Henrik Persson, Head of Plc Strategic Advisory, finnCap Group
Excerpt taken from Capital Performance - Winter 2022 report
It is a comfort, in a long period of variants and uncertainty, that at least one of my predictions as we entered 2021 – that of a high level of public takeovers and shareholder activism – has borne out to be true. Perhaps it was not the bravest call compared to 2020, but fascinating themes have emerged nonetheless.
To set the scene, by late December 2021, there had been 51 firm offers announced for LSE-listed companies, which is in line with the general long-term trend over the last decade. By comparison, there were 66 firm offers in 2019, a particularly busy year, but a limited fall to 40 offers during the exceptional year of 2020. We are proud to have been trusted to act on six of these transactions, of all shapes and sizes, in 2021 and four in 2020.
At the very least, given the number of transactions, it is clear therefore that the UK public markets host fundamentally attractive takeover targets but there are deeper observations:
– the proportion of firm offers with a value of greater than £1 billion (19 in 2021, approximately 40%) has risen markedly to be at least double the proportion in recent years, unusually also matching the number of smaller offers with a value less than £250m;
– private equity and financial sponsors were involved in almost two-thirds of these offers;
– approximately two-thirds of offers were by overseas bidders, a pattern consistent since at least the Brexit referendum, including a number of US private equity and/or in larger deals, and roughly half of the overall value of offers made were by North Americans;
– there was an exceptional number of public auctions and competitive situations, most famously that for Morrisons, where two different private equity firm consortia competed publicly over a “blockbuster” £7bn takeover.
The long-awaited increase in financial sponsor-led public-to-private transactions appears finally to be bearing out. The willingness of financial sponsors to put aside historical concerns around the risks and cost of public market transactions, and to do so on big ticket transactions, and sometimes in public competition with each other, highlights both that they are more comfortable with these concerns, but also that there are relative bargains or relatively gentler competition for these assets as compared to private or overseas markets.
It is perhaps understandable that private equity would target larger, more established, or otherwise derisked and/or potentially more readily geared targets at a time when financial firepower is readily available. One expects that midmarket financial sponsors will also increase their interest in public company transactions, having seen the offers launched by their larger or braver peers.
It has frequently been noted that whilst UK public markets are at near pre-pandemic levels and institutional shareholders remain supportive, broadly valuations lag overseas peers. Equally, there has been a marked emboldening of investor activism after an understandable pause for much of 2020. Heightened ESG concerns and executive remuneration have increased as reasons for campaigning for change though, as ever, the classic thesis remains that superior value could be released by agitating for break-ups and management change. There has also been a number of situations where major shareholders have threatened or launched takeover offers.
Looking into the new year, there are very good grounds for expecting these patterns to continue: equity firepower and debt financing for transactions remains readily available; private equity remain hungry for deals; and opportunities will arise from the hangover from the tapering of financial stimulus and other state support. The currency advantage for overseas bidders continues, but in this respect, the extent and impact of newly-implemented national security legislation and increasing state intervention in foreign takeovers remains to be seen.