The Carlsberg-led consortium bid for Scottish & Newcastle is just one example of a recent run of break-up bids in the M&A market.
Consortium bids are now common and often attractive in that they enable their members (whether they be trade bidders, private equity houses or others) to pool resources and funding and seek to reduce competition risks. However, break-up bids can also be highly complicated and involve significant practical difficulties.
When considering a consortium break-up bid, there are a substantial number of crucial issues to be addressed at the outset, such as:
- Picking the right consortium members: do they have the appropriate know-how, equity, debt, management and reputation?
- Establishing a good relationship with those members at an early stage, including commonly shared objectives and an agreed way of working: the consortium needs to be able to negotiate and make decisions effectively and quickly, as a competing single bidder would.
- Due diligence: what information is available on the target? The issue of due diligence is considered in more detail below.
- Antitrust risk: can this be reduced by appropriate asset allocation and will disposals or undertakings be required? The consortium members will need to be entirely clear as to how any anti-trust review will proceed and how divestments or other remedies will be negotiated. In addition, the authorities may view the separation as one notification or multiple notifications.
- Regulatory analysis – in cross-border bids, the consortium may need to consider how to deal with different regulators having jurisdiction over the same businesses.
- How will the bid be financed? In addition, should the bid be unsuccessful, the members will need to have agreed at the outset who will bear the costs and in what proportion and how to allocate any break fee which may be received.
- Careful tax planning: this is essential to ensure that tax charges on separation are as limited as possible. Tax costs inmaking the bid and separating the assets will need to be allocated between the members of the consortium.
The target may seek to limit the consortium’s due diligence for a number of reasons. On a public bid in the UK, one such reason is the Takeover Code requirement that equivalent information be made available to other genuine bidders (whether or not those other bidders are welcome). If diligence is limited, the consortium may not be able to clearly identify, allocate and value assets, thus increasing the risks for the bidders. In this case, allocation principles need to be defined as clearly as possible with later adjustments being catered for after completion of the acquisition and clear dispute resolution procedures become crucial.
In addition, the consortium’s lendersmay need to undertake a certain amount of diligence (not least where a security package is being put in place). Alternatively they may seek to rely on the diligence carried out by the consortium’s advisers.
The consortium or implementation agreement will need to be carefully negotiated and drafted and should address key aspects of how the break-up bid is to be governed, such as:
- How will strategy negotiations and discussions with the target be carried out and who will lead them?
- What will the bid parameters be? The consortium members will need to agree on a maximum total bid price and a maximum contribution payable by each member.
They will also need to look at whether new members could be admitted to the consortium and, if so, how.
- How will management, governance and voting rights be allocated? This will often depend to an extent on whether the consortium is to be a long-termor short-termarrangement.
- The consortium agreement will likely dictate a list of matters for which unanimous members’ consent is required.Minority members willwish to seek information and veto rights.
- How will the separation process be carried out and how will the control andmanagement of the business be regulated before legal transfer? This question is considered in more detail below.
- What due diligence rights will members have as between consortium members?
- How will the members participate in income and capital rights and the assumption of liabilities?
- Transitional arrangements and services – the consortium will need to set out a clear strategy and principles for the provision of goods and services on a transitional basis during the period of separation of the business between members.
Separation and control before legal separation
Separation of the target business and control thereof before legal separation will likely be impacted by, amongst other things, anti-trust issues. As is the case with the Carlsberg and Heineken consortium,members may well be competitors and so commercially confidential information and know-how will need to be protected. The target group may well have shared information systems and employees who work across a number of group businesses which are to be split between the consortium members.
Constitutional protections (as well as contractual ones) may be sought if assets are to be mixed or held by another consortium member for any significant time. A party may, for example, seek rights to appoint directors in the bidco, veto rights and other share rights (giving rights to control certain assets). Similar rights might also be sought in the target as well as in key subsidiaries of the target. However, where businesses are co-mingled, consortium members will need to bear in mind issues of confidentiality and directors’ duties.
Finally, consortium members or their lenders may wish to take security over the shares of the key trading companies or key assets. This should be approached with some caution where there is existing security in place and given the existing financial assistance restrictions. In addition, on a break-up, the parties will wish to avoid overlapping security.