Trends in UK public M&A—post-Brexit update

LexisNexis Market Tracker has conducted research to examine the current post-Brexit market trends in respect of UK public M&A for the period between 1 September 2016 to 31 October 2016.

Background and approach

LexisNexis Market Tracker has conducted research to examine the current post-Brexit market trends in respect of UK public M&A.

This is an update to our latest post-Brexit UK public M&A update which reviewed trends in UK public M&A during 1 July 2016 to 31 August 2016. To read this update, click here.

For the purposes of this update we analysed firm and possible announcements made for companies subject to the Takeover Code (Code) between 1 September 2016 to 31 October 2016 (the Review Period). During the Review Period, 15 deals were announced: 9 firm offers (6 for AIM companies and 3 for Main Market) and 6 which were at the possible offer stage at 31 October 2016 (3 for AIM and 3 for Main Market companies).

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

Possible offers

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A total of 6 targets had an offer period begin with a possible offer announcement (including 2 FSPs).

Of the 4 possible offers which began with a Rule 2.4 announcement:

  • one deal (25%) progressed to a firm offer during the Review Period within the initial 'put up or shut up' deadline (PUSU deadline); and
  • 3 deals (75%) terminated within their initial PUSU deadlines. Of these 3 deals, 2 were possible competing offers and involved bidders subject to a Rule 2.6(e) deadline of 7 November 2016 (53 days following the publication of HarbourVest's offer document)

The 2 FSPs remain ongoing as at 31 October 2016.

Firm offers

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Deal volume

The total number of firm offers announced during the Review Period was 9; the same volume of firm offers was recorded in the 2 month period directly following the Brexit vote (1 July 2016 to 31 August 2016). In contrast, there were only 20 firm offer announcements made in the whole of H1 2016, indicating that bidders may have adopted a 'wait and see' approach before committing to any deals.

The significant decline in the value of Sterling compared with other currencies following the Brexit vote, coupled with, on the whole, low interest rates and the low cost of borrowing globally seems to have made investment in the UK attractive to foreign bidders.

Based on current activity we expect the number of firm offers in H2 2016 to significantly exceed the volume recorded in H1 2016.

Deal structure

There was a much more even mix in the structure chosen to implement takeovers during the Review Period. Although the majority of takeovers were structured as schemes of arrangement, this majority was lower compared with H1 2016: 5 (55%) of 9 deals were structured as schemes during the Review Period, compared with 13 (65%) of 20 deals in H1 2016.

While schemes were the deal structure of choice in the largest transactions in H1 2016, the two largest transactions in the Review Period were structured as offers (offers for SVG Capital plc and M.P. Evans Group plc). It is worth noting that both were hostile offers.

Deal value

The aggregate deal value in the Review Period was £1.84 billion, substantially lower than the total deal value in H1 2016 (£24.94 billion). The average deal value in the Review Period was £204.48 million (H1 2016: £2.91 billion).

However, we saw a 'tent pole' deal in the both the Review Period (offer for SVG Capital plc, valued at £1.02 billion, which accounted for 55% of the total deal value during the Review Period) and in H1 2016 (merger of the London Stock Exchange and Deutsche Boerse, valued at £20.3 billion, which accounted for 81% of the total deal value in H1 2016). Excluding each tent pole deal, aggregate deal values in the Review Period and H1 2016 were £820.3 million and £4.64 billion respectively, which brings down the average deal value in the Review Period to £102.54 million. This indicates that although we are seeing a higher number of deals being announced, the majority of takeovers during the Review Period have been limited to mid-sized deals (in line with what we saw in H1 2016).

Industry analysis

Of the 9 firm offers, the slim majority (2 or 22%) were made for targets operating in support services industry. There were 4 (20%) firm offers made for targets operating in the Support Services industry in H1 2016.

It is interesting to note that unlike in H1 2016—where 60% of bidder activity was in the technology, media & telecommunications (TMT) industry—there were no firm offers during the Review Period for targets in the TMT industry.

The trend in deal activity in the TMT industry continued in the two months following the Brexit vote (between 1 July 2016–31 August 2016) where 4 (44%) of firm offers were made for targets operating in the TMT industry. The recent slowdown in bidder activity in the TMT industry may indicate that targets in the TMT industry are less attractive to bidders. However, the Review Period is too short to draw to any definitive conclusions and we expect to see TMT activity in the remainder of 2016.

The highest value deal was for a target operating in the financial services industry; the lowest was for a target in the professional services industry.

Only one deal, valued at £610.4 million was for a target in the retail & wholesale trade sector (offer for M.P. Evans Group plc by Kuala Lumpur Kepong Berhad).

Other industry sectors which saw deal activity were energy & utilities, pharmaceuticals & biotechnology, engineering & manufacturing and transport.

