M&A in Europe

Are shareholders pushing back on cheaper pricing?

James Agnew, Chairman, Corporate Broking


Takeovers of UK-listed companies have soared in recent months. With record levels of capital available and the appetite to deploy it, the surge in UK-listed takeovers show no signs of slowing down.

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By Alexander Thomas and James Agnew
Published July 12, 2021 | 2 min watch
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Key Points

  • Buyout firms swooping on the low valuations of UK-listed companies will have to contend with target shareholders fighting harder for a fair price.
  • Private equity firms historically avoid challenging boards with hostile takeover bids, but their tactics may change in today's climate.
  • Recent changes to the Takeover Code, which will apply to all firm offers announced on or after 5 July 2021, will further impact the landscape for public M&A in the UK.

Buyout firms hunting for bargains in a lacklustre UK stock market should prepare for greater shareholder resistance in their pursuit of undervalued UK companies to take private. With takeover bids from private equity firms coming thick and fast, UK shareholders are becoming less inclined to roll over for low offers.

“We’re seeing a lot of commentary in the press in terms of shareholder reaction to pricing,” says Alexander Thomas, Managing Director, Mergers & Acquisitions, Europe. “Shareholders are being more assertive. In the past, it’s been pretty much a rule that once a bid is recommended by the board, it would be voted through by shareholders unless there’s a higher competing offer. We've seen a few examples recently of deals being sweetened, which in the past has been rare.”

“As the number of listed companies going private continues to accelerate, UK shareholders are undoubtedly becoming more robust in their views on pricing.”

James Agnew, Chairman, Corporate Broking

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Buyouts of UK-listed firms have soared in recent months, raising concerns that companies are being snapped up too cheaply. “There’s a lot which goes on behind the scenes before bids are announced, so very often the board are negotiating hard across several rounds of bidding before the price actually becomes public,” says James Agnew, Chairman, Corporate Broking. “However, as the number of listed companies going private continues to accelerate, UK shareholders are undoubtedly becoming more robust in their views on pricing.”

Historically, private equity firms have avoiding challenging boards with hostile takeover bids, but their tactics may change in today's climate. “Hostile bids are uncommon,” explains Alexander. “One of the reasons they tend to be rare, aside from the fact that there's lower certainty from a bidders’ perspective, is that there's a large body of shareholders who are effectively unable to vote for a deal that's not recommended. So, the addressable base of shareholders who can accept is something way below 100%. It's not necessarily a bad thing if we see hostile bids now and again. The threat of them can help to keep a sense of fair play.”

Elsewhere, recent changes to the Takeover Code, which will apply to all firm offers announced on or after 5 July 2021, will further impact the landscape for public M&A in the UK.

“These are the most significant changes there have been to the Code for around ten years, although many of them are procedural,” says Alexander. “One of the key points is how the changes bring EU and UK anti-trust approval processes into line with other jurisdictions, which will make it harder for bidders to walk away because there's now a materiality threshold.”

“Overall, the changes are less significant than those we saw 10 years ago, which effectively prohibited break fees and non-solicited arrangements,” concludes Alexander. “Over time, private equity and private equity investors got used to those changes, and they'll get used to these”.

The confluence of factors that have contributed to this surge in activity are unlikely to go away anytime soon, fuelling the demand side of the M&A equation, as James Agnew, Chairman, Corporate Broking. “On the demand side, the UK economy has recovered well with the success of the vaccination program – particularly in the mid-cap sector, where a lot of travel and leisure companies have seen a sharp bounce-back. Another key factor is that UK governance is seen to be pretty good with strong disclosure levels, so that makes for an environment where buyers have confidence about the companies they're acquiring.”

However, as cash-rich buyout firms search for more listed businesses to take private, there are concerns the UK’s public equity markets are underpriced and undervalued. “UK investors have felt for a long time that the market was undervalued, with extended periods of concern over Brexit and now COVID-19,” continues James. “There are other structural reasons why the UK market often trades at a discount to US markets, in particular. Part of that is because the UK tends to have more of a value bias and there are more growth companies in the US, so there has always been a pretty significant valuation gap.”

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