One of the highest profile public M&A transactions of 2018 was the competitive takeover battle between Comcast and Fox for control of Sky, against the backdrop of Disney's proposed merger with Fox. This article on the transaction looks at the auction rules that are used to determine final bids by competing bidders.(1)
As neither Comcast nor Fox had declared their bids as final by the relevant Takeover Code deadline (22 September 2018), the Takeover Panel supervised an auction process to determine the final offer prices. On conclusion of the auction process, Fox and Comcast had made final offers of £15.67 and £17.28 per Sky share, respectively, with Comcast's superior offer valuing Sky at approximately £30.6 billion.
As the first competitive process to proceed to an auction since the introduction of the default auction rules into Appendix 8 of the code on 1 January 2015, the auction for Sky has been watched closely by public M&A practitioners.
Rule 32.5 of the code provides that "if a competitive situation continues to exist in the later stages of the offer period, the Panel will normally require revised offers to be announced in accordance with an auction procedure", the terms of which it will determine and announce.
To expand the different aspects of this rule:
- A "competitive situation" will "continue to exist" if neither bidder has declared its offer final such that, at the cut-off time for the commencement of the auction, either bidder may be increased or otherwise revised.
- The "later stages of the offer period" will most likely be Day 46 of the reset offer timetable, being the 46th day following publication of the last bidder's offer document. The relevance of Day 46 stems from the code rule prohibiting a revised offer document from being published in the 14 days ending on the last day the offer is able to go unconditional as to acceptances (Rule 32.1(c)) which, subject to any permitted extensions to the timetable, is the 60th day following publication of the last bidder's offer document.
- "In accordance with an auction procedure" means either pursuant to the default auction rules prescribed in Appendix 8 of the code or pursuant to a bespoke auction procedure where the rules have been agreed to by the competing bidders and the target board.
Historically, competing bidders have favoured agreeing bespoke rules (the exact details of which remain private), with the default auction rules serving as a framework on which a bespoke alternative can be based or as a contingency where the parties are unable to agree to an alternative.
The default auction rules provide for an open auction (ie, by public bids in the form of regulatory information service announcements to the market) between two competing bidders – where there are more than two bidders, the panel will modify the rules as appropriate.
- The default auction rules will apply where a competitive situation still exists at 5:00pm on Day 46 and no alternative auction procedure has been agreed.
- The auction process is spread over a maximum of five days, the first of which (Auction Day 1) is the business day immediately following Day 46. Auction Days 2 to 5 are the business days immediately following each previous auction day.
- Both bidders can bid on Auction Day 1, but if neither bids the auction ends.
- On Auction Days 2 to 4, each bidder may announce a revised offer only if the other bidder announced a revised offer on the previous auction day. Broadly, this means that both bidders can bid on each auction day, but if one bidder chooses not to bid on a particular day and the other bidder does bid on that day, the bidding will occur sequentially from then on. If no revised offers are announced on a given day, the auction procedure ends on that day.
- On Auction Day 5 (if reached), either bidder may announce a revised offer, which may be conditional on the other bidder also submitting an offer on that day.
- Although formula bids calculated by reference to a competing bidder's revised offer are prohibited, there is no minimum increment limit on the amount that can be bid. If permitted to bid, a bidder may make only one revised offer per auction day.
There are also restrictions in the default auction rules on:
- competing bidders, the target and its concert parties making public statements;
- dealing in target securities; and
- procuring irrevocable commitments during the auction.
These are designed to ensure that the competitive situation is resolved in an orderly fashion.
In the offer for Sky, the interested parties (Comcast, Fox, Disney – as a concert party of Fox – and Sky) agreed to an alternative set of rules rather than the default auction rules, in which bids would be submitted in private to the panel over a single day and with only three rounds of bidding.
The key aspects of the alternative rules that were agreed were as follows:
- Commencement of auction procedure – if a competitive situation existed at 5:00pm on 21 September 2018 (Day 45), the agreed auction rules would apply with the rounds of bidding taking place on 22 September 2018 (Day 46).
- Round one – only the bidder with the lowest offer at the cut-off time or, if both offers were equal, the bidder which submitted the last offer, was permitted to bid.
