The U.K. Is an Open, Undefended Goal For Buyouts

(Bloomberg Opinion) -- The buyout industry's controversial shopping trip in the U.K. has probably only just begun. Agreeable boards, short-termist stock market investors and a testy antitrust regime are tilting the playing field.

Around half of U.K. takeovers of more than $1 billion have been private equity-led over the last year. The offer for Wm Morrison Supermarkets Plc, worth $13 billion including assumed net debt, shows growing ambition.

Could it be that targets are more willing to approve bids by private equity than by rivals in their industry? The executives, while usually outnumbered by non-execs, have an implicit incentive to steer the boardroom conversation in favor of backing a leveraged buyout. They often get to keep their jobs (although deal negotiations aren't meant to cover their future employment) and working for private equity can be tremendously lucrative.

But the gripe that buyout shops are getting a special offer when buying British assets doesn't really stack up. The average takeover premium for sizeable U.K. private equity deals in the last year is 34% over the target's undisturbed share price (ignoring subsequent sweeteners). That's in the ballpark of what's usually regarded as acceptable. For cash takeovers launched by corporations, the average top-up was 38% — not significantly more. With such a small dataset, conclusions can only be tentative.

It does appear buyout firms get a slightly better deal judged another way. Based on premiums over the target's three-month average share price, the buyout bids were agreed at an average 45% premium, versus 56% for all-cash corporate takeovers. However, there's a good explanation. There were more corporate-led takeovers last year and more private-equity deals in the first half of this year. With stocks rising steadily since March 2020, later takeover targets will have found it harder arguing their shares were undervalued and bidders should pay up to compensate.

The reality is that some boards are rolling over too hastily irrespective of the buyer's profile. Shareholders forced buyout bidders for UDG Healthcare Plc and St. Modwen Properties Plc to sweeten offers both companies' boards had already said were good enough. The same thing happened on Monday with a raised bid for Spire Healthcare Group Plc from a corporate peer.

That still leaves the puzzle of why buyout firms are taking such a big share. There ought to be more deals and counterbids from industry rivals given they can boost profit by cutting overlapping costs.

One explanation is a perception that the U.K. antitrust regulator is getting tougher following some surprise interventions in recent years. Even when a CEO is confident of receiving clearance, the process takes months. That's not a worry for buyout bidders.

Another is that private equity is specifically targeting assets whose performance is best enhanced away from public markets. A corporate buyer will likely hesitate if a transaction entails hefty restructuring costs that could hurt its results. Fears of a short-term hit on the share price trump the long-term logic of the deal. Again, not a problem in a buyout.

Some shareholders are rightly protesting when boards capitulate to so-so offers. Others like Legal & General Investment Management have shown stewardship by cautioning on private equity's debt-fueled methods. But despite some close shaves, shareholders of U.K. Plc have tended to take the bird in the hand. Directors are probably recommending these deals because they believe their mainly risk-averse investors want to accept them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.