We see two primary areas for opportunity: (i) strategic buyers using the current conditions to accelerate strategic transformation; by using cash and equity, they can gain an edge over financial buyers that face challenging financing conditions and high interest rates and (ii) take-privates of small - or mid-caps that re-evaluate their listing and see merits in a delisting.
Our latest report offers insight into the key trends in the Dutch public M&A market from January 2022 until 14 October 2023. Our full analysis and further notable details about public M&A can be found here.
Low big-ticket activity and challenging market dynamics for private equity (PE)
While in 2022 bigger ticket deals occurred like DSM/Firmenich and HAL/Boskalis, recently more mid- and small-cap transactions were announced. In the last few years, PE has been the growing force in the P2P space. We see now that rising interest rates and other headwinds impact PE harder than strategic buyers. PE funds are forced to reconsider whether their business cases work in this high-interest-rate environment, which, with the challenges in the debt financing market, limit financing options.
Strategic buyers, in contrast, could build their business cases based on a longer-term perspective, including industry trends like consolidation and the benefit of synergies, market share and/or diversification. Finally, strategic buyers often have more access to internal cash or debt resources and/or alternative sources of funding. Strategic buyers with listed shares can offer more flexible and creative deal structures and use shares as part of their offer consideration.
Large shareholders take on more important role
Large shareholders have taken on a more important role in Dutch public offers as they increasingly commit their support for an offer through irrevocable undertakings and sometimes even join the bidder as co-investors. This trend intensified in 2023 as almost all public offers involved irrevocable undertakings. Irrevocables enhance deal certainty and the credibility of the offer price, as they signal that the bidder has secured the approval of key stakeholders.
Large shareholders are also increasingly active participants in an offer setting, as they opt to roll over their stakes in the target into the bidder. This means that they retain an interest in the future performance of the business, rather than cashing out. Large shareholders being co-bidders and potentially contributing added value to a consortium can make sense in the specific circumstances. A roll-over for some shareholders in public offers requires a careful process, consortium structuring and timing, including on (justification for) which shareholders may – and want to – participate.
Mid- and small-cap funds re-evaluate benefits of their listing
AMX, ASCX and other non-indexed small-cap companies tend to re-evaluate the benefits of their listing once in a while, especially when low liquidity and low stock price levels restrict their access to new equity capital. They can also encounter other challenges, such as a lack of analyst coverage, short-term pressures, disclosure obligations, administration costs and difficulties in finding an accountant.
A re-evaluation of a continued listing may prompt some of these companies to take destiny into their own hands by organising a strategic review that may lead to a sales process. Others may be more open to proposals by strategic partners or PE that can bring benefits, like stable ownership, expertise and funding for buy-and-build strategy and/or investments.
Increasing scrutiny of foreign investment and the introduction of the EU Foreign Subsidies Regulation
Following the adoption of the EU FDI Screening Regulation, many jurisdictions have adopted or strengthened FDI regimes in recent years. These regimes vary significantly per jurisdiction in terms of scope, procedure and potential implications. Given the potential impact on deal certainty, it is essential for companies contemplating (public) M&A to plan ahead and consider potential filing requirements in any of the relevant jurisdictions at an early stage. In the Netherlands, the Act on Security Screening of Investments, Mergers and Acquisitions took effect on 1 June 2023, requiring prior notification and approval of investments in undertakings that are active in certain vital processes.
Another related development is that the EU Foreign Subsidies Regulation (FSR) has recently become applicable. The FSR imposes mandatory ex ante filing and standstill obligations for parties engaging in M&A as of 12 October 2023 that meet the relevant turnover threshold and received foreign (non-EU) financial contributions exceeding EUR 50 million in the three years prior to concluding the merger agreement. Companies will also need to notify M&A transactions for which the agreement was concluded on or after 12 July 2023, but which have not yet been implemented on 12 October 2023.
Pre-wired back-end structures remain essential tools to obtain 100%
Pre-wired back-end structures provide the bidder and target a clear path to 100% ownership, even at a lower acceptance rate than the 95% required to initiate statutory squeeze-out proceedings. These structures increase deal certainty and allow parties to agree on a lower minimum acceptance condition. In most transactions of the past decade, an 80% acceptance condition was used as a “supermandate” for removing the remaining minority. However, this percentage has no statutory basis, so parties have also opted for lower, higher or no thresholds at all. Some listed companies have even been acquired through a stand-alone asset sale, avoiding the public takeover regime. Therefore, a minimum acceptance condition (and its percentage) should be assessed in the broader context of the transaction.
It is worth noting that the pre-wired back-end structure survived court scrutiny in the DPA/Gilde case and ruling of 14 December 2022. This was the first time the structure has been tested in court.
