The brave takeover battle that resulted in a rare COVID crisis defeat for private equity

It is open season on British companies.

The last few months of 2020 saw a host of businesses, including the insurer RSA and the bookmaker William Hill, attract takeover bids.

That process has continued into this year with bids for the likes of Signature Aviation, John Laing and the emergency power supply equipment provider Aggrekko.

In most cases, the buyer has been a private equity firm.

The latest takeover looks set to be St Modwen, the regeneration, housebuilding and commercial property specialist, which on Thursday agreed to an increased £1.25bn takeover by the US private equity giant Blackstone.

This rash of takeovers, reflecting the relatively depressed valuations of UK stocks compared with their international peers and ultra-low interest rates that enable financial buyers to borrow cheaply, has attracted much unease in some quarters about private equity.

It reached a crescendo earlier this week after Sky News revealed that the US private equity player Clayton, Dubilier & Rice had made a £5.52bn takeover proposal to the grocery chain Wm Morrison.

During the last 12 months, a narrative has developed that boards of British companies have been too quick to roll over and accept offers from such buyers, with the Financial Times reporting earlier this week that so-called ‘traditional’ fund managers are becoming increasingly concerned about some boards approving deals too readily.

It quoted Rupert Krefting, head of corporate finance and stewardship at the fund manager M&G, as saying: “Buyout groups are acquiring publicly listed companies far too cheaply.” He told the paper that these buyers were failing to compensate shareholders adequately in these deals.

One riposte to this is that, quite often, companies are trading on bombed-out stock market ratings because they are unloved by these very same fund managers. One reason why private equity owners were able to extract value from companies like Debenhams, arguably, is because fund managers had failed to put sufficient pressure on the previous managements of such companies to do so themselves.

It can also be argued that the reason why buyers like Sir Philip Green were able to acquire businesses like BHS and Arcadia were because too few fund managers had owned the shares and were not interested in these businesses. Buyers like Sir Philip merely spotted hidden treasure in these businesses that their previous stock market owners had failed to.

The boards of these companies are in an invidious position, finding themselves – as the FT noted – caught between “bullish dealmakers sitting on record-sized pots of cash” and traditional fund managers, who are unhappy at seeing companies potentially being sold cheaply.

There are signs that the criticism is starting to spur some boards into showing some teeth.

A good example came this week.

Senior, a manufacturing group that designs and makes high-technology components and systems for customers in the aerospace, defence and energy markets such as Airbus, Boeing, Rolls-Royce and Caterpillar, saw off another US private equity firm, Lone Star Global, after many weeks of jousting.

The battle began when, on 20 May, Senior – which employs nearly 6,000 people in 30 countries around the world including sites in Cheshire, Lancashire, Hampshire and south Wales – rejected a 176p-a-share offer from Lone Star valuing it at £738m.

Shares in Senior, which had lost two-thirds of their value over the previous three years, were trading at the time at just over 100p each. Lone Star came back four more times and was rebuffed on each occasion. Its fifth and final offer, tabled on Tuesday this week, was pitched at 200p each and valued Senior at £838.8m.

Senior’s board – led by its chairman, the former BAE Systems chief executive Ian King and its chief executive, David Squires – again said no and, on Thursday, Lone Star walked away. Senior’s shares are now back to around 152p.

It is, to say the least, a brave move by the Senior board. It must have been very tempting indeed to have accepted the offer. Lone Star’s final tilt, at 200p, was pitched at a level that Senior’s shares had not seen since September 2019.

Mr Squires, due to his unvested share options in the business, could have comfortably walked away with at least £2m.

So their decision to turn down Lone Star would not have been easy.

To their credit, Mr King and his colleagues set out their thinking clearly, noting that Lone Star had sought to pounce at a time when, due to the pandemic, the fall in the oil price last year and the halt in production of Boeing’s 737 MAX aircraft, Senior’s profitability had been rendered “well below historical levels” while the uncertainty had “weighed heavily” on its share price.

Mr King said: “We view this final conditional proposal as highly opportunistic given the timing and the relative share price weakness, coming at a point where our end-markets are showing signs of recovery.

“Senior has been resilient through the pandemic and is well-positioned to emerge strongly as the recovery continues. The proposal still fundamentally undervalues Senior. The board believes we have a clear strategy that will maximise value for shareholders over the medium-term and accordingly, the board is not able to recommend a sale of the business at 200p per share.”

Senior traces its origins back to the 19th century and has been listed on the London Stock Exchange for the last 74 years. It has often been seen as a somewhat unfashionable and unglamorous business.

However, in drawing a line in the sand in this way, it may have earned itself a page or two when the history of mergers and acquisitions in the early 21st century is next written up.