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In recent years, the private equity industry has seen significant growth due to a substantial increase in the number of institutional investors investing in private equity globally, amid a low interest rate environment. Fuelled by a growing appetite for assets from private equity buyers, UK public companies have increasingly been targeted by large private equity firms due to their competitive valuations. In addition, market fluctuations have resulted in more listed companies being undervalued, to the delight of private equity buyers who accounted for 64% of the takeover bidders in 2021. Last year saw an unprecedented private equity buying spree in the UK and private equity houses are expected to continue to participate strongly in public M&A in 2022.

In our Trends in UK Public M&A in 2021 trend report, Allan Taylor, Partner at White & Case predicted:

‘We expect interest from the US and the resurgence of take privates by Private Equity to continue, at least into the first half of 2022…’

In line with this forecast, Pearson plc and Ted Baker plc are the latest UK companies to become the target of a private equity buying spree, with two US-based private equity groups, Apollo Global Management (Apollo) and Sycamore Partners Management (Sycamore), announcing possible takeover bids for the UK listed companies in the last two weeks.

On 11 March 2022, US private equity giant Apollo that it is in the preliminary stages of evaluating a £7bn possible cash offer by certain of Apollo's affiliated funds’ for UK publishing company, Pearson plc. The possible bid is the second unsolicited proposal Pearson has received from Apollo and the company :

‘The Board of Pearson considered the Second Proposal, together with its financial and legal advisers, and concluded that it significantly undervalued the Company and its future prospects. Accordingly, the Board of Pearson unanimously rejected the Second Proposal.’

Shortly after, Sycamore on 18 March 2022 that it is in the early stages of considering making a possible cash offer for fashion retailer, Ted Baker. Both announcements caused shares in the target companies to soar, with Pearson shares climbing by 18% to £7.66 per share and Ted Baker shares rising by 17% to £1.15 per share.

The raid on UK-listed companies is mainly being driven by the competitive prices compared with other markets. Others point to the UK’s relatively liberal attitude towards takeovers being the reason for the boom in UK private equity deals. The relatively relaxed UK rules makes it an easier jurisdiction for global private equity houses to navigate when buying and restructuring companies.

Private equity was the story of the year in 2021 during which 34 (64%) of the 53 firm offers announced were public to private transactions made by bidcos backed by private equity, financial investors and/or individuals who spent, in aggregate, £41.1bn snapping up UK public companies. By comparison in 2020 there were 28 firm offers made by private equity-backed bidcos/financial investors which equated to 67% of all firm offers, again over half of the takeover transactions in that period, and an aggregate deal value of £20.5bn. Already in Q1 2022, three (38%) of the eight firm offers announced, not to mention five (56%) of the nine possible offers, were made by private equity-backed bidcos/financial investors, with an aggregate deal value of £910m so far.

In our Trends in UK Public M&A in 2021 trend report, Adam Cain, Legal Director at Pinsent Masons commented: 

‘Public to private transactions have remained an integral feature of the UK public M&A market during 2021, continuing the momentum from the previous year. I see this trend continuing throughout 2022, with private equity funds demonstrating their ability to successfully navigate the requirements of the Code and forensically searching for the right opportunities in the UK’s public markets. Private equity funds have demonstrated a strong desire to successfully execute transactions involving well managed UK listed companies which may have depressed share prices or be considered to be undervalued, thus negating the requirement for a significant premium to be paid. With an abundance of dry powder at their disposal, private equity funds are very well positioned to extract significant value from a large number of UK listed companies throughout 2022.’

The private equity industry was a clear winner from the economic disruptions created by the global pandemic, striking larger and more frequent deals and creating a shift in the UK economy. A growing proportion of the economy has been shifted into private hands as opposed to being dominated by the public markets. However, the structural shift towards private equity was being driven partly by the low interest environment, and rising interest rates combined with increasing political pressure may clip private equity’s wings, causing a slight lessening of the overall percentage of takeovers represented by private equity bids. 

Shareholder activism in takeover transactions is another trend on the rise and could feature heavily in both of these recent takeover transactions if shareholders believe that the offer significantly undervalues the company. In addition to the threat of being trumped by a competitive bid, private equity buyers are increasingly facing greater resistance from activist shareholders if they believe bids undervalue the company. Pearson two of Apollo’s proposals, believing that they ‘significantly undervalued the company and its future prospects,’ while Ted Baker :

‘Ted Baker continues to make good progress with its transformation and the Company is emerging from Covid as a stronger and more financially sustainable business. The Board is confident in the Company's independent prospects and would evaluate any offer for the Company against the strong shareholder value creation that it believes can be delivered as a standalone company.’

Our Public M&A Q1 2022 update will explore the trends seen in this quarter in more detail, to be published next month.

The put up or shut up deadline, by which each bidder is required to announce whether or not it has a firm intention to make an offer, is on 8 April 2022 for Apollo and on 15 April 2022 for Sycamore.

Market Tracker will continue to monitor these transactions as they develop.