Analysis

Spotlight On: M&A Defence Positioning

Despite the uncertainty around the outlook for global stock markets in a COVID-19 world, we see a number of trends emerging, with perhaps a “new abnormal” being established.

The most notable of these trends is the sudden surge of M&A activity in the UK equity markets, with greater inbound hostile activity than we have seen for some time.

So what should management of UK PLC be doing to avoid unwelcome interest at the wrong valuation?

In this note, we set out some ideas for some early defence messaging and positioning. But first, the why?

Why is it time to raise the level of alert on defence planning?

There are a number of factors pointing to a perfect storm in the UK for increased hostile takeover activity:

Depressed share prices – in addition to COVID-19, investor concerns over Brexit have left valuations of UK equities depressed compared to the US and major European markets, whilst both UK and overseas investors are significantly underweight the UK

The relatively cheap pound, again largely driven by Brexit, means that overseas bidders have greater bang for their bucks and can buy UK PLC for less

Having focused on sorting out their existing portfolios during lockdown, PE firms are now readying themselves to deploy their significant cash piles (and access debt facilities), and are keen to build up a pipeline of deals again

A lot of businesses are still in a weakened or highly distressed state; shareholders who have been supportive of distressed fundraises, may view a takeover as the best option, both to deliver performance and to recycle capital into stronger situations

 

Since we emerged from Lockdown #1, a number of high profile offer situations have already arisen, with William Hill receiving competing interest from Caesar’s and Apollo Global Management, G4S trying to fend off an offer from Canadian rival GardaWorld among others, TalkTalk in discussions with Toscafund’s ‘Rottweiler’ Martin Hughes,  McCarthy & Stone agreeing a deal with Lone Star, the US PE firm, RSA insurance being bid for by an overseas consortium,  Take-Two Interactive’s recommended offer for Codemasters and Connells approach to Countrywide, amongst other deals.

 

Raise the level of defence planning now

History shows that companies who have been proactive and in tune with their shareholders and stakeholders before a bid, by being good communicators, will fare better than even the best back foot defence strategies. So, be prepared!

What are the key points to consider to put your company in the strongest possible position?

Get your team well prepared

  • Make sure a clear defence plan is established with input from the company’s full advisory team – financial advisers, corporate brokers, sponsors/NOMADs and your Financial PR team will be able to advise on best practice and recent examples, and will all have a role to play in establishing an effective and joined-up approach.
  • Ensure internal policies and controls cover all aspects of internal and external communications, including how staff should respond to incoming media enquiries or to leaks of sensitive information in the event of an approach. Ensure spokespeople are well versed in messaging, timing and regulations. Ask your advisers for defence and leak statement templates.
  • Arrange M&A teach-ins for the Board and senior team. The Takeover Code is updated regularly, so senior personnel should know the basic principles and rules. As an example, is the team aware of the “hair trigger” definition of an approach these days?

Create a resilient narrative – “The best defence is a good offence”

  • Embed a well understood investment case in all financial communications, so that investors understand the true value and longer-term potential of the business. Clarity is especially important considering the current environment with COVID-19, including what steps have been put in place to deliver value when markets return to the “new normal”.
  • Demonstrate the company’s clear expertise and leadership. Make it clear that the current Board is the best placed team to ensure the company’s value is unlocked, particularly at a time when the numbers for 2020/21 may detract from the underlying story.
  • Clearly set out the Board’s strategic vision for growth and / or performance improvement potential, alongside a COVID-19 exit plan and description of wider market opportunities caused by the pandemic. Ensure these key messages run through all your communications with the market, with clarity around how success should be measured.

Consider carefully your approach to investor and media engagement

  • Engage and be in tune with all of your shareholder register, both institutional and retail elements. What are your big institutional holders thinking about value and long-term prospects? Have the conversation about your plans and their aspirations before a bidder appears. Companies should also keep on top of changes to the register to be aware of stake building, particularly shifts towards hedge and activist funds, including via CFDs and other products.
  • Make sure to extend the company’s reach into broker sales desks and research teams as broadly as possible. ‘House’ or ‘Connected’ analysts will be limited from publishing in the event of an offer, so it pays to have a broad understanding of the stock across numerous analysts, to increase touch points with institutional investors.
  • It can be tempting to simply focus on institutions and the larger holders on the register when considering defence planning, especially if one’s share register is highly concentrated. However, smaller shareholders can still swing votes in tightly fought situations whilst activists, hedge funds and bloggers can make a lot of noise on social media.
  • Ensure your Financial PR advisers help you build up a core group of media followers, who understand the business, empathise with management and can deliver third party endorsement of company strategy via their articles. This following will be invaluable in the case of a hostile incoming offer, to endorse your public response. If the media is offside or ignorant, negative coverage can potentially tip the balance in a bidder’s favour.
  • Use your digital channels as your own newswire – both to deliver your messaging around the investment case, and to build up a loyal following, and potential advocates, that can be tapped into in the event of a hostile offer.

Understand how the machinations of government and the regulatory landscape impact your company’s defence positioning

  • Stay abreast of key developments relevant to your sector. As an example, yesterday the Prime Minister announced a range of measures to be introduced that represent a significant shakeup of the takeover regime for companies in industries sensitive to UK national security.
  • Develop relationships with relevant government departments as well as industry regulators. Staying on the right side of politicians and industry stakeholders can make all the difference in overseas takeover situations, especially where there is a view that one’s company will be negatively impacted by the transaction.

Bids can be lost on small margins  

It should be about value – value of the final bid against the case that management can mount to match that within a reasonable time frame. But value is subjective. On their own, none of the measures outlined above will necessarily secure a successful outcome. However, if all are deployed effectively, they will help to increase the odds in the Company’s favour and may end up making the difference when the Board looks for a vote of confidence from shareholders.

Contact us

Please get in touch at capitalmarkets@mhpc.com if you would like to discuss how MHP can help ensure that your business is as well prepared as possible to defend itself from an incoming hostile bid.