Corporate governance
Remuneration rolls back into question for this year’s AGM season
Rolls-Royce Holdings plc (Rolls-Royce) revealed on 31 March 2021 that a new remuneration policy will be put to a vote at its 2021 AGM on 13 May 2021. Whilst under the remuneration policy, chief executive (CEO), Warren East’s base salary remains at £943,500, and chief financial officer, Panos Kakoullis at £680,000, 30% of East’s base salary and 20% for Kakoullis will be deferred into shares for two years.
This has come about following a turbulent year caused by the COVID-19 pandemic, which led to flight restrictions and site closures, and has greatly affected the sector in which Rolls-Royce operates, dominating the market for large commercial jets. Whilst its defence unit remained resilient, the company reported in its 2020 full year results that its civil aerospace sector was the most impacted, with revenue down by 37%. Rolls-Royce stated: ‘The impact of the COVID-19 pandemic on the Group was felt most acutely by our Civil Aerospace business. In response, we took immediate actions to address our cost base, launching the largest restructuring in our recent history, consolidating our global manufacturing footprint and delivering significant cost reduction measures.’ This resulted in a reduction of approximately 7,000 roles at the end of 2020, which is expected to rise to at least 9,000 roles. Also in 2020, in an attempt to regain financial strength, the company faced a heavily discounted £2bn rights issue, offering shareholders 10 shares at 32p each for every three they owned, representing a 41% discount. Leading advisers chose to cut back their underwriting commitments with concerns surrounding the pandemic and market volatility linked to the US election. For more information, see: Rolls-Royce taps shareholders for £2bn rescue.
Now shareholders will be faced with voting on an uncommon share payment scheme of 30% of the CEO’s base salary. Shareholders will also have to consider other elements of the remuneration policy including a reduction in the maximum incentive level from 200% of target to 175%, no long-term investment plan for the duration of the remuneration policy and an immediate reduction in pension contributions for directors to 12% of salary to align with the wider workforce.
BAE Systems plc (BAE Systems), another company operating in the aerospace sector, will also see its remuneration policy put to a vote at its 2021 AGM, to be held on 6 May 2021. BAE Systems shareholders face a very different situation, having confronted the pandemic with a resilient business plan. The company notably focussed its attention on two main areas, the acquisition of two US based companies, The Military Global Positioning System and Airborne Tactical Radios as well as injecting payments into its UK pension scheme. BAE Systems saw the acquisitions as ‘strategically attractive’ complementing its Electronic Systems portfolio and represented ‘unique opportunities to purchase high-quality, technology-based businesses with market-leading capabilities...’ As a result, the company has seen great success, which has been reflected in its remuneration report. CEO, Charles Woodburn, saw two salary increases: 3.21% with effect from 1 December 2020 and a further 9.5% increase with effect from 1 January 2021 giving a total base salary of £1,107,538, in addition to a performance share award granted in 2018, which will vest in full with the shares being receivable in 2023. This was justified on the basis of the salary ‘being in line with median market levels for a FTSE 50 Chief Executive’ and to incentivise Woodburn to remain in his role.
Rolls-Royce has also looked to technology to fuel up its business strength, with its notable increased investment in Power Systems, one of four core parts of its business less affected by the pandemic, which has enabled the company to marry its expertise as a leading industrial technology company with sustainable energy. The company, much like BAE Systems, acquired two businesses Kinolt Group and Qinous in a bid to strengthen this side of its business. In a climate where ESG is proving to be increasingly important, the company anticipates a quick recovery for Power Systems, with its potential of becoming a leader in low carbon power solutions. So far, the success of this strategy is yet to come to fruition, but Rolls-Royce remain confident, stating ‘We continue to invest in developing market-leading technology and low carbon opportunities in all our end markets, to create value for our stakeholders and ensure we are well positioned to take advantage of the transition to a lower carbon economy and growing demand for more sustainable power solutions.’ In the meantime, the remuneration strategy reflects the unprecedented past year, and the results of this year’s AGM will indicate shareholder opinion on how well Roll-Royce has dealt with the uncertainty.
