The balance of power post Kraft/Cadbury: a takeovers update · The balance of power post Kraft/Cadbury: a takeovers update │ February 2015 Other changes since 2011 > Code applicability

The balance of power post Kraft/Cadbury:

a takeovers update

Iain Fenn, Nick Rumsby, Dominic Kendal-Ward

February 2015

The balance of power post Kraft/Cadbury: a takeovers update │ February 2015

What we are going to cover

> Market practice pre-2011

> Kraft/Cadbury and the 2011 code changes

> Other changes since 2011

> Recent UK takeover activity

> Impact of changes for bidders, targets and investors


Reminder of market practice pre-2011

> Virtual bids were all the rage

> Possible offer announcements were

made (or leaks ‘happened’)

> Immediate shareholder churn in the

target company register

> Targets had to request a PUSU deadline (but were wary of doing so too

soon)

> Takeovers were won or lost before a bidder had to make any commitment –

i.e. when there was only a possible offer announcement

> Once the game was up, targets regularly raised the white flag and entered

into agreements with bidders to provide the bidder with deal certainty that

helped protect against interloper risk


Kraft/Cadbury and the 2011 Code changes

Recap:

>Jan/Feb 2010 Kraft Food’s bid for Cadbury was successful

>The Somerdale factory issue:

Sept 2009: “We believe we would be in a position to continue to operate the Somerdale facility…”

Feb 2010: “…plans to close the Somerdale manufacturing facility …are so far advanced that it is unrealistic to reverse them”

>A perfect storm – overseas buyer, a ‘national treasure’, recession, job losses, closest UK election in a generation…

>18 month consultation/review process – Carr, Mandelson, Cable…

Key conclusions:

– virtual bids – hostile bidders had gained an unfair advantage

– deal protection measures – needed to be revisited to strengthen hand of targets

– employees – offer process should take more account of employees and other affected persons

– greater disclosure by bidders


Kraft/Cadbury and the 2011 Code changes

Key changes:

Virtual bids and deal protection

> Mandatory naming of potential bidders

> Automatic 28 day

PUSU deadline

> Break fees by target banned

> Deal protection measures by target banned

(anti-trust co-operation and confidentiality still

OK)

> Schemes of arrangement entirely in hands of

target

Employees

> Increased disclosure of plans

> Statements of intent binding for stated

period/12 months

> More engagement encouraged/framework for

seeking/providing views of employee reps

Disclosure

> Advisory fees

> Financing costs

> Ratings information


Other changes since 2011

> Code applicability – AIM companies etc.

> Removal of residency test for UK incorporated companies listed on AIM, PLUS etc.

> Pension trustees

> Increased engagement (similar to employee reps)

> Profit forecasts

> New regime designed to lessen burden of reporting for pre-existing guidance but extending to parts of businesses

> Merger benefit statements (QFBS)

> Codified existing practice but now requires reports in recommended situations too

> Post-offer undertakings vs statements of intent

> Introduced in January 2015; direct response to Pfizer/ AstraZeneca and political involvement re Cambridge R&D jobs in UK

> Schemes of arrangement

> Cancellation schemes being prohibited to end stamp duty (0.5%) free structure

> Transfer schemes still possible with all other scheme advantages

> CMA/MOFCOM and others

> Elongated processes


Recent UK takeover activity

Dealflow

2011 - 76 offers 2012 - 60 2013 - 46 (3 £1bn+ deals) 2014 - 58 (9 £1bn+ deals)

Increasing levels of activity in 2014

>Lots more activity even if bid levels are low

>Possible offers coming and going very quickly

>H1 2014 dominated by potential US tax inversion deals

> (e.g. Pfizer/Astrazeneca; AbbVie/Shire; Mothercare)

>But definite overall increase in confidence amongst potential bidders and preparation by potential targets

Continued momentum in 2015 (e.g. successful Canary Wharf hostile bid) but headwinds (UK election; Eurozone etc.)

Bidders

>Continued presence of overseas bidders (including SOEs) – 60% of bidders came from overseas in 2014

>Offers from controlling shareholders

>A few but not many PE bidders:

>deals relatively small; overall PE still wary of UK takeovers

Schemes of arrangement

>Prevalence of schemes, even for small deals

Anti-trust

>Continued prolonged anti-trust and regulatory periods for global businesses


Have the changes worked?

