The Apollo bid for Wood Group is an interesting case study. Even as a mighty PE house, can you better use takeover rules and shareholder rights to increase your chances of success? If so, what can you watch out for as investors to identify a bid premium coming your way?
I worked for a fund focused on public-to-privates and they employed a detailed understanding of takeover rules and shareholder rights in order to control the buy-out process and hugely increase their chances of success. Their approach is different to ‘traditional PE’ and is designed to acquire businesses as cheaply as possible with greater certainty.
Apollo is on their fourth round of increasing bids as price is their only lever given their sunk DD costs and public exposure of a potential failed bid. In the meantime, they are looking no closer to success getting a recommendation from the Board and have effectively hung the for sale sign over the company, highlighting the opportunity to every other PE house and strategic acquirer who now have access to whatever information Apollo have received to make competing offers.
- You can do a full DD on public companies given the amount of information available, allowing you to buy shares in the market.
- It’s a public company. It’s all out there. In many cases you can go back and get, for example, 20 years’ worth of annual reports and all the intervening interims and news flow. You can then do the same with all of the listed competitors for comparable analysis
- Granted, at some point you may require additional inside information in order to secure debt financing, which generally requires a formal financial DD report from an audit firm. However, that is achievable out of the public eye using the points below to get access.
- Shareholder rights in the UK are powerful and can be utilised to influence the process.
- The key rule here is owning 5% of the shares allows you to requisition EGMs. You can propose the removal and appointment of directors i.e. if directors are reluctant to recommend your bid they can voted off in favour of others willing to recommend the bid. In practice, the EGM never happens as the directors like their fees and want to get other roles, which becomes more difficult it they’ve been publicly ousted. Therefore, the ‘threat’ of an EGM is generally enough to at least secure access to inside information in order to complete your DD to allow you to ‘put your best foot forward’ on valuation and provide financing certainty.
- One key point of calling EGMs is that there is no limit on how many you can call. With you holding ‘just’ 5% a Board may feel they can garner enough support (up to 95%) at an EGM to block your proposal and send you on your way. But the next day, you can just call another EGM with the same proposals and go again. The Board quickly comes to look ineffective having to call EGMs almost every month.
- You can own up to 30% of a company without paying a premium and triggering a mandatory bid.
- 30% is the mandatory bid threshold where the rules of making the offer change in a number of technical ways and you need to have the full cash alternative ready to go. In order to maintain your options, you generally don’t go over 30% unless it becomes tactically helpful to do so later in the process i.e. to buy over 51% in the market to push through your offer.
- However, you can buy 29.9% of the shares at the market price, and while that market price may have increased given your own buying demand and your name being disclosed, it is still less than the bid price. You have, therefore, lowered your entry cost, given yourself significant influence at the company (the Board can’t just ignore such a significant shareholder – they have to engage) and at the very least can make a profit on your investment by selling to any ‘white knight’ the company may organise now the company is ‘in play’ if they won’t recommend your offer.
- At 25% you effectively block competing bidders, greatly limiting a company’s defence options.
- 25% gives you a blocking minority as a number of key corporate actions require 75% shareholder approval. A competing bidder won’t buy 74.9% of a company as you can block dividends and limit their ability to get debt financing.
- At 25% you have, therefore, precluded the company from selling the company to another bidder without your approval and securing a decent return on your shares, or ‘forcing’ them to accept your fair, but less than full offer as there are no other options.
- Your offer price doesn’t need to be a ‘knock-out’ price. It needs to be just enough to secure a Rule 3 opinion from the company’s adviser.
- A Rule 3 adviser in the UK is a firm authorised, under the Takeover Code, to advise the shareholders of a company when there is an offer made for the company i.e. the investment bank advising the company. They will advise the Board on the valuation offered and provide a fairness opinion that the board can utilise to make their recommendation.
- The key here is that a fair price can win a recommendation, and you want a recommendation as while you can go hostile, your only weapon then really is a high price. You do not need to pay the maximum price the company might be able to achieve in a full-blown auction process which, if you’re a significant holder following the points above, you can effectively block.
With companies the size of Wood Group and Apollo’s globally recognised name, the approach is obviously more difficult to achieve as your holding becomes disclosable at 3% and the share price can react to a recognised name. However, you can buy 2.99% of shares and go over 3% with a large block. Wood Group has a number of c.5% holders and you can bid for those blocks bi-laterally and anonymously such that your first disclosure is, say, 8.99% the first time you cross the 3% threshold. Or maybe you get 2 blocks and get to 13.99%. Then you’re off to the races with potentially winning tickets in your hand…
Nick Hargrave (MHM Founder & CEO)
