Market Tracker Weekly Bulletin- 13th December 2018
A round up of key developments in corporate transactions covered by Lexis®PSL Corporate and Market Tracker this week, including the first clean energy investment firm to list on the Main Market, Baillie Gifford’s revised placing timetable in light of the Brexit vote, a review of the Green Park report on ethnic diversity targets and a look at geopolitical factors in transaction documents.
Update on Faroe Petroleum plc offer by DNO ASA
The consistent decline in oil prices has left some companies operating in the oil and gas industry at a risk of being taken over by a stronger competitor. AIM listed Faroe Petroleum plc (Faroe) is under a hostile takeover by DNO ASA (DNO) and has branded it ‘opportunistic given the recent fall in oil prices’.
DNO, who holds 28.22% of Faroe’s shareholding, announced a firm offer on 26 November 2018, valuing the entire issued shareholding of Faro at £607.9 million. Faroe urged its shareholders not to take action while it deliberated with its advisers on the offer.
On 5 December 2018, Faroe announced that it had entered into a binding agreement Equinor Energy AS (a wholly owned subsidiary of Equinor ASA) (Equinor) to swap its interests on a cashless basis with in return for interests in four production assets on the Norwegian Continental Shelf. The transaction has an effective date of 1 January 2019 and is subject only to consent from the Norwegian authorities.
DNO responded stating that despite Faroe’s assertions that the swap would not affect its offer, it wanted to investigate the impact of the significant swap before making a judgment:
‘This is a significant deal for Faroe, and we need to understand it before making a judgement. While Faroe has asserted this is not designed to stop the DNO offer, we need to ask if this is good value for a company seeking growth: to swap out of its high quality, large scale, core growth hub, Njord, operated by the national oil company of Norway, Equinor, and to take on instead mature and declining production assets - in a deal with Equinor itself. That is the test this deal needs to satisfy.’
DNO published its offer document on 12 December 2018, which had increased the offer price slightly, valuing the fully diluted share capital of Faroe (including the 28.2% shares already held by DNO), at approximately £610 million. DNO listed the reasons of its offer and ‘has set its acceptance condition at a shareholding of one share more than 57.5% of Faroe's issued share capital, representing more than 50% of Faroe's fully diluted share capital’. However, it the offer lapses, DNO cannot make a new offer for another 12 months and there can be no assurances as to DNO's long-term ambitions.
Faroe believes DNO's criticisms of Faroe are unfounded and the offer substantially undervalues Faroe.The offer for Faroe by DNO is the third hostile offer in 2018, the same number as seen in 2017.
Transactions: Equity Capital Markets
First of its kind ‘clean energy’ IPO
A new investment firm, Sustainable Development Energy Efficiency Income Trust (SDCL), has become the first of its kind to list on the Main Market of the London Stock Exchange, focusing exclusively on energy and infrastructure.
SDCL’s seed portfolio includes the installation of two 1.4 megawatt combined cooling, heating and power technology plant engines at one of Citi’s data centres in the UK and St Bartholomew’s hospital in London, as well as the installation of LED lighting in over 800 of Santander’s offices and branches across the UK. The company’s prospective future projects are entirely focused on the energy efficiency sector, where it will target a total return of 7-8 per cent per annum, with a targeted initial dividend yield of 5 per cent, rising to 5.5 per cent in the year ending 31 March 2021 and a growing yield thereafter.
On 10 December, the company announced it had raised gross proceeds of £100 million, with shares initially priced at 100p each. Early trading remained steady, with the share price closing at 100.5p on 11 December.
Baillie Gifford shifts placing timetable to avoid Brexit disruption
Baillie Gifford announced a proposed placing on 7 November 2018, with the aim of booking the last placing shares on 13 December 2018. On 7 December 2018, the company announced that it had amended the timetable for the placing in light of the proposed Brexit vote in parliament, initially scheduled for 11 December 2018.
The company had intended to close all trades before the vote took place, with the aim of mitigating potential share price fluctuations following the vote. However, the December 11 vote in parliament did not take place as planned.
Political uncertainties due to the delayed Brexit vote and the position of the UK government going forward have adversely affected UK markets, investor appetite and confidence. Amidst this uncertainty, the pound dropped down to below $1.26, its lowest level since April 2017.
