UK Public M&A - 2023 Wrap Up and What’s in Store for 2024

2023 was an unusual year for the UK public M&A market. We saw an increase (by approximately 25%) in deal volume compared to 2022 (and back similar to 2021 levels), however total deal value declined materially by approximately 50%. Reflective of these statistics, offers below £100m dominated the market and there were a significant number of offers announced below £500m. Deals above this level were infrequent and only three offers were announced above £1bn (as compared to 13 in 2022), with an average transaction size for the UK public M&A market of approximately £325m. We also saw a downturn in the number of competing bids as compared to recent years.

Interest from potential bidders (in particular, foreign bidders and financial sponsors) in acquiring UK public targets, including in potentially high value deals, remained high but a number of challenges prevented many approaches or potential bids progressing to a firm offer. UK public targets were focused on takeover defence preparation, and were robust in rejecting potential bidders seen as opportunistic in light of depressed share prices.

We explore below some of the reasons behind the state of the market last year and predict what is to come in 2024.

2023 – UK public M&A trends

The drivers of UK public M&A activity in 2023, with its focus in the lower and mid-market were as follows:

1. The valuation vs premium mismatch: With a depressed UK equities market, there was a significant gap between a potential bidders’ assessment of an appropriate premium to the trading price and the target board’s expectations based on the target’s underlying valuation. This led to some target boards feeling comfortable in rejecting offers at premiums which were high by historic standards, forcing potential bidders to walk away or consider other strategies such as engaging a public “bear hug” or directly with target shareholders (see below). Where agreement was reached on an appropriate premium, this was generally higher than has historically been the case. Potential bidders remained very focused on reducing interloper risk whilst also preparing for how they would respond to a competitive process where they expected there to be other credible/interested potential bidders.
2. Challenging financing markets: Although financing constraints eased somewhat over the course of last year, financing costs remained high and continued to be challenging, in particular for larger transactions. Several announced offers involved alternatives to leveraged finance, such as securing funding from direct lenders or using/considering the use of alternative transaction or consideration structures to spread financing costs and risk (see below). Potential bidders also considered raising equity or debt funding from public markets during the course of an offer, in order to reduce financing costs (which can create a significant degree of complexity in the context of applicable Takeover Code rules).
3. Alternative transaction structures and forms of consideration popular: As in recent years and driven by the challenging financing market, finding a consortium partner (such as a financial sponsor or sovereign wealth fund) remained popular, particularly for offers at the higher end of the market. We also saw increased consideration of “break-up” or “back-to-back” bid structures (whereby a bidder acquires the UK public target and then promptly on-sells part of the business to another party). Potential bidders were more willing to use/consider using share consideration, including non-listed/stub alternatives, as a way to reduce financing costs whilst potentially making an offer more attractive for target shareholders through the ability to roll-over their investment and benefit from potential future upside.
4. Increasingly challenging and unpredictable anti-trust/regulatory environment: Anti-trust regulators in the UK, Europe and US, as well as foreign investment regulators globally, continued to be interventionist. Anti-trust/regulatory timetables continued to become longer and more complex, with it being more challenging to predict which transactions would be called in for a more in-depth review (such as a “phase 2” process). We saw potential bidders spend an increased amount of time in the pre-approach stage focused on detailed analysis of anti-trust/regulatory risk and consideration of how they would respond to remedies or proceed if faced with a more in-depth review process. We also saw UK public targets increasing their focus on the anti-trust/regulatory risk an offer presents in terms of completion certainty when assessing whether an offer is recommendable, as well as protections that could be put in place for target shareholders to maximise deal certainty. See our Antitrust and Foreign Investment Legal Outlook 2024 for more detail on the key trends across global antitrust enforcement, foreign investment screening and merger control review.
5. Shareholder activism: Potential bidders were increasingly wanting to engage with larger shareholders prior to announcement of a firm offer in order to facilitate a firm offer, increase deal certainty and/or mitigate the risk around a price increase post-announcement. It was not uncommon for significant shareholders and a target board to have different views on the attractiveness of the premium being offered by a potential bidder as compared to the underlying valuation or views on standalone medium/long term prospects. In addition, there were a number of offers that were adjourned and the terms revised to address shareholder sentiment, and one recommended firm offer was voted down by target shareholders.
6. The macro environment: The macro environment (including a high, albeit gradually stabilising, inflationary and interest rate environment) disrupted the confidence of potential bidders on several occasions last year, with a number of economic and geopolitical events dampening willingness to proceed. As a result, we saw a higher number of aborted offers at the pre-approach or post-approach stage.
7. Financial distress: There were fewer signs of distress in UK public M&A markets than what was expected at the beginning of last year, however we saw an uptick in distressed situations towards the end of the year (and may be a sign of things to come in 2024). There were a modest number of formal sales processes (FSPs) last year, with none resulting in an offer. In addition, we saw more bidders providing stability packages for targets in the form of loans and guarantees as compared to previous years.

Takeover Code changes - a busy year for the Panel

The Takeover Code underwent several updates last year, mostly to reflect or clarify the existing practice of the Takeover Panel. These included updates to the acting in concert regime (with a particular focus on the operation of these rules for general and limited partnerships), the treatment of offer conditions (with a particular focus on anti-trust conditions referred to a “phase 2” or equivalent process) as well as to the frustrating actions regime (with a particular focus on exclusions for ordinary course and non-material transactions). Click on the hyperlinks to read about these changes in more detail. 

2024 – what’s in store?

We expect at least the first half of 2024 to be a continuation of the conditions and themes of 2023. In particular:

• The lower and mid-market will remain active, particularly as these offers can be more readily funded by cash considerations without significant debt financing requirements. If financing conditions ease and the inflationary/interest rate environment continues to stabilize, we expect to see a significant increase in deal values.
• The valuation vs premium mismatch will continue. Potential bidders should understand a target board’s likely expectations prior to approach and be prepared to increase their premium (and know their limits) to enable swift negotiation. Potential bidders should also give consideration as to how they can mitigate execution risk for a target board in order to make their offer more attractive where there are particular anti-trust/regulatory sensitives (or, at a minimum, anticipate a target board’s likely asks in this regard). It will however also be important for potential bidders to be able to move quickly so that they do not miss opportunities that exist in the current market.
• The desire to use alternative transaction or consideration structures, or alternative funding sources, rather than to accessing the leveraged finance market, will continue.
• The macro and geopolitical environments (including inflationary and interest rate conditions) will continue to create uncertainty for potential bidders, with the potential for this to be enhanced as a result of a significant number of election processes occurring globally in 2024. The degree to which that has an impact on the confidence of potential bidders is difficult to predict.
• We expect the number of FSPs to increase on 2023 levels, as signs of distress grow. We are however not expecting there to be an increase in the number of FSPs that are ultimately successful.

Nevertheless, there are positive signs for higher deal volumes and values in 2024. Interest from potential bidders in UK public targets remains very high. Financial sponsors and sovereign wealth funds continue to have significant levels of capital available, and are increasingly coming under pressure to deploy available capital or make returns for their investors. International and UK corporates with healthy balance sheets are also looking (and coming under pressure from shareholders) to pursue strategic transactions. It is possible that if a number of larger offers reach announcement stage then confidence will increase. If this happens then the higher end of the market may pick up at pace.