Hong Kong Exchange and Clearing’s bid for the London Stock Exchange Group showcases the UK’s still attractive takeover regime

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Ten years after Kraft launched a somewhat sharp-around-corners hostile bid for Cadbury, triggering a decade long tightening of the UK’s takeover regime, Hong Kong Exchanges and Clearing has made a £32 billion offer for the City’s cream egg, the London Stock Exchange Group.

The cash and shares offer, at a 23% premium worth £84 a share, has not been particularly well received, as it is conditional on the LSE abandoning its compelling merger with Refinitiv (that is the one with the record 38 contacts named on the announcement, of which only two were females). LSE’s shares are up only 5%. But the offer does raise interesting PR questions.

One reason for the poor reception is the belief the Government could intervene to block it. Andrea Leadsom, the business secretary, said she would “look very carefully at anything which had security implications for the UK.”

Incoming M&A

This begs the question, what powers do the authorities have to intervene, and what does this mean for the offeror and the target? These are pertinent issues, because the steep discount on UK assets means that offers for UK companies are coming thick and fast. If No Deal Brexit is off the table; and some sort of deal with the EU can be managed; or even Brexit reversed; and Jeremy Corbyn kept out of No.10 (a big if, admittedly) – offers for British companies could turn into a flood.

The Government’s powers are limited

On the face of it, there does not seem much opportunity for Mrs Leadsom to intervene. The newest set of proposed changes to the Enterprise Act, giving the Secretary of State wide powers to intervene on national security and national infrastructure grounds have not yet been implemented.

Instead, she would have to rely on the existing law, which leaves her powers tightly defined. She would have to demonstrate it was a “relevant merger situation”, affecting a company with military or advanced technology, with a turnover of £70m or more and a “share of supply” of 25% or more, or concoct an argument that it affected financial stability or media plurality (not likely).

The take-private of Inmarsat did pass the existing national security test, and it is now subject to a “Public Interest Intervention Notice”, issued without much comment in August, pending an inquiry by the Competition and Markets Authority.

The Competition and Markets Authority might wish to get involved unilaterally due to the high market share a new LSE/HK group might have in certain products, for example Asian equities trading in London and Remninbi trading.

The Takeover Code

Additionally, the Hong Kong Exchange must be careful what it says publicly. 2014 changes to the Takeover Code mean that the Panel has greater powers to police and enforce via the courts “Post Offer Undertakings”, relating to jobs and disposals and so on. These were put in place after Kraft said it was shutting a factory it promised to keep open during the Cadbury offer period.

Winding up the Daily Mail

So what are the non-price defence options available in such a situation, where intervention is unlikely? The answer is simple: raise a great ballyhoo among shareholders via the press and in Parliament. The Daily Mail and the Daily Telegraph can be especially useful in such situations, as the current offer for Cobham by the US private equity group, Advent, has demonstrated.

However, arguments which work cannot be based on mere sentiment, but on a genuine economic case made to shareholders, preferably inflamed by a sense that the offeror has played fast and loose in some way. Last year’s campaign to stop Unilever moving its listing to Amsterdam was especially instructive.

The arguments which worked against Unilever were: FTSE 100 tracker funds would be forced sellers, so investors faced an economic loss; the real motive of the management was to take advantage of more protective Dutch takeover rules; UK investors would be losing a quality, blue-chip, ESG compatible company which they could not readily replace in their portfolios; and that retail investors had been treated disgracefully because many of them could not vote, even though they had five per cent of the shares.

Leading shareholders were approached to speak out on all these matters and the sensible ones, such as Lindsell Train and Threadneedle, did so.

A good PR strategy

What about if you are an offeror? The key here is to anticipate the likely arguments and issues which will be made, and to pre-empt them. In a really high-profile situation, it may be worth making the Business Secretary an insider a few hours ahead of an announcement. The drafting of the release will be critical, articulating a credible case as to why the offer is in the interests of shareholders and the UK economy as a whole. The Post-Offer Undertakings regime can be used to make commitments on, say, investment and jobs, in order to settle key stakeholders.

An active communications programme, including letters and or meetings with MPs and briefings with journalists is also desirable. Answer the question, why is this deal such a good idea?

Corbynomics

If Jeremy Corbyn gets into Government, things will be much more complicated. Among the issues companies will have to wrestle with is up to 10% of equity being controlled by an “Inclusive Ownership Fund” controlled by employees, who may also have up to a third of board seats. There will be higher capital gains taxes and voting by short term shareholders, such as arbitrage hedge funds, could be banned.

The UK continues to have a relatively open and pragmatic takeover regime, but in the end an element of self-restraint and common sense always applies, which an experienced PR adviser working alongside the management, brokers, legal team and proxy advisers, is always best-placed to provide. However, if there is a Labour Government, an orderly commercial life will be much more difficult.

 

 

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