A public nuisance

In 2007, at the height of the boom, the total value of public-to-private deals completed in the UK by private equity sponsors in dollar terms was $53 billion, according to Dealogic, making it by far the biggest contributor to the $66 billion total for Europe as a whole. So far in 2013, the total value of UK public-to-privates has been $9 million. No, that's not a misprint: this year's total is about 0.00017 percent that of six years ago.

You’d expect to see some kind of drop-off after that record year in 2007, as the financial crisis started to bite. But while volumes have recovered in the rest of Europe in the last couple of years, the UK figures have continued to slide.

The answer almost certainly lies in new takeover rules introduced by the UK government in 2011 to give target companies more protection; this was prompted by US company Kraft Foods’ acrimonious hostile takeover of iconic British chocolate-maker Cadbury’s, a saga that raised questions about both the vulnerability of UK listed companies to hostile takeovers, and the conduct of acquirers.

One change that affects all buyers is the enhanced disclosure rules, according to Selina Sagayam, an M&A partner at law firm Gibson Dunn who previously spent some time on secondment at the Panel. This has made it much more incumbent on potential bidders (or targets) to name themselves at an early stage should whispers of their interest start to emerge, which can be problematic if they’re not quite ready to bid.

What’s more, named bidders 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, she says, since it will normally be more complicated for them to arrange a suitable financing package.

The Panel’s extra constraints on deal protection measures – which includes an absolute ban on break fees, except for ‘white knight’ bidders – has also affected private equity disproportionately, she suggests. “PE houses are looking at many more potential targets [than corporates]. So the ability to recoup some of their initial fees is key.”

                                                                                                             Transparency rules have also been tightened, particularly around financing, intentions towards the workforce and strategic plans for the target company, she adds. So if a bidder has any material plans to restructure the target (including changes to its places of business) that it does not disclose at the time of the bid, it could find itself in breach of the Takeover Code and  liable to sanction from the Panel.

“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.” And is that necessarily a bad thing? “If it means there are fewer options for public company shareholders – if there’s less competition on bids, because private equity firms won’t participate – then yes, that’s a bad thing. I do think the pendulum has swung a little bit too far the other way.”

Unfortunately, for the time being, the 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 problem, not the ones that have. These numbers certainly make a powerful case that the situation needs further review.