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Lexis®PSL Corporate and Market Tracker has conducted research to examine the current trends in UK public M&A for the period 1 July 2021 to 30 September 2021.

Background and approach

Lexis®PSL Corporate and Market Tracker has conducted research to examine the current trends in respect of UK public M&A. Data for this report has been sourced from the Market Tracker transaction data analysis tool which allows users to access, analyse and compare the specific features of numerous corporate transactions. This is an update to our Market Tracker Trend Report: Trends in UK Public M&A in H1 2021 in which we examined firm and possible offers announced in H1 2021.

For the purposes of this update we analysed the period between 1 July 2021 to 30 September 2021 (Q3 2021). While comparisons have been made to the corresponding period in 2020 (1 July 2020 to 30 September 2020) and with the preceding quarter (1 April 2021 to 30 June 2021), definitive conclusions can only be made on the completion of the full year trend report of 2021.

We reviewed a total of 36 transactions that were subject to the Takeover Code (Code): 18 firm offers (11 for Main Market companies and seven for AIM companies), 16 possible offers (ten for Main Market companies and six for AIM companies) and two formal sale processes (FSPs) (both for AIM companies).

The percentages included in this report have been rounded up or down to whole numbers, as appropriate. Accordingly, the percentages may not in aggregate add up to 100%. Deal values have been rounded to the nearest million (where expressed in millions) and have been rounded to the nearest hundred million (where expressed in billions).

The final date for inclusion of developments in this report is 30 September 2021. Reference has been made to deal developments after this date if considered noteworthy.

Deal highlights

Deal activity was particularly strong in Q3 2021. Key highlights from this report include:

• 18 firm offers (Q2 2021: 13 firm offers; Q3 2020: 12 firm offers)
• £37bn aggregate deal value (Q2 2021: £10.2bn; Q3 2020: £10.1bn)
• £2.1bn average deal value (Q2 2021: £783m; Q3 2020: £839m)
• 61% of firm offers were public to private transactions
• Overseas bidders involved in 73% of firm offers announced, including on seven out of eight £1²ú²Ô plus transactions
  

Deal volume and deal value

In our H1 2021 public M&A trend report we noted that deal activity had decreased to more moderate levels following the particularly active Q4 2020. The continued depressed valuations of UK companies, improved outlook on the COVID-19 pandemic and cash-rich investors saw Q3 2021 experience a significant increase in deal activity, with 18 firm offers announced in contrast to the 13 announced in Q2 2021. This represented a 38% increase compared with the preceding quarter.

Aggregate deal value was markedly higher in Q3 2021 at £36.5bn, more than double the aggregate deal value for the whole of H1 2021 (£17.9bn) and average deal value was £2.1bn (Q2 2021: £783m; Q3 2020: £839m). This has been the highest aggregate deal value for any quarter since Q2 2018 which saw a £82.4bn aggregate deal value (inclusive of two mega deals; Takeda Pharmaceuticals’ £45.6bn offer for Shire and Comcast’s £30.6bn offer for Sky).

Average bid premium (measured by comparing the offer price with the target’s share price immediately before the start of the offer period) also increased from Q2 2021’s 38% to 45% for Q3 2021. The highest bid premium paid was 71% (Parker-Hannifin’s £6.3²ú²Ô offer for Meggitt) and the lowest was 8%.

£1²ú²Ô plus transactions

Eight (44%) of the 18 firm offers announced in Q3 2021 had deal values exceeding £1²ú²Ô. The largest transaction was Clayton Dubilier & Rice (CD&R)’s £7.1²ú²Ô recommended offer for Morrisons.

*Apex is a Bermuda registered company, which is majority owned by private equity firm Genstar. 

Deal structure

Of the 18 firm offers announced in Q3 2021, 14 (78%) were structured as schemes of arrangement and four (22%) were structured as contractual offers.

Philip Morris’ offer for Vectura was originally structured as a scheme. However, following the emergence of a competitive situation with Carlyle, this was switched to a contractual offer on 9 August 2021. Philip Morris stated that it was implementing the offer by way of a contractual offer rather than by scheme of arrangement ‘to increase certainty of execution’.

The other three transactions structured as contractual offers were:

• Ecotricity’s £70³¾ offer for Good Energy
• Polygon’s £17.5m offer for Watchstone
• Ganfeng International Trading’s £282³¾ offer for Bacanora Lithium

These offers were hostile and/or involved bidders that held significant stakes in the target companies, which is likely to have influenced the choice in structure. 

Public to private transactions

Public to private transactions continue to account for a large proportion of deal activity; of the 18 firm offers announced in Q3 2021, 11 (61%) were made by private equity, financial investors and/or individuals.

