Public-to-Private Transactions in the U.K.
The Current Public-to-Private Market
The year 2021 proved to be a busy one for the acquisition of U.K. public companies, particularly by U.S.-based bidders and private equity sponsors (Sponsors) (for more information please see our article U.S. Bidders Lead the Way on U.K. Public Takeovers). Furthermore, the number of U.K. public companies taken private as a result of these acquisitions has increased significantly over this time, from only 5 in 2020 to 19 in 2021.
Whilst this momentum has curtailed slightly of late, principally as a result of the effects of ongoing global economic, political and market volatility, the recent fall in public company equity values presents a unique prospect for Sponsors to seize opportunities to invest in the U.K. British companies have appeared relatively cheap of late when compared with their U.S. rivals and as measured on a price-to-earnings ratio. This is even more the case considering the recent fall in public company equity values globally, in addition to the pound falling to its lowest level since the pandemic crash. The gap between these valuations has made “take private” deals more attractive to U.S. funds. When combined with the fact that PE funds are also sitting on large amounts of cash that underlying investors are keen to be deployed now, public to private transactions are set to continue for the moment.
There are key considerations Sponsors should take into account when considering a public-to-private transaction involving a U.K.-listed target against the backdrop of the current market and the ongoing crisis and economic fallout from the war in Ukraine, which we cover below.
Key Considerations for Sponsors
Pricing a target company
As a result of falling share prices and the decline in global currencies, determining the price of a target U.K. public company is not a straightforward or simple task. While transport, tourism and hospitality are still recovering, tech companies have become the latest to see large losses in their share prices, making it difficult to value prospects at the current time. Many new entrants as well as long-term tech companies have lost significant value across Q1 and Q2 in 2022, after what was for many a record year in 2021. As a result, there are multi-faceted pricing considerations that Sponsors will need to consider, including:
- the liquidity of the target company;
- composition of the target board;
- the shareholders of the target company; and
- the messaging and justification of the valuation and offer price.
These are just some of the concerns that will need to be taken into account when considering the pricing of the target company, in light of the current market conditions and volatility. Pricing is an important step that Sponsors need to consider carefully, in order to make sure that the price of the target company best takes into account and deals with the various points needed to successfully navigate a transaction.
Scheme of Arrangements
The most direct and most common way for a potential bidder to structure a public-to-private transaction in the U.K. is by means of a scheme of arrangement. A scheme of arrangement enables the bidder to acquire 100% ownership of the target U.K. public company. Whilst it is often quicker, the scheme of arrangement route requires both shareholder approval at a general meeting of the company and court approval. As such, there is a structured procedure and court application process involved that will require local U.K. advisers for both the bidder and target company. Before proceeding with a scheme of arrangement, Sponsors will need to better understand the deal structure and procedural steps in relation to the suitability of this approach. For more information on scheme of arrangements generally, please see our article on Structuring Public Takeovers in the U.K..
Foreign Investments Review and Scrutiny
In recent years, there has been a focus on the review and scrutiny of foreign investment into the U.K., which has only intensified as a result of the underlying global issues that have made the control of assets in relation to strategically important industries such as health and technology of paramount importance. This came to light in particular during the COVID-19 pandemic in relation to medical supplies and equipment. Once again, this remains a consideration in relation to the energy crisis in Europe as a result of the sanctions on Russia, as governments globally look to protect industries and companies that are economically or nationally strategic such as those in the health care or energy and power sectors. Sponsors should consider the effect (if any) that U.K. foreign investments review and scrutiny may have on the acquisition of a potential target company.
As a result of applicable listing rules and ongoing disclosure requirements placed on a U.K.-listed company, a lot of information is already in the public domain and only confirmatory/high-level due diligence is usually necessary. Furthermore, any competing bidders have the right to equal access to information supplied to another bidder under the Code, which can restrain co-operation with the target company.
