Corporate takeovers: rules change

How takeovers have become more complex

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Takeovers of public companies are always challenging. The way that negotiations play out in public and the need for certain funds (under some takeover rules) are among the factors making them more difficult than private deals. But private equity in particular faces new challenges when trying to take over UK-listed companies.

The UK is an important market for M&A, being one of the most open for corporate takeovers. However, that could be set to change after the Takeover Panel, which seeks to protect the interests of shareholders of target companies, introduced rule changes last week.

Over the past year, the panel has been consulting on a series of revisions of the rules that are designed to protect target companies from undue distractions caused by drawn-out bid processes. Under the changes, deals to take UK companies private are likely to become more difficult, say some M&A advisers, and private equity funds in particular face the brunt.

One key feature will be that upon a leak of talks, the identities of all bidders that have made an approach and not been rebuffed, must be revealed. Moreover, the clock then starts ticking on a four-week deadline by which they have to produce bids. This is expected to put particular strain on private equity funds that prefer to go about approaches to public companies in a consensual way, getting access to due diligence, before launching offers. A limit of four weeks creates an additional strain for private equity funds needing to get funding together. Moreover, they also face having failed attempts publicised.

Leveraged loans typically used for buyouts can be expensive and require both due diligence to have been carried out and time for banks to approve lending commitments. Corporates, many of which are cash rich today, will find meeting this requirement much less onerous. Being in the same industry, their need for due diligence will be less, and their high cash balances and likely synergies will mean funding is less of an issue.

On top of the new requirements, buyers will need to make much greater disclosure around the debt funding they secure for a buyout.

Another potential bugbear is a ban on break fees. These inducements can be important for private equity funds, for whom they offer reassurance that their costs will be covered should the target board seek to change its recommendation or if the fund’s offer is trumped.

Views among advisers are split, with some believing the revised rules will make take-privates much harder in the UK, while others expect no real change.

There are some elements of relief for financial sponsors under the new rules. For example, although there is an automatic so-called “put up or shut up” of four weeks, this can be extended with the consent of the target and the Takeover Panel.

Also, break fees can be paid in certain circumstances such as in the case of a “white knight”, where the target is already the target of a hostile bid, or if the process is an auction process initiated by the bidder.

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