In the last five years, the European Commission (EC) has required divestitures in more than 70 antitrust cases, requiring merging parties to divest business assets as a condition to receiving regulatory approval. This increasingly interventionist approach from competition regulators presents opportunities for buyout firms to acquire divested assets.
However, regulators are increasingly imposing upfront buyer requirements to ensure the ongoing success of the divested business — divested asset purchasers must be approved before the underlying merger transaction can be completed. PE buyers may need to significantly advance transaction work, including negotiating final form documents (which must be provided to the regulator for review), before they find out if they are a suitable purchaser.
Since the divestment assets are often valuable businesses that would not ordinarily come to market, PE sponsors’ effort in such processes can be well worth it.
Issues PE Buyers Must Overcome
Regulators will require a suitable purchaser to compete effectively with the merged entity and not create competition problems of its own. The key criteria regulators look for in prospective purchasers are financial resources, proven industry expertise, and the purchaser’s incentive and ability to maintain and develop the divested business as a competitive force.
PE buyers have been explicitly excluded from acquiring some divestment assets, on the grounds of lack of sector experience, with regulators favouring strategic buyers with industry knowledge, supporting assets, and a long investment horizon. This is especially the case if the assets are a collection from merging parties’ businesses rather than a stand- alone going concern business. In the recent Ball/Rexam merger, the EC required that the prospective purchaser must have proven expertise in the packaging sector, stating that “the majority of respondents raised doubts as to whether a financial investor (for instance a private equity fund) would be a suitable purchaser and have the ability to replicate the competitive constraint that Ball and Rexam exercised on each other pre-transaction”.
How Can PE Buyers Best Position Themselves as a Suitable Purchaser?
Regulators require a business plan, which gives the PE sponsor an opportunity to detail its plans and forecasts and also promote its capabilities and experience. The business plan should highlight the PE firm’s track-record in similar sectors, and explain that the firm has (or will hire) industry experts to operate the business. Plans to retain and incentivise the existing management team are also helpful. The business plan should also outline how the PE sponsor intends to develop the divestment assets and highlight any synergies with portfolio companies, as well as growth and expansion opportunities, including planned bolt-on acquisitions.
PE bidders can be successful in demonstrating suitability by working with expert antitrust advisors — who understand the criteria the regulator will apply — early in a process to develop a strong business plan that addresses relevant matters. This gives the regulator comfort that the assets will be in capable hands. A PE bidder can also bolster its case with in-person regulator meetings.
Competition regulators will assess whether the PE sponsor has genuine long-term intentions; regulators will want to ensure that the assets will not be flipped to an untested buyer or split up after a short period. PE sponsors should therefore be ready to reveal their planned holding period for the assets and their exit strategy.
In our view, there is a premium on being well-prepared to engage with sellers and regulators, as the divestment assets may not return to the market for some time.