- Round two – only the bidder which was not eligible to submit a revised offer in round one was permitted to bid (and could do so even if no bid was made in round one by the other bidder). The auction would end if no bid was made.
- Round three – if reached, either or both bidders were permitted to submit a revised offer, which could be made conditional on the other bidder submitting a revised offer in the round.
- Conclusion of the auction procedure – as soon as practicable following completion of the auction, the panel would announce to the market the offer prices made by each bidder, following which each bidder would by no later than 7:00pm on 24 September 2018 make a full Rule 2.7 offer announcement in respect of the last bid it made during the auction (or, if it did not revise its offer, confirm its pre-existing offer).
To assist comparability between offers, each bidder was required to bid in cash only and, if Sky paid a dividend before the end of the offer period, to reduce its offer by an amount per share equal to the amount of the dividend per share. Further, on conclusion of the auction procedure, neither bidder was permitted to revise the price or nature of its offer unless a third party (excluding any concert party such as Disney) announced a firm intention to offer for Sky.
The Sky auction rules had broadly similar rules to those in the default auction rules prohibiting formula bids and restricting public statements. The Sky auction rules also did not require minimum increment increases, provided that the bid was higher than the last bid made by that party.
As an auction process involves a bidder revising its offer, following its conclusion a revised offer document drawn up in accordance with the code must be sent to the target shareholders (Rule 32.1(a)).
The panel has the discretion to set the deadline by which any such document must be published (Rule 32.5), and will also extend Day 60 in accordance with any auction process established by it in accordance with Rule 32.5 (Note 2 to Rule 31.6). This is necessary given the obvious difficulty in finalising, printing and distributing a revised offer document on or prior to Day 46 (as required by Rule 32.1(c)) if the auction process only starts on or shortly prior to Day 46.
For the Sky auction, the agreed rules provided that each bidder that made a revised offer had to publish a revised offer document on or before 27 September 2018 (the fifth day after the auction) and, regardless of when each document was published, the latest date on which either offer could become or be declared unconditional as to acceptances (Day 60) was set as 14 days from 27 September 2018 (11 October 2018). However, note that in the auction rules for Shell's and PTT Exploration's competing offers for Cove Energy, each bidder was required to publish its revised offer document on or before the seventh day following the auction and Day 60 was set as the 14th day after the latest date on which either bidder publishes its revised offer document.
It is possible that, if the target board consents, the lower bidder may be granted a dispensation by the panel from the requirement to publish a revised offer document (Note 1 to Rule 32.5). To avoid the confusion of multiple offer documents and forms of acceptance being sent to shareholders, the target board's consent would typically be expected in this scenario (unless, for example, the deliverability of the higher bidder was less certain than that of the lower bidder).
The discussion on the commencement of the auction process on Day 46 addresses the situation where both offers are being implemented by way of a contractual offer. However, if one or more of the competing offers is being implemented by way of a scheme, the panel must be consulted on the applicable timetable (Note 2 to Rule 32.5). This is because a scheme's timetable (which is agreed with the court) is not subject to the same timetabling requirements as a contractual offer, and there are no dates in a scheme which are directly equivalent to Day 46 and Day 60 of a contractual offer.
Although the panel should be consulted in all such occasions, in prior consultation papers and response statements the panel has indicated how it may approach such situations. Accordingly, where a contractual offer is made in competition with an existing scheme, the panel has commented that both bidders will normally be bound by the timetable set by the publication of the competing bidder's contractual offer document (ie, the auction process will normally commence on Day 46 of the reset timetable), and, where a scheme is proposed in competition with an existing contractual offer, the panel has said that the 14th day prior to the scheme shareholder meetings will normally be treated as the equivalent of the 46th day following the posting of the competing offer document.
However, the panel recognises that there may be situations where such an approach would be inappropriate – for example, if the scheme meetings are set at a date that is earlier than the first bidder's Day 60, it might be unfair to impose an auction procedure on a date that is earlier than Day 46 of the original bidder's timetable.
For further information on this topic please contact Will Pearce or Joseph Scrace at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (email@example.com or firstname.lastname@example.org). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
(1) This article is part of a series on the transaction. For the previous article in the series, please see "Sky takeover – applying the chain principle".
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