P2Ps to rise – despite Code changes

Take-privates are set to rise next year as depressed stock markets provide rich pickings for acquisitive corporates as well as financial buyers eyeing up bargains. This comes in spite of the recent changes to the UK Takeover Code, which came into play on 19 September 2011 and could make such deals less straightforward. The changes include a 28-day PUSU clause (put up or shut up) which require offerors to make a formal bid within the time frame – or step back.

A meeting in May with the Takeover Panel saw its director general Robert Gillespie admit that financial backers' requirement for third-party funding would mean they will find the 28-day limit more constraining than corporates: "The world of private equity will always be at a disadvantage to cash-rich buyers. This situation will always exist. But if private equity is the preferred bidder, this timetable should not make it impossible to compete."

Indeed it would seem that listed companies are ripe for the picking right now, even for private equity players.

"The interest we are seeing in take-privates is the highest we've seen in a long time," says Pinsent Masons partner Alison Starr (pictured), suggesting appetite P2Ps is as robust as a decade ago. "We thought 2011 would be a big year for P2Ps, but it's taken longer to materialise than expected, so we will likely see this activity well into 2012."

The firm is currently working on a number of take-privates, some of which involve private equity. Ironically, the bulk of enquiries have come in the last two months since the changes came into effect. "The changes to the Code do not create an unlevel playing field for private equity as trade bidders often have the same concerns, such as triggering announcements that prematurely identify them, or being forced into making a bid. However it is certainly the case that P2P bidders will need to be better prepared with their funding arrangements prior to making an approach. The 28-day limit is a realistic period of time for a serious bidder to work on the terms of its offer and assess the likely support from key shareholders or pension trustees. This is because you don't approach a board of a PLC unless you have done your in-depth diligence and have your senior debt and private equity on board. You would have no credibility otherwise."

According to unquote" data, larger PE houses have been historically more reliant on stock markets for their deal flow: P2Ps have accounted for £45.6bn of £149.7bn of UK deals done since 2005. But those are spread across 73 deals, resulting in a hefty average deal size of £625m. Smaller players have been unsurprisingly less fussed about the changes to the Code for two reasons: firstly, take-privates do not form a meaningful part of their dealflow (despite the large value of take-private activity, by number of deals it represents just 7% of UK deals volume since 2005). And secondly, when they do consider a P2P, the 28-day limit would not be disastrous, since they will only pursue such a deal if they have done proper diligence on the target and can proceed promptly.

Therefore it is just the hostile bids that would be more difficult – which was the Code's aim in the first place. "Nothing in the Code is fundamentally against private equity. We will, though, see a decreased number of speculative bids. It will reduce the proportion of private equity interest in listed companies, but won't deter those businesses with serious intent," says Simon Boadle, partner at PricewaterhouseCoopers. He was speaking to your correspondent yesterday at a discussion on the changes hosted by the ICAEW's Corporate Finance Faculty.

Now, shareholders will have a more active role in take-privates. Adds Boadle: "The offeror must be in a position where it can effectively lobby shareholders now. This is novel for shareholders, who have traditionally been passive during [take-private] processes."

So far, the Panel has seen initial signs that the changes have had the desired impact. Part of the changes stipulate that an extension of the 28-day period may be agreed. Gillespie explained that where this is occurring, target companies are retaining a bit of control: "Extensions are so far around a week or two at a time. Offerees are keeping offerors on a short leash. The changes are being used, as we had hoped, as a tactical advantage for the offeree companies." He added that five such processes have been approved since the 19 September 2011 implementation, with another half dozen in the pipeline.

There may also be an uptick in P2P activity owing to cash-strapped PLCs. "There is an exception to the PUSU rule when the target puts itself up for sale. This is not that common, but if PLCs lack access to capital as banks squeeze lending, we may see more P2P activity, which is a great opportunity for the private equity industry," Starr says.

Gillespie said the Panel will review the changes next autumn. "We are looking at a long list of fundamental revisions," he said.

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