Adherence to secrecy, pre-announcement preparations, realistic expectations-setting, and strategic plans for taking control are keys to P2P deal success.
By Richard Butterwick, Pierre-Louis Clero, Manuel Deo, Tom D. Evans, Tobias Larisch, David J. Walker, Suneel Basson-Bhatoa, Phillippe Tesson, Connor Cahalane, and Catherine Campbell
The deal market has seen a resurgence in public to private (P2P) transactions — global P2P volumes exceeded €115 billion in 2018, and have already surpassed €88 billion as of September 2019. As PE firms increasingly target complex and ambitious European P2P deals, deal teams need to consider tactics and understand local requirements. In our view, buyout firms can maximise the likelihood of successfully closing a P2P deal by considering these key issues.
Manage Your Information Expectations — Public Diligence Is Different
Public deals can falter over diligence, particularly if information requests are sizeable or require significant management time. Additional diligence will likely be carried out post agreement of headline terms — e.g., review of key legal documents, management presentations, etc. — but this is typically more limited than on a private deal, particularly with respect to time. In the UK, France, and Spain, equal information must be provided to bidders — target boards will be conscious that information shared with a bidder may need to be more widely distributed in due course. In Germany, while bidders do not need to be treated equally, access to information will only be granted by the target if it considers this to be in the best interests of the shareholders and the company. In all cases, buyers need to act quickly, with clear and realistic expectations of the public diligence process, in order to keep the board onside.
Deal teams should plan to anticipate, address, and resolve issues in advance. For UK deals, care should be taken at the deal screening stage to avoid tipping into “active consideration” too early, precipitating announcement obligations that may be premature. There is no “bright line” and a fact-specific analysis is required — however, actions including the appointment of advisors and seeking investment committee approval should be taken with care. Management discussions should take place early in the process, within appropriate guardrails, as the endorsement of the board can carry significant weight with shareholders. Further, advisors should be mobilised and be ready to move quickly.
Secrecy is Paramount
Secrecy is paramount, particularly before offer announcement — to minimise inside information risks, prevent leaks, and reduce the risk of competitive bids. For PE bidders seeking to stake build, care is needed to avoid triggering disclosure obligations or otherwise notifying the market of their interest in the target. Deal teams should note that once there are market rumours of a deal, most European regimes require an announcement be made, making a pre-drafted statement essential.
Take a Strategic Approach to Control and Price
Failure to obtain the relevant level of control is a common trigger for deal collapse. Companies with large shareholder blocks have proved attractive in recent P2P deals, allowing bidders to lay solid foundations for obtaining control. For deals with a less consolidated shareholder base, teams must take a strategic approach to local deal architecture.
In the UK, France and Spain, PE firms typically seek pre-bid irrevocable shareholder commitments and put topping hurdles in place to disincentivise withdrawal of support. Building a strong shareholder consensus via irrevocable commitments can prevent merger arbitrage funds from building stakes and using “bumpitrage” tactics to seek higher offers.
In contrast, acquirers of German companies seldom achieve outright control at completion and the squeeze-out threshold (of 90% or 95%, depending on entity type and deal structure) is often not achieved. Accordingly, bidders typically accept a lower level of control (frequently 75%), allowing signature of a domination and profit and loss transfer agreement (DPLTA), which enables access to the target’s cash-flows. Buyers targeting German and Spanish public companies also need to consider measures that allow minority shareholders to challenge the offer price / DPLTA compensation and seek additional court determined statutory compensation. This compensation has incentivised arbitrage-seeking hedge funds to buy into German deals, such as during Bain and Cinven’s acquisition of pharmaceuticals company Stada.
Several French deals have faltered due to the activities of greenmailers — third parties who buy shares to disrupt the squeeze-out process, hoping that the bidder will pay a premium. Recent changes to French squeeze-out thresholds will help buyers to delist target companies more easily — which is expected to result in an increase in French P2P deals. The threshold at which minority shareholders can be compelled to sell is now 90% of the share capital and voting rights, bringing it into line with most other European jurisdictions.
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