Proposed amendments to UK’s takeover regime and its potential impact on acquisitive Indian companies

Friday, January 21, 2011 | Posted by: Grant Thornton
Categories: | Tags: business, India, economy, Grant Thornton, governance, growth, India Watch, UK, risk, South Asia Group, Grant Thornton India, international, aim, South Asia, Capital Markets, mergers

Last year saw a public debate in respect of the UK takeover regime which ensued as a result of the acquisition of Cadbury by Kraft. Some of the market participants were of the view that the UK takeover regime made it too easy for hostile offerors (i.e. offerors whose offers are not from the outset recommended by the board of the offeree company) to succeed.  In addition, some commentators felt that the outcome of offers, particularly hostile offers, was influenced unduly by the actions of the so-called ‘short-term’ investors (eg persons who become interested in the shares of an offeree company only after the possibility of an offer has been publicly announced).

This debate ultimately resulted in the takeover regulatory body, the Panel on Takeovers and Mergers, undertaking a public consultation on possible amendments to the City Code (the rule book that governs how takeover bids in the UK are governed). The Panel issued a public consultation paper to address the concerns that were raised by this debate and subsequently issued a response statement, in light of the responses it received on its consultation paper, proposing certain amendments to the Code.

As part of these proposed amendments, there are two key issues which are likely to have a significant impact on current market practice and are expected to alter the approach adopted by parties to a bid in relation to takeovers and mergers in the UK for transactions that are subject to the Code. These are:

• Automatic fixed deadlines - the Panel is proposing to increase the protection for offeree companies against protracted ‘virtual bid’ periods (a term commonly used for situations where a bidder may deliberately announce a possible offer to the market to test shareholder appetite, put pressure on the target board as well as buy itself time to work on other offer related matters). The mechanism being proposed to increase offeree company protection is to impose an automatic requirement on publicly named potential offerors to either announce a firm intention to make an offer or walk away (more commonly known as ‘put up or shut up’) within a fixed period of four weeks.

• Deal protection measures - the Panel is also proposing to prohibit deal protection measures, other than in certain limited cases. Currently, it is common practice for certain deal protection measures such as inducement/break fee arrangements to be provided by an offeree company to an offeror. The Panel proposes to prohibit such protectionist measures in order to ‘shift’ the position of strength back to the offeree company in bid situations.

There were also certain other key proposals that were considered as part of the public consultation process but the Panel does not intend to introduce any amendments to the Code in relation to these matters at this stage. These included, inter alia, raising the minimum acceptance condition threshold for offers above the current level of ‘50% plus one’ and disenfranchising shares acquired during the offer period. The Panel was of the view that any such changes should be introduced through UK company law rather than the Code.

So how are these proposed changes likely to impact Indian companies looking for acquisition opportunities in the UK?

The reality is that Indian companies, like most other acquisitive entities, are likely to focus on the fundamentals of a deal, assessing the commercial, financial and operational aspects such as potential synergistic benefits, cost-savings, valuations and the opportunity to enter into new markets when deciding whether to pursue an acquisition opportunity.  In my view, it is therefore highly unlikely that any of the proposed Code amendments will cause foreign offerors to start reconsidering their acquisition strategies in respect of UK corporates.

One should, however, expect that the proposed regulatory amendments will change, to some extent, the bid strategy and tactics normally deployed by bidders when contemplating an offer. For example, potential bidders are likely to conduct more ‘home-work’ than is perhaps currently the case prior to approaching the target company’s board.  In addition, bidders are also likely to consider the risk factors associated with pursuing an offer without deal protection measures more carefully and this may result in potential downward adjustments to bid premia to reflect this added risk.

The UK remains an attractive market for offerors and investors due to its strong corporate governance system as well as its transparent legal and regulatory regime that provides a conducive platform for M&A activity. Indian companies with strong balance sheets and access to capital, and with the benefit of the relatively strong Indian Rupee, remain eager to augment their capabilities by entering into new geographies and acquiring new technologies and products.

It is difficult to favour one particular sector that can be expected to dominate the Indian corporate shopping list during 2011. Natural resources, renewable energy, software, support services and industrials are expected to remain buoyant. In addition, given the growth potential to pharma companies, M&A activity can be expected to continue in this sector. One recent example of such a transaction was the acquisition of Neutrahealth plc (an AIM company based in the UK) by Indian-listed Elder Pharmaceuticals (through its Dubai subsidiary), advised by Grant Thornton’s South Asia Group Capital Markets team in London.

Overall, as long as the key drivers for acquisition opportunities continue to apply to Indian companies and appropriate advice is sought on the changing takeover regulatory landscape in the UK, it seems that deal-making between Indian and UK businesses will continue to bolster the two economies during 2011.

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Associate Director, Capital Markets, South Asia Group

For Grant Thornton UK LLP

Other articles in this issue of India Watch include:

Grant Thornton India Watch shows significant growth in 2010

Indian cross boarder M&A closes the year on a high

2011 set to be a key year for India’s economy

The UK Bribery Act. Is your organisation adequately prepared?