuations in Sterling against the Japanese Yen.

Industry analysis

The industry which saw the most activity during the Review Period was property: of the 14 firm offers, 3 (21%) were made for targets operating in the property industry. Interestingly, there were no firm offers made for targets operating in the technology, media & telecommunication (TMT) industry. This is in stark contrast to the dominance of TMT M&A activity recorded in the first half of 2016, where 60% of bidder activity was in the TMT industry. There was a fair spread of M&A activity across the other industry types in the Review Period.

Financial services saw the largest (Aberdeen Asset Management plc by Standard Life plc) and smallest deals (Panmure Gordon & Co. plc by QInvest LLC and Atlas Merchant Capital LLC). There was also a notable variance in terms of deal value in the property industry offers: one deal was valued in excess of £1 billion (Kennedy Wilson Europe Real Estate plc by Kennedy-Wilson Holdings, Inc.) and the remaining two, offers for Market Tech Holdings Limited and Industrial Multi Property Trust plc, were valued at £892.5 million and £25.23 million respectively.

Both offers in the engineering & manufacturing industry were in excess of £1 billion (aggregate value £4.3 billion).

Foreign bidders

Of the 14 firm offers, 7 (50%) were made by non-UK bidders. Only 4 of the 10 largest deals by deal value were made by non-UK bidders and non-UK bidders accounted for 30% of total deal value in the Review Period, which represents a significant decline compared to H1 2016 (where non-UK bidders accounted for 96% of the aggregate deal value).

US and Canadian incorporated bidders accounted for the joint majority of all deals involving foreign bidders (4 in total or 57%). The aggregate deal value of bids made by Canadian bidders was £2.67 billion, 75% greater than the total of those made by US bidders (£1.52 billion).

Whilst Canadian bidder activity was in line with H1 2016 (2 deals), the Review Period saw a decline in US bidder activity (the majority of H1 2016 foreign bids were made by US bidders, 4 deals).

The fall in foreign bidder activity is surprising considering the weakening of the British pound against the US Dollar, Euro, Japanese Yen and other major currencies. This may indicate a 'wait and see' approach of foreign bidders in response to political uncertainties surrounding the forthcoming general election and the mechanics of Brexit. We will continue to monitor foreign bidder activity and will report on this in our Market Tracker UK public M&A trend report - first half of 2017.

Consideration structure

Of the 14 firm offers announced:

  • 3 (21%) involved a combination of consideration types
  • 11 (79%) offered one form of consideration only, and of these 11:
    • 3 (27%) were all-share offers
    • 8 (73%) were all-cash offers

In summary 11 of the 14 firm offers had a cash element, either solely, in combination or as an alternative, accounting in total for 79% of firm offers announced in the Review Period.

Cash only consideration was less frequently used by bidders in the Review Period compared to H1 2016, but continues as the most popular consideration structure.

There was a 300% increase in the popularity of all-share offers, compared to the first half of 2016. It is worth noting that of the 3 deals where shares only consideration was offered, 2 deals (both received a target board recommendation) involved bidders incorporated in Scotland. This suggests that target shareholders seem to be shaking off economic and political risks in relation to Brexit and the potential for a second Scottish independence referendum, and are willing to accept shares in Scottish-incorporated companies. The FTSE 100 breaking record highs in May 2017 and the growing strength of other major indices may be another factor behind this rise.

In QInvest LLC and Atlas Merchant Capital LLC's approach for AIM-listed Panmure Gordon & Co. plc, target shareholders were offered cash and an unlisted securities alternative. Harwood Capital LLP's lapsed offer for Journey Group plc announced on 23 August 2016 was the last instance of a cash and unlisted securities alternative being offered.

The £3.7 billion offer for Booker Group plc by Tesco plc included a ‘mix and match facility’, giving Booker shareholders the option of varying the proportions of new Tesco shares and cash receivable in respect of their holding of Booker shares. This method of giving Booker shareholders a choice of consideration, subject to the elections of other target shareholders, made the offer more attractive in terms of taxation and investment options. Where shareholder elections could not be satisfied in full, they were scaled down on a pro-rata basis.

Usage of mix and match facilities in the Review Period matched H1 2016, where only one instance was recorded.

