Take-private deals will increase
Take-private deals are back in the spotlight, driven in part by lower valuations on the London markets, the impact of weak sterling, and corporate boards and shareholders seeking cash.
A recent survey indicated that over 70% of the PE pipeline is focused on UK-listed companies. This builds on a record year for take-private deals in 2021, with 19 companies taken private at a value of £29.3bn.
These deals are unlikely to be subject to new regulatory restrictions, but we expect greater political and stakeholder scrutiny by the current Government, the Opposition, the media and regulatory bodies. Several take-private deals have been contentious, triggered by concerns such as UK job losses (e.g., Morrisons) and national security (e.g., Cobham.)
As the volume and value of these deals grow there will be increasing political concern about high leverage and the potential hollowing out of the FTSE.
We can also expect greater political scrutiny when sovereign wealth funds or other state-backed funds are involved in these deals either directly, or as minority investors in PE.
A Labour government is likely to be more interventionist and hostile to PE than the current one, which could see take-private deals accelerate before the next election (probably in 2024).
However, most of these risks can be mitigated, including through good planning, widespread stakeholder engagement and open communication, which we explore below.
Why are take-privates different?
The key difference in buying listed companies as opposed to private companies is the requirement for a public announcement to be made before the deal has been approved by the selling shareholders.
Historically those announcements have been focused on the City and financial markets rather than wider stakeholders. But in today’s environment, it will often be critical to address the concerns of wider stakeholders when an announcement of a possible deal is first made, rather than waiting until there is more certainty that the deal will proceed.
Another way of putting it is that parties may need to consider the appropriate political premium as well as the shareholder premium.
Take-private deals can expect greater political and regulatory scrutiny, on the following grounds:
1. National security. The National Security and Investment Act (NSIA) came into effect in January 2022, giving the government new powers to intervene in mergers, acquisitions, and investments to protect “national security”, which is undefined.
While there have been fewer call-ins than expected, the terms of the Act are so broad – especially the general call-in power (which is not limited to the 17 specified sectors) - that the current government or a future Labour one (with its much wider focus on sovereign capabilities – see below) could intervene in a very wide range of circumstances and sectors depending on the context at the time.
Policymakers in government are particularly concerned about PE acquisitions imposing high levels of leverage, threatening the function of sensitive assets - irrespective of the acquirer’s nationality (e.g., Advent/Cobham - a US/UK acquirer of a sensitive defence asset).
Moreover, the NSIA – and the mere possibility of government intervention – has created a prominent new hook to call a potential deal into question and generate media and political attention.
2. Reduced transparency and levels of publicly available information when an asset is in private hands compared to when listed. This concern will become more acute as the disclosure requirements (on ESG data, etc) on listed companies increase, which will further raise suspicions of regulatory arbitrage and that private companies and their investors want to avoid public scrutiny.
3. Anxiety that investors will ‘strip assets’ with loss of UK jobs and economic capability. Although we’ve seen these types of concerns often raised in relation to European transactions (several countries have a general hostility to PE), this has been relatively rare in the UK until recently.
The Trades Union Congress, for example, in a recent sustained critique of private equity, said that ‘it is well established that some private equity owners and other private owners extract significant economic value from their portfolio companies, leaving the latter more economically vulnerable and with less money for wages, training and other investment.’
4. Excessive leverage. High levels of leverage, and the associated low levels of resilience, has been criticised at a sector level (e.g., in children’s services) and in relation to high street brands; in 2021 the Business, Energy and Industrial Strategy Committee concluded that highly leveraged purchases of high street brands have ultimately resulted in administration, job losses and pension fund shortfalls.
And recently the Bank of England has raised concerns about systemic levels of risk due to leverage in the wider shadow banking sector.
5. Concern that foreign owners will be remote and not responsive to UK political and local community sensitivities or pressures.
6. Potential loss of competition and local amenity if:
The CMA continues to review deals where there are worries that roll-ups or other forms of consolidation could reduce local competition. Buyers should be prepared to divest themselves of some portion of an asset in order to get regulatory approval for a deal (there have been 6-8 related divestitures per annum over the last three years).
7. Potential loss of ‘sovereign capability’, recently defined broadly by the Labour party as ‘the critical infrastructure and industrial competencies that underpin the rest of our economy, including energy, steel, IT, defence, food and medical equipment. The Government has shown that is increasingly reviewing deals on national security grounds through this lens. Labour is committed to strengthening the public interest test on takeovers and would introduce sovereign capability as a key ground for intervention.
Labour has also indicated that it sees private equity as a politically popular target (e.g. the proposed elimination of carried interest and attacks on the sector’s performance in social care). Private equity firms will therefore need to carefully evaluate their engagement with Labour and develop a clear plan for transactions which are likely to be politically sensitive or face strong trade union opposition.
PE deals often attract scepticism from the political world. And because timetables for take privates allow for early scrutiny, it is even more important that wider stakeholder risks are assessed and dealt with before the obligation arises to make an announcement to markets.
Many concerns about PE and delisting are derived from considerable scepticism, but little knowledge, about PE. Most awareness of PE at the political level involves high-profile negative cases. Politicians will often approach PE with this as their starting point, especially where there is media or trade union speculation about job losses and a reduced UK footprint.
Potential PE buyers of listed companies or carve outs should map the potential national and local stakeholders and engage with them, accompanied by politically appropriate positioning of the transaction, evidence of their track record (such as previous success with similar assets) and a robust business strategy which sets out how they will deliver a better future for the company. The sell side should do the same and prepare the ground well in advance of sale.
Flint has worked on numerous take-private transactions on both the buy and sell sides, and across multiple jurisdictions. We have advised on every aspect of these transactions, including due diligence, feasibility, positioning, political handling, stakeholder engagement, undertakings negotiation as well as competition clearance.
Martin Summers is a Director based in London, he advises private equity clients and their portfolio companies on transactions and strategy. Katie Whitting is a Director based in London who advises clients on policy and political issues with a focus on national security, investment and geopolitics. Adam Atashzai is a Partner based in London, he leads Flint’s transactions work, especially FDI and other public interest clearances.
Get in touch to find out more about how Flint can help you navigate political and regulatory risks.