Expect a rise in hostile takeovers in the UK, experts predict

Adam Cain of Pinsent Masons, the law firm behind Out-Law, said many would-be acquirers of UK companies are likely to be US-incorporated or other foreign businesses seeking to take advantage of the financial difficulties some businesses in the UK are encountering because of the coronavirus pandemic. Cain’s sentiments were echoed by colleague Sunjay Malhotra.

Cain’s predictions, alongside those of Malhotra, were published in the latest LexisNexis market tracker trend report, which focused on trends in UK public merger and acquisition deals in the first half of 2021.

According to the LexisNexis data, there were 48 transactions subject to the UK’s Takeover Code during the first six months of this year involving companies listed on the Main Market of the London Stock Exchange (LSE) or the Alternative Investment Market (AIM), which is the junior market of the LSE. Of the 48 prospective deals, 22 constituted firm offers to acquire a UK public company – down from 30 such offers recorded in the second half of 2020. There were also 24 possible offers and two announcements of formal sale processes and/or strategic reviews.

“As the current level of public M&A activity in the UK market shows no sign of abating, it is likely that we will see an increased number of hostile approaches, particularly for companies with an attractive asset base that are perceived to be significantly undervalued,” Cain said.

“If initial approaches are rejected and differences in valuation cannot be reconciled, we may see hostile bidders electing to bypass target company boards and discuss the strategic rationale for their bid directly with institutional shareholders. Sophisticated prospective bidders that are well-versed in the requirements of the Code could launch hostile bids if the right circumstances arise, as they seek to control the investment narrative with shareholders and use their first-mover advantage to try and dispel any potential interloper risk,” he said.

Just seven of the firm offers announced in the first half of 2021 were made by UK bidders – half of the 22 offers made came from US companies and a further one was made by a consortium made up of a UK bidder and a US bidder. Other bids were made by companies from Australia, Luxembourg and Russia.

“Despite the recent buoyancy in the UK equity markets, it is clear that overseas acquirers consider the UK to be fertile territory for opportunistic acquisitions,” Cain said. “We are seeing US bidders that consider UK public companies to be a strong value proposition attempting to take advantage of the perceived dislocation between a company’s current share price and its positive long-term trading prospects. The increased degree of unsolicited activity by US bidders is a reflection of the relative cheapness of UK mid-cap stocks in particular.”

“US bidders remain well-placed to take advantage of the relative weakness of sterling and to capitalise on the opportunities that the pandemic has presented, through accelerating their plans for strategic growth and executing transformational deals within the regulatory framework that the UK Takeover Code imposes. The resurgence of SPACs in the US has added an additional degree of competition for high-quality listed assets. This degree of activity has precipitated a renewed focus from companies on implementing the correct defence strategy as they seek to ward off unwelcome approaches,” he said.

According to Sunjay Malhotra, one of the factors that has provided the impetus for a strong degree of activity is the fact that “UK assets have traded at a discount to global markets since 2016”. However, Malhotra said that “in the longer term, with the US dollar heading towards bear territory, it will be interesting to see whether US bidders continue to be a dominant force in the UK public M&A market”.

Most of the firm offers made in the first half of 2021 were recorded in the healthcare, financial services, investment and real estate sectors. The total value of the 22 firm offers announced in the period across all sectors was £17.9 billion.

“The increased interest in healthcare companies, particularly from cash rich overseas bidders, is not unexpected,” said Malhotra, who specialises in corporate transactions in the life sciences and healthcare sector at Pinsent Masons. “Vaccine, medical device and diagnostics companies, particularly those connected to the pandemic response and preparedness for future pandemics, will continue to make attractive targets not least because they offer the real prospect of long-term value creation for bidders.”

“Conversely, those companies with established business models that have performed poorly during the pandemic – often because their businesses were not directly connected with fighting the pandemic – will be seen as undervalued as focus starts to slowly shift away from Covid and back towards more routine therapies. By the same token, the valuation of private hospitals and clinics which lost out during the pandemic on being able to offer elective procedures to foreign customers after partnering with the NHS, has been negatively impacted during the pandemic, thereby presenting an opportunistic bidder with the chance to acquire a target that is only likely to increase in value as the restrictions imposed during the pandemic begin to ease,” he said.

Almost three quarters (73%) of firm offers made for UK-listed companies between 1 January and 30 June 2021 were from private equity houses, institutional investors or other private individuals or businesses. Of those 16 transactions, four bids were made by consortiums.

“Although consortium deals pose their own particular challenges in terms of how the acquisition is to be funded and the respective roles of the members of the consortium in terms of the implementation of the proposed bid, private equity funds appear adept at managing these risks,” Cain said.

“We expect consortium bids to remain a feature of the public M&A market in the medium term particularly because they provide an ideal structure for prospective purchasers to combine their differing capabilities and expertise. Bidders with significant financial resources but which lack the degree of industry specialism to evaluate the merits of a bid independently will continue to work alongside market participants that have the requisite sector knowledge and have a degree of familiarity with the mechanics of the Takeover Code,” he said.

Malhotra said: “PE houses are taking advantage of the fact that it is becoming increasingly difficult to determine the fair value of a target company, with company boards often treading a fine line between not wanting to undervalue a company’s assets while at the same time being forced to acknowledge that in many cases the performance of their business has not yet recovered from the dual shock of the pandemic and Brexit.” Malhotra also said that there was a disconnect between boards and their institutional shareholders, stating that “a number of fund managers have publicly opposed recent deals because they consider the target to be undervalued, notwithstanding a board recommendation.”