Drafting examples

Unlisted securities alternative

Panmure Gordon & Co. plc by QInvest LLC and Atlas Merchant Capital LLC

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Mix and match facility

Tesco plc by Booker Group plc

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Bid financing

Of the 11 firm offers that involved a cash element (accounting for 79% of all firm offers in the Review Period), 4 were funded by existing cash reserves only, 2 were financed with a combination of existing cash resources and debt facilities. See table below for details of financing:

Financing of 11 firm offers involving a cash element (whole or part)

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The use of existing cash reserves is broadly in line with the first half of 2016 (5 deals), however there was a 66% decline in deals funded by a combination of debt finance and existing cash reserves (6 deals in H1 2016).

The decline in usage of debt financing is further shown with no deals recorded in the Review Period which were funded by debt alone (3 deals in H1 2016). This indicates that despite historically low interest rates (on the whole) globally bidders are opting for existing cash reserves and other forms of financing. Bidders may have doubts whether interest rates will continue to be kept low; the US Federal Reserve has continued its programme of increasing interest rates and with UK inflation rising 2.7% in April (Consumer Prices Index) the Bank of England has been under pressure to begin similar interest rate rises.

The continued popularity of using cash reserves to finance deals could be a direct result of low (or negative) interest rates on cash held in bank accounts (when considering account fees) in the UK and other low interest bearing jurisdictions.

The cash consideration in FIH Group by The Rowland Purpose Trust 2001 was financed by a shareholder loan advanced by Albany Treasury Limited (Albany) to the bid vehicle. Albany is incorporated in Guernsey and is an associated entity of the bid vehicle. The bid vehicle entered into an agreement with Albany on 7 February 2017, under which Albany agreed to extend a facility of up to £40 million to the bid vehicle in order to finance the offer. The loan is repayable on demand on 60 days' notice but may not be demanded whilst the offer remains open for acceptances or when consideration under the offer remains outstanding.

Public to private activity

Of the 14 firm offers in the Review Period, 4 (29%) involved a private equity backed bidder, compared to 5 such transactions in H1 2016. Based on current deals, P2P appears to be on course to meet or exceed P2P deal activity recorded in H1 2016.

The average value of P2P transactions in the Review Period was £393.8 million, which represents almost a fivefold increase on P2P deal activity in H1 2016 (£83.92 million). The total deal value of P2P transactions in Review Period was £1.58 billion, an increase of over 3.5 times on the total deal value of PE transactions in H1 2016 (434.52 million).

The surge in the volume and average deal value of P2P transactions indicates that PE bidders may have been putting deals on hold until the conclusion of the Brexit vote and triggering of Article 50 and are now seeing value in the UK public M&A market. However, it remains to be seen if this translates into a long term improvement in P2P activity, particularly as fresh uncertainties arise as to what form Brexit will take and whether access to the single market will be maintained.

Regulatory & political

London Stock Exchange Group plc by Deutsche Börse AG

The regulatory landscape and competition issues have led to the delay in completing and even lapsing of some of the biggest offers. Deutsche Börse AG's £20 billion all-share offer for the London Stock Exchange Group plc lapsed following the European Commission's decision to prohibit the merger.

In a statement on the decision to block the proposed merger, Competition Commissioner, Margerethe Vestager said:

'Commission cannot allow the creation of monopolies. That is what would have happened in this case. That is why we have prohibited this merger, for the benefit of competition in European financial markets. The merger between Deutsche Börse and the London Stock Exchange would have significantly reduced competition by creating a de facto monopoly in the crucial area of clearing of fixed income instruments. As the parties failed to offer the remedies required to address our competition concerns, the Commission has decided to prohibit the merger.'

Sky plc by Twenty-First Century Fox, Inc.

Twenty-First Century Fox, Inc.'s £11.7 billion offer for Sky plc announced in December 2016 has also been subject to regulatory hurdles and political intervention.

16 March 2017 - Secretary of State for Culture, Media and Sport, Karen Bradley MP intervenes in the acquisition on media public interest grounds of media plurality and commitment to broadcasting standards by issuing a European Intervention Notice (EIN). The EIN triggered the requirement for Ofcom to report on the effects of the proposed transaction on the public interest grounds and the CMA on jurisdictional matters, namely whether arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a European relevant merger situation.

