UK Public Markets Snapshot – March 2022

Headlines

1. Don’t ignore merger arbs – they pile in quick and often need careful handling.
2. Takeover Panel red lines – on tricky Code “hot-spots”.
3. “Just say no” – investors pump up the volume to bidders.
4. Tactical use by bidders of new Takeover Code levers – important to tailor and time for optimum result.
5. “Turbo-drive” M&A tactics and analysis – giving the “edge” on game-planning.

Our view

1. Don’t ignore merger arbs:  who typically flood a target’s shareholder register once a possible takeover is announced, and sometimes well before. We’re seeing them continually develop their armoury beyond typical “bump and grind” tactics. Innovations include:

• sophisticated scoping of likely areas of market uncertainty, information asymmetry, shareholder churn, and resulting tactical/possible value opportunities, including those prompted by recent Takeover Code and market practice changes and otherwise (e.g. National Security and Investment Act). Watch out for later snapshots where we’ll scope out how merger arbs have been playing any opportunities/risks arising.
• engaging us to advise, particularly given our strength at the intersection of business and government, on “regulatory creep” increasing globally, with unpredictable regulators/governments (even in the UK/U.S./EU).

• taking advantage of pricing anomalies on certain deals with particularly tricky conditionality issues, and on share exchange bids.

Being “best-in-class” in terms of deal information/preparation regarding particular merger arb/activist behaviour is crucial not just for corporates, but also competitor merger arbs and other shareholders. We partner with leading global proxy advisor Georgeson, and M&A Monitor, to deliver tailored and holistic advice on how to “get it right” with merger arbs in any given situation (ideally before any public debate starts to snowball as shown e.g. in recent bids for Morrisons, UDG Healthcare, KAZ Minerals and Merlin Entertainments). More to follow in later snapshots on best tactics to mitigate activist opposition.

2. Takeover Panel red lines:  Kicking off its new series of “Panel Bulletins", the Panel has raised Takeover Code compliance “red lines” regarding:

• meetings/calls with shareholders (Rule 20.2): needing to be properly “chaperoned”, and related responsibilities on financial advisers.
• management buy-outs or similar transactions: importance of consulting the Panel Executive at an early stage to agree the application of a range of complex Code Rules, including on director and financial adviser independence/conflict issues, a “level playing field” between different types of bidder, information flows/protocols and profit forecasts.
• irrevocables and letters of intent: reminder that shareholders must promptly announce any changes regarding their ability/intention to comply.

These are effectively warnings from the Panel that any future slip-ups by advisers and clients here will attract particularly increased risk (and severity) of Panel censure – emphasising the importance of getting these right from the off. 

3.  “Just say no”: As noted in our previous snapshot, investors are continuing to mount public challenges to deals perceived as opportunistically low in value – as shown on Ecotricity’s hostile bid for Good Energy Group (which failed notwithstanding a significant increase in the offer price), where a group of shareholders (representing c.15%) successfully publicly opposed the offer.

Indeed we also successfully executed this tactic of amplifying shareholder opposition on a much larger scale (martialling 55% opposition) when advising MP Evans on its successful bid defence. Shareholder opposition can however be overcome with the right bidder tactics, as shown when we acted for CPI Property Group on its €1.57bn  joint bid with Aroundtown for Globalworth (being the only recent hostile bid to have completed successfully).

4. Tactical use by bidders of new Takeover Code levers:   is starting to emerge, as predicted in our previous snapshot, including first use of:

• an “acceleration statement” (on the Ecotricity/Good Energy bid), where the bidder brought forward the date on which the offer conditions would be tested, stating that it wanted to conclude the offer ASAP given continuing uncertainty in the energy market.

Although an “acceleration statement” will typically be made to speedily complete an offer successfully, here the bidder seemed to “throw in the towel early” given shareholder opposition noted above, failure to reach 50% acceptances and nerves regarding continuing market turbulence in the energy market. The offer therefore lapsed on the accelerated "testing date".

The Rothermere/Daily Mail bid on the other hand involved more conventional use of an “acceleration statement” – bringing forward the testing date, and then successfully declaring the offer unconditional early.

• a “timetable suspension” (on the Ganfeng/Bacanora Lithium bid) due to Mexican antitrust clearance not having been received by “Day 37” of the offer timetable – another helpful practical “nod” from the Takeover Panel to the increasing global complexity of offers, demonstrating that contractual offers can incorporate better timetable flexibility (potentially closing the gap on the traditionally greater flexibility offered by schemes).  The Constellation Automotive/Marshall Motor bid became the second example of a timetable suspension following the changes to the Takeover Code offer timetable, due to delay in receiving FCA regulatory approvals.

5. “Turbo-drive” M&A tactics and analysis:  We have partnered with M&A Monitor to provide leading financial metrics and shareholder intel/analysis, particularly on public takeovers. Up-to-date and compelling market metrics give the “edge” on game-planning, including:

• key industry-specific and peer group transaction data, synergies, premia, multiples and interloper scanning.
• typical bidder behaviour (e.g. how often offers are raised, interlopers emerge, how hostile bids differ, average deal durations), all tailored by sector, date range and other inputs. 
• tailored shareholder and merger arb intelligence profiling and transaction history (including giving of irrevocables and letters of intent) and live shareholder behaviour/ “Rule 8.3” disclosure tracking.

Well thought out market-backed statistics help to win over targets, shareholders and other key stakeholders to drive efficient execution and shut down any tricky counter-arguments/valuations early. Watch out in later snapshots for key data and statistical “gold nuggets”.

Our recent public markets experience

• Clipper Logistics on its £1bn takeover by GXO Logistics.
• CPI Property Group on its initial investment in, and subsequent €1.57bn joint hostile takeover (with Aroundtown) of, Globalworth Real Estate Investments.
• DBAY Advisors on its £307m takeover of Telit Communications.
• Houlihan Lokey in connection with the £75m takeover of Proactis by Pollen Street Capital and DBAY Advisors.
• Innospec Inc. on its potential £1bn takeover of Elementis.
• Numis Securities in connection with the £639m takeover of Alternative Credit Investments (formerly Pollen Street Secured Lending) by Waterfall Asset Management.
• PerkinElmer on its US$591m takeover of Oxford Immunotec Global plc, its £110m takeover of Immunodiagnostic Systems Holdings and its £296m takeover of Horizon Discovery Group.
• SB Management, a subsidiary of Japanese multinational investment conglomerate SoftBank Group, on its £1.6bn investment in the online retail group THG, the largest strategic tech investment in the UK market in 2021.

Authored by Patrick Sarch, Daniel Simons, Tom Brassington, Nicola Evans, John Connell, and John Holme.