UK public M&A—Trend Report update—1 January-30 June 2018

Lexis®PSL Corporate and Market Tracker have conducted research to examine the current trends in UK public M&A for the period 1 January 2018 to 30 June 2018.

Background and approach

Lexis®PSL Corporate and Market Tracker have 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 analysis tool which allows users to access, analyse and compare the specific features of a range of corporate transactions. This is an update to our  Market Tracker Trend Report which reviewed trends in UK public M&A in 2017.

For the purposes of this update we analysed the period between 1 January 2018 to 30 June 2018 (the 2018 Review Period). While comparisons have been made to the equivalent period in 2017, (1 January 2017-30 June 2017) (the 2017 Review Period) definitive conclusions can only be made on the completion of the full year trend report of 2018.

We reviewed a total of 54 transactions that were subject to the Takeover Code (the Code): 22 firm offers (12 for Main Market companies, 10 for AIM), 32 possible offers, made up of 27 possible offers (22 for Main Market and 5 for AIM companies) and five formal sale processes (FSP) (1 for a Main Market company and 4 for AIM 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)

During the 2018 Review Period, 27 Rule 2.4 announcements were made.

A total of 32 targets had an offer period begin with either the announcement of a possible offer or an FSP.

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

10 (37%) progressed to a firm offer during the 2018 Review Period, of which:

  • eight (80%) progressed to firm offers during their initial PUSU deadline (possible offers for Virgin Money Holdings (UK) plc CYBG plc, Fidessa Group plc by ION Investment Group Limited, Vipera plc by Banca Sella Holding S.p.A., NEX Group plc by CME Group, Inc, Fidessa Group plc by Temenos Group AG, UBM plc by Informa plc, Sky plc by Comcast Corporation and GKN plc by Melrose Industries plc); and
  • two (20%) progressed to firm offers within extended PUSU deadlines (possible offers for Shire plc by Takeda Pharmaceuticals Limited and Stellar Diamonds plc by Newfield Resources Limited

11 (40%) terminated prior to the initial PUSU deadline (possible offers for Inmarsat plc by Eutelsat Communications S.A., BCA Marketplace plc by Apax Patners LLP, Inmarsat plc by Echostar Corporation, IWG plc by Lone Star Funds, Horizon Discovery Group plc by Abcam plc, Shire plc by Allergan plc, FirstGroup plc by Apollo Management IX L.P., Airea plc by James Halstead plc, Fidessa Group plc by SS&C Technologies Holdings, Inc., Hammerson plc by Klepierre S.A. and Flybe Group plc by Stobart Group Limited); and

six (23%) possible offers were ongoing as at 30 June 2018 (possible offer for Action Hotels plc by Action Group Holdings Co KSCCpossible offer for Phaunos Timber Fund Limited by Stafford Capital Partners Limited and four possible competing offers for IWG plc from Terra Firma Investments Limited, with one or more PUSU extensions, from Prime Opportunities Investment Group, LLC, Starwood Capital Group and TDR Capital LLP)

Five FSPs were announced in the 2018 Review Period, of which two (40%) terminated (FSPs by Weatherly International plc and Imaginatik plc) and three (60%) remain on going as at 30 June 2018 (FSPs by Electra Private Equity plc, Ascent Resources plc and Vernalis plc).

One FSP was announced before the commencement of the 2018 Review Period but resulted in a firm offer being announced during the 2018 Review Period. Plant Impact plc announced an FSP on 13 December 2017. On 16 February 2018, Croda Europe Limited announced a firm offer for Plant Impact plc.

Competing offers and public to private activity (P2P)

In the 2018 Review Period there was a rise in possible competing offers made mostly by US private equity funds or by foreign bidders.

In the first quarter of the 2018 Review Period, Fidessa Group plc received a possible offer from Swiss incorporated Temenos Group AG, which progressed to a firm offer the following day. Subsequently, Fidessa received two separate possible competing offers by US private equity fund SS&C Investments Group, Inc. and by Irish incorporated ION Investment Limited. Temenos’ offer lapsed after Fidessa adjourned its meetings which breached the terms of the cooperation agreement between Temenos and Fidessa. Each of ION Investment and SS&C were granted a PUSU extension. SS&C terminated its offer. ION Investment’s possible offer progressed to a firm offer and the offer was made unconditional as to acceptances on 19 June 2018.

