UK Public M&A Trend Report update—1 January–31 March 2019

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. This is an update to our Market Tracker Trend Report––Trends in UK Public M&Adeals in 2018 in which we examined firm and possible offers announced in 2018.

For the purposes of this update we analysed the period between 1 January 2019 to 31 March 2019 (Q1 2019). While comparisons have been made to the corresponding period in 2018 (1 January 2018–31 March 2018) (Q1 2018), definitive conclusions can only be made on the completion of the full year trend report of 2019.

We reviewed a total of 31 transactions that were subject to the Takeover Code (Code): 16 firm offers (11 for Main Market companies, five for AIM companies) and 15 possible offers, made up of 12 possible offers (nine for Main Market companies and three for AIM companies) and three formal sale processes (FSP) (for three AIM companies).

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

Deal highlights

Key highlights during the review period include:

1. •increase in deal volume compared with Q1 2018, but a 27% decrease in aggregate deal value
2. •69% of firm offers structured as schemes
3. •75% of firm offers involved cash consideration
4. •four hostile bids and three sets of competing bids
5. •technology sector the most active (19% of firm offers)
6. •38% of firm offers made by private equity bidders and 44% of bidders by non-UK bidders
7. •US bidders involved on 25% of firm offers with aggregate deal value of £9.5bn

Deal value and deal volume

Deal volume was higher in Q1 2019 compared with Q1 2018 (16 firm offers compared with 13 firm offers in Q1 2018).

However, aggregate deal value was lower (£14bn in Q1 2019 compared with £19.3bn in Q1 2018), which represented a 27% decrease in aggregate deal value. This decline in deal value becomes even more marked (45%) if the lower of the two competing offers for plastics company, RPC Group, is ignored. The largest deal during Q1 2019 was offer for RPC Group by Berry Global Group (£3.34bn).

Of the 16 firm offers recorded in Q1 2019, four (25%) had a deal value of £1bn or higher compared with six (46%) such deals announced during Q1 2018. Two of these £1bn plus transactions were competing bids for RPC Group.

The average deal value for Q1 2019 was £880.7m (or £718.1m if the lower of the two competing bids for RPC Group is ignored), which represents a 41% decrease in the average deal value recorded in Q1 2018 (£1.5bn).

Deal structure

Schemes of arrangement remain the preferred choice of structure with 11 out of 16 (69%) firm offers announced during Q1 2019 structured as schemes and 5 out of 16 (31%) structured as contractual offers. Three of the five transactions that were structured as offers were hostile bids and one (offer for Earthport by Mastercard International) was a competing bid. This suggests that bidders need a compelling reason not to structure a transaction as a scheme of arrangement.

Consideration structure

Of the 16 firm offers announced:

1. •11 (69%) were cash only offers
2. •four (25%) were share only offers
3. •one (6%) offered a combination of cash and shares

Cash therefore featured in 75% of firm offers in Q1 2019 (Q1 2018: 92%) and was the exclusive form of consideration in 69% of deals (Q1 2018: 69%).

Q1 2019 saw a decrease in the proportion of transactions offering a combination of cash and shares (6% compared with 23% during Q1 2018).

The proportion of securities exchange offers increased from 8% (one deal) in Q1 2018 to 25% (four deals) in Q1 2019. Three securities exchange offers were made by UK bidders and one by an Israeli bidder, Taptica International, whose securities are admitted to trading on AIM.

The three largest deals in Q1 2019 were cash only offers, which accounted for 66% of total deal value for Q1 2019:

1. • (£3.34bn)offer for RPC Group by Berry Global Group
2. • (£3.32bn)offer for RPC Group by Apollo Global Management
3. • (£2.6bn)offer for Inmarsat by Apax Partners, Warburg Pincus International and Canada Pension Plan Investment Board

Each of these involved US bidders, with the Inmarsat bid being made by a consortium of US, Canadian and UK investors.

Bid financing

Q1 2019 saw a variety of funding structures. Of the 12 firms offers featuring a cash element in Q1 2019:

1. •three (19%) were funded solely from existing cash resources
2. •two (13%) were funded solely by debt finance
3. •four (25%) were funded by a combination of debt finance and equity subscription to bidco/PE funds
4. •one (6%) was funded by a combination of existing cash resources and debt finance
5. •one (6%) was funded by existing cash resources and consideration of shares
6. •one (6%) was funded by existing cash resources and equity subscription to bidco/PE funds

The proportion of transactions financed in whole or in part by existing cash reserves was similar to the corresponding period last year (50% of firm offers in Q1 2019 compared with 58% in Q1 2018). There was a slight decline in the use of debt, in whole or in part, (58% in Q1 2019 compared with 75% in Q1 2018). However, debt remained the most common source of finance for offers involving a cash element.

