Take privates in the UK

Taking a publicly listed company private can be a complicated affair. Here, in an extract from the recently published UK LBO Manual, Simon Beddow, Corporate Partner at Ashurst, outlines the main structural issues and the key differences between P2Ps and r

What is a take private?

When a company previously listed on a public market is acquired, it will be de-listed and usually re-registered as a private limited company. In this sense, any public takeover could be termed a ‘take private’.

However, this term is usually used to refer to the situation where one or more private equity houses acquire a company listed in the UK, in conjunction with a management team comprising either existing directors of the target (an MBO) or a new management team (an MBI). The rest of this extract will assume the private equity house is backing an MBO team.

References in this extract to ‘Rules’ and ‘General Principles’ are to the Rules and General Principles of the City Code on Takeovers and Mergers as administered by the Panel on Takeovers and Mergers.

Financing the take private

Take privates are usually highly leveraged, with a majority of the finance being provided by lenders of debt (probably comprising senior, mezzanine and working capital facilities), which debt would ultimately be secured on the assets and cashflows of the target. The remainder of the finance will typically be in the form of equity (normally shares and a subordinated debt instrument), the vast majority of which will be invested by the private equity house, with a small stake for the management team (possibly only in shares).

Why have take privates become popular?

At the same time as the larger institutional investors have lost interest in small to mid-cap listed stocks, the private equity houses active in the UK market have increasing amounts of funds to invest and have an appetite to undertake larger value transactions (often in consortia). There has therefore been a renewed interest in extracting value from previously listed companies.

For example, in the ten years prior to 1998, only in one year (1989) were there more than ten UK take privates. In 1998 there were over 25 (aggregate value approximately £2.5 billion), in 1999 over 45 (aggregate value approximately £4.6 billion), in 2000 (when the market peaked) over 40 (aggregate value approximately £9.4 billion), and even in 2003, following the decline of M&A activity generally, there were still over 35 (aggregate value approximately £3.8 billion) (Source: CMBOR Management Buy-outs, Winter 2003/04).

Commercial issues with take privates

There is increasing institutional hostility to take privates; rightly or wrongly there is a perception that private equity houses, by involving the executive management, acquire assets on the cheap. This was apparent in 2004, in the media commentary on the Debenhams bid, where the position of the then Debenhams CEO in the Permira MBO team became the focus of considerable criticism.

Structure

There are two basic methods of acquiring a listed UK plc. The first is to make an offer to target shareholders to acquire their shares in return for cash or paper consideration. The second is to effect a court-sanctioned ‘scheme of arrangement’ with target shareholders, where their shares are either transferred to the bidder pursuant to a court order (a transfer scheme) or their shares are cancelled and re-issued to the bidder (a reduction of capital scheme), in each case in return for the cash or paper consideration.

Historically, schemes of arrangement were seen as less flexible in terms of timing and execution, more costly, and unavailable to hostile bidders. However, this perception has weakened recently and many takeover offers are today structured as schemes (usually reduction schemes). The Debenhams bid even saw a scheme used in an init