All of the consortium bids were P2P transactions:

• the £969³¾ offer for GCP Student Living by a consortium comprising Scape Living, APG Asset Management and Blackstone
• the £390³¾ offer for Augean by a consortium comprising Ancala Partners and Fiera Infrastructure
• the £6.7bn offer for Morrisons made by a consortium comprising Softbank subsidiary, Fortress Investment Group, Koch Real Estate Investments, GIC Private and Canada Pension Plan Investment Board (CPPIB)
  

In addition to its involvement on the unsuccessful consortium bid for Morrisons, pension scheme trustee CPPIB has previously been involved in a number of high-profile UK takeovers: in 2019 it was a member of the consortia on the £2.6²ú²Ô offer for Inmarsat and the £4.8bn offer for Merlin Entertainments and in 2020 it provided financing on the £7.2bn offer for RSA (see: and ).

The Fortress-led consortium also comprised the Koch brothers’, Koch Real Estate Investments, and GIC Private, an investment firm which manages Singapore’s foreign reserves.

Aggregate deal value for P2P transactions in Q3 2021 was £22bn, with five of the eight £1²ú²Ô plus transactions announced being P2P transactions. This accounted for 59% of total aggregate deal value in Q3 2021. This compares with an aggregate deal value of £12.9bn in H1 2021 (72% of total deal value).

Consideration and bid financing

Of the 18 firm offers announced in Q3 2021:

• 14 (78%) were cash only offers
• 2 (11%) were cash and share offers
• 1 (6%) was a cash offer with a loan note alternative
• 1 (6%) was a shares only offer
  

Cash remained king with 17 (94%) of the 18 firm offers announced in Q3 2021 involving a cash element and it was the exclusive form of consideration in 78% of deals.

This is not markedly different to H1 2021, when all transactions involved a cash element and it was the exclusive form of consideration on 73% of firm offers announced during the period.

Of the 17 firm offers that involved a cash consideration element:

• two were funded solely by debt finance
• seven were funded by a combination of debt finance and equity subscriptions to bidco/PE funds
• two were funded by a combination of debt finance and existing cash resources
• five were funded solely by existing cash resources
• one was funded by a combination of debt finance, equity subscriptions to bidco/PE funds and the sale of cumulative preferred shares 

Bidders’ country of incorporation

Overseas bidders were involved in 78% of all firm offers announced in Q3 2021. Of the 18 firm offers announced:

• eight (44%) were made by US bidders*
• four (22%) were made by UK bidders
• two (11%) were made by Chinese bidders
• one (6%) was made by a consortium comprising UK and Canadian bidders
• one (6%) was made by a Luxembourg bidder
• one (6%) was made by a consortium comprising US, Dutch and UK bidders
• one (6%) was made by a consortium comprising US, Singaporean and Canadian bidders 

The aggregate deal value for all firms involving overseas bidders was £34.3bn, which represents 93% of the aggregate deal value in Q3 2021. This is the same as in H1 2021, where firm offers involving overseas bidders also accounted for 93% of aggregate deal value (Q3 2020: 89%). US bidders were involved in seven of the £1²ú²Ô plus transactions announced in Q3 2021.

Q3 2021 also saw two high profile transactions involving Chinese bidders:

• Tencent’s £919³¾ offer for video games company, Sumo
• Ganfeng International’s £282³¾ offer for lithium battery producer, Baconora Lithium

Tencent has reportedly made 34 international acquisitions in H1 2021 with this overseas expansion taking place against the backdrop of increased regulatory scrutiny from Beijing of the technology sector.

*Apex is a Bermuda registered company, which is majority owned by US private equity firm Genstar. 

Industry sector

Public M&A was spread across a range of sectors in Q3 2021, with the most active sectors being Computing & IT (17%), Aerospace & Defence (11%), Environmental Services & Waste Management (11%), Financial Services (11%) and Retail & Wholesale Trade (11%).

Two of the five largest transactions in Q3 2021 were in the Aerospace and Defence sector. Defence technology supplier Ultra Electronics received a £2.6²ú²Ô offer from Cobham Holdings, a UK aerospace and supplier that was itself taken private by US private equity firm Advent in January 2020 (see: ). Aerospace and defence firm, Meggitt, also reached agreement with US motion and control technology specialist, Parker-Hannifin, on the terms of a £6.3²ú²Ô recommended cash offer (see: Parker-Hannifin to take off with Meggitt). Both of these transactions have attracted the attention of the UK government, with the business secretary, Kwasi Kwarteng, issuing intervention notices.

