Cleary Gottlieb | UK Public M&A Snapshot Q3 2021

The UK public M&A market experienced sustained high levels of activity throughout the summer months, continuing the trends we saw earlier in the year.

The Market is Vibrant but UK Bids are Complex

11 new firm offers for targets listed on the main market of the London Stock Exchange were announced in Q3 (matching the total of 11 firm offers announced during Q1 and Q2 combined).

Strong demand for UK assets was underpinned by confidence in the prospects for an accelerated post-Covid economic recovery as the vaccination programme gathered momentum and the UK economy was reopened. At the same time, diminishing concerns about the longer-term impact of Brexit further supported investors’ belief in the growth potential of the UK economy. One clear example of the strength of private equity demand for exposure to the UK consumer has been the battle for Wm Morrison Supermarkets PLC (Morrisons) (see below), which attracted interest from at least three sponsors.

Attractive equity valuations – especially compared to U.S. multiples – and the continued appeal of sterling’s relative weakness to the dollar, have also drawn the attention of overseas bidders.

Deal Sizes Increase

There was a noticeable increase in the number of larger deals, with four firm offers valued at over £5bn in Q3¹, there having been no deals above this threshold announced in H1. Towards the end of the quarter, Entain PLC announced that it had received a possible £16.4bn offer from DraftKings that will be the biggest deal of the year to date if a firm offer materialises.

The Corporate Bidder Returns

In H1 2021, private equity bidders were the principal drivers of public M&A activity in the UK. While they remained active in Q3 (and there is no sign of their appetite for UK listed targets waning), Q3 also saw the return of the corporate bidder which had been noticeably absent in H1.

On 2 August, U.S. Industrial group, Parker-Hannifin, announced a recommended 800p-per-share bid for aerospace and defence company, Meggit. This proposed deal, valuing the UK company at £6.2bn, is comfortably the largest in the UK public M&A market this year which does not involve a private equity bidder.

On 11 August, another U.S. corporate bidder, TransDigm Group, announced that it was considering making a higher offer of 900p a share for Meggitt. But the competitive situation here was short-lived, with TransDigm formally withdrawing on 7 September.

Competition for Targets Remains Fierce

Competition for attractive targets remained fierce in Q3, with multiple bidders vying for Morrisons, Vectura Group PLC, Meggitt PLC and Augean PLC. Two of these competitive situations (Morrisons and Augean) were ultimately resolved by way of – historically rare – Takeover Panel auctions and a third (Vectura) was set to go to the same way until Carlyle declared its bid final shortly before the auction was due to commence.

Having rejected a possible £5.5bn offer from CD&R in June, the board of Morrisons initially recommended a £6.3bn firm bid by a consortium led by Fortress Investment Group on 2 July. With CD&R and at least one other private equity bidder known to be circling Morrisons, Fortress pre-emptively increased its bid to £6.7bn in August.

Soon afterwards, CD&R managed to persuade the Morrisons board to switch its recommendation with a £7bn firm bid announced on 19 August.

The continuing competitive situation was finally resolved by way of a Takeover Panel auction on 2 October, with CD&R ultimately outbidding Fortress by just 1p a share.

With Increased Activity Comes Heightened Scrutiny

A good illustration of both trends was seen in Philip Morris’s bid for Vectura Group PLC. Philip Morris managed to see off the approach from rival bidder Carlyle, sending a reminder that corporate buyers can often outgun private equity bidders.

The bid also quickly became one of the most controversial of the year, garnering a furious reaction from anti-smoking campaigners and the medical establishment, who were outraged at the prospect of a tobacco company securing control over a manufacturer of treatments for smoking-related illnesses.

On 26 May, Carlyle announced a recommended £958m bid for Vectura. On 9 July, PMI managed to persuade the Vectura board to switch its recommendation with a higher £1.045bn bid.

On 6 August, Carlyle returned with a higher 155p a share bid, with PMI subsequently topping this with a 165p a share bid on 8 August. A formal Panel auction was cancelled when Carlyle declared its lower 155p a share bid final shortly before the auction was due to commence.

On 10 August, PMI switched from a scheme to an offer with a 50% acceptance condition to increase the deliverability of its bid. On 19 August, PMI announced that it had made market purchases of ~29% of Vectura’s shares, which helped PMI get across the 50% acceptance threshold, declaring its offer wholly unconditional on 16 September.

Cleary Gottlieb won the ‘Corporate Team of the Year’ award at the 2021 Legal Business Awards for the firm's work advising Euronext on its acquisition of Borsa Italiana from the London Stock Exchange Group.

This caps a particularly successful last year for the firm in UK M&A where we secured a role on a number of the most significant transactions in the UK market. In addition, we have worked on a number of UK public M&A transactions in the past few years, including some of the most significant and complex transactions:

Acting for Cascade on its joint bid (as part of a consortium with Blackstone and GIP) for Signature Aviation, which topped a prior recommended bid from GIP on a standalone basis;
Acting for Allied Universal on its successful bid for G4S, which topped a hostile competing bid from GardaWorld;
Acting for Ivanhoe Cambridge on its joint bid (as part of a consortium with ICAMAP) for easyHotel;
Acting for American Express on the bid by Global Business Travel for Hogg Robinson plc;
Acting for Fidessa on the recommended bid for it by Ion, which topped a competing bid from Temenos; and
Acting for Loxam on its successful bid for Lavendon, which topped a hostile competing bid from TVH