Corporate Governance and AGMs
Report analyses progress towards FTSE 100 ethnic diversity targets
On 6 December, executive recruitment company Green Park published their 2018 Leadership 10,000 report, which analyses gender and ethnic diversity within FTSE 100 company leadership positions. The report considers diversity across three leadership ‘levels’:
Top 3 (Chair, CEO and CFO)
- 3.3% BAME representation
- 7.6% female representation
Top 20 (the board (including Chair, CEO and CFO) and the executive committee)
- 8.8% BAME representation
- 26.3% female representation
Top 100 (leadership pipeline)
- 10.6% BAME representation
- 28.8% female representation
Green Park’s review comes at a time when diversity within senior positions of listed companies is attracting more attention than ever. The Parker Review has prescribed a voluntary target for FTSE 100 companies to have at least one ethnic minority director by 2021, however Green Park have found that unless progress accelerates, the target will not be met until 2066.
When considering executive directorships, Green Park found less diverse representation. Only 9.3% of executive directors are BAME, and just 21.8% of executive directors are female. Although both figures are higher than in 2017, the study also found BAME representation within the Top 100 had decreased from 2017, which raises concerns that companies do not have a ‘pipeline’ in place to ensure BAME representation within the most senior roles of FTSE 100 companies increases quickly.
Ethnic diversity is one of the areas considered within the LexisNexis Market Tracker Trend Report AGM Season 2018. Our review found ethnic diversity ‘disclosures’ within FTSE 350 companies’ annual reports almost doubled from 2017, with 106 companies providing information. 50% of disclosures were categorised as ‘reasonably detailed’ and 50% of disclosures were categorised as a ‘general disclosure’. The findings of the Market Tracker report indicate that ethnic diversity is an area companies are becoming increasingly aware of. We will continue to monitor developments in this area to track progress in 2019.
In Focus: Geopolitical Factors
Companies increasingly cite geopolitical factors in their transaction documents, most obviously as risks, but sometimes as opportunities. Economic and political instability typically lead to government actions, such as the imposition of martial law, trade restrictions, foreign ownership restrictions, capital, price or currency controls, nationalisation or expropriation of property or other resources or changes in legal and regulatory requirements, including those resulting in potentially adverse tax consequences.
In their recent registration document, Aston Martin Lagonda noted several geopolitical events that might impact on their future markets, including:
‘instability within the Eurozone, a second independence referendum in Scotland, uncertainty as to the global effect of the current U.S. administration, strained relations with North Korea and Russia, tensions in the South China Sea, tensions in Iran and the Middle East and widespread increases in global tariffs.’
Interestingly the same language, word for word, appears in the Quilter plc prospectus published earlier in 2018. Whilst this is not unusual, especially if the companies have the same legal or financial advisers, it is perhaps notable that standardised language capturing a wide range of often cited trouble spots and circumstances is becoming more commonplace.
Sometimes the language used is more generic, like that seen in loan facility agreements or force majeure clauses. Indeed, in their 2018 prospectus Blue Ocean Maritime Income plc referred specifically to the various global risks faced by their ‘Borrowers’, defined as entities owning or operating vessels in the maritime business with which the company participated in various debt arrangements:
‘For example, the Borrower may be exposed to risks of political unrest, war and economic and other forms of instability, such as natural disasters, epidemics, widespread transmission of communicable or infectious diseases, natural disasters, terrorist attacks, changes in government policies, taxation, restrictions on foreign investment and currency repatriation, currency fluctuations and other developments …’
Disruption is not always a threat to the business model, but sometimes an opportunity. In their 2018 annual report Informa plc carried several commentaries about their various strategic markets. In the report relating to aviation it was noted that:
‘After several years of decline, Defense Department funding in the US, by far the world’s biggest spender, is growing again. The Trump administration has requested $686bn for the Pentagon in fiscal 2019, a nearly 18% increase since the budget bottomed out in fiscal 2015. Missile defence programmes should see hefty increases as Washington seeks to counter strategic threats from a nuclear-armed North Korea, with additional money going to modernise forces and aircraft used during conflicts in the Middle East and Afghanistan.’
Similarly, Hochschild Mining plc considered the interplay between geopolitical tension and the gold price in their annual report:
‘Prices rose from $1,152 at the end of 2016 to an intraday high of $1,358 on 8 September 2017. Escalating tensions between the US and North Korea, several policy implementation failures by the Donald Trump US government and politically inspired problems in Syria, Qatar, Iran, and Catalonia helped to fuel the rally in gold prices.’