Hostile and competing offers

Two of the firm offers announced in Q3 2021 were hostile from the outset with a further two becoming hostile after higher competing offers emerged. The two offers that were hostile from the outset were Ecotricity’s £70³¾ offer for Good Energy and Polygon’s £17m offer for Watchstone. Both bidders held significant stakes in the target company, with Polygon and persons acting in concert holding 30% of the issued share capital of Watchstone, and Ecotricity holding 25% of the issued share capital of Good Energy. However, both offers lapsed after receiving insufficient acceptances.

Morgan Stanley Infrastructure’s £379³¾ offer for Augean and the Fortress-led consortium offer for Morrisons were both initially recommended, but became hostile after higher bids from competing bidders were made and subsequently recommended. 

Three companies were the subject of actual competing offers in Q3 2021:

• Vectura was the subject of competing offers from Philip Morris International and Carlyle
• Augean was the subject of competing offers from Morgan Stanley Infrastructure and a consortium comprising Ancala Partners and Fiera Infrastructure
• Morrisons was the subject of competing offers offer by CD&R and a consortium comprising Fortress Investment, Canada Pension Plan Investment Board, Koch Real Estate Investments, and GIC Private Ltd
  

All three sets of competing offers saw the Takeover Panel (Panel) establish an auction process to resolve the competitive situation, although in the case of Vectura the auction process was not implemented after Carlyle announced that its earlier offer of 155p per share was final.

In addition to these actual competing offers, two companies were the subject of potential competing offers:

• Meggitt was the subject of a £6.3²ú²Ô firm offer from Parker-Hannifin and a potential £7bn offer from TransDigm

• Sanne Group was the subject of a £1.5²ú²Ô firm offer from Apex Group and a possible offer from Cinven
  

However, neither of these potential competing offers proceeded.  

Deal in focus: Morrisons

Morrisons confirms that it received a £5.5bn possible cash offer at £2.30 per share from CD&R. The board rejects CD&R’s proposal. 

The boards of Morrisons and a consortium comprising Softbank subsidiary, Fortress Investment Group, Canada Pension Plan Investment Board and Koch Real Estate Investments announce the terms of a recommended cash offer for Morrisons. The offer values Morrisons at approximately £6.3²ú²Ô.

Apollo Global Management confirms that it is in discussions regarding a possible offer for Morrisons.

Apollo Global Management announces that it is in preliminary discussions with Fortress Investment Group to join its consortium and that it does not intend to make an offer for Morrisons other than as part of the offer from the Fortress-led consortium. 

The Fortress-led consortium announces that Singaporean sovereign wealth fund GIC Private will join the consortium as an additional co-investor.

The Fortress-led consortium announces that the Competition and Markets Authority (CMA) has confirmed that it has no questions in relation to the Fortress offer and has not opened an inquiry or indicated in writing that it is still investigating whether to open an inquiry. 

The boards of Morrisons and the Fortress-led consortium announce the terms of an increased recommended cash offer. The offer values Morrisons at approximately £6.7bn.

The boards of Morrisons and CD&R announce the terms of a recommended cash offer for Morrisons. The offer values Morrisons at approximately £7bn.

The pension scheme trustees of the Morrisons Retirement Saver Plan and The Safeway Pension Scheme issue a statement on its concerns that both offers would weaken existing sponsor covenants supporting the pension schemes.

The boards of Morrisons, CD&R and the Fortress-led consortium announce that they have engaged with the Panel to begin discussions around implementing an auction procedure to resolve the competitive situation between the two bidders.

CD&R announces that it has reached agreement with the trustees of the Morrisons Retirement Saver Plan and The Safeway Pension Scheme on the terms of a mitigation package to provide additional security and covenant to support the pension schemes.

The Panel announces that it has established an auction procedure for the resolution of the competitive bids for Morrisons.

CD&R announces that it has prevailed with the highest offer for Morrisons following conclusion of the auction procedure. The recommended cash offer values Morrisons at approximately £7.1²ú²Ô at £2.87 per share. 

The Fortress-led consortium announces the terms of its final cash offer, valuing the company at approximately £7.1²ú²Ô at £2.86 per share.

Possible offers and FSPs/strategic reviews

There were 16 possible offers in relation to 15 targets announced in Q3 2021. This compares with 24 possible offers (in relation to 23 targets) in H1 2021 and 15 possible offers (in relation to nine targets) in Q3 2020.

Of these possible offers, seven progressed to firm offers, six were terminated, and three were ongoing.

