When UK regulator the Financial Services Authority (FSA) conducted an investigation into private equity towards the end of 2006, much of the press coverage focused on its claim that the collapse of a large private equity-backed company was ?inevitable?. But, in fact, the two main concerns highlighted in the report related to conflicts of interest and market abuse: both of which were identified as ?high risk? issues.
Furthermore, both the FSA and the Takeover Panel, the UK's takeover supervisory body, expressed specific concern over large public-to-private transactions. The FSA's wholesale business managing director Hector Sants recently raised concerns about the potential for market abuse arising from large private equity deals because of the sheer volume of people that can be involved in them and the greater likelihood, therefore, of leaks occurring.
It is arguably no coincidence that greater attention is being paid to the issue at a time when a number of large, iconic listed British companies appear to have drifted onto the radar of private equity groups. Notably, a consortium comprising CVC Capital Partners, The Blackstone Group, Kohlberg Kravis Roberts and TPG are currently circling retailer Sainsbury's with a check reportedly made out for around £10 billion (€14.7 billion; $19.3 billion).
The increased focus on the issue raises questions about the point at which a potential bidder's maneuver should be forced into the open to avoid any possibility of individuals benefiting financially by being privy to information not available to others. Says Ian Hamilton, a corporate partner in the London office of law firm Weil Gotshal & Manges: ?If you can keep the bid confidential then no announcement is required by the Takeover Panel or anyone else. But Rule 2.2 of the City Code on Takeovers and Mergers says there are certain circumstances where you do need to make an announcement.?
So what are these circumstances? One is when a formal offer is made to the target company's board. But before that point, announcements may be required when there is rumour and speculation about a bid and grounds for believing that a bidder's actions have led to that rumour and speculation; or where there is an ?untoward share movement?. In the latter case?defined as a sudden increase in the share price of 10 percent or more?the Takeover Panel must be consulted to see whether an announcement is necessary.
There is another trigger for an announcement, and it's one that's arguably less well known. This is when more than six organizations become involved in the bid. So you could, for example, work alongside a couple of banks, a financial advisor, a legal advisor and a target company shareholder, and as soon as the number of organisations goes above this level, the Panel may require an announcement to be made.
In terms of which party is obliged to issue any announcement? prior to an approach, it's the bidder; after an approach, it's the target. In the latter case, bidders will usually hope they are not identified by name: rather that, in its statement, the target will simply say it has been approached by a third party. ?Not many bidders like to be in the limelight before they are ready to announce a bid,? says Hamilton. ?It can put pressure on them to announce a deal more quickly than they would like, and anyone seen as being a serial failed bidder may find it harder to be taken seriously in future.?
There are sound reasons why private equity bidders will seek to do all they can to avoid showing their hands until the last possible moment. For one thing, an official announcement will often send the target's share price skyward. However much the target will insist that any premium is relative to the share price before the approach became known, there is little doubt that the bid will be perceived as less attractive when this happens.
There is also the possibility that the Takeover Panel will ask a bidder to ?put up or shut up? by imposing a deadline for any bid to be submitted. This has been seen in the case of Sainsbury's, where the consortium was given until April 13 to make a formal offer or walk away. Such a request is designed to protect the target: ?Constant speculation could distract management from running the business,? explains Hamilton.
There is no indication at this point that the rules are likely to become any tougher for private equity bidders conducting take-privates, but the Takeover Panel's concerns about possible leaks will ensure that it continue to monitor such bids closely. It's just another reminder of how much private equity is in the public eye these days.