Foreign bidders

Of the 9 firm offers, 6 (66%) were made by non-UK bidders. Of the 6 largest deals by deal value, 5 (83%) were made by non-UK bidders and non-UK bidders accounted for 93.59% of total deal value in the Review Period. The surge of deals involving a foreign bidder indicates that post-Brexit, non-UK bidders are increasingly seeing value in the UK public M&A market. A principal factor behind this has been the weakening of the British pound against the US Dollar, Euro and other major currencies.

2 deals were made by a US-incorporated bidder which is broadly in line with the first half of 2016, where US bidders accounted for 4 (31%) out of 13 deals involving a foreign bidder.

The largest deal, by deal value, was US-incorporated HarbourVest's £1.02 billion approach for SVG Capital. The average deal value of deals involving a foreign bidder was £287 million, indicating that foreign bids were limited to small and mid-sized deals.

Consideration structure

As expected cash remained the consideration structure of choice and was the exclusive form of consideration in all deals.

In Harwood Capital LLP's second approach for Journey Group plc (offer for Journey Group plc by Harwood Capital LLP), target shareholders were offered cash consideration only, which deviates from Harwood's initial lapsed offer for Journey announced prior to the Review Period (on 23 August 2016) where an unlisted securities alternative to cash consideration was offered. See deal summary: Journey Group plc—offer by Harwood Capital LLP (lapsed).

The popularity of cash consideration is due to a combination of factors, most notably the need for certainty of value in a deal-making environment which is still challenging, continuing post-Brexit vote unpredictably in financial markets, and the weakening of Sterling against major currencies leading to the targets appearing increasingly attractive to foreign bidders.

Public to private activity

Of 9 firm offers in the Review Period, 4 (44%) involved a private equity backed bidder, compared to 5 such transactions in H1 2016.

The average value of P2P transactions in the Review Period was £291 million, 247% higher than in the first half of 2016 (£83.92 million); total deal value of P2P transactions in Review Period was £1.16 billion, a 176% increase on the total deal value of PE transactions in H1 2016.

However, we recorded a 'tent pole' P2P deal in the Review Period, the lapsed offer for SVG Capital plc by HarbourVest Partners, LLC, valued at £1.02 billion, which accounts for 87.63% of the aggregate value of P2P transactions in the Review Period. Excluding this tent pole deal, aggregate and average deal values of P2P transactions were £114 million and £48 million respectively.

The surge in the volume and average deal values of P2P transactions recorded in the 2 month period directly following the Brexit vote continued into the Review Period. PE bidders who may have been putting deals on hold until the conclusion of the Brexit vote are continue to see value in the UK public M&A market. With underlying uncertainties around the mechanics of Brexit, especially the issue of access to the single market, it remains to be seen if this translates into a long term improvement in P2P activity.

Deal financing

During the Review Period there was a relatively even mix of funding by existing cash reserves and debt finance.

5 deals were financed using cash reserves only and there was a fair split with a single occurrence of financing types for the remaining deals:

  • Debt finance—offer M.P. Evans Group plc by Kuala Lumpur Kepong Berhad
  • Loan notes and debt finance—offer for SWP Group plc by SWP Management Team
  • Equity subscription to bidco / PE funds and loan notes—Journey Group plc—offer by Harwood Capital LLP
  • Equity subscription to bidco / PE funds or debt finance—SVG Capital plc—offer by HarbourVest Partners, LLC (lapsed)

Debt financing was used exclusively or in part in 3 (33%) of 9 firm offers. Interest rates globally have been low for quite some time now, and the Bank of England halved interest rates as a response to the Brexit vote. Companies and PE funds are able to finance deals both through borrowing very cheaply or they may choose to rely on any cash reserves built up which may not be attracting any interest.

£1.02 billion lapsed offer for SVG Capital plc by HarbourVest Partners, LLC

The highest value deal in the Review Period was the £1.02 billion hostile approach by US-incorporated HarbourVest Partners, LLC (HarbourVest) for SVG Capital plc (SVG Capital), structured as a contractual offer. HarbourVest's offer was a final all-cash offer and at the date of the announcement HarbourVest held 8.5% of SVG's issued share capital. The offer was rejected by SVG Capital on the grounds that it undervalued the company and its assets.

Prior to the first closing date SVG Capital signalled its interest to wind down the company and pursue a divestment of its investment portfolio to a number of other interested parties.

Following an offer extension to 13 October 2016, HarbourVest proposed an asset purchase proposal to acquire 100% of SVG Capital's investment portfolio for at least £783.1 million. The proposal was conditional on its final offer for SVG Capital lapsing. In its market announcement, HarbourVest clarified that SVG Capital's willingness for an asset purchase transaction had led to it making a proposal.

The offer was further extended to 18 October 2016, on which date SVG Capital announced that it had agreed a sale of its investment portfolio to HarbourVest for £807 million.