FRC strategy supports plans to transition to ARGA
The Financial Reporting Council (FRC) has published its strategy, plan and budget for 2021–2022. The strategy confirms plans to establish a new Audit, Reporting and Governance Authority (ARGA) to succeed the FRC, following stakeholder support. FRC CEO, Sir Jon Thompson, stated the FRC aims to ‘create an organisation which is ready to become ARGA as soon as the legislation permits, whilst becoming increasingly effective and resilient’. To do so, the FRC plans to adopt new functions and enhance organisational resilience. As part of the process, the FRC plans to develop a three-year forward plan and further measures to report the strategy’s progress.
See: LNB News 08/04/2021 34.
ESMA report sets out enforcement and convergence actions on corporate reporting
ESMA has published its annual report on enforcement and regulatory activities related to corporate reporting in the EEA. It provides an overview of the 2020 activities of ESMA and of European accounting enforcers when examining compliance of financial and non-financial statements of European issuers. It also discusses other activities contributing to supervisory convergence and to the development of a single rulebook in the area of corporate reporting.
See: LNB News 06/04/2021 84.
UK Public M&A Trend Report update—1 January–31 March 2021
Lexis®PSL Corporate and Market Tracker has conducted research to examine the current trends in UK public M&A for the period 1 January 2021 to 31 March 2021.
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&A in 2020 in which we examined firm and possible offers announced in 2020.
For the purposes of this update we analysed the period between 1 January 2021 to 31 March 2021 (Q1 2021). While comparisons have been made to the corresponding period in 2020 (1 January 2020 to 31 March 2020) and with the preceding quarter (1 October 2020 to 31 December 2020), definitive conclusions can only be made on the completion of the full year trend report of 2021.
We reviewed a total of 24 transactions that were subject to the Takeover Code (Code): nine firm offers* (four for Main Market companies and five for AIM companies), 13 possible offers (nine for Main Market companies and four for AIM companies) and two formal sale processes (FSPs) (both for Main Market companies).
The percentages included in this report have been rounded up or down to whole numbers, as appropriate. Accordingly, the percentages may not in aggregate add up to 100%. Deal values have been rounded to the nearest million (where expressed in millions) and have been rounded to the nearest hundred million (where expressed in billions).
The final date for inclusion of developments in this report is 31 March 2021.
* For the purposes of this report we have not included Global Infrastructure’s bid for Signature Aviation, which was withdrawn on 5 February 2021, when Global Infrastructure instead announced a joint offer for Signature Aviation with Blackstone and Cascade.
Deal highlights
The desire to agree offer terms before the end of the Brexit implementation period resulted in a strong uptick in deal activity during Q4 2020. This acceleration in takeover activity in the last quarter of 2020 translated into a sharp drop-off in deal volume and aggregate deal value in Q1 2021. Key highlights from this report include:
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9 firm offers (Q1 2020: eight firm offers; Q4 2020: 18 firm offers)
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£7.7bn aggregate deal value (Q1 2020: £2.4bn; Q4 2020: £22.6bn)
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£859m average deal value (Q1 2020: £300m; Q4 2020: £1.3bn)
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two £1bn plus transactions announced
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78% of firm offers were public to private transactions (Q1 2020: 75%; Q4 2020: 61%)
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overseas bidders were involved in 67% of firm offers announced, including on both £1bn plus transactions.
Deal volume and deal value
In our 2020 public M&A Trend Report we noted that deal activity increased significantly in H2 2020 as confidence returned to the market. Q4 2020 was particularly active, with 18 firm offers announced during the period. Q1 2021 saw a drop in deal activity, with nine firm offers announced during the review period. This may have been attributable to a desire by bidders to agree offer terms before the end of the Brexit implementation period.