21 April 2017 - Culture Secretary announces that, in light of the General Election on 8 June 2017, the deadline for submission of the public interest report by the CMA and Ofcom into the proposed acquisition has been extended from 16 May 2017 until 20 June 2017.

The snap general election called by Theresa May on 18 April 2017, the continuing uncertainties around the mechanics of Brexit and a possible second Scottish independence referendum have all contributed to a increasingly testy political and economic climate.

FIH Group plc by The Rowland Purpose Trust 2001

FIH Group, an AIM-listed company with operations in the Falkland Islands and the UK, was subject to a firm and possible competing offer in the first half of 2017. These terminated following poor shareholder acceptance for The Rowland Purpose Trust’s offer and in the case of the competing offer, politically charged issues surrounding Dolphin and its beneficial owner Eduardo Elsztain, an Argentinian citizen.

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Reforms

Following Theresa May’s campaign speech (in her bid for leadership of the Conservative Party and Prime Minister) in July 2016 in which she confirmed her willingness to introduce new powers for the government to intervene in UK public M&A and be capable of ‘stepping in to defend a sector’, there have been further indications of the Conservative party's desire to introduce new powers for the government to intervene in UK public M&A.

The Conservative Party manifesto sets out proposals on takeovers and mergers to be implemented if the party is elected on 8 June 2017. These include:

  • requiring bidders to be clear about their intentions from the outset of the bid process
  • ensuring all promises and undertakings made in the course of takeover bids can be legally enforced afterwards; and
  • allowing the government to require that a bid be paused to allow greater scrutiny

Concerns remain as to how these reforms, if introduced, will operate, government overreach being a concern and whether burdening bidders with further risks in a takeover scenario has the potential to dampen UK public M&A. The government's continued messaging on takeover and mergers reform suggests that we can expect to see these reforms introduced in the next parliament.

The manifesto also pledges to protect 'critical national infrastructure', with the government ensuring that issues of British security or essential services are not undermined by the infrastructure ownership by foreign companies.

This follows from the government's political intervention in the Hinkley Point C nuclear power plant project in 2016. The Department of Business, Energy and Industrial Strategy (BEIS) reached an agreement with EDF to prevent EDF selling its holdings in the project without prior notification and government consent. Post-Hinkley project intervention the government set out its intention to introduce a new legal framework in relation to critical infrastructure. Under the new regime, among other things:

• the UK government will take a special share in all future nuclear new build projects to ensure that significant stakes cannot be sold without the government’s knowledge or consent, and

• the Office for Nuclear Regulation (ONR) will be directed to require notice from developers or operators of nuclear sites of any change of ownership or part-ownership in order to allow the government to advise or direct the ONR to take action to protect national security as a result of a change in ownership

In the press release dated 15 September 2016 issued by the BEIS, the government states that it will reform its ‘approach to the ownership and control of critical infrastructure to ensure that the full implications of foreign ownership are scrutinised for the purposes of national security’ and that this will include ‘a review of the public interest regime under the Enterprise Act 2002’ which will bring the UK’s policy framework for the ownership and control of critical infrastructure in line with other major economies.

Reforming rules on takeovers and mergers

'Conservatives believe in the rights of business owners. We want to be a global nation that is competitive, outward-looking and open for business – the best country in Europe for doing business. We welcome overseas investment and want investors to succeed here but not when success is driven by aggressive asset-stripping or tax avoidance. We will update the rules that govern mergers and takeovers. This will require careful deliberation but we can state now that we will require bidders to be clear about their intentions from the outset of the bid process; that all promises and undertakings made in the course of takeover bids can be legally enforced afterwards; and that the government can require a bid to be paused to allow greater scrutiny.

We shall also take action to protect our critical national infrastructure. We will ensure that foreign ownership of companies controlling important infrastructure does not undermine British security or essential services. We have already strengthened ministerial scrutiny and control in respect of civil nuclear power and will take a similarly robust approach across a limited range of other sectors, such as telecoms, defence and energy.'

Source: The Conservative and Unionist Party Manifesto 2017

We will continue to monitor developments in this area and will report on these in our forthcoming Market Tracker UK public M&A trend report - first half of 2017.

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