Vedanta Resources plc, in their 2018 annual report, noted similar price effects in relation to silver.
As for gold, so obviously for oil. In their 2018 secondary offer prospectus EnQuest plc reproduce commentary derived from the International Energy Agency – Oil Market Report, July 2018, namely:
‘…a number of outages are expected to restrict flows as geopolitical events impact key producing countries. Unrest in Libya has seen production levels decline this year from 1MMboed to 760Kboed in June 2018, whilst continuing political instability in Venezuela has seen production decline by nearly 800Kboed over the last 12 months. Additionally, sanctions announced in May 2018 by the US administration against Iran are expected to strongly impact Iranian oil production from Q4 2018 onwards. These headwinds, plus the limited number of countries (Saudi Arabia, the UAE and Kuwait) that hold significant latent production capacity that is readily available, indicate that global crude supply will remain constrained for the foreseeable future.’
No discussion of risk and opportunity would be complete without a look at the way companies specifically cite the Trump administration in their documents.
CEIBA Investments plc, with significant Cuban real estate assets, refer, in their 2018 prospectus, many times to the stance of the US administration toward Cuba:
‘The policy of the Trump administration towards Cuba represents a partial reversal of the earlier measures aimed at easing sanctions that the Obama Administration initiated. However, the majority of the Obama administration’s measures remain in force and have not been overturned. At present, it is not clear whether the Trump administration will adopt further policies aimed at undermining the Obama overtures towards Cuba and there can be no guarantee that the direction of future U.S. policy will continue to be towards the normalisation of relationships between the United States and Cuba.’
Similarly, Trump often gets a specific mention in relation to oil, particularly in the context of the Iranian nuclear agreement (Jadestone Energy inc; Lamprell plc), climate change (National Grid plc), trade barriers (Team 17 Group plc) and tax legislation (Central Asia Metals plc; Prudential plc).
The transactions noted above are all available on the Market Tracker comparator tool and the team will continue to track the different factors affecting business stability and growth.
On 10 December, the Financial Reporting Council launched a new corporate governance code for large private companies. The Wates Corporate Governance Principles for Large Private Companies (Wates Principles) aim to address a concern that large private companies are not as accountable as publicly listed companies despite often having significant economic and social influence.
Under the government’s new reporting requirement, large private companies will be able to voluntarily adopt the Wates Principles. The Wates Principles recognise that a ‘one-size-fits-all’ approach is not appropriate given the large variety of large private companies, and therefore companies following them are required to use an ‘apply and explain’ approach according to what is suitable for that company.
The document is framed around six ‘core principles’ of good governance, with supporting guidance. For more on this story see our news article: New corporate governance code for large private companies launched - (a subscription to Lexis®PSL Corporate is required).
FRC publishes Thematic Review on Other Information in Annual Report
The Financial Reporting Council (FRC) has published its Thematic Review on the auditors’ work on ‘Other Information’ in the annual report. The purpose of the review is to gain an understanding of the work auditors at the six major UK audit firms are currently performing on the Other Information, ascertain the extent to which it meets the requirements placed upon them and identify any significant differences in practice. This will help firms in improving the quality and consistency of the work performed. For more on this story see our news article: FRC publishes Thematic Review on Other Information in Annual Report - (a subscription to Lexis®PSL Corporate is required).
Institutional Shareholder Services publishes guidelines for proxy voting
The Institutional Shareholder Services (ISS) has published guidelines for proxy voting in UK and Ireland. Previously using the voting guidelines of the Pensions and Lifetime Savings Association, ISS has operated a standalone policy for the UK and Ireland since 2015. The new guidelines are effective for meetings on or after 1 February 2019. For more on this story see our news article: Institutional Shareholder Services publishes guidelines for proxy voting - (a subscription to Lexis®PSL Corporate is required).
Directors' Remuneration Reporting Guidance updated by GC100 and Investor Group
The GC100 and Investor Group have updated their Directors' Remuneration Reporting Guidance to reflect changes to the directors’ remuneration reporting regime introduced by the Companies (Miscellaneous Reporting) Regulations 2018 (2018 Regulations), together with feedback received from other stakeholders. For more on this story see our news article: Directors' Remuneration Reporting Guidance updated by GC100 and Investor Group - (a subscription to Lexis®PSL Corporate is required).
Please note that this is the last edition of the Market Tracker Weekly Bulletin for 2018. We will resume coverage on 9th January 2019