UK Public Procurement Snapshot – July 2021 | Hogan Lovells
In our first UK public procurement snapshot, we cover the main market trends in the first half of 2021 and share our outlook for the second half of the year.
The headlines of the first half of 2021
- Increase in consortium bids – large targets attracting sponsor more strategic consortia or LP.
- Increased investor challenges in transactions – institutions as well as militants push back opportunism – “bumpers and crushers”.
- “Ghost auctions“ controversy – seems misguided.
- “Heel fairness“ back to fashion – new alternative to the “exempt document” prospectus.
- Recent change to the takeover codes – should be accepted quickly, including the new general conditions, although the dynamics of competitive and hostile situations change. The new national security and investment law may have a less predictable impact.
Our point of view
The UK and international M&A markets are booming, with a wave of takeover bids including P2P deals, competitive and hostile deals and some areas of heightened controversy amid some regulatory changes:
- Rise in consortium offers, including the fact that we have acted to CPI Property Group as part of its joint offer with Aroundtown for Globalworth (being the only recent hostile offer to have been successful) – requires going through the various “Glick tests” involved in obtaining the status of “joint bidder” from the Takeover Panel with regard to control, governance, the exit horizon, shareholding, financial contributions and others. Many larger targets are pursued by a financial sponsor working with a strategic partner or financial investor, usually one of its mainstay LPs.
- Our prediction: this trend in consortium calls for tenders is likely to continue and grow, as shown by recent offers and possible offers from Morrisons Supermarkets.
- Once the complications of consortium bids are overcome, the main benefits include maximizing efficiency and pooling capacity / synergy potential, sharing the risk of the agreement as well as funding bids for larger targets, and
- It may be particularly important for some key shareholders to maintain an ongoing interest in the target through such structures (as shown in the recent Aeronautical signature and Proactis offers). PE sponsors will also likely continue to seek suitable commercial buyers to partner with in terms of complementary perspectives, assets and expertise.
- Increase in investor challenges transactions perceived as opportunistic of low value (including on offers of Properties of St Modwen, Telit and Globalworth).
- Our prediction: Both avowed activists and long-term institutions will continue to push back on relevant offers (both publicly and behind the scenes, in terms of lobbying the board, other shareholders and other stakeholders) and maintain for a higher value in the medium term (“end a deal) or improve the terms of supply (” increase “the price).
- Challenging a proposal can backfire, whether it is triggering an auction process, destabilizing the target, their activities and stakeholders, or anchoring the original proposal so that it is not improved. . The most effective challenges are often the preemptive discussions about a bearable exit price before a bid is made, in discussions with bidders as well as behind the scenes targets – we see more of this activity.
- Recent controversy around “ghost auctionsAnd some target shareholders (who sold before an offer was announced) complaining that a target’s approaches had not been publicly announced earlier.
- Our prediction: the relevant rules in this area (including rule 2 of the code for take-over bids and the DTR / market abuse regulation) are already sufficiently sophisticated and strict – any new tinkering could paradoxically lead to certain bids being are not made or proposed to shareholders and / or a worse and more uncertain situation in terms of information obligations and proper functioning of the market than it currently exists. In our opinion, the rules are as sophisticated and balanced as any regime allowing private negotiations to a certain extent. Leaks seem to be the real problem.
- Recent trend (including recent PE offers for Telit, Speak speak, and Proactis) to offer “Equity title” (ie the possibility for target shareholders to “renew” and remain invested in the private auction vehicle). Almost a quarter of firm offers in the first half of 2021 included stock buyback offers, a recent record.
- Our prediction: Stub equity is likely to continue to be seen as a good option for PE bidders (who generally cannot offer conventional listed stocks) looking to convince target shareholders who want some form of participation continues in the activities of the target and opportunities for growth:
- While this can involve a lot of up-front work (potentially requiring evaluation of the acquisition code “Rule 24.11”, and tax and other structuring), it can earn subsequent rewards for target shareholders and bidders.
- The precise terms of participation may vary considerably depending on the preferences of the Offeror and the Target Shareholder, including restrictions on transferability. Limiting transferability may allow the originator to avoid onerous full prospectus requirements – the exemption introduced in 2019 by the Prospectus Regulation, involving publication instead of a simpler “Exempt Document”, has not been used only occasionally in practice and has not yet gained popularity. Key terms also include dividends and voting rights, director appointments, ownership caps, and the potential addition of debt features or paired debt instruments. We expect more use of exempt documents on transactions where most of the target shareholders are in the UK, but the use of prospectuses where there are many international shareholders.
- The Takeover Code changes on the conditionality and the calendar of offers (summaries here) are now “live”:
- Our prediction: Changes are logical and welcome, so they should be ‘integrated’ and accepted by the market quickly and easily. They will change the dynamics of competitive and hostile situations, where the levers available to bidders will be operated differently but will return in substance to the same options as before (except that bidders will be less able to opt out early in the process). The combination of the new National Security and Investment Law and the new code is less predictable. We work in close collaboration with:
- the City of London Law Society on Sample Takeover Documents (and advice, if any) regarding these changes, available here (including updated Offer Terms and Conditions, ‘Declaration of ‘acceleration’ and advice on cash confirmations and financing arrangements beyond the long term of an offer – end date).
- key officials and other stakeholders on the scope, implementation and operation in practice / preparation of the National Security and Investment Law, and ensuring that our clients are in the best position to eliminate the complexities that arise – and one area to watch in particular will be how it interacts in practice with the Takeover Code.
Our recent experience in public procurement
- IPC Property Group on its initial investment in, and subsequently, a joint hostile takeover of 1.57 billion euros (with Aroundtown) of Globalworth Real Estate Investments.
- DBAY Advisors on its £ 307 million buyout of Telit Communications.
- Houlihan Lokey in connection with the buyout of Proactis for £ 75 million by Pollen Street Capital and DBAY Advisors.
- Innospec Inc. on its potential buyout of Elementis for £ 1 billion.
- Numis Securities in connection with the £ 639 million buyout of Alternative Credit Investments (formerly Pollen Street Secured Lending) by Waterfall Asset Management.
- Marathon Group on the US $ 8.3 billion IPO of FixPrice Group Ltd on the main market of the London Stock Exchange and the Moscow Stock Exchange.
- PerkinElmer on its buyout of Oxford Immunotec Global plc for US $ 591 million, its £ 110 million buyout of Immunodiagnostic Systems Holdings and its £ 296 million buyout of Horizon Discovery Group.
- SoftBank on its £ 1.6 billion investment in online retail group The Hut Group, the largest strategic technology investment in the UK market this year.