Aggregate deal value in Q1 2021 was £7.7bn. While this represents a decrease on Q4 2020 (£22.6bn) and Q3 2020 (£10.1bn), it is higher than the aggregate deal values in Q1 and Q2 2020. The largest transaction was the £3.5bn offer for Signature Aviation by a consortium comprising Blackstone, Global Infrastructure Partners and Bill Gates’s Cascade Investment.
Average deal value in Q1 2021 was £859m (Q1 2020: £300m; Q4 2020: £1.3bn).
£1bn plus transactions
Two (22%) of the nine firm offers announced in Q1 2021 had deal values exceeding £1bn. The largest transaction was the £3.5bn consortium offer by Blackstone, Global Infrastructure Partners and Cascade. Global Infrastructure Partners originally made a £3.4bn offer for Signature Aviation, but this was terminated when the consortium offer was announced. The second £1bn plus transaction announced in Q1 2021 was the £2.3bn joint offer for Aggreko by TDR Capital and I Squared Capital.
Deal structure
Of the nine firm offers announced in Q1 2021, seven (78%) were structured as schemes of arrangement and two were structured as contractual offers. This is in line with previous trends where schemes of arrangement have proven to be the more popular choice (Q1 2020: 88%; Q4 2020: 72%).
James Hay Partnership’s offer for Nucleus Financial was originally structured as a scheme, however, following some shareholder dissent surrounding the takeover, this was changed to a contractual offer on 30 March 2020. The bidder cited a desire ‘to increase certainty of execution’ as the reason for the change in structure.
The second transaction to be structured as a contractual offer was Horvik’s mandatory offer for Trans-Siberian Gold. The mandatory offer was triggered by Horvik agreeing to acquire shares representing approximately 51.2% of the issued share capital of Trans-Siberian Gold. Mandatory offers are required to be structured as contractual offers under the Code.
Public to private transaction
In our full year 2020 public M&A report, we commented on the long-term trend of P2P transactions accounting for an increasingly large proportion of public M&A activity each year. This trend continued in Q1 2021 with seven (78%) of the nine firm offers being P2P transactions (Q1 2020: 75%; Q4 2020: 61%).
Aggregate deal value for P2P transactions in Q1 2020 was £6.7bn, with both of the £1bn plus transactions announced being P2P transactions. This accounted for 87% of total aggregate deal value in Q1 2021. This compares with an aggregate deal value of £1.9bn in Q1 2020 (79% of total deal value) and £12.2bn in Q4 2020 (54% of total deal value).
Consideration and bid financing
Cash remained king with all firm offers announced in Q1 2021 involving a cash element. One of the firm offers announced involved a mix of cash and shares and one was a cash offer with a share alternative. The remaining seven deals (78%) had cash as the sole form of consideration. This is similar to Q4 2020, where 16 (89%) of deals utilised cash as the sole form of consideration, and two (11%) deals used a mixture of shares and cash.
The cash consideration on Global Infrastructure Partners’ initial bid for Signature Aviation (and the subsequent consortium offer for Signature) was denominated in US dollars, with target shareholders having the option to take the cash consideration in sterling under a currency conversion facility. It is relatively unusual for offers for UK-listed targets to be made in foreign currency, although 2019 saw two such offers (Thomas Bravo’s US$3.8bn offer for Sophos and the US$3.4bn consortium bid for Inmarsat), both of which also featured currency conversion facilities. The decision to structure the takeovers in this way may have been motivated by a desire to protect the bidders from Brexit-related currency swings.
Of the nine firm offers announced:
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four were funded by a combination of debt finance and equity subscriptions to bidco/PE funds
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two were funded solely by debt financing
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one was funded by a combination of debt finance, consideration shares and existing cash resources
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one was funded solely by equity subscriptions to bidco/PE funds
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one was funded solely by equity financing
Bidders’ country of incorporation
Overseas bidders were involved in 67% of all firm offers announced in Q1 2021. Of the nine firm offers announced:
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four (44%) were made by US bidders
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three (33%) were made by UK bidders
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one (11%) was made from a consortium comprising US and UK bidders.