As the war in Ukraine continues, Sponsors in the U.S. looking to purchase a U.K.-listed company need to consider the sanctions in place by the U.K. and the U.S. as they relate to any assets that might be owned by sanctioned companies or individuals related to Russia ownership. With each country having their own list of sanctioned companies and individuals, Sponsors should note whether something permitted under the U.K. sanctions is also permitted under U.S. sanctions and vice versa. Due diligence becomes a key process for Sponsors to understand ownership of a company, and therefore their obligations under sanctions in both countries and how the acquisition of the target company might affect those obligations.
With public company share values being felt across all markets, particularly the FTSE 100 and S&P 500, as well as the general volatility globally, lenders may be unlikely or unwilling to provide debt financing to Sponsors. Due to increased market volatility, it will become difficult for lenders to predict a Sponsor’s ability to repay the debt in the future, largely because of the uncertainty of the financial performance of any target businesses. Furthermore, the increase in central bank interest rates that we are currently witnessing will also be a key consideration as this will clearly affect deal metrics. It is also worth noting that, under the City Code on Takeovers and Mergers (the Code), the financing for an acquisition is to be made on a “certain funds” basis, to which there are limited exceptions. As such, the volatility combined with requirements under the Code may mean there is a scarcity of available financing for any transaction. Therefore, Sponsors need to carefully consider financing options as a part of their plans for any acquisition.
Acquiring an Early Stake
It is common for Sponsors bidding for public targets to first look to acquire a small stake in the target. This is often the case in competitive bids. However, Sponsors need to be aware that any market purchases they make prior to any later acquisition offer will still be relevant for setting the price that must be offered under a subsequent bid for the same target company under the Code. What this means in practical terms is, if a bidder or its ‘concert party’ (as defined under the Code) acquires an interest in shares of a target during a three-month period;
- prior to the offer period; or
- during any period between the commencement of the offer period and the announcement by the bidder of an intention to make an offer,
then the offer is required to not be on less favourable terms (i.e., the price per share offered must be no less than the highest amount paid for any shares previously acquired by the Sponsor during this period). In a market with increasing volatility and where prices could continue to fall, an earlier stake could bind a company to a minimum price that hinders a Sponsor’s ability to secure the best terms for an acquisition. These types of Code considerations are a key part of transactions.
A break fee that is payable by a target to a bidder in the event of a takeover offer not proceeding is prohibited under the Code. The only exceptions to this prohibition are when the target has announced that it is seeking one or more potential bidders by means of a formal sale process or where a hostile firm offer has been announced, in which case the target company can agree to pay a break fee to a recommended "white knight" (i.e., a possible counter-bidder) if the target company is in serious financial difficulties.
In each case, the break fee must be entered into only at the time that a firm offer for the target is announced, it must be limited to no more than 1% of the aggregate offer value of the offer (on a fully diluted basis), and must be payable only if another offer becomes wholly unconditional.
However, there is no prohibition under the Code on a bidder agreeing to pay a reverse break fee (i.e., a fee payable by a proposed bidder to a target if the offer does not proceed for specified reasons).
Timeline for Acquisition
With continuing issues related to the COVID-19 pandemic, as well as the ripple effects of Russian sanctions, Sponsors need to be prepared that timelines for acquisitions may be extended in response to navigating these issues. It becomes imperative at an early stage for Sponsors to consult legal counsel for any proposed transaction to ensure any legal or regulatory filings/requirements can be dealt with as expediently as possible. Particular timing considerations will apply where regulatory or merger control conditions need to be satisfied before completion takes place and early consultation with legal counsel is advisable in these instances.
How Armstrong Teasdale Can Help
Armstrong Teasdale is experienced in advising on public-to-private transactions, and our experienced U.K. Capital Markets team is able to guide any interested Sponsors through the process of acquiring a publicly listed U.K. company, including the necessary legal and regulatory advice before, during and after the acquisition.
Disclaimer: This publication is provided by Armstrong Teasdale Limited for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to Armstrong Teasdale’s U.K. Capital Markets team.