This article is an extract from GTDT Market Intelligence M&A 2023. Click here for the full guide.

Clare Gaskell advises clients on private M&A and public takeovers as well as equity capital markets transactions and other corporate matters, including minority and preferred equity investments, consortium transactions, restructurings and management equity plans, with a focus on private equity and other financial sponsor clients. Based in the firm’s London office, she has particular experience in law and regulation applicable to UK-listed companies. Her most recent M&A experience includes advising KKR on its sale of a majority stake in A-Gas and acquisitions of ContourGlobal plc, John Laing Group Plc, a majority stake in Wella and Unilever’s spreads business, HIG Capital on its acquisition of KPMG’s restructuring business and CBRE on its acquisition of a majority stake in Turner & Townsend.

Jiaying Zhang advises a range of clients through all stages of the investment cycle within the energy and infrastructure industry. She counsels infrastructure funds on a wide range of complex domestic and cross-border M&A, joint venture and consortium transactions, management equity plans, GP-led secondaries and restructurings across the infrastructure sector. Jiaying was named a finalist in the ‘Rising Star’ category at Law.com International’s 2022 British Legal Awards. Jiaying’s recent work highlights include advising TPIH in the sale of a 49 per cent stake in CSP Spain Ports to CMA CGM, KKR in its investment in Greenvolt and acquisitions of ContourGlobal plc and John Laing Group plc, and Stonepeak in its acquisition of a stake in Inspired Education Group.

1 What trends are you seeing in overall activity levels for mergers and acquisitions in your jurisdiction during the past year or so?

It was recently reported that the value of M&A deals with UK involvement has fallen to a 14-year low in 2023, with a total value down 45 per cent on 2022 levels. However, UK companies remain attractive targets for bidders. In public M&A, 2022 was a quieter year than 2021, with 46 firm offers announced for companies traded on the London Stock Exchange Main Market or AIM (compared to 55 in 2021). In addition, a lower proportion of the bids announced in 2022 were by companies backed by private equity or other financial sponsors than in 2021, and only 13 had a deal value of over £1 billion (compared to 21 in 2021).

The volume of activity remained steady in 2023, with 25 firm offers for Main Market or AIM companies in the first half of 2023 (compared to 27 in the first half of 2022), of which seven had a deal value of over £1 billion. However, there has been a resurgence in the number of private equity or other financial sponsor-backed bids in the first half of 2023 compared to 2022, with 14 announced offers (compared to 19 in the first half of 2022).

2 Which sectors have been particularly active or stagnant? What are the underlying reasons for these activity levels? What size are typical transactions?

The year 2022 was a turbulent one for the British economy. At the beginning of the year, we saw the further escalation of the conflict in Ukraine. The economy later suffered from investor backlash to a calamitous mini budget delivered by the Truss government in September. The aftershocks to these historic events have been rising interest and inflation rates, leading to choppier M&A activity. Buyers and sellers continue to grapple with increased market volatility, capital constraints and a mismatch in pricing expectations.

While UK M&A deal activity has been affected across the board by the troubled markets, segments of the infrastructure sector have remained more active than other sectors. The digital infrastructure segment remains active, as investors rush to buy essential infrastructure to support the digitalisation of business and society and the expansion of AI technology. Renewable energy and energy transition investments remain active, given the focus on net zero targets. Technology, media and telecoms (TMT) and financial institutions have seen a reasonable level of M&A activity. There have also been an increased number of restructurings of distressed assets and investments by the direct lending arms of private equity firms.

By comparison, investment teams have been less active in certain sectors such as consumer goods and retail – other than in a distressed context.

In recent years, we have seen a greater volume of mid-market deals (this typically includes deals of £25 million to up to £1 billion or more), which are less reliant on debt financing than large-cap transactions. According to KPMG’s 2022 review, UK mid-market private equity investment grew by 13 per cent to £46 billion compared to 2019.