In the second quarter of the 2018 Review Period, IWG plc received five possible competing offers. Of these:

  • three were from US private equity funds (Prime Opportunities Investment Group, LLC, Lone Star Funds and Starwood Capital Group)
  • one was from Guernsey private equity fund (Terra Firma Investment Limited); and
  • one was from a UK private equity fund (TDR Capital LLP)

Each of Prime Opportunities, Starwood Capital and TDR Capital received an extension to their PUSU deadline. Terra Firma’s competing possible offer was the fifth possible competing offer made and the four possible offers remain ongoing as at 30 June 2018. Lone Star terminated its offer on 4 June 2018.

A potential competing offer to US incorporated Twenty-First Century Fox (Fox) was made by US incorporated Comcast Corporation (Comcast) for Sky plc (Sky). The possible competing offer by Comcast progressed to a firm offer and remains on going as of 30 June 2018. See ‘Bidding wars—Sky/Fox/Disney/Comcast’ below.

Two possible competing offers were terminated in a short period of time: the shortest period of time it took for a bidder to terminate its possible offer was on the same day as the Rule 2.4 announcement (possible offer for Shire plc by Allergan plc); the second shortest deal was terminated a day after the Rule 2.4 announcement (possible offer for Inmarsat plc by Eutelsat Communication S.A).

Firm offers

Schemes of arrangement remain the preferred choice of structure with 17 out of 22 (77%) firm offers announced in the 2018 Review Period structured as schemes and 5 out of 22 (23%) structured as contractual offers. In contrast, the 2017 Review Period saw an increase in contractual offers and a decrease in schemes of arrangement because of the higher than usual number of hostile offers (five) and mandatory offers (three). Although it is technically possible, there has never been a hostile bid successfully implemented by way of a scheme. Under the Code, an offeror requires Panel consent if it wishes to make a Rule 9 offer for an offeree by way of a scheme of arrangement and therefore Rule 9 offers are inevitably structured as contractual offers. There has only been one hostile offer in the 2018 Review Period (offer for GKN by Melrose Industries plc).

Deal Value

The offer for Shire plc by Takeda Pharmaceutical Limited was the largest deal during the 2018 Review Period (£46 billion) and the smallest deal was Newfield Resources Limited’s £7.7 million offer for Stellar Diamonds plc.

Despite the 2017 Review Period having 27 firm offers announced (which is higher in deal volume than in the 2018 Review Period (22)), the 2018 Review Period had an increase in deal value due to an increase in higher value deals.

The aggregate deal value recorded in the 2018 Review Period was just over £94 billion (£94,048,200,000), which is almost a 382% increase on the aggregate deal value in the 2017 Review Period (£19.5 billion). The aggregate deal value for the 2018 Review Period so far dwarfs the aggregate deal value for takeovers for the whole of 2017 (£45 billion) and 2016 (£67.3 billion). Excluding the two mega deals announced during the 2018 Review Period (Shire plc (£46 billion) and Sky plc (£22 billion — which increased after the end of the 2018 Review Period to £25.9 billion), the aggregate deal value for the 2018 Review Period reduces to just over £26 billion.

Of the 22 firm offers recorded in the 2018 Review Period, 11 (50%) had a deal value of £1 billion or higher, equivalent to the number of £1 billion deals announced during the whole of 2017. The data suggests an increase in bidder participation in larger transactions. We will monitor the increase and evaluate the data for the full year 2018 in our 2018 trend report.

There were two mid-sized deals (ie, firm offers that fell within the £200 and £600m deal value range) (CityFibre Infrastructure Holdings plc by Antin Infrastructure Partners and West Street Infrastructure Partners and Hogg Robinson Group plc by GBT III B.V.), which is comparable with the 2017 Review Period.

The average deal value for the 2018 Review Period was £4.27 billion, which represents a 491% increase on the average deal value recorded in the 2017 Review Period (£722 million). Excluding the two mega deals announced during the 2018 Review Period reduces the average deal value to £1.3 billion.

Despite schemes being the preferred structure for bidders, there was an increase in deal value (just under 34%) for contractual offers compared to the 2017 Review Period (15%).

