The UK bid market rebounded strongly in the second half of 2020 and in Q1 2021 and we believe there will be a significant amount of activity in this market over the short to medium term. However, implementing UK bids has never been so complex. We have seen a significant increase in complexity even in the past five or so years.
The complexity in UK bid markets in the current environment is a result of a combination of key factors:
Disagreements on Valuation
In the current environment, there have been fundamental disagreements on value between bidders, targets and their shareholders.
Disagreements on value were particularly acute during 2020 when uncertainty plagued the market and the UK stock market was subject to significant dislocation. Target boards in receipt of bid proposals had a very difficult question to consider – should they recommend bid proposals at significant premium to pandemic depressed share prices?
This has resulted, for one, in protracted and difficult negotiations. For instance, in the bid documentation relating to the bid for Signature Aviation, the board of the target indicated that over more than six months one of the bidders had made six independent proposals to the target and another had made five.
Some of the uncertainty and dislocation has subsided, at least for the moment. However, there remains significant ongoing uncertainty. At a macro level, it remains unclear when and to what extent, pre-pandemic life will resume and to what extent we are in inflexion point triggered by the pandemic in politics, economies and industries. At a micro level, it also remains unclear whether the businesses models of the companies worst hit by the pandemic will be viable.
We believe there will therefore continue to be the potential for fundamental disagreements on value in bid situations.
There have been two other noticeable impacts of disagreements on value.
Disagreements on Valuation
In the current environment, there have been fundamental disagreements on value between bidders, targets and their shareholders.
Disagreements on value were particularly acute during 2020 when uncertainty plagued the market and the UK stock market was subject to significant dislocation. Target boards in receipt of bid proposals had a very difficult question to consider – should they recommend bid proposals at significant premium to pandemic depressed share prices?
This has resulted, for one, in protracted and difficult negotiations. For instance, in the bid documentation relating to the bid for Signature Aviation, the board of the target indicated that over more than 6 months one of the bidders had made 6 independent proposals to the target and another had made 5.
Some of the uncertainty and dislocation has subsided, at least for the moment. However, there remains significant ongoing uncertainty. At a macro level, it remains unclear when and to what extent, pre-pandemic life will resume and to what extent we are in inflexion point triggered by the pandemic in politics, economies and industries. At a micro level, it also remains unclear whether the businesses models of the companies worst hit by the pandemic will be viable.
We believe there will therefore continue to be the potential for fundamental disagreements on value in bid situations.
There have been two other noticeable impacts of disagreements on value.
Markets Have Become Tougher and Rougher
Firstly, there has been an increase in hostile bid activity. In particular, where there have been fundamental disagreements on value, some bidders have taken their bids directly to target shareholders in hostile transactions. One recent example of this in the UK was Garda World’s hostile bid for G4S. G4S’s share price fell significantly during the first half of 2020. Garda made various proposals to G4S at a material premium to the then depressed market price which were rejected by G4S. Ultimately, given G4S’s rejection of Garda’s proposals, Garda made a hostile bid directly to G4S’s shareholders and engaged in an extraordinary series of denunciations of G4S’s management.
This is not just a UK phenomenon either. There has also been a noticeable increase in recent times in hostile bid activity in other jurisdictions including the U.S., Japan and France.
Shareholders are Increasingly Speaking Out on Bid Values
Secondly, there has been a significant increase in activist type activity in target shareholder registers where target shareholders believe that the bid has undervalued the target.
By some measures, the UK stock markets have had the highest levels of shareholder activism in the world in recent years. Shareholder activism is being initiated not only by traditional activists (such as Elliott), but by other parts of shareholders registers, including the traditional ‘long only’ community.
There has been a perception in the UK market that some bidders are opportunistically capitalising on low valuations and uncertainties in the current environment and that UK targets are being sold on the cheap.
It has been a recent feature of the UK bid market that shareholders are increasingly prepared to speak out against, and actively resist, bids, even recommended bids, which are perceived to undervalue the target.
Recent bids where shareholders and activists have actively resisted recommended bids including Odey Asset Management’s objections to Anglo American’s recommended bid for Sirius Minerals and the objections made by activist shareholders in relation to the recommended bids for Inmarsat and William Hill.
Most recently, there has been significant shareholder opposition in relation to Clayton Dubilier & Rice’s recommended bid for UDG which was announced in May 2021. Interestingly, this opposition has emanated (at least publicly) from the long only community – both Allianz and M&G, who are shareholders of UDG, have made public statements to the effect that bid fails to offer UDG shareholders fair value. There are also reports that Elliot has now acquired an interest in UDG.
We believe that bid planners now need to assume that shareholders will be increasingly prepared to actively resist bids which they believe undervalue the target, even in the context of a recommended transaction.
Shareholders are Increasingly Speaking Out on Bid Values
Secondly, there has been a significant increase in activist type activity in target shareholder registers where target shareholders believe that the bid has undervalued the target.
By some measures, the UK stock markets have had the highest levels of shareholder activism in the world in recent years. Shareholder activism is being initiated not only by traditional activists (such as Elliot), but by other parts of shareholders registers, including the traditional ‘long only’ community.
There has been a perception in the UK market that some bidders are opportunistically capitalising on low valuations and uncertainties in the current environment and that UK targets are being sold on the cheap.
It has been a recent feature of the UK bid market that shareholders are increasingly prepared to speak out against, and actively resist, bids, even recommended bids, which are perceived to undervalue the target.
Recent bids where shareholders and activists have actively resisted recommended bids including Odey Asset Management’s objections to Anglo American’s recommended bid for Sirius Minerals and the objections made by activist shareholders in relation to the recommended bids for Inmarsat and William Hill.
