A corporate partner based in Simpson Thacher & Bartlett LLP’s London office, Clare Gaskell advises private equity firms and corporate clients on private M&A, public takeovers, equity capital markets transactions and general corporate matters. Clare regularly handles complex cross-border transactions and her most recent M&A experience includes advising KKR on its acquisitions of the Unilever spreads business and A-Gas, Blackstone on its acquisition of Acetow and Silver Lake on its acquisition of ZPG plc.
Ben Spiers is a corporate partner at Simpson Thacher & Bartlett LLP based in London. He joined the firm in early 2017 having spent 23 years at Freshfields, most recently as co-head of their Global M&A Group. His focus at Simpson Thacher is corporate and sponsor clients across both public and private deals. He first came across the Simpson Thacher team across the table acting for Honeywell who bought Elster off Melrose (for whom Clare acted). Over the last year Ben advised Axis on its bid for Novae Group plc; Melrose Industries on its acquisition of GKN plc; Silver Lake on its acquisition of ZPG plc and Blackstone Capital Partners on its acquisition of Cirsa SA.
GTDT: What trends are you seeing in overall activity levels for mergers and acquisitions in your jurisdiction during the past year or so?
Clare Gaskell and Ben Spiers: M&A has boomed in 2018. Various league tables put activity at the highest level since 2007. This is despite Brexit uncertainty and despite a fall-off in Chinese outbound transactions, which were much more prevalent last year. Of course many UK deals are much more international in nature – the country’s biggest companies derive the vast majority of revenues from overseas. However, English (and New York) law continues to be popular with clients, which drives the London market. Recent statistics for the third quarter have, however, shown a fall-off in UK deals – and again commentators suggest Brexit might be the reason.
Having said that, as was the case for 2017, fundamentals remained solid: good balance sheets (on the whole); the need for growth; lots of ‘dry powder’ in the hands of financial sponsors and benign debt markets. There is some talk in the market that very UK-centric deals (which don’t account for much of the market here) will continue to slow down in the first half of 2019 as we get closer to the actual withdrawal of the UK from the EU, but we have lived with this suggestion all year and deals keep on being done – both very large strategic deals that drive headlines and of course the continued appetite from financial sponsors.
GTDT: Which sectors have been particularly active or stagnant? What are the underlying reasons for these activity levels? What size are typical transactions?
CG & BS: As in other parts of the world, the telecoms, media and technology sector has been particularly active. Despite Brexit, the United Kingdom remains an attractive centre for technology companies and M&A continues both at the start-up end of the scale as well as at the larger end. The biggest and most stand-out of these was the fight for control of Sky – eventually won by Comcast after a sealed bid auction run over a weekend by the UK Takeover Panel. Other hot sectors include healthcare (eg, the unwinding of the GSK/Novartis joint venture) and retail (eg, Sainsbury’s/Asda tie-up).
There is no ‘typically sized’ transaction, with a wide variation in deal sizes up to values in the multiple billions of pounds sterling. The UK market is, however, rather unique in Europe inasmuch as professionals based here tend to cover financing and M&A across multiple European geographies. This can be either because cross-border deals happen under English law, because the relevant professionals on the buy or sell side are based in London or simply because of the expertise of the advisers who live and work in the United Kingdom. Invariably the financing of pan-European deals uses debt under English law or capital markets financing under New York law. Hence, even when UK M&A itself is quiet, the M&A professionals based in London tend to be busy dealing with global or pan-European deals (whether or not the relevant assets are wrapped in a UK corporate).
“The UK market is, however, rather unique in Europe inasmuch as professionals based here tend to cover financing and M&A across multiple European geographies.”
GTDT: What were the recent keynote deals? What made them so significant?
CG & BS: There are three key themes that have emerged over the past year or so that have manifested themselves in keynote deals.
First, private equity has returned to looking at public target assets. This is, we think, a function in part of the lack of the assets available on the private markets (as compared to the capital available to sponsors) as well as a better understanding of the rules governing takeovers in the United Kingdom by financial sponsors. UK take-privates by financial sponsors in the past year include Bain’s pending offer for eSure, Silver Lake’s acquisition of ZPG, Advent’s acquisition of Laird, Blackstone’s acquisition of Taliesin Property Fund, Montagu’s acquisition of Servelec and Blackstone and CVC’s acquisition of Paysafe.
Second, big ticket private equity has continued with a vengeance. This has been epitomised by KKR’s acquisition of Unilever’s spreads business, which was the largest European leveraged buy-out announced in 2017 with a purchase price of €6.825 billion. Despite being an international euro-denominated deal, it was based on English law transaction documents negotiated in London. The same applied to the AkzoNobel sale of its speciality chemicals business to The Carlyle Group and GIC for €10.1 billion, which announced at the end of 2018’s first quarter.
Third, the UK government continues to play a key role, as witnessed by the level of scrutiny applied to Melrose’s hostile bid for GKN plc and discussed further below.
