Private equity ‘raid’ on UK firms sparks heated feud in City
An attempt by private equity firm Clayton, Dubilier & Rice to take over Wm Morrison’s supermarket chain would, if successful, be one of the biggest UK corporate takeovers since the 2008 crisis.
It would also end a frenzied six-month period in which private equity traders announced offers for the fastest-paced UK-listed companies in more than two decades, sparking a heated row in the City of London.
The surge in the buyout industry pits traditional fund managers, who have begun to take the rare step of publicly exposing takeovers, against bullish traders sitting on record-sized pots of money, who claim that some of the objections are unreasonable. UK boards are caught in the middle, walking a fine line between the two groups at a time when the operations of many companies have been disrupted by Brexit and the pandemic, making it more difficult to agree on an assessment fair.
“There is currently a private equity raid” on UK companies, said James Henderson, fund manager at Janus Henderson.
Buyout groups “are acquiring publicly traded companies at far too low a price,” in deals that “fail to compensate [shareholders] adequately, ”said Rupert Krefting, head of corporate finance and stewardship at M&G.
CD&R is expected to continue its offer on Morrison’s this week despite the rejection of its £ 8.7bn offer and criticism from top 10 shareholders Legal and General Investment Management.
Morrison’s, which was relegated this year to London’s FTSE 100 Large Corporations Index, is one of 13 listed companies private equity firms have set up since the start of the year, the highest number high since 1999. There were only four in the same period last year and three in 2019, figures from the Refinitiv show.
Overall, private equity offerings for UK listed companies amounted to £ 21 billion this year, according to Refinitiv. Companies have made 345 offers for UK businesses in total – including those already private – the highest number since registrations began in 1984.
For buyout companies, there is an ideal combination of cheap debt and significant interest in alternative investments, giving them access to large amounts of cash.
At the same time, the UK stock market struggled to recover from the Brexit vote and suffered another blow in last year’s pandemic liquidation, depressing valuations and creating an opportunity for equity groups. redemption.
But some fund managers fear that boards may approve transactions at too low a price. They worry about how the shift from public to private ownership could affect jobs, pensions, public services and the future of businesses.
US buyout firm Blackstone’s £ 1.2bn offer for St Modwen, a real estate company involved in the redevelopment of London’s new Covent Garden market, which has been on the stock market for more than three decades, is a example of the intensification of the battle.
Henderson said he spoke to the company’s board of directors about his concerns about the deal, which shareholders are expected to vote on next month.
“The premium is not enough,” he said. Janus Henderson, one of St Modwen’s top 10 shareholders, has sold about a third of his stake in St Modwen in recent weeks, documents show, but a person familiar with the matter said this had nothing to do with l ‘agreement.
JO Hambro, one of St Modwen’s biggest investors, also recently said he opposed Blackstone’s offer, while M&G Investments and Allianz Global Investors criticized their plans to sell UDG Healthcare last month. , listed on the FTSE 250, on CD&R. Schroders criticized in May the sale by transport operator FirstGroup of its US operations to Swedish buyout group EQT.
Infrastructure investor John Laing, electricity supplier Aggreko, AA car breakdown service and debt collector Arrow Global are among the UK-listed companies that have entered into private equity deals over the course of the year. past year.
Senior, the aerospace and defense group FTSE 250, is currently targeted by the US group Lone Star, which softened its offer on Monday after an initial approach was categorically rejected.
Richard Marwood, investment manager at Royal London Asset Management, said the departure of state-owned companies, especially specialist firms such as Signature Aviation, could make the UK market less attractive. “The question is whether the companies that we win [through IPOs] are better than the ones we lose – that remains to be proven, ”he said.
M&G’s Krefting added that the increase in takeover attempts was “a bad result for shareholders, especially since these private equity firms also benefit from leverage, tax benefits and requirements. lower in terms of financial, environmental, social and governance disclosure “.
Private equity firms have been criticized that the cost-cutting model they sometimes use reduces the quality of services and investments, especially in critical public sectors such as water, elderly care and children’s homes.
Nick Hood, analyst at Opus Restructuring and Insolvency, said there was a danger “when a risky financial model is applied to an industry which provides a vital service”.
The private equity lobby group, the British Private Equity and Venture Capital Association, said many of its members “aim to provide more scrutiny and better reporting on [ESG] results than listed markets.
The BVCA said private equity “brings value and long-term support to the companies it invests in and creates jobs across the country.”
He added that there was no obligation for boards to accept an offer and shareholders can object if they feel a company is undervalued.
Yet private equity executives are increasingly frustrated by resistance from shareholders. “If you think these stocks are worth a lot more, why haven’t you bought a lot more? Said a senior official from a buyout group that approached UK listed companies.
“You sit there doing nothing, and if someone offers you a price for your shares that the other shareholders are willing to accept, you complain.”
Piers Prichard Jones, co-head of the M&A practice at London law firm Freshfields, argued that boards are “negotiating hard” with private equity bidders.
“There are a lot of offers that are being privately rejected right now, and shareholders just don’t see it,” he said. “It is more difficult now than it has been since the financial crisis to assess what is fair value for many companies. “
FTSE 250-listed fund services firm Sanne has rejected four approaches to Cinven before agreeing to talks this month over a potential £ 1.4 billion takeover.
Along with the pressure from private equity firms to be private, there has been an increase in the number of state-owned enterprises. This year, 31 companies were listed in the UK, raising $ 11.8 billion, up from four in the same period last year and 11 in 2019, according to figures from Refinitiv.
Private equity executives typically avoid challenging boards with hostile take-over bids. But some privately wonder if such tactics could make a comeback, as they come under pressure to deploy funds.
“It’s definitely more of a talking point than it has been before,” said Prichard Jones. “There is a stage before a hostile bid, where you can go public with the aim of trying to persuade a board of directors to make a recommendation, and that’s more likely from private equity firms. than to become totally hostile. ”
Even so, they may have a hard time winning over shareholders, who “don’t give up” on low offers, said James Thorne, fund manager at Columbia Threadneedle.
Henderson also said he believes investors will “fight harder on prices” as it becomes more difficult for them to find new stocks to replace those that have been private. “It’s going to become more difficult for private equity in the future.”