Conclusions from post-Cadbury review:

>Hostile bidders had gained an unfair advantage

>Hand of targets needed to be strengthened

Have the changes worked?

>Definite changes in behaviour

>But limited deals to evaluate properly

>Have the changes levelled the playing field

>Has the pendulum swung too far?


Impact of changes on bidders

> Impact of changes largely depends on level of hostility

> If hostile deal with little chance of recommendation:

– no real change

> If friendly:

– PUSU/naming – minimal impact

– deal certainty – bidder cannot have implementation agreement – only really relevant for interloper risk

– synergy reporting – even if recommended these now need accountants’ reports

> If unsolicited bidder seeking recommendation:

– PUSU/naming – bidder very keen to maintain secrecy and avoid 28 day clock ticking; therefore far fewer virtual bids

– deal certainty – cannot seek deal certainty from target BUT target can extract concessions from bidder as price for due diligence/recommendation

> One constant is improved levels of secrecy

> Before approach, bidders need to decide if they are ‘flying a kite’ with little preparation or whether they need to be prepared to go hostile very quickly

> All bidders also need to give very careful consideration to employee/future intention disclosures – particularly if politicians are going to get involved!

> willing to give a post-offer undertaking to ensure recommendation/political approval?


Impact of changes on bidders (cont.)

Trends:

>Continued trend of mostly recommended deals and very few competitive or hostile situations

>Very few bear hugs but still possible and increasing examples:

– Pfizer/AstraZeneca; AbbVie/Shire

– Carillion/Balfour Beatty

– Vesuvius/Morgan Advanced Materials

NOT a high success rate

>Continued trend of use of schemes of arrangement

– But – imminent prohibition on ‘cancellation’ schemes

>Surprise within overseas buyers of how the rules operate – role of advisers

Impact of PUSUs:

>Automatic PUSUs and naming potential bidders deterring many potential bidders

– lots of examples of a private approach being rejected and nothing more happening

>28 days still widely seen as too short:

– 38% of all PUSUs are extended

– 41% of firm offers have resulted from PUSUs that were extended

>Can be used by a well prepared bidder to create pressure on target in a compressed timetable


Impact of changes on targets

Overall feeling that targets have more control of the process

Impact of PUSUs:

>Targets are using the time pressure of an automatic PUSU to their advantage:

– timing out bidders and not agreeing to extension

– only engaging very late on in PUSU period to improve negotiating leverage

– negotiating value and other points as price for recommendation or extension of PUSU deadline (and due diligence)

>Targets are under pressure to understand the views of their shareholders very quickly

Naming bidders:

>Targets have to consider timing of seeking white knights

>Quite a lot of Formal Sales Processes – naming and PUSU rules disapplied

Early points of leverage:

>Announcement of possible deal terms (to help set floor for market expectations)

>Where due diligence access is required, conditions to access often include:

– standstill requirement

– restrictions on hostile offers

– restrictions on speaking to target shareholders (What would shareholders think?)

– restrictions on announcements/bear hugs


Impact of changes on targets (cont.)

One-way street:

>Unless their negotiating position is weak, targets are very aware that whilst they can’t give deal certainty, bidders can give comfort…

>Recent examples of targets asking for reverse break fees

>Targets seeking to restrict deal structuring flexibility of bidders (e.g. switching to an offer etc.)

All of the above were possible pre-2011 but now:

– the 28 day PUSU puts more time pressure on bidder and so creates point of leverage for target

– lack of reciprocity as targets cannot give same protections to the bidder

Schemes of arrangement:

>Targets can turn on and off at will

>Prohibition of cancellation schemes may reduce value of recommendation

Defence tactics:

>Impact of new profit forecast rules – e.g. parts of business

>Need to consider use of existing forward guidance

>Mobilising employee reps and pension trustees?

Employee etc. intentions:

>Using the new two-tier regime?


Impact of changes on targets (cont.)

