Probably the best way of reaching targets that other bids can’t reach

Consortium bids have for a long time been favoured by private equity houses as a way of acquiring targets which might otherwise be too big for any one buyer. The recent acquisition of the UK brewer Scottish & Newcastle by a consortium formed by Carlsberg and Heineken illustrates that such structures can also be used by trade buyers to good effect. This is particularly the case where the consortium intends to divide the target’s assets between the consortium’s members, sometimes known as break-up bids.

This briefing examines the reasons for making a break-up bid and the issues associated with them. Whilst this briefing focuses on bids for public companies, many of the issues will apply equally to a private company acquisition.

Why launch a break-up bid?

For many different reasons, particular assets and businesses of a large group may be attractive to certain buyers and not to others. Strategic objectives and anti-trust constraints may mean a buyer is very interested, for example, in a target company’s businesses in particular jurisdictions, but not in others. This is particularly likely to be the case in sectors which are highly consolidated. Break-up bids can facilitate acquisitions which would otherwise be impossible from a regulatory perspective if consortium members with complementary objectives and characteristics can be identified.

Financing bids for large target companies can be challenging even for the strongest buyers particularly if there may be competing bids. As was the case in the RBS, Fortis, Santander bid for ABN Amro, a consortium bid can facilitate the financing of bids which would be too big for any single buyer, although the recent financial difficulties suffered by Fortis highlight the dangers of involvement in large deals even as part of consortium.

Control of the acquisition and separation process

Although alternative structures are available, break-up bids are often made by a corporate entity (Bidco) in which each of the consortium members has a shareholding and in connection with which they enter into a consortium agreement.

Control of the acquisition negotiations and process (and/or Bidco) is likely to be a key commercial decision for the consortium members. One of the principal practical issues when pursuing an acquisition as a consortium is that the consortium should not be slowed down or burdened by an unwieldy decision-making process, and should present a coherent and cohesive negotiating team to the target and its shareholders.

If there are only two consortium members, and the respective values of target businesses each will be acquiring are roughly equal, then the consortium members may agree that Bidco or conduct of the bid should be deadlocked with all decisions requiring unanimous approval. If there are more than two consortium members (or two members who hold unequal interests), then they may agree that decisions should be taken by majority approval with certain reserved matters requiring unanimous approval (for example increasing the offer price). However decisions are to be taken, the parties need to be reasonably confident that the consortium will be able to react effectively to the quickly changing circumstances which sometimes arise in the context of a public company bid.

Immediately following completion of the acquisition, the consortium agreement will usually provide that the parties be given management and operational control, and be beneficially entitled to the profits, of the respective parts of the business which they are seeking to acquire. In this way the consortium members would become, from the moment of closing, effective owners of businesses they wish to acquire, notwithstanding that the legal separation of those businesses may not occur for some time.

Separation of the businesses

The consortium agreement will usually provide for separation of the businesses within a specified period of time. Although an outline step plan (or, in cases where the potential bid has been mooted for some time, a comprehensive strategy) for the separation may already be agreed between the parties, the parties will want to ensure that they have the flexibility to deviate from the plan should they need to do so, for example, so as to minimise unanticipated tax or stamp duty issues. However, the parties will need to ensure that the break-up remains sufficiently certain so that, from a competition perspective, the deal is treated as separate acquisitions of parts of the business by individual consortium members rather than one overall acquisition of the target by the consortium.

The consortium’s due diligence will need to focus on whether the target has, or is subject to, any arrangements that would prevent the consortium members’ plans or make them more expensive. Typical examples would include tax, pensions or change of control issues that would be triggered on separation of underlying businesses as opposed to acquiring control of the target.


If a consortium bid is to be funded by bank debt, the parties need to decide if the debt is to be provided to (and then on-lent to Bidco by) each individual consortium member, or alternatively to be borrowed by Bidco itself. The identity of the borrower is often principally driven by the nature of the consortium members themselves. For instance, can the consortium members raise debt against their own balance sheets or will debt need to be raised against the creditworthiness of the underlying target?

If consortium members are investment grade and are able to obtain debt finance based on their own balance sheets, this is likely to be advantageous because funding is likely to be cheaper and/or more readily available. If a consortium member is sub-investment grade (perhaps because of an existing debt burden or would be due to the effects of the proposed break-up bid) or Bidco is the borrower, the terms of the funding are likely to be quite different since, amongst other considerations, lenders will usually require collateral support (guarantees, asset security etc.) from the target group directly.