In addition to the 16 possible offers, there were two FSPs/strategic reviews announced (H1 2021: two FSPs, Q3 2020: three FSPs) during the review period, both of which were by AIM-quoted companies:

• Safestay launched its FSP after receiving an approach from an unnamed party (see: Increase in leisure sector takeover activity as post-pandemic dust settles)
• Tricorn announced an FSP in response to the continued impact of COVID-19, material inflation and shipping delays
  

Safestay’s FSP was ongoing as at 30 September 2021 and Tricorn’s FSP terminated on 18 August 2021.

Legal and regulatory developments

UK’s national security regime to enter into force in January 2022

In July 2021, the UK government confirmed that the UK’s new national security regime is due to enter into force on 4 January 2022. This follows publication of the National Security and Investment Bill on 11 November 2020, which became the National Security and Investment Act 2021 (the NS&I Act 2021) after receiving Royal Assent on 29 April 2021.

In July 2021, the government also published four new pieces of guidance, an updated draft of sector definitions for the mandatory notification regime under the NS&I Act 2021 and a statement on how it proposes to exercise its new call-in powers. Moreover, in September 2021, the government published a further updated draft of sector definitions for the mandatory notification regime, together with an explanatory note. However, other than an amendment to state they will come into force on 4 January 2022, the draft definitions are in substantially the same form as the July 2021 draft. Finally, the government also published draft regulations on monetary penalties under the NS&I Act 2021, together with an explanatory memorandum. These regulations are broadly in line with the rules for calculating penalties under the Enterprise Act 2002 (albeit with some difference).

The introduction of the NS&I Act 2021 represents part of a global trend towards stricter control of foreign direct investment (as seen in the US and across Europe). As far as foreign investment in the UK is concerned, the NS&I Act 2021 will afford the UK government one of the highest levels of scrutiny of any regime globally.

In terms of the NS&I Act 2021’s broader impact, there are two key points for businesses to consider. The first concerns the need to alert the government of any transactions entered into on or after 12 November 2020 (or conditional deals entered into prior to that date but where a ‘trigger event’ might still occur) to manage the risk of those deals being ‘called-in’ for retrospective review once the NS&I Act 2021 comes into force. The second concerns how, looking forward, the regime will need to be factored into future deal timelines and documentation to manage the risks of delay or government intervention.

In Q3 2021, six firm offers (33%) included National Security & Investment conditions in their deal documentation. Of those six, two firm offers each were in the Aerospace & Defence and Computing & IT sectors, one firm offer was in the healthcare sector and one firm offer was in the consumer products sector. For examples of how companies are drafting offer conditions to address the forthcoming regime, see our  (a subscription to Lexis®PSL Corporate is required).

Government interventions on national security grounds

In 2021, there has been a number of transactions in which the Government has intervened under the national security provisions of the Enterprise Act 2020 (which fall away when the NS&I Act 2021 comes into force in January 2022). At the time of writing, the Secretary of State for BEIS has issued public interest intervention notices on national security grounds in relation to five ongoing transactions. These include:

• the anticipated acquisition of all or part of the Perpetuus Group by Taurus International
• the proposed acquisition of Ultra Electronics Holdings by Cobham Holdings
• the proposed acquisition of Meggitt by Parker-Hannifin
• the anticipated acquisition by NVIDIA Corporation of Arm’s Intellectual Property Group business
• a consultation on revised statutory undertakings offered by the parties involved in the acquisition of Sepura by Hytera Communications Corporation (which took place back in May 2017)
  

See further,  (a subscription to Lexis®PSL Competition is required).

General Court upholds Commission’s highest ever gun-jumping fine

On 22 September 2021, the General Court issued its judgment dismissing an appeal brought by Altice Europe NV (Altice) against a ‘gun-jumping’ fine imposed on it by the European Commission (the Commission). The €124.5m fine, which was reduced on appeal by €6m in consideration of certain limited mitigating factors, remains the highest imposed by the Commission for gun-jumping offences in merger cases to date. The fine (issued in 2018) was imposed because the Commission considered that interim covenants in the sale and purchase agreement to acquire PT Portugal SGPS (PT Portugal), as well as other conduct between the parties, conferred on Altice the possibility to exercise ‘decisive influence’ over PT Portugal before the clearance was obtained. Decisive influence means the possibility to determine the strategic commercial behaviour of the target undertaking (ie the ability to control the target for the purpose of the EU Merger Regulation).

The General Court’s judgment will likely encourage the Commission, in line with other competition authorities, to take a hard line on M&A purchasers who influence or start to run the target business before a transaction has been approved. It emphasises why it is critical to have robust procedures in place, not just on paper but in practice, to manage contact between the buyer and target both before signing and between signing and completion of the transaction (see further, ) (a subscription to Lexis®PSL Competition is required).

