The latest example of "despite Brexit" activity in the UK corporate world is a surge in takeovers of UK public listed companies, especially by or including private equity and/or investment funds (the so called public to private, PTP or P2P transactions). So far in 2019 there have been multiple P2P transactions announced, including the recently announced £4.8bn P2P of Merlin Entertainments plc where Value Act Capital, a 9.3% shareholder was an active proponent of the deal taking place. Some of these are consortium offers with several funds combining (like the bid for Inmarsat by a consortium of Apax, Warburg Pincus, CPPIB and OTPP), others a mix of private equity and other investors (Merlin).
We have also seen a couple which have gone competitive:
- the tussle for RPC Group plc between Bain and Apollo where a strategic corporate bidder, Berry Global Group Inc ultimately prevailed; and
- the competing bids for KCOM Group plc by USSL and Macquarie European Infrastructure Fund.
All this activity is taking place "despite" the fact that since the last golden era of P2Ps (from 2001 until the global financial crisis in 2008), new rules have been introduced by the UK Takeover Panel (mainly in 2011) which were expected to put off private equity bidders such as:
- break fees payable in the event of the bid failing being outlawed (except for white knights or after a formal sale process);
- the introduction of the automatic 28 day deadline after a leak to announce a firm financed offer or walk away;
- additional disclosure of finance documents and transaction fees; and
- stricter rules on future intentions for running the target business. Also the old method of avoiding 0.5% stamp duty on a scheme of arrangement by combining the cancellation scheme with a reduction of capital was removed by the UK Government in 2015.
The Code rules around management buyout (MBO) bids have not changed much:
- management still need consent from the target plc to work with private equity due to conflicts;
- a fairness opinion on the incentive arrangements and a shareholder vote where the management own shares will be required; and
- the requirement to share the MBO business plan which the management have contributed to with the non-executive directors still exists (which was never much liked by private equity). Consequently, one change we have noticed is a clearer demarcation between private equity-led deals and MBO-led deals. Broadly speaking, the larger the deal, the more likely it is that any management incentive arrangements will be deferred until after the takeover such that it will be a private equity led deal. In fact since 2010, only five of the 22 P2P transactions in the £250m to £1bn range we reviewed provided for management incentive arrangements to be approved in advance. By avoiding getting embroiled in an MBO-led deal, the private equity bidders can largely avoid the Code rules around MBO bids.
The same old issue pertains around getting security over target assets and providing upstream guarantees. This still tilts the balance in favour of using a scheme of arrangement so the bidder and the financing banks don't have a potential argument over declaring the offer unconditional as to acceptances at a level lower than 75% (being the threshold for passing a special resolution needed to whitewash financial assistance and convert a plc into a private company).
Legoland owner Merlin Entertainments agrees £4.8bn offer