One issue that the consortium members are also likely to be concerned about is the ability to refinance the debt at some point after the deal is announced. By then, the constraints felt by the consortium members and the need for speed and confidentiality will have fallen away and a more cost-effective and long-term funding option may be available. As well as simply refinancing the acquisition debt with longer term credit facilities, possibilities may include more fundamental alternatives such as a bond or note issue or an IPO of a target group member. For example, on the Scottish & Newcastle acquisition, Carlsberg obtained a bridging loan which was subsequently repaid with the proceeds of a rights issue. Alternatively, consortium members may want (or be forced) to sell on target assets to pay down their own portion of the consortium’s debt. For example, following the ABN Amro bid Santander sold on ABN’s Italian retail network.

The consortium agreement

Although private equity consortium bids often involve long-term co-operation between bidders, the period of co-operation between trade buyers is likely to be limited to the minimum required to acquire the target and divide its businesses. Because of this, a strong legal framework is required for implementing the transaction in the form of a consortium agreement. In a break-up bid, the consortium agreement’s key terms will typically include:

Bid control

As described above, an efficient decision making process can be key to the success of a bid. The consortium agreement will therefore need to clearly set out the manner in which the bid or acquisition process is to be conducted and the rights of representation on Bidco’s board.

Asset allocation and valuation

Perhaps the two most fundamental issues to resolve are asset allocation and valuation. Often the amount of information available on the target’s business and assets will be limited, particularly where the target board is not cooperating with the due diligence process. The consortium members therefore need to agree a basis for allocating the target’s businesses and assets. For example, if key assets have been identified, these may be expressly allocated to a particular consortium member. A consortium member may then be allocated target businesses in particular countries with a corresponding right to all target assets exclusively or predominantly used by those businesses. A mechanism is also required for dealing with unallocated assets and liabilities and a process for dealing with any disputes.

Similarly, if the information available does not allow for the different businesses and assets to be separately valued, a mechanism for doing so will have to be agreed. Often this will involve a best estimate of relative values of such businesses and assets, upon which the parties’ initial funding obligations are based, followed by an iterative process pursuant to which the consideration paid is adjusted as more information is obtained.


The consortium agreement will typically contain exclusivity provisions which prevent consortium members (including withdrawing investors) from making any offer for the target independently of the consortium. Sometimes the parties may agree to disband the consortium (for instance if there is a fundamental disagreement) and allow each member to proceed with the transaction independently.

Fees and expenses

If a transaction is successful, Bidco or one of its subsidiaries will usually bear the transaction fees and expenses. If the transaction is unsuccessful, a common approach is for abort or break fees received from the target to be used to pay professional fees. To the extent that break fees are not payable, or are insufficient to cover the costs, the costs will be split among the members of the consortium, usually pro rata to their respective equity commitments.


On a break-up bid, in most jurisdictions, competition authorities will look through to the “real deal” (ie which businesses will end up with which consortium partner). If anti-trust issues are likely to arise on a real deal analysis, the parties need to agree the extent to which they are each required to make disposals or give undertakings to avoid a Phase II investigation.

Information rights

Given that the target businesses are to be separated between the consortium members, consortium members will not want the others to have rights in respect of sensitive commercial information relating to “their” target businesses (and there may also be anti-trust restrictions on the provision of such information). The limiting of access to information can be a complicated process, particularly where target’s head office is allocated to one party but holds sensitive information relating to businesses to be acquired by other parties.


While, in principle, the ability for a consortium member to transfer its participation to members of its group will be acceptable, consortium members will need to ensure that these provisions only enable intra-group transfers and do not inadvertently permit a consortium member to exit or sell-on its investment.


There is commonly a prohibition on dealings by consortium members for so long as they are treated as acting in concert under the Takeover Code. These provisions are vital to ensure that certain obligations under the Takeover Code (such as the Rule 9 mandatory offer obligation) are not triggered inadvertently.

Other provisions

The respective rights of the various classes of shareholder, in particular regarding matters such as voting, rights to dividends and return of capital are also catered for. The detail for these provisions will typically be light to reflect the anticipated short term nature of a break-up consortium.


Consortium bids should not be regarded as being reserved solely for private equity buyers. They can also be used to good effect by trade buyers who, in normal circumstances, would consider themselves to be competitors and should be seriously considered by potential buyers as a way of obtaining assets which form part of a target which would otherwise be to big or (for other reasons) too difficult to acquire. As is the case for many types of transaction, preparation is key. In particular, a strong legal framework for conducting the bid and dealing with the allocation and valuation of businesses is vital to the successful execution of the transaction.