GTDT: In your experience, what consideration do shareholders in a target tend to prefer? Are mergers and acquisitions in your jurisdiction primarily cash or share transactions? Are shareholders generally willing to accept shares issued by a foreign acquirer?
CG & BS: In private M&A, the overwhelming majority of deals are cash only.
In the case of public takeovers, unlisted securities or loan notes are rare and typically offered only as an alternative to cash. Overseas bidders without an existing UK listing generally do not tend to offer share consideration (unless as an alternative to cash) because overseas securities tend to be unattractive to UK shareholders. Those that do offer stock tend to offer a UK listing as part of the transaction. Having said that, a bidder company offering liquid securities which are listed on a recognised investment exchange should be appealing to a UK PLC shareholder base – especially since those shareholders tend to have a global outlook. On the whole, though, share consideration is mostly seen in the case of a takeover of a UK target by a UK bidder – such as Melrose’s offer for GKN.
GTDT: How has the legal and regulatory landscape for mergers and acquisitions changed during the past few years in your jurisdiction?
CG & BS: The changes to the UK Takeover Rules that require bidders to make their intentions about a target business known to target shareholders and the public are now a few years old. However, these rules have been supplemented this year by expanding the requirements relating to post-offer intentions for the target business. Bidders are now required to make specific statements of intention with regard to research and development functions, changes in the balance of the skills and function of the target’s employees and management, and the likely repercussions on the target’s headquarters. Furthermore, bidders are now obliged to publicly report on their compliance (or otherwise) with their intention statements at the end of the 12-month period following completion of the acquisition.
These intention statements can be bolstered to become ‘undertakings’ and, until this year, such undertakings had only ever been used once – on Softbank’s bid for ARM Holdings. In 2018, they have become much more common for big high profile transactions – like Melrose/GKN and Comcast/Fox/Sky. We expect that big takeovers of UK-listed companies (especially if they are household names) by foreign buyers (in particular) are likely to continue to require similar undertakings in order to get political buy-in from Westminster.
Political sensitivity to ‘foreign buyers’ and to jobs remains strong here in the UK and indeed across Europe. Getting something more from bidders than just price is seen to be increasingly important to target boards. In a hostile context its clear that politicians will do what they can to wring concessions from bidders.
In addition, the UK government has been consulting on a new regime under which it would have significantly increased powers to scrutinise M&A transactions on national security grounds. The proposed system would be based on voluntary notifications, with the government having powers to call in transactions for review where it has a reasonable suspicion that the transaction may give rise to a risk to national security. At the time of writing the government consultation is ongoing so the final shape of the new regime is not yet known, but it seems inevitable that measures will be introduced, which could affect deal timetables and, on some deals, depending on the target sector, increase execution risk.
“Market commentators continue to speculate that overseas buyers have and will look to take advantage of the relative weakness of sterling since the Brexit vote.”
GTDT: Describe recent developments in the commercial landscape. Are buyers from outside your jurisdiction common?
CG & BS: When we wrote this article a year ago Chinese buyers were still common. Now they are very rare (following a crackdown by Chinese regulatory authorities).
Market commentators continue to speculate that overseas buyers have and will look to take advantage of the relative weakness of sterling since the Brexit vote. On the other hand, valuations of UK companies with non-sterling earnings have increased – effectively neutralising the effect of the change in sterling. Indeed, the overall impression is of a sellers’ market with high valuations – albeit ones that are being achieved, especially in competitive auction scenarios.
Warranty and indemnity insurance continues to be popular as a tool to provide buyers with some post closing protection without sellers losing the ability to have a ‘clean break’. In recent transactions and auction processes, particularly those involving strategic or non-European buyers, sellers have been offering up a package of business warranties (usually to be given by management) to form the basis for more substantial coverage under an insurance policy.
GTDT: Are shareholder activists part of the corporate scene? How have they influenced M&A?
CG & BS: Activist activity remains focused on the UK – rather than a number of other European countries – because of the lack of controlling shareholders in many listed companies. There continues to be talk of limiting the role of arbitrage funds on public deals – with suggestions that only those on the register on the day of announcement would be allowed to vote. Of course, arbitrages are crucial to takeover battles and they are only able to get shares to vote from willing sellers – of which there appear to many (at least on the most high-profile deals).
Bidders for public companies continue to worry about intervention by activist shareholders seeking a higher offer price on public deals, referred to as ‘bumpitrage’. Hence, binding irrevocable undertakings from major target shareholders (to vote in favour of the transaction) before announcement have become even more important to would-be bidders. Bidders also consider more carefully whether to neutralise the arbitrages by making an offer ‘best and final’ (subject only to the ability to increase in the event of a competing offer).
GTDT: Take us through the typical stages of a transaction in your jurisdiction.
CG & BS: The M&A process very much depends on the parties involved. In the case of a big strategic deal, for example, most of the contact from the early stages tends to be at a principal-to-principal level. On the other hand, auction processes are usually run by financial advisers who coordinate with potential bidders and feed information back to their clients.