CMA responds to government’s proposals for reforming competition policy

On 4 October 2021, the Competition and Markets Authority (CMA) published its response to a consultation launched in July 2021 by the Department for Business Energy and Industrial Strategy (BEIS) regarding proposals to reform competition and consumer policy.

In particular, with regards to merger control, the CMA strongly supports the BEIS’ proposals to: (i) increase the level of the jurisdictional ‘turnover’ test from £70³¾ to £100m; and (ii) introduce a new, additional merger threshold to allow the CMA to investigate mergers that may be ‘killer acquisitions’ (ie the acquisition by a large incumbent of a smaller or potential rival to remove them from the market), which would be met if one of the parties to the transaction has a UK turnover of £100m and a market share of 25% or more.

In relation to the proposed new jurisdictional threshold, the CMA recognises it could, in theory, attach to deals with little UK nexus. However, the CMA states that the test would be applied within the context of the UK’s existing voluntary merger control regime. In accordance with current practice, the CMA will only ever ‘call in’ a transaction for investigation where there is reasonable chance that it raises competition concerns in the UK.

Changes to the Takeover code

On 28 July 2021, the Panel published a statement in which it ruled out amending the Code so as to require an immediate disclosure by a target company of any serious takeover approach. The statement follows a concern raised with the Panel about the number of recent ‘shadow bids’, in which takeover approaches were kept confidential for a long period of time without any announcement being made or required.

For further details, see:  (a subscription to Lexis®PSL Corporate is required).

Acceleration statements

On 5 July 2021 the Code was amended to confer changes confirmed in (which were in the Panel’s October 2020 consultation paper). For further details, see:  and  (a subscription to Lexis®PSL Corporate is required).

Q3 2021 saw the first acceleration statement since the Code changes by Ecotricity in it’s bid for Good Energy. In its statement, Ecotricity brought forward the unconditional date of its hostile offer from 10 October 2021 to 8 October 2021 due to the ‘continuing uncertainty in the energy market with soaring prices and supplier failures’.  

Pension scheme trustees

Rule 25.9 of the Code entitles the offeree’s employee representatives and pension scheme trustees to require the offeree to publish their opinion on the effects of the offer on employment and on the pension scheme. To address a lack of engagement by employee representatives and pension scheme, the Panel amended the Code in 2018 so that bidders are required to include in the firm offer announcement details of their intentions regarding the offeree’s business, employees and pension schemes. Previously this information was only required to be included in the offer document and the Panel hoped that by requiring this information at an earlier stage, this would assist the target company’s employee representatives and pension scheme trustees in formulating their opinions on the offer.

These changes have had minimal impact on encouraging engagement by employee representatives and pension scheme trustees. However, in Q3 2021 there were two instances of pension scheme trustees publishing their opinion on an offer. On the Morrisons takeover, the trustees of the Morrisons pension fund issued a statement noting that they would be focussed on agreeing additional security to provide covenant support for the pension schemes and that any mitigation to be provided by the two bidders (CD&R and Fortress Investment) should be agreed upon before any shareholder meeting in consideration of any offer is convened. Meetings with the bidders culminated in agreements with both CD&R and the Fortress-led consortium to provide additional property security to support the pension schemes’ journey to ‘buy out’ (see: Place your bids: Private equity fight for Morrisons to be settled this Saturday).

The pension scheme trustees of the Ultra Electronics pension fund also issued an opinion on the proposed acquisition by Cobham following engagement with Cobham. Cobham agreed to a series of commitments; to increase payments to the pension scheme over five years, grant additional security and agree to additional documentation setting out Ultra’s information sharing obligations with the pension scheme trustees.

For further details, see:  (a subscription to Lexis®PSL Corporate is required). 

Firm offers included in this report

*Watchstone’s offer period commenced on 1 July 2021 and was delisted from AIM on 7 July 2021.

*Apex is a Bermuda registered company, which is majority owned by private equity firm Genstar.

• Market Tracker Trend Report: Trends in UK public M&A in H1 2021
• CD&R set to check out with Morrisons whilst Fortress remains in the aisle
• Place your bids: Private equity fight for Morrisons to be settled this Saturday
• Increase in leisure sector takeover activity as post-pandemic dust settles
• Battle for Morrisons to be settled in auction
• CD&R agrees £7bn bid with Morrisons whilst pension scheme trustees voice concerns
• Cobham takes aim at Ultra Electronics
• Competition heats up for Morrisons, Vectura and Meggitt
• Parker-Hannifin to take off with Meggitt
• Singapore’s GIC joins expected takeover battle for Morrisons and Silchester voices opposition
• Bidding war expected for Morrisons
• Market Tracker Trend Report: Trends in Public M&A in Q3 2020