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one (11%) was made by a Russian bidder
The aggregate deal value for all firms involving overseas bidders was £7.6bn, which represents 98% of the aggregate deal value in Q1 2021. This is an increase from Q4 2020, where firm offers involving overseas bidders accounted 89.6% of aggregate deal value (Q1 2020: 27%). US bidders were involved in both of the £1bn plus transactions announced in Q1 2021.
Industry sector
The most active sector in Q1 2021 was Financial Services, with three (33%) of the nine firm offers announced being in this sector. The remaining offers occurred in a variety of sectors.
Hostile and competing offers
There were no hostile offers in Q1 2021, however, two of the firm offers announced in Q1 2021 took place against the backdrop of potential competing offers: the consortium offer for Signature Aviation and the consortium offer for Nucleus Financial Group.
Nucleus Financial Group announced on 2 December 2020 that it was in discussions with four separate bidders in relation to possible offers for the company (see Nucleus at the centre of takeover interest). Aquiline Capital partners and Allfunds (UK) both withdrew from the process on 3 December and 4 December 2020 respectively, and Integrafin Holdings withdrew on 4 January 2021. The final offeror, Epiris, in conjunction with its associate, James Hay Partnership announced a firm offer for the company on 9 February 2021.
Deal in focus: Signature Aviation
17 December 2020: Signature Aviation announces that it is in discussions with Blackstone regarding a possible cash offer of £3.83 per share. Signature Aviation also confirms it has received an indicative proposal from Global Infrastructure Partners (GIP) regarding a possible cash offer at a lower price than the Blackstone proposal. The board rejects the GIP proposal.
21 December 2020: Signature Aviation states it would currently be minded to recommend a firm offer at the price set out in the Blackstone proposal.
7 January 2021: Signature Aviation confirms it has received an approach from Carlyle regarding a possible offer for the company, although no proposal has been received.
8 January 2021: Blackstone and Cascade Investments (a 19% shareholder in Signature Aviation) announce that they have formed a consortium regarding a possible offer for Signature Aviation. Cascade has undertaken with Blackstone that it will not work with any other company on a takeover bid for Signature Aviation.
11 January 2021: the board of Signature Aviation and GIP announce the terms of a recommend cash offer for Signature Aviation. The offer values Signature Aviation at approximately £3.4bn.
5 February 2021: GIP, Blackstone and Cascade form a new consortium and announce a firm offer for Signature Aviation, valuing the company at £3.5bn. In light of the new offer, Signature Aviation withdraws its recommendation for the GIP offer and GIP withdraws its previous firm offer.
Legal and regulatory developments
National Security and Investment Bill:
On 11 November 2020, the UK government laid before Parliament its draft National Security and Investment Bill (the NS&I Bill), which seeks to introduce a mandatory foreign direct investment (FDI) notification regime in the UK for transactions in certain sectors to protect national security. This new regime will sit alongside the existing merger control regime and replace the current powers for the government to intervene in merger investigations on national security grounds.
The NS&I Bill has passed through the House of Commons and is currently sitting in the House of Lords in the ‘Report stage’. To track the progress of the bill, see our National Security and Investment Bill—progress tracker in Competition. For examples of how companies are drafting offer conditions to address the forthcoming regime, see our National Security and Investment regime—market practice tracker.
Changes to the Takeover code:
On 31 March 2021, the Takeover Panel announced that it would be proceeding with the amendments to the Code, which were outlined in its October consultation paper. The amended Code comes into effect on 5 July 2021 (implementation date) and makes substantial changes to the treatment of offer conditions and the timetable for takeovers structured as contractual offers.
The Code, as amended, will be applied in relation to all firm offers which are announced on or after the implementation date, except where to do so would give the amendments retroactive effect. Any ongoing firm offers which straddle the implementation date, and any offers announced on or after the implementation date which are in competition with such ongoing offers, will continue to be subject to the unamended provisions of the Code.
For further details, see: Analysing the Takeover Panel’s proposed changes to the offer timetable and offer conditions and Takeover Panel confirms proposed changes to the offer timetable and offer conditions.