Three out of ten of the largest offers were from UK incorporated companies. UK bidders were also active in smaller deals during the 2018 Review Period. However, overall, non-UK bidders outnumbered UK bidders during the 2018 Review Period. See further below (Foreign bidders).

Industry analysis

The 2018 Review Period continues the trend seen in the 2017 Review Period where deal activity was spread across a variety of industries.

In the 2018 Review Period, firm offers were made for targets operating in 11 different industries.

The largest deals that are over £1 billion were spread across Pharmaceutical & Biotechnology (£46 billion), Media & Telecommunication (£28.1 billion), Engineering & Manufacturing (£10.3 billion), Financial Services (£3.9 billion), Computing & IT (£2.9 billion) and Banking & Finance (£1.7 billion).

The Pharmaceutical & Biotechnology industry saw the highest deal value (offer for Shire plc by Takeda Pharmaceutical Limited) at £46 billion, the Media & Telecommunications industry saw the second largest deal, at £22 billion (offer for Sky plc by Comcast Corporation) and Engineering & Manufacturing saw the third largest deal at £8.1 billion (offer for GKN plc by Melrose Industries plc).

Foreign bidders

Non-UK bidders continue to be active.

Of the 22 firm offers announced during the 2018 Review Period:

  • six (28%) were made by UK bidders; and
  • 16 (72%) were made by non-UK bidders

Non-UK bidders also accounted for 85% of total deal value in the 2018 Review Period, which represents a significant increase compared to the 2017 Review Period (where non-UK bidders accounted for 39% of deal value). Deal volume and deal value involving US bidders increased in the 2018 Review Period.

Table of origin: UK and non-UK bidders

Bidder countryNumber of biddersTotal deal value
United States6£29.6 billion
England and Wales4£13.55 billion
Japan1£46 billion
Ireland1£1.5 billion
Switzerland1£1.4 billion
France1£1.2 billion
France & United States1£537.8 million
Guernsey1£78.9 million
Scotland1£53 million
Netherlands1£52.08 million
British Virgin Islands1£50.35 million
Italy1£24.03 million
Australia1£7.74 million

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 2018.

Consideration structure

Of the 22 firm offers announced:

  • four (18%) offered a combination of cash and shares
  • one (5%) offered a combination of cash and shares or cash and shares alternative
  • two (9%) offered one form of consideration of all-shares offers; and
  • 15 (68%) offered one form of consideration of all-cash offers.

20 of the 22 firm offers had a cash element, either solely or in combination with another form of consideration, accounting in total for 91% of firm offers announced in the 2018 Review Period, and it was the exclusive form of consideration in 68% of deals. This is an increase from the 2017 Review Period, where cash featured in 78% of all deals and was the exclusive form of consideration in 56% of deals.

Although cash only consideration was more frequently used by bidders in the 2018 Review Period (continuing the trend from the 2017 Review Period as the most popular consideration structure), use of shares only consideration decreased from 22% (6 deals) in the 2017 Review Period to 9% (2 deals) in the 2018 Review Period, which represents a 66.67% decrease. This may indicate that although the UK is in a period of political and economic uncertainty, there is confidence in some of our strongest listed companies.

The nine out of ten of the largest deals in the 2018 Review Period featured a cash element, either solely or in combination with shares, accounting for almost 96% of total deal value for the 2018 Review Period. Only one out the ten largest deals featured shares only consideration accounting for 1.8% of total deal value for the 2018 Review Period.

The two firm offers announced during the 2018 Review Period featuring shares only consideration were made by one UK bidder (Virgin Money Holdings (UK) plc offer by CYBG plc) and one non-UK bidder (Stellar Diamonds plc- offer by Newfield Resources Limited).

The 2018 Review Period saw a slight increase in a combination of cash and shares considerations (18%) than in the 2017 Review Period (15%). However, the number of deals featuring cash and shares remains on par with the 2017 Review Period (4 deals).

The 2018 Review Period saw one firm offer with a combination of either cash and shares or cash and American Depositary Shares (Shire plc offer by Takeda Pharmaceuticals Limited).

Bid financing

The 2018 Review Period saw a variety of funding structures with debt finance being the preferred form of finance structure.

