New takeover rules set to test the City

Elizabeth Fournier
ALMOST two years after Kraft’s unsolicited bid for Cadbury, changes are being introduced today designed to strengthen the hand of companies that find themselves the subject of unwanted advances.

But critics fear the changes will further damage the UK’s stalled M&A market, proving onerous for bidders and diverting investment away from the UK economy.

Shortly after Kraft won control of the British confectioner in January 2010, then-business secretary Lord Mandelson used the annual Mansion House dinner to urge changes to the UK’s Takeover Code ­– largely unchanged since it was brought into line with the EC Takeovers Directive in 2006.

“While nobody believes that poorly performing companies should be protected,” said Mandelson, he argued that there was a “strong case for throwing some extra grit in the system.”

Now that grit has arrived, in the form of four significant amendments to the Code, affecting bid deadlines, notifications and deal protections, and formalising any employment promises a bidder makes during its approach.

The key change that has companies worried is the new deadline for a bid to be made after initial interest is declared. Subject to the Takeover Panel’s discretion until now, from today bidders will only have 28 days to make a formal offer. The potential bidder must now also be named in the first announcement related to a bid as from 5 o’clock today.

The new regime could have affected how Entertainment One – the media distributor that owns the rights to Peppa Pig – informed the market last week that it was “considering its strategic options, which may include a sale of the company in response to interest it has received from various parties”.

While the company insisted that all discussion were preliminary and no firm offers has been received, speculation swirled through the market as to who the interested parties could be.

The change will mean confidentiality surrounding early talks is likely to increase, with market leaks impacting deals in a way that they wouldn’t have until now. It would also rule out so-called virtual bids, where a potential bidder sounds out the target to gauge interest and put pressure on management without launching a formal offer.

“There are concerns that this may discourage bidders from making approaches, or may lead bidders to decide to break off talks rather than be named,” says Alan Diamond, a partner at McGrigors.

Private equity buyers are particularly concerned. Leveraged financing, often used by private equity to fund a buyout, requires lengthy due diligence that would be curtailed by a four-week deadline.

Reforming fee transparency is also in the Panel’s sights, with payments made to everyone from the acquirer and target to the financial advisers, lawyers and PR companies disclosed under the new rules.

And in the wake of Kraft closing Cadbury’s Somerdale factory despite pledging to keep it open, employees’ interests are also tackled, with proposals to discipline companies that renege on employment promises made during negotiations.

But despite concerns that the appetite for UK companies could be hit, others are sure that the market – worth £40bn in the first half of this year – will survive.

“We remain confident that the UK M&A market will remain strong,” said Deloitte’s head of M&A Richard Lloyd-Owen.

“A more pressing issue is the current uncertainty surrounding the European debt markets, which will undoubtedly have a far more adverse effect on investor confidence.”