However, there is no ‘typically sized’ transaction in the UK, with a wide variation in deal sizes up to values in the multiple billions of pounds sterling. The UK market is somewhat unique in Europe inasmuch as professionals based here tend to cover financing and M&A across multiple European geographies. This can be either because cross-border deals happen under English law, because the relevant professionals on the buy or sell side are based in London or simply because of the expertise of the advisers who live and work in the UK. Invariably, the financing of pan European deals uses debt under English law and/or capital markets financing under New York law. Hence, even when UK M&A itself is quiet, the M&A professionals based in London tend to be busy dealing with global or pan-European deals (whether the relevant assets are wrapped in a UK corporate).

3 What were the recent keynote deals? What made them so significant?

We have advised on a number of significant sales this year, including KKR’s sale of a majority stake in A-Gas to TPG Climate Rise, KKR’s sale of a 50 per cent stake in X-Elio to Brookfield and TPIH’s sale of a 49 per cent stake in CSP Spain to CMA CGM. Transactions involving stake sales often require careful navigation of existing pre-emption regimes, management equity plans and/or regulatory requirements. In the current economic climate, certainty of funds is also critical, so understanding buyers’ sources of funding – both on the debt and equity side – is essential to structuring a successful transaction.

Our London Corporate team also represented Melrose Industries plc in the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses from the Melrose group into a new independent holding company, Dowlais Group plc. The transaction was significant because demergers of large cap listed companies such as this one are rare and require careful planning and stakeholder management.

Other keynote deals included EQT’s £4.5 billion recommended offer for Dechra, a global developer, manufacturer and supplier of products relating to the companion animal, equine, food producing animal and nutrition categories. EQT overcame a challenging financing market to raise debt from direct lenders (including credit funds advised by Blackstone, CVC, KKR and Permira) and equity from ADIA and various passive co-investors.

4 In your experience, what consideration do shareholders in a target tend to prefer? Are mergers and acquisitions in your jurisdiction primarily cash or share transactions? Are shareholders generally willing to accept shares issued by a foreign acquirer?

In private M&A, the overwhelming majority of deals are cash only, although on secondaries transactions (where one financial sponsor buys from another), management will often be required and the selling financial sponsor will sometimes choose to roll over a portion of their existing target securities for securities in the buyer entity.

In the case of public takeovers, unlisted securities or loan notes are rare and typically offered only as an alternative to cash. Overseas bidders without an existing UK listing generally do not tend to offer share consideration (unless as an alternative to cash) because overseas securities tend to be unattractive to UK shareholders. Those that do offer stock tend to be listed in the UK already or offer a UK listing as part of the transaction (see, for example, the quasi-hostile offer by Hong Kong Exchanges and Clearing (HKEX) for the London Stock Exchange, though this was not a feature of the merger of equals between Elemental Royalties Corp and Altus Strategies plc). Having said that, a bidder company offering liquid securities that are listed on an overseas investment exchange (such as the TSX Venture Exchange, in the case of Elemental Royalties Corp) should be appealing to a UK PLC shareholder base – especially since those shareholders tend to have a global outlook.

5 How has the legal and regulatory landscape for mergers and acquisitions changed during the past few years in your jurisdiction?

The Digital Markets, Competition and Consumers Bill (DMCC) was introduced to the UK Parliament on 25 April 2023. While it is still uncertain when the DMCC will enter the statute book, the bill heralds significant reforms for national competition rules, including by empowering the CMA to designate businesses as having ‘strategic market status’ (SMS) in respect of a digital activity, enabling (amongst other things) the CMA to impose conduct requirements and requiring enhanced M&A reporting. It also introduces a new jurisdictional basis for merger control, under which the CMA will gain oversight where (1) at least one party has £350 million in UK turnover and at least a 33 per cent UK ‘share of supply’ (without any need for a target increment); and (2) the other party has a ‘UK nexus’ (broadly defined to be satisfied where the party has any activity, legal entity or supply of goods or services in the UK).

