Changes to the UK’s Enterprise Act 2002 have left private equity firms and M&A advisors with an increasing degree of uncertainty on how to acquire UK healthcare companies.
Amendments to the legislation, which took effect on 23 June, allow the government to block the foreign acquisition of a company that would threaten the UK’s ability to combat a public health emergency.
According to a statement from the Department for Business, Energy & Industrial Strategy, “the powers will enable the government to intervene if a business that is directly involved in a pandemic response, for example, a vaccine research company or personal protective equipment manufacturer – finds itself the target of a takeover”.
There is no clear definition of what a “public health emergency” is, nor is there an expansion of what future M&A in healthcare could look like, Alasdair Steele, a partner and head of equity capital markets at law firm CMS, told Private Equity International.
Debevoise & Plimpton noted that there is “sufficient ambiguity” in what the new rules may mean in practice and could potentially be applied widely across the healthcare, pharmaceutical, medical equipment manufacturing, food supply chain and related logistics.
Because of this, GPs can expect delays in their deals because “very few buyers are prepared to go ahead and buy a company, then worry about their regulatory position afterwards”, Steele said.
“The worst-case scenario is you need to unwind the deal, and that’s a bit of a nightmare,” he said. “That doesn’t work for investors because their capital has been deployed and returned back without generating returns. Also, mandates may not even be able to reuse the capital.”
Pieter van der Meer, managing partner at European healthcare firm Gilde Healthcare Partners, noted that introducing additional administrative hurdles to an M&A transaction can delay deal closing and could negatively affect deal dynamics.
“While we understand the background of avoiding another case of being poorly prepared for the next pandemic, this act does not seem to be an effective way to do so,” Van der Meer said. “It is good to see that healthcare is recognised as a strategic industry, but that doesn’t mean that we should regress into protectionist practices.”
Steele added there is also a lack of clarity on how firms can receive clearance on a deal. Advisors are unsure whether the Competition and Markets Authority, which enforces EA 2002, could “pre-clear” deals so the government can get comfortable with issues in the business, he said.
Investors will want maximum clarity as early on as possible in their dealmaking, he added. The ideal solution would be a process where straightforward deals could be pre-cleared before buyers incur significant time and expense. Having to wait until a deal is signed and then see what the UK government’s position is will not be attractive to investors, Steele said.
A more politicised process
The EA 2002 allows the UK government to intervene in mergers and takeovers on four specified public interest considerations: national security, media plurality, financial stability and, since last week, mitigating a public health emergency.
The UK government’s move is in line with France, Spain and Germany’s actions in recent months – curbing foreign takeovers of companies struggling in the wake of the covid-19 pandemic.
The coronavirus outbreak has pushed first half Europe PE deal volume to its lowest since the global financial crisis – €41.1 billion across 205 deals – according to provisional data from the Centre for Management Buy-Out Research at Imperial College Business School, Equistone Partners Europe and Investec. In the UK this year, deal value slid more than 80 percent to €2 billion in the second quarter, compared with €12.7 billion in the first quarter.
In addition to pushing out transaction timelines, GPs caught under the latest rules will potentially incur additional costs.
Firms are going to involve other experts to provide evidence to government, which can include economists who can give insight on the risks to the UK of the particular business under foreign ownership, as well as technical experts in fields such as artificial intelligence, Steele said.
GPs in smaller deals may also be put off, added Steele: “Why take the risk, invest a lot of time and effort and get to a point where for a relatively small deal you would have to negotiate with government?”
Under current UK legislation, there is no formal distinction between domestic and foreign investment. Instead, the government can intervene on “public interest” grounds, which includes, for example, government contractors or newspaper and broadcasting deals.
The legislation applies to anticipated mergers that meet certain thresholds. These were that the target company had a UK turnover of over £70 million ($87 million; €77 million), or that the merger took the merging parties’ combined share of supply in the UK to 25 percent or more.
Since 2018, the government has lowered the threshold tests for businesses in the military, dual-use, computing hardware and quantum technology sectors to £1 million and the share of supply test applies even when the target has little or no UK market presence.
UK government intervention in private equity deals is rare. Last year, however, two PE-backed deals faced government intervention on national security grounds – US PE firm Advent International’s takeover of aerospace company Cobham for £4 billion, as well as the $3.4 billion acquisition of satellite group Inmarsat by Apax Partners, Warburg Pincus, Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan.
Steele noted the UK faces a difficult balancing act with the new rules. “As with most countries, they all want to make their economies strong but the covid-19 effect has been that they need to restrain foreign investment,” he said.
“Investors just don’t tend to give money away, they will want to know that they can buy things and do things. If they can’t buy in the UK, they will go elsewhere.”