Of the 20 firms offers that featured a cash element (accounting for 91% of all firm offers in the 2018 Review Period):

  • five (25%) were funded by existing cash resources only
  • eight (40%) were funded by debt facilities alone
  • four (20%) were funded by a combination of existing cash resources and debt finance
  • one (5%) was funded by equity subscription to bidco/PE funds only; and
  • two (10%) were funded by a combination of debt finance and equity subscription to bidco/PE funds

Two firm offers (representing 9% of all firm offers) that offered shares only consideration were financed by consideration shares.

Nine out of the 22 firm offers (41%) were financed in whole or in part by existing cash reserves (compared with 12 out of 16 (75%) in the 2017 Review Period). Accordingly there was a decline in the use of cash reserves in the 2018 Review Period. Conversely, there has been an increase in the use of debt, in whole or in part, with 14 out of 22 (64%) bidders choosing to finance deals by debt (compared with 7 out of 16 (44% in the 2017 Review Period).

The largest five firm offers were funded by debt finance in whole or in combination with cash resources (with four out of the five being funded by debt finance alone (offers for Shire plc by Takeda Pharmaceuticals Limited, Sky plc by Comcast Corporation, GKN plc by Melrose Industries plc and UBM plc by Informa plc) and one was funded by a combination of debt finance and existing cash resources (offer for NEX Group plc by CME Group, Inc.).

Bidding wars—Sky/Fox/Disney/Comcast

On 15 December 2016, Fox made a firm offer for Sky for the 61% shares in Sky that it does not already own. In 2017, the proposed acquisition by Fox was referred to the Competition and Markets Authority (CMA) for an in-depth review of media plurality and Fox’s commitment to broadcasting standards. On 14 December 2017, Fox and The Walt Disney Company (Disney) announced an agreement for Disney to acquire Fox, after a spin-off of certain businesses (the Disney/Fox Transaction), with the effect that if the Disney/Fox Transaction were to complete, Disney would acquire Fox’s 39% stake in Sky.

The Disney/Fox Transaction caught the attention of the Takeover Panel, which ruled on 12 April 2018 that following the completion of the acquisition by Disney of Fox, Disney will be required to make a mandatory offer for Sky pursuant to the chain principle under Rule 9.1 of the Takeover Code. Fox has a 39% shareholding in Sky and the Panel determined that securing control of Sky might reasonably be considered to be a significant purpose of Disney acquiring control of Fox. For further details on the Panel’s ruling and the chain principle, see News Analysis: Panel confirms that Disney will need to make mandatory offer following Fox acquisition.

In 2018, the CMA published two proposals aimed at removing media plurality fears: the first proposal involves Fox ring-fencing Sky News, making it a distinct company within Sky, run by the head of Sky News and the second proposal involves the divestiture of Sky News to Disney. As a result of the proposals, Fox submitted proposed undertakings to achieve the divestiture of Sky News to Disney.

Comcast started a bidding war with Fox for Sky by making a firm offer on 25 April 2018 of £12.50 per share, which represented a premium of 16% to Fox’s offer of £10.75 per share. Comcast submitted its post-offer undertakings in a bid to win Sky shareholders and to prevent any delays caused by any UK regulators. Comcast’s offer caused Sky’s board to withdraw its recommendation from Fox’s offer, putting both competing offerors on a level playing field until such offers were capable of being put formally to Sky shareholders.

In June 2018, the UK Secretary of State accepted Fox’s proposed undertakings with a view to clearing Fox’s proposed acquisition of the remaining shares in Sky on media plurality grounds. On 10 July 2018, Fox, with the consent of Disney, increased its offer price to £14 per share, representing a 12% increase to Comcast’s offer price of £12.50 for each Sky share. The Panel Executive responded in its ruling on 13 July 2018 that as a result of the increase in the offer price by Fox, the price at which the chain principle offer must be made by Disney would also increase to £14 per share. The ruling is subject to a review by the Hearings Committee who will review the ruling on 27 July 2018. In a bid to win, on 11 July 2018, Comcast increased its offer price for Sky to £14.75 per Sky share. Sky’s board recommended Sky shareholders accept Comcast’s offer.

Comcast was engaged in another bidding war in 2018 with Disney for the entire issued share capital of Fox. However, the recent news regarding the acquisition of Time Warner by AT&T, which saw the US government trying to block the AT&T deal based on competitive grounds, has led Comcast to focus its bidding war on Sky and increase its offer price for Sky instead of Fox.

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