Public company M&A booming

Activity in the UK’s M&A market has rocketed in 2021. There were 1,477 M&A transactions involving a UK target during the first three quarters of the year, according to data from Mergermarket – well ahead of the 1,300 deals recorded during the whole of 2020. And in value terms, too, 2021 has already eclipsed last year, with $308.5bn of deals in the first three quarters, compared with $264.7bn in all of last year.

As ever, much of this deal activity centred on privately owned companies, but 2021 has also seen a striking recovery in public-company M&A. Lexis Nexis data reveals that in the first three quarters of the year, there were 40 firm offers announced for listed companies subject to the Takeover Code – close to double the number announced in the same period of 2020.

The list includes some well-known names. For example, supermarket group Morrisons was sold to US private equity firm CD&R for about £10bn. Aerospace manufacturer Meggitt has been sold to US company Parker-Hannifin for £6.3bn and cybersecurity firm Avast went to US rival Norton for £6.2bn. But there have also been many smaller deals – for example, the £24m takeover of Hunters Property by The Property Franchise Group.

“It’s been the busiest year of my career for corporate finance transactions,” reflects KPMG partner Helen Roxburgh, who leads the advisory firm’s public company M&A team. “There’s so much capital available, ranging from corporates that have emerged from the COVID-19 crisis in a strong position to private equity firms that are highly active as they seek to deploy record amounts of dry powder.”

Against such a backdrop, competition for target businesses is fierce. PwC partner Joseph Katz, who, like Roxburgh, is an alternate to ICAEW’s president on the Takeover Panel, explains: “There are certainly some hot sectors: healthcare is seen as a defensive play in the downturn and a good sector to earn returns from in a recovery, and technology-enabled firms are hugely in demand. There’s also a significant volume of private capital constantly on the lookout for a home.”

Public-to-privates

Indeed, while this year has seen a number of strategic M&A transactions, the big story of public-company M&A recovery has been a surge in the number of public-to-private (P2P) deals.

Of the 18 firm offers made for publicly listed companies in the third quarter of 2021, 11 came from such sources, led by the £969m offer for GCP Student Living by a consortium comprising Scape Living, APG Asset Management and Blackstone. Over the year to date, P2P deals account for around two-thirds of all public market M&A activity.

In part, this reflects the sheer weight of money held by PE funds worldwide, says Andrew Killick, head of the corporate finance team at PKF Francis Clark. “The big difference between this downturn and previous recessions has been that equity is available for transactions, although traditional debt is still quite risk averse.” 

To prove this point, S&P Global says PE houses globally are currently sitting on dry powder of $2.3trn, despite best efforts to do more deals.

Moreover, listed UK companies make a happy hunting ground for investors, given their relative affordability. Even before the COVID-19 crisis, UK equities looked cheap relative to other world markets, as Brexit fears weighed on investors; this has not changed since the pandemic. Based on price-to-earnings ratios, the UK market currently trades at a discount of 26% to the eurozone and 44% to the US.

Valuations are so low, at least in relative terms, that in some cases privately owned businesses in the UK now trade at higher multiples than listed peers. Katz says: “It used to be the case that a listed business would almost always trade higher than a comparable private peer, but that is no longer necessarily the case. We do now see examples of private businesses selling for higher multiples than public counterparts trade, even when one adjusts for a control premium.”

Naturally, this has piqued the interest of private equity buyers who are focused on value rather than prioritising strategic fit in the way a trade buyer might. When a Blackstone-led consortium took Signature Aviation private earlier this year for £3.5bn, it felt able to do so at a 53% premium to the company’s share price prior to the deal.

In many ways, that transaction typified the intense competition for public market assets in the UK. When Blackstone approached Signature Aviation, it was the sixth time it had courted the company in 10 months, but its bid was frustrated by rival interest from Global Infrastructure Partners and wealth manager Cascade Investment. After a bidding war – and with Carlyle also understood to be mulling an offer – the three rivals teamed up to secure the transaction.

Bidding wars

The strength of competition for public companies is leading to some changing bid dynamics, according to Simmons & Simmons partner Mark Curtis, with shareholders anxious to secure every penny of value available in a sellers’ market. 

“Shareholders are much less willing to give irrevocable undertakings to bidders in advance of an offer, opting instead to see how the offer process pans out,” he says. In some cases, they’re actively pushing back on offers that boards are recommending: “We’re seeing shareholders come out publicly to say that a recommended offer undervalues the company. Bidders are effectively having to open up a second set of negotiations with shareholders.”

One high-profile example of that is the ongoing row at the Warrington-based software company Blue Prism, which accepted a £1.1bn bid from US private equity firm Vista Equity Partners earlier this year. Two of the company’s 10 biggest shareholders have already broken ranks to reject the deal as valuing Blue Prism too cheaply.

Another result of there being so many contested bids has been the re-emergence of public auction processes in the UK. Roxburgh says: “Public market auctions have really been quite unusual in the UK in recent years, but we are now beginning to see them much more often.”

In the past three months alone, contested bids for Morrisons and the waste management company Augean have been concluded by auction processes, run by the Takeover Panel. Earlier this year, the battle for security group G4S was also concluded in this way. 

Most M&A advisers expect this elevated level of deal activity – and competition – to persist for some time, including Killick: “The sheer volume of capital will underpin activity well into 2022.”

Potential headwinds do not appear to be hindering the market. For example, changes to the Takeover Code, billed as the most significant amendments for a decade, do not seem to have proved material, despite prompting bidders and their advisers to think hard about the impact of regulatory and competition issues on offer timetables and conditions. 

Similarly, concern about the National Security and Investment Act, coming into effect in January, has remained relatively low-level, at least for now. While the new law gives the UK government more powers to review M&A transactions on national security grounds, advisers are waiting to see just how aggressively these powers will be wielded.

In the meantime, strategic buyers continue to regard M&A as a crucial route to growth and transformation, and many have the balance sheet strength to pursue it – private buyers are rich with capital. 

The stage is set for further dealmaking, including on the UK’s public markets.