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Private capital continues to be highly active in the UK public markets

Private capital bidders continue to be more active than corporates in the UK public markets, despite a difficult financing market, higher interest rates and a weaker UK economy. 

Despite the well-documented headwinds currently facing buyers in the M&A markets globally – particularly private capital buyers who are more exposed to higher interest rates and financing costs – the highest-value UK bids announced so far in 2023 have all been public-to-private deals, including Brookfield’s GBP2.2 billion recommended offer for Network International (on which A&O is advising Network) and EQT and ADIA’s joint GBP4.5 billion recommended offer for Dechra Pharmaceuticals.

In fact, of the 10 firm bids announced so far in 2023 with values in excess of GBP250 million, only three have been by corporate bidders (Deutsche Bank’s GBP410 million offer for Numis, CKA’s GBP485 million offer for Civitas Social Housing and AAG’s GBP465m offer for Lookers). 2023 has also seen Apollo announce two possible offers (for THG and Wood Group) and EQT announce a possible GBP615 million offer for Alfa Financial Software.

These statistics demonstrate that recent challenging global M&A conditions, including higher interest rates and longer antitrust, foreign direct investment and regulatory review periods (which impact financing costs as a well as deal certainty), have not dampened appetite among private capital bidders for UK PLCs and – perhaps surprisingly – are not impacting financial sponsors disproportionately versus corporate bidders.

One development we are seeing as a result of the more challenging financing market is bidders approaching prospective lenders earlier than they historically would have, with the need to secure comfort around financing outweighing the increased risk of a leak. This is the case even though a leak could force the bidder into a premature 28-day put-up-or-shut-up period under the rules of the UK Takeover Code. This particular trend also underlines that financial sponsors, who once had a reputation for being extremely sensitive to the risk of being “outed” early, have become more comfortable with the UK regime and the risk of an early announcement.

We are also seeing more offers by private capital bidders being fully equity underwritten (with no debt) at the time of the Rule 2.7 firm offer announcement (i.e. the point at which the bidder is required to have committed financing in place on certain funds terms), with bidders then putting debt financing in place only after the firm offer announcement. This was the approach taken on Sun European Partners’ GBP272 million offer for K3 Capital (on which A&O advised Tikehau Capital as private credit lender) and a number of other public-to-private bids this year.

Financing from direct credit funds is becoming more commonplace in UK bids. This is helping to reduce the impact of traditional lenders being less willing or able to finance some deals in the current market, but can also lead to a more protracted cash confirmation process (as the bidder’s financial adviser and their cash confirmation counsel will usually seek more extensive due diligence information before they give the cash confirmation statement required by the Takeover Code) so this needs to be identified early and factored into the bid timetable.