Most recently, there has been significant shareholder opposition in relation to Clayton Dubilier & Rice’s recommended bid for UDG which was announced in May 2021. Interestingly, this opposition has emanated (at least publicly) from the long only community – both Alliance and M&G, who are shareholders of UDG, have made public statements to the effect that bid fails to offer UDG shareholders fair value. There are also reports that Elliot has now acquired an interest in UDG.
We believe that bid planners now need to assume that shareholders will be increasingly prepared to actively resist bids which they believe undervalue the target, even in the context of a recommended transaction.
Increasing Prevalence of Competing Bids
In addition to the above factors which have increased complexity in UK bid markets, there has been an increasing prevalence of competing bids in recent years. There have been six over past three years in the UK.
There are a number of reasons for this:
Current Environment
For the reasons mentioned in 1 above, there have been significant divergences of opinion between bidders, and targets and their shareholders, as to value. In situations where the bid value is seen as opportunistic, competing bidders are encouraged to enter the fray. Again, the bid for G4S is one recent example of this, where the board of G4S rejected Garda’s hostile bid as fundamentally undervaluing G4S and Allied Universal subsequently successfully agreed a recommended competing proposal with G4S.
Recent Reforms to the Takeover Code
The reforms introduced to the Takeover Code over the last decade have created a more open and competitive playing field. These reforms have included a prohibition on target companies providing deal protection measures for the benefit of bidders including break fees payable to bidders and undertakings on the target company not to solicit competing proposals and to provide bidders with a right to match a subsequent bid. These reforms have restricted the ability of first mover bidders to successfully ‘lock out’ subsequent competing bidders.
UK target boards are increasingly focused on demonstrating that they have complied with their fiduciary duties and that they have sought to maximize value for target shareholders.
Although boards of UK companies are not (yet) subject to enhanced fiduciary duties to take proactive steps to maximize value (as U.S. target boards are in the context of bids), as a practical matter, many UK boards are now behaving as if they were (at least to some extent). Drawing on U.S. experience, UK boards and their advisors are increasingly focused on ‘go shop’ type processes, where other potential competing bidders are actively solicited whether before or after bid announcement, and increasingly sophisticated in implementing those strategies. This has contributed to a more vibrant competing bid market in the UK.
Increased Political Intervention in Markets and in Particular in Bids
Economies, and bid markets, are becoming increasingly politicised.
A number of countries have had national security regimes on their books for some time (including the U.S. and Australia) and a number of other countries, including UK, France, Germany and Italy, are introducing, or have recently introduced, new national security regimes. There have been fears expressed that these regimes will be used for short term political expediency or industrial policy. One recent manifestation of these fears was the French government’s intimation that it intended to block Alimentation Couche-Tard’s potential bid for French supermarket group Carrefour on national security grounds. Surprisingly, this was apparently on the basis that France’s food security would be threatened by the bid.
The UK government also has a history of seeking to intervene in bids for grounds which seemed tangentially related to national security. In particular, undertakings to maintain employment were sought from the bidders in the bids for Cobham (by Advent) and GKN (by Melrose) ostensibly on the grounds that the UK’s national security was threatened. The introduction of the UK’s new national security bill only heightens concerns that the UK government may seek to intervene in a capricious way in UK bids. In particular, concerns have been raised that the UK’s new national security legislation does not clearly define what ‘national security’ is, which allows the government to define threats to national security in a way which it believes is appropriate.
To add to the complexity, competition regulators around the world are increasingly under pressure to demonstrate that they are not ‘weak’ on mergers. In addition, competition regulators are increasingly considering whether their mandates should include broader goals, such as the alleviation of inequality and the adverse impacts of climate change. This will likely further increase risks for bidders of political intervention in bids.
There is therefore increased risk of government intervention in UK bids and concerns that government powers will be used in a capricious way which serves short term political exigencies.
Increased Political Intervention in Markets and in Particular in Bids
Economies, and bid markets, are becoming increasingly politicised.
A number of countries have had national security regimes on their books for some time (including the U.S. and Australia) and a number of other countries, including UK, France, Germany and Italy, are introducing, or have recently introduced, new national security regimes. There have been fears expressed that these regimes will be used for short term political expediency or industrial policy. One recent manifestation of these fears was the French government’s intimation that it intended to block Alimentation Couche-Tard’s potential bid for French supermarket group Carrefour on national security grounds. Surprisingly, this was apparently on the basis that France’s food security would be threatened by the bid.
The UK government also has a history of seeking to intervene in bids for grounds which seemed tangentially related to national security. In particular, undertakings to maintain employment were sought from the bidders in the bids for Cobham (by Advent) and GKN (by Melrose) ostensibly on the grounds that the UK’s nationality security was threatened. The introduction of the UK’s new national security bill only heightens concerns that the UK government may seek to intervene in a capricious way in UK bids. In particular, concerns have been raised that the UK’s new national security legislation does not clearly define what ‘national security’ is, which allows the government to define threats to national security in a way which it believes is appropriate.
To add to the complexity, competition regulators around the world are increasingly under pressure to demonstrate that they are not ‘weak’ on mergers. In addition, competition regulators are increasingly considering whether their mandates should include broader goals, such as the alleviation of inequality and the adverse impacts of climate change. This will likely further increase risks for bidders of political intervention in bids.
There is therefore increased risk of government intervention in UK bids and concerns that government powers will be used in a capricious way which serves short term political exigencies.
Conclusion
While the outlook for the UK bid market remains robust for the reasons we set out in the first article of this series, UK bids are becoming increasingly complex to implement. Bidders increasingly need to be prepared to manage fundamental disagreements on value, tougher and rougher markets, increasingly sophisticated target tactics to provide alternatives to shareholders, potential competitors, increasingly vociferous target shareholders and political intervention, potentially of a capricious nature, in UK bids.
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