Shire example

>Negotiated price of recommendation

>3% reverse break fee

>Notice before change in recommendation

>Change in law condition removed

>Restricted ability of bidder to switch from a scheme

>Involvement in anti-trust process

>AbbVie conduct of business

>Shire share plan discretions

>Employee retention arrangements

>Shire board ongoing D&O insurance

But all to no avail (save for an enormous break fee!) because of bidder shareholder

approval condition

>New ability to seek post-offer undertakings


Impact of changes on investors

Changes in investor behaviour?

>Engagement

– Investors need to engage with bidders and targets very quickly following

start of an offer period

– 28 days is not long – do investors support target?

– Do they want to put pressure on the target to extend the PUSU deadline?

>Certainty

– The short time period has led to uncertainty as to the likely outcomes

– Opportunities and risks

>Letters of support

– Prohibition on deal protection measures is good for shareholders

– Puts premium on shareholder support – letters of intent and irrevocables

– However, no obvious increase in levels of support they are willing to give


Conclusions

How might things have been different today?

Kraft / Cadbury

>2-month period of ‘siege’ halved assuming Cadbury would not have agreed to extend PUSU

>Caution exercised before making statements regarding the Somerdale factory

>Earlier / closer engagement with employee representative bodies

Key changes to be aware of in takeover practice

>Bidders must be prepared to be named and to act quickly when they are (or to walk away).

>Bidders can no longer get any deal certainty through implementation agreements

>Bidders therefore less likely to engage in ‘virtual bid’ tactics at an early stage and will be focussed on secrecy

>Targets have more tools and leverage in defence planning – eg. can use automatic PUSUs to their tactical advantage

>Targets may be more likely to seek reverse break fees and other undertakings from bidders

>Investors’ continued support and engagement will be important due to prohibition on deal protection measures

Contact details

Dominic Kendal-Ward

Tel: +44 20 7456 5583

Mob: +44 7779 313 302

[email protected]

Nick Rumsby

Tel: +44 20 7456 3606

Mob: +44 7967 357 086

[email protected]

Iain Fenn

Tel: +44 20 7456 3164

Mob: +44 7880 743 445

[email protected]

Iain is a specialist in corporate law, including mergers and acquisitions, corporate

restructurings, public offerings and joint ventures. He advises the board of a number

of FTSE 100 companies on strategic and governance issues. Recent matters

include advising Home Retail Group on the acquisition of assets of Focus DIY and

Habitat, Landsbanki on the sale of Iceland Foods, Vodafone on the acquisition of

Kabel Deutschland and the lenders on the restructurings of Game, DTZ and Hibu.

Nick is a corporate partner based in our London office. He specialises in numerous

areas of corporate law, including international mergers and acquisitions, takeovers,

demergers, public offerings, joint ventures and corporate reorganisations. He has

completed secondments to Schroder Salomon Smith Barney (now Citi) and to our

Hong Kong office. Nick recently spent two years at the UK Takeover Panel as a

senior case officer, where he was involved in all major decisions and policies made

during that time.

Dominic is a Managing Associate in the corporate department with transactional

experience across the range of public and private mergers and acquisitions, equity

issues, group reorganisations and joint ventures. He has spent time on secondment

at HSBC, Friends Life, Rothschild and BP. Dominic has significant experience of

advising on both domestic and cross-border public M&A transactions, with recent

experience including advising Friends Life on its proposed acquisition by Aviva and

Dixons Retail on its merger with Carphone Warehouse.


Some of our recent deal experience

2014

>Brookfield on the £2.6bn offer for Songbird

>Friends Life on the recommended £5.6bn share offer by Aviva

>Ophir Energy on its recommended £314m share offer for Salamander Energy

>Greene King on its recommended £774m cash and share offer for Spirit Pub Company

>Dealogic on the recommended $700m cash offer by Carlyle

>Jazztel on the £2.7bn cash offer by Orange

>Balfour Beatty on its successful defence against a possible £2bn offer by Carillion

>Dixons on its recommended £3.6bn share merger with Carphone Warehouse

>Essar Energy on the £477m cash offer by its majority shareholder


Linklaters LLP

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Fax: +44 20 7456 2222

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to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A

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The balance of power post Kraft/Cadbury: a takeovers update · The balance of power post Kraft/Cadbury: a takeovers update │ February 2015 Other changes since 2011 > Code applicability