Following commencement of the National Security and Investment Act 2021 (NSI Act) on 4 January 2022, the Cabinet Office published the first annual report covering a full 12-month period on 11 July 2023. This report provides valuable insights into the operation of the UK’s foreign direct investment regime. The UK government reviewed 766 notifications from 1 April 2022 to 31 March 2023, of which 617 (81 per cent) were mandatorily notified, and 65 (8 per cent) were subject to call-in notices. This reflects a significantly lower number of notifications than anticipated (the expectation being 1,000–1,830 each year), and a slightly lower number of call-in notices (the expectation being 75–90 each year), which might be partly due to fluctuations in overall M&A activity.

Out of the 65 notifications called-in under the NSI Act, 10 transactions were subject to conditions, ranging from relatively light-touch interventions (such as restrictions on the sharing of sensitive information) to more onerous requirements (such as due diligence of all new customers of sensitive products). These conditions were imposed on acquirers from jurisdictions including China, France, Germany, Switzerland, the UAE, the UK and the US, serving as a reminder that the NSI Act can be still be relevant for deals in sensitive sectors regardless of the acquirer’s nationality. In contrast, out of 65 notifications called in, only five were prohibited (all involving acquirers of Chinese or Russian origin). Activities in the sectors of advanced materials, defence and military and dual-use were most commonly subjected to call-in notices.

6 Describe recent developments in the commercial landscape. Are buyers from outside your jurisdiction common?

Yes. In public M&A, 68 per cent of the firm offers announced in the first half of 2023 for London Stock Exchange Main Market or AIM companies involved at least one non-UK bidder, including bidders from the US, Canada, Sweden, the UAE and Japan. A large portion of our private M&A clients are financial sponsors headquartered outside the UK and Europe; however, most have London offices and local deal teams who execute the transactions and monitor the portfolio companies after closing.

7 Are shareholder activists part of the corporate scene? How have they influenced M&A?

Shareholder activism has had an increasing impact on UK M&A since the covid-19 pandemic. The year 2022 was particularly busy for shareholder activists on public deals, particularly investors opposing specific M&A transactions and those agitating for ESG-driven changes.

A prominent example of shareholder activism against specific deals has been the ongoing row between Capricorn and its activist shareholders in relation to its failed mergers with Tullow Oil and subsequently NewMed. Major shareholders opposed both deals, leading the board to abandon both and ultimately resign. We have also seen a number of high-profile examples of ESG-driven activism: for example, ClientEarth, an environmental group, has filed a derivative action claim against the directors of Shell, alleging they had failed to prepare the company for the impacts of climate change, and that this amounted to a breach of their directors’ duties.

8 Take us through the typical stages of a transaction in your jurisdiction.

The M&A process very much depends on the parties involved. In the case of a big strategic deal, for example, most of the contact from the early stages tends to be at a principal-to-principal level. On the other hand, auction processes are usually run by financial advisers who coordinate with potential bidders and feed information back to their clients.

A typical auction process involves the circulation of a ‘teaser’ containing limited, often publicly available, information about a target and a non-disclosure agreement is then entered into before more information is made available. Bidders are invited to submit non-binding offers at the end of a first phase that typically lasts four to six weeks. Selected bidders are taken through to a second phase during which they are given access to a data room, management and sometimes experts such as vendor due diligence providers, and the opportunity to ask follow up questions. At the end of the second phase bidders must submit what is referred to as a final ‘binding’ offer – although it invariably remains subject to negotiation and signing of definitive transaction documents, at least. If due diligence has been completed before submission of the final offer and the buyer is otherwise ready to proceed, then signing can occur within 24–48 hours of the final offer deadline. In other cases, particularly where the target business is being carved out from a larger group, it can take longer – sometimes weeks – for the parties to enter into a legally binding contract.

The extent of due diligence also depends on the parties involved and the type of transaction. In public M&A, due diligence tends to be very limited – partly driven by the Takeover Code requirement that any due diligence information given to one bidder must be given to any other bona fide potential bidder on request. Due diligence is also typically limited in secondary buyouts, where financial sponsor buyers focus on big value items and take comfort from the fact that the target will have been the subject of due diligence in the fairly recent past. In contrast, a strategic buyer is more likely to want a detailed due diligence process, partly so that it can fully understand and test potential synergies that may underlie its price.