A typical auction process involves the circulation of a ‘teaser’ containing limited, often publicly available, information about a target and a non-disclosure agreement is then entered into before more information is made available. Bidders are invited to submit non-binding offers at the end of a first phase, which typically lasts four to six weeks. Selected bidders are taken through to a second phase during which they are given access to a data room, management and sometimes experts, such as vendor due diligence providers, and the opportunity to ask follow-up questions. At the end of the second phase, bidders must submit what is referred to as a final ‘binding’ offer – although it invariably remains subject to negotiation and signing of definitive transaction documents, at least. If due diligence has been completed before submission of the final offer and the buyer is otherwise ready to proceed, then signing can occur within 24–48 hours of the final offer deadline. In other cases, particularly where the target business is being carved out from a larger group, it can take longer – sometimes weeks – for the parties to enter into a legally binding contract.
The extent of due diligence also depends on the parties involved and the type of transaction. In public M&A, due diligence tends to be very limited – partly driven by the Takeover Code requirement that any due diligence information given to one bidder must be given to any other bona fide potential bidder on request. Due diligence is also typically limited in secondary buyouts, where financial sponsor buyers focus on big value items and take comfort from the fact that the target will have been the subject of due diligence in the fairly recent past. In contrast, a strategic buyer is more likely to want a detailed due diligence process, partly so that it can fully understand and test potential synergies which may underly its price.
GTDT: Are there any legal or commercial changes anticipated in the near future that will materially affect practice or activity in your jurisdiction?
CG & BS: Continued political focus on ‘foreign buyers’ is likely. This is a global theme – driven by politics as much as anything. We expect that public companies – especially large ones that are subject to a takeover by a foreign acquirer – will be subject to increased scrutiny from politicians. As noted above, the UK government is currently consulting on tougher regulation of transactions deemed to pose a national security risk. Government support of a large transaction is often really important (for PR as much as anything). So even absent new regulation (relating to security and public interest for example), we expect to see more binding undertakings being given by bidders around jobs in the UK, HQ location and perhaps tax.
As already noted above, the Takeover Panel will continue to police and monitor statements of intent and binding undertakings given by bidders for listed companies. We expect private companies will continue to be somewhat immune from the rules and politics – probably incentivising many to keep their assets in unlisted companies to avoid such regulation and scrutiny.
“Even absent new regulation (relating to security and public interest for example), we expect to see more binding undertakings being given by bidders around jobs in the UK, HQ location and perhaps tax.”
GTDT: What does the future hold? What activity levels do you expect for the next year? Which sectors will be the most active? Do you foresee any particular geopolitical or macroeconomic developments that will affect deal sizes and activity?
CG & BS: Given impending developments relating to Brexit, including the 31 March 2019 withdrawal date, and following the bumper M&A run in the second half of 2017 and the first half of 2018, we expect that the period to mid-2019 will be somewhat subdued in relative terms. However, cheap debt with loose covenants continues to be available, and financial sponsors have plenty of capital to invest. In recent times, slower periods as a result of political and economic uncertainty have been fairly short-term trends and dealmakers have quickly returned to action once markets settle. There is no evidence that medium to long-term M&A activity in the United Kingdom (including international transactions brokered and negotiated in London) will be adversely affected by Brexit.
The Inside Track
What factors make mergers and acquisitions practice in your jurisdiction unique?
The shareholder base in the UK is generally more capitalist than elsewhere in Europe (inasmuch as we do not have many family-owned or majority-owned businesses). This, together with the lack of works councils and Takeover Code prohibition on poison pills and other ‘frustrating action’, has traditionally made for an M&A-rich environment. Also, most financial sponsors base their European operations in London which means that M&A should continue apace here (even if UK M&A itself slows down). On current evidence, while some dealmakers and back-office operations have relocated to the continent or Ireland, the vast majority remain in London and some financial sponsors are actually ramping up their London operations.
What three things should a client consider when choosing counsel for a complex transaction in your jurisdiction?
There’s no ‘one size fits all’ approach – clients should choose counsel with the insight and experience to master complexity and make judgement calls, but with the flexibility to collaborate with other advisers, in the UK and elsewhere, to achieve the best possible result. Experience is especially important in relation to public company deals in the UK. The rules are very ‘principles’ based and require a detailed knowledge of practice and precedent. As law firms and legal practice continue to disaggregate partner judgement is what will be key on complex and fast moving M&A deals.
What is the most interesting or unusual matter you have recently worked on, and why?
Melrose’s hostile offer for GKN was the first large successful hostile bid for many years. It had all the hallmarks of an ‘old-fashioned’ unsolicited tender offer. Perhaps most surprising was how the politics played out – both sides were hauled before select committees in Parliament (streamed live on TV); unions played an active role; and, despite Melrose being a UK company, GKN managed to wrap itself in the Union Jack playing the card of a good British company under siege from rapacious capitalists. Beware in particular a hostile foreign buyer trying to do the same.
Clare Gaskell and Ben Spiers
Simpson Thacher & Bartlett LLP