Europe's listed companies see brighter prospects away from public markets

Life for many European public companies has been tough in recent years. Between 2003 and 2007, the MSCI Europe index (which comprises large- and mid-cap stocks across 15 markets), outperformed the S&P 500 by a factor of two. But since 2008, the eurozone crisis, austerity cuts and the impact of the Ukraine war have flipped this on its head. S&P 500 returns began to outstrip the those of the MSCI Europe in 2011 and are now 2.5 times higher.

The volume of European public takeovers has fluctuated through this period, peaking in 2021 before falling back in 2022. However, although not showing in the public data, there were signs of activity starting to rise again in the final six months of 2023, including among sponsors looking to buy back businesses they themselves had previously listed. We expect the trend for more public-to-private (P2P) M&A to continue as we head into 2024.

Uptick in public takeovers involving small- and mid-cap businesses

While there have been some large public takeovers over the past 12 months – including some logical big strategic deals – we are seeing more activity among mid- and smaller-cap targets, many of whom are out of the analysts’ spotlight and struggling to access liquidity with their stock trading at a discount. Here a delisting can provide a better route to growth, either via a strategic combination or a private equity investment or buyout. PE deals were more common before interest rates rose – particularly in 2021 – but higher rates and a reduction in the availability of syndicated bank loans has given strategics an advantage because they can fund deals (in whole or part) with shares.

Clubs of private debt funds are stepping into the financing gap, but the higher cost of borrowing relative to recent years makes it more challenging for PE firms to generate the returns they have achieved historically. That said, we have seen PE investors have success with buy and build strategies, where several businesses are bolted together to create a larger and more valuable whole.

Executing transactions successfully requires an understanding of the nuances of public M&A markets and regimes across different European jurisdictions. While every deal is unique, below are 11 key features that you should be aware of.

1. Secrecy is critical in all European markets. Buyers must limit the number of insiders and use codenames and passwords to preserve confidentiality, while NDAs and standstill agreements with the target are usually needed before non-public information can be shared. Even in the earliest stages, any leaks or even general market rumors can trigger a requirement to formally announce under market abuse regulations or specific takeover rules (eg the Takeover Code in the UK) – and in some markets can cause the bidder to lose control of the process. In the UK for example, media rumors or speculation (even very early in the process) can cause the Takeover Panel to force an announcement and impose a 28-day “put up or shut up” deadline on each identified bidder. In Germany, a share price rise after a leak increases the mandatory minimum price the bidder must offer if it proceeds with its interest.
2. Due diligence is shorter and more limited than in private M&A deals, which helps to reduce the risk of leaks. Price-sensitive information should already be in the public domain due to MAR requirements, meaning targets typically see the DD process as more an exercise in confirmation than discovery. In some jurisdictions including the UK, Spain, France and Belgium, targets are required to share the same diligence information with all bidders, which can cause some to withhold information in case any of their competitors emerge among the potential buyers. In the Netherlands, Germany and Italy, asymmetric disclosure is permitted.
3. It’s common for buyers to seek early engagement with senior management (and in Germany possibly the chair of the supervisory board) before making a formal approach. Managers may – and sometimes in some jurisdictions should – brief their directors but could initially maintain confidentiality; if PE bidders jump the gun on discussions around topics like management incentives and/or equity rollovers it can jeopardize the deal and, in the UK, trigger disclosure requirements.
4. In jurisdictions including the Netherlands and the UK, it’s standard practice to submit a non-binding offer to the target board that includes, among other things, details on price, strategic rationale, financing and high-level plans for management and employees. In these markets, unilateral engagement with shareholders may be viewed as hostile and may be restricted under the terms of the NDA. Spanish and German public companies typically have a controlling shareholder; here it’s common for the buyer to make a direct approach to them either before, or alongside, any talks with the target board.
5. Some degree of certain funds financing is required in all European markets before launching a cash bid, but there is variation among regulations and market practice in relation to the level of certainty of funding, the timing and the evidence required. For example, bank guarantees/letters of credit are required in France, Spain, Italy and Germany (although funds can be placed in a blocked account in Germany as an alternative).
6. The most common way for a bidder to achieve control is via a tender offer recommended by the target’s board. However, depending on the jurisdiction, different levels of shareholder acceptance are required to delist the target and execute a squeeze-out to reach 100% ownership. In the UK, a scheme of arrangement is commonly used instead of a tender offer as it delivers 100% of the target’s shares if the scheme is approved by a majority (in number) of target shareholders holding 75% in value of the shares voted at the relevant meeting. In France and Germany, the threshold for squeezing-out minorities is 90%. In the Netherlands – where public takeovers are executed via so-called “pre-wired back end” structures – the market practice acceptance threshold is 80% (you can read more about trends in Dutch public M&A here).
7. Directors’ fiduciary duties play a critical role in negotiations, and again vary across borders. The German and Dutch legal systems operate a stakeholder model whereby directors must consider a broad range of interests, including what’s best for the business in the longer term. In the UK, target boards must also take into account a range of factors, but maximizing shareholder value is the most important.
8. Takeover regulators are equally important to the process, although at what level varies from market to market. The UK Takeover Panel, Spanish CNMV and Italian CONSOB are heavily involved from the outset and throughout. By contrast, the Dutch AFM and Germany’s BaFin are more reactive.
9. Interloper risk is significant, particularly in the UK and Italy where many deal protections for the bidder (including break fees, “no shop” clauses and exclusivity) are prohibited. In other jurisdictions, including the Netherlands, meaningful no-shop and break fees are seen.
10. Buyers have limited ability to walk away from a deal post-announcement. In some markets, many types of condition (for example, material adverse change (MAC)conditions) are either prohibited or not invocable except in extremely limited circumstances.
11. Deal timetables are similar across Europe given they are largely driven by regulatory processes (eg merger control, foreign direct investment and financial regulatory).