 

12 September 2016—HarbourVest announces final all-cash offer

HarbourVest announces a final all-cash offer for SVG Capital, structured as a contractual offer. SVG Capital shareholders are set to receive 650 pence per share held, valuing the acquisition at £1.02 billion.
At the date of the announcement, HarbourVest held 8.5% of SVG Capital's entire issued share capital. This is a public to private transaction. The first closing date was 6 October 2016.

16 September 2016—possible competing offer approaches from a 'number of credible parties'

SVG Capital rejects HarbourVest's unsolicited final cash offer on grounds that it undervalued the company and its assets, and confirms that it had received approaches from a 'number of credible parties' which may lead to a competing offer to the offer by HarbourVest.

In accordance with Rule 2.6(e) of the City Code on Takeovers and Mergers (the Code), these unknown bidders were required to either announce a firm offer or that they do not intend to make an offer by 7 November 2016 (53 days following the publication of HarbourVest's offer document). See deal summary: SVG Capital plc—possible offers (terminated).

3 October 2016—possible competing offer from Goldman Sachs and the Canadian Pension Plan Investment Board

SVG Capital announces that it is in discussions with a Consortium involving Goldman Sachs and the Canadian Pension Plan Investment Board (CPPIB) in relation to a possible competing offer.

In accordance with Rule 2.6(e), the Consortium is required to clarify its intentions whether to make a firm offer or not, by 7 November 2016 (53 days following the publication of HarbourVest's offer document). See deal summary: SVG Capital plc—possible offer by Consortium including Goldman Sachs and the Canadian Pension Plan Investment Board (terminated).

4 October 2016—SVG Capital to wind down and divest 50% of investment portfolio

  • SVG Capital announces that it has reached agreement in principle with Pomona Capital (Pomona) and Pantheon Ventures (Pantheon) in regard to a sale of a significant percentage of its investment portfolio
  • SVG Capital announces, late on 4 October 2016, that it has agreed to sell 50% of its investment portfolio for £379 million to Pomona and Pantheon, which compares to an asset value of £401 million as at 31 July 2016. SVG Capital also set out its plans to wind down the company, initiate a £450 million tender offer before year end at 700 pence per share and launch a further £300 million tender offer early in 2017; and
  • HarbourVest responds reiterating its view that its 650 pence per share offer provides superior cash value in the immediate term and certainty, offering shareholders a 'clean break', with HarbourVest absorbing the risks and uncertainties with winding down SVG Capital
5 October 2016—SVG Capital to wind down and divest 100% of investment portfolio

  • SVG Capital announces that it has received a proposal from certain investment funds managed by Goldman Sachs Asset Management's Alternative Investments & Manager Selection Group (the Goldman Sachs AIMS Group) and certain investment entities managed by the CPPIB for the acquisition of 100% of SVG Capital's investment portfolio; and
  • HarbourVest responds highlighting the uncertainties involved with the investment portfolio sale proposal and restating the immediate nature of payment that SVG Capital shareholders are set to receive, in cash, if SVG Capital shareholders accept the offer, within 14-days of the offer becoming or being declared unconditional in all respects
6 October 2016—first closing date

  • on the first closing date HarbourVest held and had received valid acceptances in respect of 36.2% of SVG Capital's issued share capital. The offer was extended until 13 October 2016; and
  • SVG Capital announces terms of the proposed sale of 100% of its investment portfolio to funds managed by the Goldman Sachs AIMS Group and certain investment entities managed by the CPPIB for approximately £748 million. If the sale completes, SVG Capital is to return £1.064 billion to its shareholders through a series of tender offers. SVG Capital sets out its opinion that the sale of its investment portfolio to the Goldman Sachs AIMS Group and wind down of the company would generate superior value compared with HarbourVest's 650 pence per share offer
10 October 2016—HarbourVest announces asset purchase proposal

On 10 October 2016, HarbourVest announced that it had submitted an asset purchase proposal to acquire 100% of SVG Capital's investment portfolio for at least £783.1 million. The asset purchase proposal is conditional on its final offer lapsing. In its market announcement, HarbourVest clarified that SVG Capital's willingness for an asset purchase transaction had led to it making a proposal.

SVG Capital did not provide an opinion on the asset purchase transaction.

13 October 2016—First extended closing date

On the first extended closing date, HarbourVest had received valid acceptances in respect of, and owned SVG Capital shares amounting to 36.2% of SVG Capital's issued share capital. The offer was further extended until 18 October 2016.

18 October 2016—SVG Capital agrees sale of investment portfolio to HarbourVest and offer lapses

SVG Capital announces that it has agreed a sale of 100% of its investment portfolio to HarbourVest for £807 million. SVG Capital is to return approximately £1,118 million to shareholders through a series of tender offers and the winding up of the company.

HarbourVest announces that its offer has now lapsed.

 

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