Big Investors Leverage Their M&A Promises

Promises should always be golden, but they can be especially lucrative where U.K. mergers and acquisitions are concerned.

In 2011, U.K. regulators began discouraging the use of merger-breakup fees, which are paid by takeover targets if they abandon a deal in favor of a competing offer. The regulators wanted to help shareholders of target companies reap the highest price possible, and felt breakup fees discouraged the consideration of rival offers.

Without breakup fees in their toolbox, bidding companies instead increasingly started seeking promises from the biggest shareholders of a target company to support the deal, pledges known as “irrevocables.” The hope in part is to deter rival bids by signaling to the market that a deal already enjoys shareholder support.

With irrevocables, bidding companies in the U.K. seek yes-vote commitments from the biggest shareholders after a merger agreement has been struck but before it has been announced. Usually such irrevocables are negotiated behind closed doors 12 to 48 hours ahead of a deal announcement, according to bankers and lawyers. They often include caveats that allow investors to drop their support if a sufficiently higher bid emerges.

Deals in the U.S. sometimes include such support agreements from big shareholders. But a key difference is that, in the U.K., bidders show a greater willingness to allow for the sale of shares pledged to an irrevocable after a deal is announced—but ahead of the shareholder vote—on the condition that the buyer also agrees to pledge the newly bought shares in support of the deal. Such transactions are uncommon in the U.S., industry participants say.

With these sales, the bidder doesn’t lose any of the original support it had for the deal because the new owners of the irrevocable-pledged shares are still bound to support it. At the same time, the investor that sold the irrevocable-pledged shares is able to reap much of the price gain in the stock of the target company following a deal’s announcement.

Dealmaking U.K. Style

Subsequent to the BTG takeover-bid announcement on Nov. 20, 2018, Boston Scientific made an agreement with Invesco to allow the sale of irrevocable-pledged shares.

How the irrevocable-share deal worked

In November, Invesco pledged its almost 16% stake in the U.K.’s BTG to vote in favor of Boston Scientific ’s £3.3 billion takeover bid, or £8.40 a share.

On Nov. 19, BTG shares closed at £6.15 each. On Nov. 20, when the deal was announced, the stock closed at £8.245.

BTG’s closing share price

Nov. 19

Before announcement

Nov. 20

After announcement

Pentwater Capital’s

purchase price

In January, the agreement was amended, allowing Invesco to sell half of its BTG stake, or

30.8 million shares, to Pentwater Capital on the condition that the U.S.-based hedge fund accept the restrictions attached to those shares.

U.S. asset manager Invesco Ltd., French asset manager AXA Investment Managers, as well as U.K. asset manager Woodford Investment Management Ltd. have been among the most frequent investors to agree to some type of irrevocable over the past five years, according to data provider M&A Monitor Ltd.

Invesco took advantage of the U.K. rule to help

Boston Scientific
Corp.

pursue its £3.3 billion (about $4 billion) takeover bid for Britain’s BTG PLC late last year. Invesco pledged its almost 16% BTG stake in favor of the deal and a little more than two months later struck a side deal to sell half of that position to hedge fund Pentwater Capital Management, regulatory filings show. That way Invesco quickly pocketed a big part of the gain resulting from the bid announcement while minimizing any potential losses if the takeover bid didn’t proceed.

As part of the share sale, Pentwater, like Invesco, agreed to vote its BTG shares in favor of Boston Scientific’s offer, regulatory filings show. Pentwater agreed not to sell the shares ahead of the takeover’s completion, which has been postponed to later this month from the initial expectation of June. In return for taking on the risk and the large position in BTG, Pentwater got a discounted price for the shares, according to the filings.

U.K. companies have used several dozen irrevocables in their deals since 2011, according to an analysis of London Stock Exchange securities filings by The Wall Street Journal. They have been used in other markets such as Germany, Spain and Sweden, but the U.K. is the most active market, according to bankers, lawyers and data reviewed by the Journal.

Investors who pledge their shares to an irrevocable agreement increasingly have more reason to sell at least a portion of their holdings at a discount to the bid price of a takeover offer as it is taking longer for deals to close. Last year, it took 128 days for deals totaling $1 billion or more involving target U.K. companies to close, up from 97 days in 2012, according to data provider Dealogic.

By selling irrevocable-pledged shares early, investors gain access to money that otherwise could have been tied up until the deal closed. If the deal does ultimately collapse, selling the irrevocable-pledged shares early also helps the investor guard against losing out on the profit generated by the initial stock increase after a takeover is announced.

It isn’t known how often investors sell their shares after signing an irrevocable. But some bankers suggest such sales are on the rise.

“We are seeing an increasing amount of this kind of activity,” said Dwayne Lysaght, co-head of M&A for Europe, Middle East and Africa at

JPMorgan Chase

& Co. “People want the flexibility to sell some shares to take some money off the table, while still supporting the transaction and retaining upside potential should a higher offer result.”

New York-based hedge fund Manikay Partners was one of several investors that acquired shares last year in Esure Group PLC from Toscafund Asset Management LLP, shares the U.K.-based fund had pledged to Bain Capital LP’s takeover bid for the insurance provider.

“When a trade like that comes up, we would want to be one of the parties getting a phone call,” said Shane Finemore, a partner at Manikay Partners.

Write to Ben Dummett at ben.dummett@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

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