9 Are there any legal or commercial changes anticipated in the near future that will materially affect practice or activity in your jurisdiction?

The tightening of debt financing markets and mismatch in pricing expectations between buyers and sellers has led to many parties rethinking how they structure and finance M&A transactions.

For example, more parties are seeking to use earn-outs to bridge valuation gaps. For a buyer, an earn-out can be helpful in reducing its funding requirements at closing; and a seller can ensure that any short- to mid-term uplift in performance or value in the target is returned to it.

Financial sponsors have also been focused on portfolio company add-on deals: these investments tend to be less risky from a valuation standpoint given their size, and enable sponsors to price in synergies to help bridge pricing gaps.

More sellers are exiting their investments through stake sales, particularly on larger deals in the infrastructure sector where the sheer size of the business means there is rarely one buyer who can buy the entire asset alone.

We have also seen more interest from financial sponsors in providing financing to companies through convertible preferred investments. This gives them downside protection with a fixed rate return acting as a floor, while they retain the potential for sharing in the equity in an upside scenario. There has been increasing demand from companies to raise financing in this manner, particularly from those that would have completed an IPO in healthier capital markets.

Finally, investors continue to see opportunities in the public markets, whether through take-privates or private investment in public equity, as a result of lower valuations of UK-listed companies.

10 What does the future hold? What activity levels do you expect for the next year? Which sectors will be the most active? Do you foresee any particular geopolitical or macroeconomic developments that will affect deal sizes and activity?

It seems likely that the downturn in the UK economy will lead to more distressed M&A, restructurings and corporate defaults in late 2023 and through 2024. Financial sponsors, with their ready access to large and flexible pools of committed capital, should be well positioned to take advantage of these opportunities, notwithstanding the tightening of debt financing conditions. In other cases, however, continuing differences of opinion between buyers and sellers regarding valuations may result in an extended slowdown in M&A activity until those sellers have an urgent need for cash and are forced to lower their expectations.

The Inside Track

What factors make mergers and acquisitions practice in your jurisdiction unique?

The shareholder base in the UK is generally more capitalist than elsewhere in Europe (inasmuch as we do not have many family-owned or majority-owned businesses). This, together with the lack of works councils and Takeover Code prohibition on poison pills and other ‘frustrating action’, has traditionally made for an M&A-rich environment. Also, most financial sponsors headquarter their European operations in London, which means that M&A should continue apace here (even if UK M&A itself slows down). On current evidence, while some dealmakers and back-office operations have relocated to the continent or Ireland, the vast majority remain in London and some financial sponsors are actually ramping up their London operations.

What three things should a client consider when choosing counsel for a complex transaction in your jurisdiction?

There’s no ‘one size fits all’ approach – clients should choose counsel with the insight and experience to master complexity and make judgement calls but with the flexibility to collaborate with other advisers, in the UK and elsewhere, to achieve the best possible result. Experience is especially important in relation to public company deals in the UK. The rules are very ‘principles’ based and require a detailed knowledge of practice and precedent. As law firms and legal practice continue to disaggregate, partner judgement is what will be key on complex and fast moving M&A deals.

What is the most interesting or unusual matter you have recently worked on, and why?

We advised on KKR’s investment in convertible bonds issued by Greenvolt, a renewables business listed in Portugal. It was an interesting matter because convertible instruments are becoming an increasingly popular form of instrument for investments. Also, where the instrument holder has co-investors, the co-investment terms may need to also be tailored to those in the underlying bond instrument, factoring in matters such as the impact of any underlying governance rights, convertibility of the instrument, and transfer restrictions into the arrangements upstairs. We have led on a number of multi-layered consortium arrangements recently where such considerations have arisen. Ensuring that the mechanics across different shareholder arrangements or instruments is key.