All of the six largest transaction that comprised a cash element were funded wholly or partly by debt finance, including the largest transaction, offer for RPC Group by Berry Global Group., which was funded solely by debt finance.

Target response: recommended or hostile

Four hostile offers were made in Q1 2019:

1. •offer for Provident Financial by Non-Standard Financial
2. •offer for The Local Shopping REIT by Thalassa Holdings
3. •offer for RPC Group by Apollo Global Management
4. •offer for Findel by Sports Direct International

Sports Direct’s offer for Findel was a mandatory offer triggered after the acquisition of 36.8% of Findel’s issue share capital. Apollo Global Management’s offer for RPC Group was initially friendly, but the recommendation was withdrawn following a higher competing offer from Berry Global Group.

Competing offers

During Q1 2019 three targets were subject to competing offers:

1. •Earthport was the subject of competing firm offers from Visa and Mastercard International. The Mastercard offer lapsed on 8 March 2019, following the acceptance condition not being satisfied. The offer from Visa was ongoing as at 31 March 2019 with the FCA approving the transaction in March
2. •Ophir Energy was the subject of competing offers from Coro Energy (possible offer) and PT Medco Energi Internasional (firm offer). Coro Energy issued a ‘no intention to bid’ statement following PT Medco increasing its offer for Ophir Energy
3. •RPC Group was the subject of competing firm offers from US private equity funds, Apollo Global Management and Berry Global Group. Both offers were ongoing as at 31 March 2019 but the offer of Apollo Global Management lapsed on 12 April 2019

Industry analysis

Q1 2019 continued the trend seen in 2018 where deal activity was spread across a variety of industries.

In Q1 2019, firm offers were made for targets operating in nine different industries. The most active industry in Q1 2019 was Computing & IT (19%).

Private equity

Private equity bidders continue to be active driven by high levels of fund raising and affordable debt. Of the 16 firm offers announced during Q1 2019, six (38%) were made by private equity bidders with an aggregate deal value of £6.7bn. Private equity bidders were involved in two of the three largest transactions: offer for RPC Group by Apollo Global Management (£3.32bn) and offer for Immarsat by Apax Partners, Warburg Pincus International and Canada Pension Plan Investment Board (£2.6bn).

Foreign bidders

Weak sterling appears to have contributed to continued interest from non-UK bidders.

Of the 16 firm offers announced during Q1 2019:

1. •eight (50%) were made by UK bidders
2. •seven (44%) were made by non-UK bidders
3. •one (6%) was made by a consortium comprising a UK, US and Canadian bidder

Non-UK bidders also accounted for 78% of total deal value in Q1 2019, which represents a significant increase compared to Q1 2018 (where non-UK bidders accounted for 41% of deal value). In Q1 2019 US bidders were involved in four deals with an aggregate deal value of £9.5bn (or £6.2bn if the lower of the two competing offers for RPC Group is excluded). This represents an increase compared to Q1 2018 where US bidders were involved in three deals with an aggregate deal value of £5.3bn.

Table of origin: UK and non-UK bidders

* Total deal value is £3.6bn, if the lower of the two competing offers for RPC Group is excluded.

We will continue to monitor foreign bidder activity and will report on it in the Market Tracker UK Public M&A Trend Report for the full year 2019.

Possible offers

During Q1 2019, a total of 15 targets had an offer period begin with either the announcement of a possible offer or an FSP.

12 offer periods began with a Rule 2.4 announcement. Of these:

1. •seven (58%) progressed to a firm offer during Q1 2019
2. •three (25%) terminated during Q1 2019
3. •two (17%) possible offers were ongoing as at 31 March 2019

One of these possible offers, the offer for Debenhams by Sports Direct, terminated on 9 April 2019 following Debenhams going into administration.

Three FSPs were announced during Q1 2019. Of which:

1. •two (67%) remained ongoing as at 31 March 2019
2. •one (33%) terminated during Q1 2019