Possible offers and FSPs/strategic reviews
There were 13 possible offers in relation to 12 targets in Q1 2021. This compares with seven possible offers (in relation to six targets) in Q1 2020 and 21 possible offers (in relation to 13 targets) in Q4 2020.
Of these possible offers, two progressed to a firm offer (TDR Capital and I Squared Capital’s joint offer for Aggreko and TDR Capital’s offer for Arrow Global Group). Of the remaining possible offers, seven were terminated, and four were ongoing during the review period.
In addition to the 13 possible offers, there were two FSPs announced (Q1 2020: 8 FSPs/Strategic reviews, Q4 2021: 3 FSPs/Strategic reviews) during the review period, both of which were quoted on the premium segment of the Main Market. The FSPs were initiated by French Connection, which launched its FSP after receiving several possible offers, and Renishaw, which announced a FSP after the founding directors indicated their intentions to sell their 53% stake in the company. Both FSPs were ongoing as at 31 March 2021.
Firm offers included in this report
| Target | Bidder | Deal value | Industry sector of target | Bidder jurisdiction |
| Signature Aviation | Blackstone, Global
Infrastructure Partners and Cascade | £3.5bn | Aerospace & Defence | United States |
| Aggreko | TDR Capital and I Squared Capital (US) | £2.3bn | Energy & Utilities | England & Wales, United States |
| Arrow Group Global | TDR Capital | £563m | Financial Services | England & Wales |
| RDI REIT | Starwood Capital Group | £468m | Investment | United States |
| Scapa Group | Schweitzer-Mauduit International | £413m | Healthcare & Industrial | United States |
| AFH Financial Group | Flexpoint Ford | £232m | Financial Services | United States |
| Nucleus Financial Group | Epiris in conjunction with its associate, James Hay Partnership | £145m | Financial Services | England & Wales |
| Trans-Siberian Gold | Horvik | £108m | Mining, Metals & Extraction | Russia* |
| Hunters Property | The Property Franchise Group | £24m | Real Estate | England & Wales |
*Horvik is a Cyprus registered company indirectly owned by Vladislav Sviblov.
Key offer updates since 2020
Hedge funds, GWM Asset Management and HBK Capital Management, sought to challenge Caesars’ takeover of William Hill ahead of the court hearing to sanction the scheme scheduled for 31 March 2021. In a letter to William Hill’s board, the hedge funds reportedly accused the board of a failing to disclose potentially material information concerning Caesars’ right to terminate its joint venture with William Hill in the US in the event that one or more specified acquirers bought William Hill (see: Caesars looking to conquer US Sports betting market). According GWM and HBK (who hold a 1% and 10% stake in William Hill respectively), it was not clarified until after the shareholder vote to approve the scheme that Caesars could only add six names to its ‘blocked’ list, and that it could only substitute one of these names every six months. Judgement is currently awaited regarding the outcome of the scheme hearing.
Competing offers for G4S
The heated takeover battle between Allied Universal and GardaWorld for security company, G4S, was resolved by the Takeover Panel implementing an auction process under the Code. Allied Universal emerged as the highest bidder, with GardaWorld resolving on Day one of the auction process not to increase its offer for G4S (see: GardaWorld fails to break into world’s biggest security company). On 16 March 2021, Allied Universal declared its offer for G4S unconditional after receiving valid acceptances representing 79.09% of G4S’s issued share capital.
Further reading
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Market Tracker Trend Report: Trends in UK Public M&A in 2020
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Market Tracker Trend Report: Trends in Public M&A in Q3 2020
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Market Tracker trend report - trends in UK public M&A deals in H1 2020
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UK Public M&A Trend Report update—1 January–31 March 2020
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New year, new deals as 2021 sees a continued uptick in M&A activity
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February 2021 public M&A update: PE firms search for their perfect match
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Cambria Automobiles faces possible management buy-out
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Tavistock not feeling the Team spirit
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Sviblov’s Midas touch in Trans-Siberian Gold acquisition