Formal sale processes now a key element of UK public M&A market

Research by Pinsent Masons, the law firm behind Out-Law, shows a steady increase in interest in FSPs with a total of 15 announced in 2020, up from 13 in 2019 and 11 in 2018. This increase can be seen as part of a wider trend towards companies and advisers being more willing to conduct an operational review under the auspices of an FSP.

Interest in FSPs since their introduction in 2011 was initially fairly underwhelming. Market commentators had initially considered that the process would be popular among companies considering their future strategic direction, given their flexibility and the availability of certain dispensations under the UK Takeover Code ('the Code').

Given the challenges posed by Covid-19 to large swathes of the UK economy, we expect the FSP to become a more prominent feature of the UK public M&A landscape in the coming year - particularly in view of the number of FSPs that were initiated during the course of 2020. There are tangible benefits for companies wishing to undertake an FSP, particularly those who have received a great deal of interest from prospective bidders and are seeking to conduct a competitive process.

Increased pressure from a cash flow perspective may also mean that more companies seek to take advantage of the flexibility of an FSP to find a strategic partner before triggering the timetable prescribed by the Code.

What is a formal sale process?

While not formally defined in the Code, an FSP effectively enables a target company to announce that it is actively seeking one or more potential bidders prior to receiving an offer.

There have been 109 FSPs launched since 2011, when the Code Committee of the Panel on Takeovers and Mergers ('the Panel') decided to strengthen the position of target companies in the context of Code transactions. FSPs were introduced alongside a general prohibition on offer-related arrangements such as break fees, which had previously been a staple of the UK public M&A environment.

The announcement that a company is conducting an FSP triggers the commencement of an 'offer period' under the Code. One of the fundamental principles of the Code is that any announcement made by a target company which starts an offer period must publicly identify the potential bidder with which it is engaged in discussions, or from whom they have received an approach. Once identified, the potential bidder is subject to a 28-day 'put up or shut up' (PUSU) deadline, by which it must announce a firm intention to make a bid for the target company or walk away.

However, the Panel can now grant dispensations to a target company which allow it to conduct an FSP without being required to publicly identify the potential bidder. The potential bidder may also not be subject to a PUSU deadline. This enables the potential bidder to take the appropriate time to formulate its strategic plans for the company, and to carry out the necessary financial and operational due diligence.

There are other features of an FSP which benefit both target companies and potential bidders and, interestingly, the Code allows target companies the latitude to impose certain conditions on a potential bidder's participation in the FSP. In order to take advantage of  dispensations provided by the FSP regime, all parties involved in discussions should be minded to engage with the Panel at the earliest opportunity. Practice Statement No. 31 also makes it clear that, to the extent that an announcement is required under the Code, this should not be delayed in order for the company to seek the relevant FSP dispensations.

Which companies have been using formal sale processes?

Among the FSPs launched to date, a significant number have involved companies in the energy sector, according to Pinsent Masons' research - particularly those involved in oil and gas exploration, which require a substantial degree of investment to meet their development goals. Over half of the FSPs launched in 2015 were by energy companies – an increase on 2014, when over 25% of FSPs involved energy companies. Energy companies also explored the FSP route in 2019 and 2020, with Amerisur Resources and Volga Gas being two examples of companies which completed the process successfully.

The FSP has also been used by companies operating in the life sciences sector, with certain companies exploring this option where they have been unable to raise additional capital to fund future development. Over 35% of the FSPs that were launched in 2018 were by companies operating in this sector. There has been sustained interest in FSPs from life sciences companies, with a little more than 25% of the FSPs announced in 2020 coming from companies operating in this field.

Companies often provide multiple reasons for proceeding down the FSP route in their announcements. However, by far the most popular reason given since 2011 is to "maximise shareholder value", used in over 50% of launch announcements, according to our analysis.

"Maximising shareholder value" is often accompanied by an explanation from the target company that it is undertaking the FSP for "strategic reasons". A number of companies have also launched a strategic review alongside the FSP, as was the case in the announcement launching the process by sub-prime lender Amigo Holdings in February 2020. Although an FSP is a distinct process under the Code, a strategic review announcement issued by a target company may also include an announcement of an FSP under Rule 2.6.

Other common reasons given for undertaking an FSP include as a consequence of encountering issues relating to financing matters and as a result of expressions of interest in the target or its assets.

The outlook in terms of the success of the FSP  has been mixed, with 21% of FSPs announced to date having been successfully completed. A number of companies subsequently completed sales of substantial assets outside the ambit of the FSP. A small number of companies that launched an FSP subsequently became insolvent, such as Utilitywise Group plc, which announced the commencement of its process in January 2019.

Of the 15 FSPs announced in 2020, three have resulted in a formal offer announcement. Volga Gas launched an FSP on 7 April 2020, having previously explored this option in 2014. GEM Capital Holdings (CY) Ltd launched its offer for Volga Gas on 16 November 2020. Collagen Solutions plc announced the commencement of an FSP on 16 April 2020, with Rosen's Diversified Inc. announcing a recommended cash offer for the company on 27 August 2020. ADVANZ Pharma Corp Ltd launched an FSP on 23 October 2020 and Cidron Aida Bidco Limited announced a recommended cash offer for the company on 27 January 2021.

The very public nature of a formal sale process means that a company is seen as being ‘in play', as such, boards of directors may not wish to give this impression. One should not, however, discount the possibility in the coming months of opportunistic bidders seeking to take advantage of the commencement of a formal sale process to launch an offer which the target company may consider to undervalue it fundamentally.