How the UK killed P2Ps

The precipitous drop in UK sponsor-backed take-private deals suggests the government needs to re-think its revised takeover rules

In 2007, at the height of the boom, the total dollar value of public-to-private deals completed in the UK by private equity sponsors was $53 billion, according to Dealogic – about 80 percent of the $66 billion total for Europe as a whole.

So far in 2013, the equivalent UK figure is $9 million. No, that's not a typo: this year's total is about 0.00017 percent that of six years ago.

So what caused this precipitous decline? The impact of the financial crisis obviously played a big part. And with public markets so (improbably) high at the moment, clearly there are not many bargains to be had. But what's interesting is that in the last few years, the rest of Europe has seen take-private volumes start to recover – whereas UK volumes have continued to slide.

The answer almost certainly lies in the changes made to the takeover rules by the UK government in 2011. Kraft Foods’ acrimonious hostile takeover of iconic British chocolate-maker Cadbury’s prompted various questions about both the vulnerability of UK-listed companies, and the conduct of potential acquirers – which led to a series of revisions to the Takeover Code intended to give target companies more protection.

Arguably, these revisions have hit private equity bidders particularly hard.

For example, the disclosure rules have been beefed up substantially: it's now much more incumbent on potential bidders to out themselves at an early stage should whispers of their interest start to emerge – which may well smoke out rival bidders. And once they are outed, they now have just four weeks to ‘put up or shut up’, i.e. submit an offer or walk away. This timeframe can be particularly challenging for private equity firms, according to Selina Sagayam, an M&A partner at law firm Gibson Dunn (who previously spent time on secondment at the Takeover Panel), since unlike corporates, they'll probably need to put together a financing package in order to launch a full bid.

There are also additional constraints on deal protection measures, including an absolute ban on break fees (except for ‘white knight’ bidders). This may also affect private equity disproportionately: GPs will generally be looking at multiple targets at any one time, so they'll be far less inclined to spend time on public company bids when they know there's no prospect of them being able to reclaim their initial costs.

Transparency rules have also been tightened, particularly around financing, intentions towards the workforce and strategic plans for the target company. So if a bidder has any plans to restructure the target (including changes to its places of business) that it doesn't disclose at the time of the bid, it could potentially find itself in breach of the Takeover Code. Since private equity firms will invariably be looking at all those areas, they have to be particularly careful.

“If you put all these strands together, it means longer timeframes, more competition, a greater level of difficulty and ultimately more risk of the deal not getting through,” says Sagayam. “That’s a real factor that puts private equity off.”

The data certainly seem to suggest as much. As does the anecdotal evidence: most investment professionals will tell you that UK public-to-privates are far more trouble than they're worth at the moment.

Some would argue that this is no bad thing; that if private equity's tanks are kept off UK plc's lawn, so much the better. But if the priority here is the interests of public company shareholders – as it should be – then this is an extremely short-sighted view. If private equity firms effectively write off the public markets as a source of deals, it will mean fewer options for companies that actually want to sell – which will ultimately mean less competitive pressure on pricing, and less value to shareholders. That can't be a good thing.

Unfortunately, for the time being, the Takeover Panel doesn’t seem to share this view: its first review of the new system, based on completed deals, concluded that it was working well. But it’s the deals that haven’t happened that are the real problem, not the ones that have. These numbers make a powerful case that the situation needs further review.