Analysis: UK takeovers flop as boards rebuff low valuations
05/03/2024 07:00
By Amy-Jo Crowley and Andres Gonzalez
LONDON, March 5 (Reuters) - The number of failed
takeovers of UK-listed companies has more than doubled in recent
years as boards have rebuffed a slew of bids they believe are
taking advantage of cheapened stock prices.
Britain's Currys CURY.L and Direct Line DLGD.L in recent
weeks are the latest example of companies that have rejected
offers because their boards said they were too low.
Dealmakers have been hoping for a rebound in mergers and
acquisitions this year after dealmaking in 2023 globally fell
to lows not seen since 2013. Private equity-led buyout volumes
in particular globally slumped last year, as financial sponsors
cut back on leveraged buyouts (LBOs) and sold fewer companies
against a backdrop of higher financing costs and an uncertain
economic outlook.
The share of takeover offers for UK-listed companies that
were withdrawn between 2021-2023 was about 17%, versus 8%
between 2014 and 2020, according to LSEG data.
UK takeover activity has also increased during that period
as bidders zone in on the relative low valuations of the members
of the FTSE 100 and FTSE 250.
Britain's FTSE 100 .FTSE index has fallen 0.85% so far
this year, versus a 4% gain for Europe's broad STOXX 600 index
.STOXX and a 7.5% gain for the S&P500 .SPX both of which are
trading at all time highs. The FTSE 250 mid cap index .FTMC is
down around 2%.
"The proportion of possible takeover offers that were
withdrawn in the last two years was elevated and something that
drew attention in the market," said Stuart Ord, Co-Head of M&A
at Deutsche Numis.
The trend underscores challenging financing conditions for
buyers and a substantial gap in valuation expectations between
buyers and sellers, leading to multiple rejections and "buyer
frustration", Ord explained.
Typically investors can expect a premium of around 30% of a
company's market capitalisation with a takeover offer but M&A
specialists interviewed by Reuters said even much higher premia
are being rebuffed.
"A 50% premium in today's market may not work for some
companies, especially if the valuation is down versus historic
norms," according to a UK M&A banker at a global investment
bank, who declined to be identified.
Buyers have also been hobbled by higher borrowing costs and
limits to financing under UK takeover rules (which limit them
going out to more than six potential bank lenders before a
possible offer is made public).
The board of electrical goods group Currys last week
rejected a improved offer of 67 pence a share in cash from US
investor Elliott Advisors as it undervalued the company. That
represented a premium of about 42% to Currys undisturbed share
price.
Currys' largest shareholder Redwheel supported the board's
rejection, while analysts at Peel Hunt previously said it would
struggle to see the Currys board engaging on anything less than
80 pence a share.
Insurance group Direct Line last week also announced it
rejected an "unattractive" proposal from Belgium-listed rival
Ageas AGES.BR .
In a period of higher borrowing costs and uncertain market
conditions, some proposals were made public prematurely to put
pressure on boards after private approaches were rejected or to
involve more parties in financing, according to Claire Coppel,
M&A partner at law firm Allen & Overy.
As soon as a potential offer is leaked and the bidder
confirms its interest, it has 28 days to firm it up or walk
away, according to "put up or shut up" (PUSU) UK takeover rules.
That can make completing deals harder, bankers said.
Ord said the rule pressurises bidders to demonstrate to the
target’s board or shareholders that it has a deliverable deal at
an attractive value. "If you can't show that, or you try to and
fail, then you are likely to walk away," he said.
Bidders instead are deploying new strategies such as the
"private bear hug", where a spurned bidder takes its proposal
direct to one or more of the leading shareholders and seeks
their support with the target board, Ord said.
An expectation of falling interest rates and improved
financing markets this year is unlikely to translate into
frenetic deal activity.
"We expect more activity this year, and we have seen quite a
lot of things start. But it takes more time to execute," said
Eleanor Shanks, partner and head of International Private Equity
at Herbert Smith Freehills.
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(Reporting by Amy-Jo Crowley and Andres Gonzalez in London.
Additional reporting by Alun John; Editing by Anousha Sakoui and
David Evans)
((andres.gonzalez@thomsonreuters.com; +44 (0) 7551 790019;
Reuters Messaging:
andres.gonzalez.thomsonreuters.com@reuters.net))