Private equity ‘raid’ on UK companies sparks furious row in City

An attempt by private equity firm Clayton, Dubilier & Rice to take over the supermarket chain Wm Morrison’s would, if successful, mark one of Britain’s biggest leveraged buyouts since the 2008 crisis.

It would also cap a frenzied six-month period in which private equity dealmakers have announced bids for UK-listed companies at the fastest pace in more than two decades, triggering a fierce row in the City of London.

The push from the buyouts industry pits traditional fund managers, who have started to take the rare step of publicly speaking out against takeovers, against bullish dealmakers sitting on record-sized pots of cash, who claim some of the objections are unreasonable. Britain’s corporate boards are caught in the middle, treading a fine line between the two groups at a time when many companies’ operations have been disrupted by Brexit and the pandemic, making it harder to agree on a fair valuation.

“There is a private equity raid right now” on UK companies, said James Henderson, a fund manager at Janus Henderson.

Buyout groups are “acquiring publicly listed companies far too cheaply,” in deals that “fail to compensate [shareholders] adequately” said Rupert Krefting, head of corporate finance and stewardship at M&G.

CD&R is expected to push ahead with its bid for Morrison’s this week despite its £8.7bn offer being rejected and criticism from top 10 shareholder Legal and General Investment Management.

Morrison’s, which was this year relegated from London’s FTSE 100 index of major companies, is one of 13 listed businesses that private equity firms have put into play since the start of the year, the highest figure since 1999. There were just four in the same period last year and three in 2019, figures from Refinitiv show.

Overall, private equity bids for UK-listed companies have amounted to £21bn this year, according to Refinitiv. Firms have made 345 bids for British companies altogether — including those that are already privately owned — the highest number since records began in 1984.

For buyout firms, there is an ideal combination of cheap debt and significant interest in alternative investing, giving them access to large amounts of cash.

At the same time, the UK’s stock market has struggled to recover from the Brexit vote, and took a further big hit during last year’s pandemic sell-off, depressing valuations and creating an opportunity for buyout groups. 

But some fund managers are concerned that boards are approving deals too cheaply. They worry about how the shift from public to private equity ownership could affect jobs, pensions, public services and companies’ futures.

US buyout firm Blackstone’s £1.2bn offer for St Modwen, a property company involved in the redevelopment of London’s New Covent Garden Market that has been a steady stock market presence for more than three decades, is one example of the intensifying battle.

Henderson said he had spoken to the company’s board about his concerns with the deal, which shareholders are due to vote on next month.

“The premium isn’t enough,” he said. Janus Henderson, a top 10 shareholder in St Modwen, has sold about a third of its shareholding in St Modwen in recent weeks, filings show, but one person close to the matter said this was unrelated to the deal.

JO Hambro, one of St Modwen’s biggest investors, also recently said it opposed the Blackstone bid, while M&G Investments and Allianz Global Investors last month blasted plans to sell FTSE 250-listed UDG Healthcare to CD&R. Schroders in May criticised transport operator FirstGroup’s sale of its US business to Swedish buyout group EQT.

Infrastructure investor John Laing, power supplier Aggreko, car breakdown service AA, and debt collector Arrow Global are among the UK-listed companies to have agreed private equity deals in the past year.

Senior, the FTSE 250 aerospace and defence group, is currently being targeted by US group, Lone Star, which on Monday sweetened its offer after an initial approach was roundly rejected.

Richard Marwood, an investment manager at Royal London Asset Management, said the departure of public businesses, particularly specialist companies such as Signature Aviation, could leave the UK market less attractive. “The question is whether the businesses we are gaining [through IPOs] are better than the ones we are losing — that has yet to be proven,” he said.

Krefting at M&G added that the increase in buyout attempts was “a bad outcome for shareholders, particularly as these private equity firms also benefit from leverage, tax benefits and lower requirements for financial, environmental, social and governance disclosure.”

Private equity firms have faced criticism that the cost-cutting model they sometimes use reduces service quality and investment, particularly in crucial public sectors such as water, elderly care and children’s homes.

Nick Hood, analyst at Opus Restructuring and Insolvency, said there was a danger “when a risky finance model is applied to an industry that provides a vital service.”

Private equity lobby group, the British Private Equity and Venture Capital Association, said many of its members were “aiming to provide greater scrutiny and better reporting of [ESG] outcomes than the listed markets.”

The BVCA said private equity “brings value and long-term support to the businesses it invests in and creates jobs up and down the country”.

It added that there was no obligation on boards to accept an offer and that shareholders can object if they feel a company is being undervalued.

Still, private equity executives are growing frustrated with shareholders’ resistance. “If you think these shares are worth a lot more, why weren’t you buying a lot more of them?” said one senior figure at a buyout group that has approached UK listed companies. 

“You’re sitting there doing nothing, and if somebody offers you a price for your shares, which other shareholders are willing to accept, you complain.”

Piers Prichard Jones, co-head of law firm Freshfields’ M&A practice in London, argued that boards were “driving a hard bargain” with private equity bidders.

“There are a lot of bids being rejected at the moment in private, and shareholders just don’t see that,” he said. “It’s harder now than it has been since the financial crisis to assess what a fair value is for a lot of companies.”

FTSE 250-listed fund services company Sanne rejected four approaches from Cinven before agreeing to talks this month over a potential £1.4bn takeover.

Alongside private equity’s push to take companies private, there has been a surge in the number of companies going public. This year 31 companies have listed in the UK, raising $11.8bn, up from four in the same period last year and 11 in 2019, Refinitiv figures showed.

Private equity executives typically avoid challenging boards with hostile takeover bids. But some are privately wondering if such tactics may make a comeback, as they face pressure to deploy funds.

“It’s certainly more of a topic for discussion than it has been previously,” Prichard Jones said. “There’s a stage before a hostile offer, where you can go public with a view to trying to persuade a board into a recommendation, and that’s more likely from private equity houses than going fully hostile.”

Even so, they may struggle to win over shareholders, who “aren’t rolling over” on low offers, said James Thorne, a fund manager at Columbia Threadneedle.

Henderson also said he believed investors would “fight harder on price” as it became more difficult for them to find new stocks to replace those taken private. “It will become tougher for private equity going forward.”