The rising influence of shareholder activism in M&A transactions: recent trends in the UK
June 2019 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2019 Issue
The level of shareholder activism in the UK has risen dramatically in the last few years, with the UK arguably representing the most dynamic market for activist campaigns outside the US. Consistent with trends seen in the US, the UK has also recently experienced a broadening of the pool of investors engaging in activist strategies, as well as the tactics being employed by them and the types of companies being targeted.
In particular, many traditional long-only investors who in the UK have historically been reluctant to publicly criticise management, are increasingly – publicly or privately – lending their support to campaigns led by activist shareholders and some are even employing ‘activist’ tactics themselves.
While shareholder activism in the UK has been focused historically on governance matters – including executive compensation and requests for board appointments – a material proportion of recent activist campaigns have sought to instigate, or influence the outcome of, M&A transactions. We explore below the main M&A-driven strategies that have been employed by activist shareholders in the UK to date.
Sell or break-up the company
This is the classic M&A-driven activist strategy in the UK and involves an activist acquiring a stake in a publicly listed company and – publicly or privately – pressuring the board to put the company up for sale or dispose of a division. Originally imported from the US, activists have found fertile ground in Europe for the implementation of this strategy given the continued prevalence of conglomerates across the continent.
Recent high-profile examples of this strategy in the UK have included: (i) a campaign led by Elliott and Sachem Head, which led to Whitbread plc selling its Costa Coffee business to The Coca-Cola Company, which was completed in January 2019; (ii) an extended campaign led by Oasis and Paulson & Co., which led to Premier Foods plc announcing a strategic review in February 2019, including a potential sale of the group or one or more of its businesses; and (iii) a campaign led by Elliott, which led to BHP Billiton selling its US shale oil and gas assets to BP plc, which was completed in October 2018.
In addition to seeking to instigate M&A transactions, activist shareholders frequently intervene in live M&A transactions in the UK. The strategy of acquiring a stake in a publicly listed target following the announcement of a bid with a view to forcing the bidder to improve its terms is commonly known as ‘bumpitrage’.
Having originally built on experience gained in intervening in public bids in the US, activists have now adapted this strategy for the UK market. Activists frequently seek to exploit minority shareholder protections built into the UK legal framework for takeovers, which are implemented through either a scheme of arrangement or a contractual offer.
The scheme of arrangement is the most popular structure for implementing public takeover bids in the UK and is a court-based procedure that, if successful, results in the bidder acquiring 100 percent of the target’s shares, including those of dissenting shareholders. As a result of this element of compulsion, various minority protections are built into the scheme procedure to ensure fairness. The first is that the scheme must be approved by a majority in number, representing at least 75 percent of votes cast by, target shareholders present at a specially convened shareholder meeting.
The second is that the scheme must be approved by the court, which has a broad discretion whether to give such approval and will hear objections from interested parties, including dissenting shareholders, before deciding whether to do so. The most straightforward tactic for an activist to bumpitrage a scheme is to threaten to vote it down unless the bidder improves its terms. Given the 75 percent approval threshold for a scheme, an activist shareholder will not normally be able to acquire a sufficiently large stake in a target to vote down the scheme itself and so will often seek to influence the votes of other target shareholders through – public or private – criticism of the bid. In conjunction with this, an activist may also threaten to object at the court sanction hearing (although the threshold for successful challenge in practice is usually high).
The other structure for implementing a public takeover bid in the UK is a contractual offer made by the bidder to the target’s shareholders. Unlike a scheme, a contractual offer does not operate in an all-or-nothing manner. A bidder can only squeeze-out dissenting minority shareholders if the bidder acquires 90 percent of the shares to which the offer relates. Given this higher threshold, it is often easier for an activist shareholder to bumpitrage a contractual offer as compared to a scheme and, indeed, there have been a number of recent UK takeovers where an activist has individually acquired a shareholding large enough to block a squeeze out.
While this does not prevent a bidder from acquiring control of the target, the presence of minority shareholders in a target post-bid can potentially significantly restrict the bidder’s actions following the bid. There is therefore an implicit, and indeed sometimes explicit, threat in these sorts of activist interventions that, if the bidder were to proceed without reaching the squeeze-out threshold, the activist would exercise its minority shareholder rights to the fullest extent possible to frustrate the bidder’s actions.
Bumpitrage has been used by activist shareholders in a number of recent significant UK takeovers bids. Perhaps the most high-profile example was Elliott’s intervention in AB InBev’s takeover of SABMiller, which included a cash offer and a partial share alternative. Following the significant drop in the value of sterling after the Brexit referendum, the value of the cash offer fell below the value of the alternative offer and Elliott bought into SABMiller at this time and successfully pushed AB InBev into increasing its cash offer. Activist shareholders also sought to intervene in Fox’s bid for Sky and Tesco’s bid for Booker.
Activist turned acquirer?
Activist shareholders typically acquire minority shareholdings in publicly listed targets and then push for changes designed to increase the share price (from which the activist shareholder then profits). The acquisition of control has not typically been an objective pursued by activist shareholders.
However, in recent years, there have been a number of examples of activists adopting private equity style strategies to acquire control of a target, or a division of a target, after having first invested in the target as an activist. Some commentators have attributed this trend to a desire by activists to capture a greater share of the value created by their strategies, which has often accrued to the private equity acquirers of the businesses that activists have pushed to be sold. These include Elliott’s pending takeover (alongside Siris Capital) of Travelport Worldwide (a UK headquartered, NYSE listed company), which was announced in December 2018. Elliott had initially acquired an 11 percent stake in Travelport in March 2018 and then pushed Travelport to put itself up for sale. Another example is Gatemore Capital’s acquisition of the US division of TLA Worldwide plc, an AIM-listed sports marketing agency, which completed in December 2018. Gatemore had initially acquired a 6 percent stake in TLA in December 2017. After Gatemore gradually increased its shareholding during 2018, TLA launched a sale process for its US business with Gatemore ultimately being the successful bidder.
Sam Bagot is a partner and Dan Tierney is an associate at Cleary Gottlieb Steen & Hamilton LLP. Mr Bagot can be contacted on +44 (0)20 7614 2232 or by email: firstname.lastname@example.org. Mr Tierney can be contacted on +44 (0)20 7614 2329 or by email: email@example.com.
© Financier Worldwide
Sam Bagot and Dan Tierney
Cleary Gottlieb Steen & Hamilton LLP