Private-equity firms spark bidding wars in UK
Summary
- After Brexit, investors think big assets can be found cheaply
Blackstone Group Inc., Carlyle Group Inc. and other buyout firms are bidding for U.K. publicly listed companies at a faster rate than they have in years. The reason: Post-Brexit Britain is one of the few markets where investors think big assets are going for cheap.
Buyout firms have struck 13 so-called public-to-private deals in Britain so far this year for a total value of almost $31 billion, acquiring businesses in sectors including healthcare, supermarkets and property development, according to Dealogic. That is the highest number for the comparable period since 2007 and more than double the six deals done in all of 2020.
By comparison, the U.S. has recorded 20 such deals since January, compared with 21 in all of last year.
The latest example: On Friday, Ultra Electronics Holdings PLC, a U.K.-based provider of defense equipment, received a roughly $3.5 billion takeover proposal from Cobham Ltd., a British aerospace and defense company owned by U.S. buyout firm Advent International.
Another high-profile example is the bidding for Wm. Morrison Supermarkets PLC, Britain’s fourth-largest grocery operator. In June, Morrisons rejected an approach of £5.5 billion, equivalent to $7.57 billion, from New York private-equity firm Clayton, Dubilier & Rice LLC. The food retailer later agreed to a higher £6.3 billion offer from a group of investors led by SoftBank Group Corp.’s Fortress Investment Group LLC.
Apollo Global Management Inc., the big New-York-based buyout firm, initially said it was considering an offer for Morrisons. Then last week, it abandoned that plan and said it was in talks to join the Fortress consortium.
CD&R is considering its options, a person familiar with the matter said. The buyout firm has until Aug. 9 to make an offer or drop its pursuit under U.K. takeover rules.
Buying out public companies is a key tactic of the private-equity deal world. With interest rates for risky corporate borrowers at record lows, firms can use mounds of low-cost debt to make acquisitions. Private-equity firms are also under pressure to invest a record $1.7 trillion of unspent cash, according to data provider Preqin.
But when stock markets soar, as they have over the past year, it makes it harder for private-equity investors to justify paying the high premiums required to gain shareholder approval to take a public company private.
Many British companies are attractive because they are cheap, deal advisers say. The FTSE 100 and 250 indexes, which track the major U.K.-listed companies, trade close to 13 and 19 times the combined earnings estimates of each of the benchmark’s constituents, according to FactSet. That compares with 21 times for the U.S.’s S&P 500 index.
“You have got massive amounts of dry powder and massive amounts of debt, not surprisingly then relatively undervalued U.K. public companies look like a very good source of buyouts for the first time in 15 years," said Philip Noblet, head of U.K. investment banking at Jefferies Financial Group.
The British market’s lower valuation reflects the smaller weighting of technology and other growth stocks that thrived during the pandemic, and the economic fallout from the country’s divorce from the European Union.
The perceived value is sparking bidding wars. This month, tobacco giant Philip Morris International Inc. agreed to acquire Vectura Group PLC for £852 million, beating out Washington, D.C.-based Carlyle for the British pharmaceutical company. Carlyle declined to comment.
Another reason the U.K. is attractive: takeover rules that largely prevent company boards from adopting so-called poison pills to block would-be suitors or use break fees in deals to make it too costly for rival bids to emerge.
“Directors are precluded from frustrating a deal," to help ensure shareholders decide if a company is sold, said Scott Hopkins, co-head of U.K. mergers and acquisitions at law firm Skadden, Arps, Slate, Meagher & Flom LLP.
That gives shareholders leverage to demand more from buyout firms.
Last month, CD&R struck a £2.76 billion pact to acquire UDG Healthcare PLC, a U.K. healthcare advisory company, and Blackstone reached a £1.27 billion deal for St. Modwen Properties PLC, a Birmingham-based real-estate company.
In both instances, the buyout firms, under pressure from shareholders, raised their initial offers even though the companies’ respective boards had each supported the original bids.
The Morrisons deal might play out in a similar way. The chain is considered an attractive target because it owns most of its stores and distribution centers.
Andrew Koch, a fund manager at U.K.-based Legal & General Investment Management, a large Morrisons shareholder, this month warned the company’s board against agreeing to a deal that would allow the buyer to generate strong returns by “buying [the company’s] property portfolio too cheaply, levering the company up with debt, and potentially reducing the tax paid" to the government.
This story has been published from a wire agency feed without modifications to the text
