Market Tracker weekly bulletin – 7 February 2019

07 Feb 2019 | 10 min read

A round up of key developments in corporate transactions covered by Lexis®PSL Corporate and Market Tracker this week, including a summary of the key findings in the upcoming 2018 Public M&A Report, a look at law firm IPOs, an update on cancelled IPOs and a focus piece on recent developments in the audit process.

Transactions

Takeovers

Public M&A Trend Report 2018

The Market Tracker team have conducted research into public M&A activity in 2018 for their annual Public M&A report, which aims to provide an insight into the dynamics of UK public M&A activity in 2018 and predictions for 2019. The report will examine UK public M&A deals announced from 1 January 2018—31 December 2018 (2018 review period).

A total of 91 transactions which were subject to the Takeover Code (the Code) were reviewed, of which 42 were firm offers (23 Main Market companies and 19 AIM companies) and 49 were possible offers, including 10 formal sale processes and one strategic review, (36 Main Market companies and 13 AIM companies).

Our initial findings suggest that the volume of firm offers in 2018 decreased by 10% from a total 47 firm offers announced in 2017 to 42 in 2018. In contrast, deal value totalled £121.8 billion in 2018, a 170% increase on total deal value in 2017. In terms of deal financing, we found that 76% of firm offers were made on a cash only basis. 2018 also saw an increase in public equity funds financing the offers. 

Foreign bidders were active in the 2018 review period where 40% of firm offers were made by US bidders. The most active industry sector during the 2018 review period was Computing & IT, accounting for 17% of firm offers.

The report, which will be published at the end of this month, will also examine government intervention in the offer for GKN plc by Melrose Industries plc and the Takeover Panel’s implementation of auction bids in the separate competing offers by Comcast Corporation and by Twenty first Century Fox, Inc. for Sky plc. 

Equity Capital Markets

DWF Group Limited joins listed law firms

On 31 January 2019, DWF Group Ltd (DWF) announced a that it is in the process of considering an IPO on the London Stock Exchange’s Main Market.

DWF reported 18.3% year-on-year net revenue growth for the six months ended 31 October 2018, indicating strong growth across the business and announced the company has plans to undertake a reorganisation of its structure, governance and internal contractual arrangements, before the potential float.

DWF’s CEO commented ‘this announcement is an important step for DWF and our future growth story highlighting just how far we have come over the past decade. This success has been driven by our differentiated business model’.

DWF focuses on three key sector areas - insurance, financial services and real estate. The Group has 27 offices in 14 jurisdictions across four continents. A registration document is expected in due course.

DWF are the latest legal services provider to mull over plans to go public.  Last year, Knights Group announced plans to list on AIM. On 26 June 2018, the company went public.  This was the largest law firm flotation to date, with an estimated valuation of more than £100m.

Gateley was the first UK firm to list on AIM in June 2015, raising 30m from the float. Gateley was followed by Gordon Dadds, which listed in August 2017, raising £20m. Virtual firm Keystone Law was the third firm to apply for admission to AIM in November 2017, raising approximately £15m and Rosenblatt Solicitors were admitted to trading on 8 May 2018.

Cancelled IPO update trend continues into 2019

Greenfields Petroleum plc

On 31 January, Toronto-listed Greenfields Petroleum delayed its planned listing on AIM to late February. The company initially announced its IPO plans in November 2018.

It has since postponed its listing four times.

The company provided no other details relating to the listing, and no update on the financials. The November announcement indicated that the float was targeting gross proceeds of £60 million.

The Global Sustainability Trust plc

On 28 January 2019, The Global Sustainability Trust postponed its planned IPO. The announcement stated, ‘the continuing difficult market conditions for fund-raising, despite a large breadth of support, the minimum net Proceeds of the initial issue have not been met during the offer period’. The company had planned to raise £200 million through the offer.

In Focus: Report finds that company secretaries have no confidence in audit process

A recent poll conducted by ICSA: The Governance Institute and recruitment specialist The Core Partnership found that ‘just 9% of company secretaries surveyed think that the audit process has improved since the collapse of Carillion.’

On 9 October 2018 the Competition & Markets Authority (CMA) launched a market study into the statutory audit market, to see if the market is working as well as it should. The study considers three sets of issues: (a) choice and switching; (b) the long-term resilience of the sector; and (c) the incentives between audited companies, audit firms and investors.

An update paper to the study was published on 18 December 2018, in which the CMA outlined a number of reasons why it believes audit quality is falling short:

  • companies choose their own auditors, with the decision typically based on the best ‘cultural fit’ rather than an assessment of who offers the toughest scrutiny
  • audit choice is too limited, with the Big Four audit firms conducting 97% of the audits of the biggest companies, and
  • auditors’ focus on quality appears diluted by the fact that at least 75% of the revenue of the Big Four comes from other services like consulting

 The reforms proposed by the CMA are:

  • a split between audit and advisory businesses, to ensure higher quality
  • regulatory scrutiny of auditor appointment and management, and
  • encouraging more choice — audits of FTSE 350 companies should be carried out by at least 2 firms, at least one of which would be from outside the Big Four

 In addition, on 18 December 2018 Sir John Kingman published his independent review of the FRC. Some of the main recommendations are as follows:

  • the FRC should be replaced with a new independent regulator with clear statutory powers and objectives, accountable to Parliament, funded by a statutory levy, to be named the Audit, Reporting and Governance Authority
  • this regulator should have an overarching duty to promote the interests of consumers of financial information, not producers. It should also have a duty to promote competition, a duty to promote innovation and a duty to apply proportionality to all its work
  • a new board should be appointed, with some, but limited, continuity with the existing board. It should be significantly smaller than the FRC’s and should not seek to be ‘representative’ of stakeholder interests
  • the board should cease to be self-perpetuating. All appointments to the new board should be public appointments. All appointments to both the board and committees of the new regulator should be advertised, and headhunters should be used. The regulator’s sub-board structure should be simplified
  • the regulator’s corporate reporting work should be extended from its current limited scope to cover the entire annual report. It should be given stronger powers to require documents and other relevant information in order to conduct that review work. The regulator should be given the power to require restatements promptly (rather than requiring a Court Order)
  • the Government, working with the new regulator, should develop detailed proposals for an effective enforcement regime in relation to PIEs that holds all relevant directors, not just members of professional bodies, to account for their duties to prepare and approve true and fair corporate reports and to deal openly and honestly with auditors, and
  • a fundamental shift in approach is needed to ensure that the revised Stewardship Code more clearly differentiates excellence in stewardship. It should focus on outcomes and effectiveness, not on policy statements. If this cannot be achieved, and the code remains simply a driver of boilerplate reporting, serious consideration should be given to its abolition

 Finally, on 18 December 2018 the government launched a new independent review into standards in the UK audit market, with the outgoing Chairman of the London Stock Exchange, Donald Brydon, tasked with recommending what more can be done to ensure audits meet public, shareholder and investor expectations. The Brydon review of UK Audit Standards will build on the findings of the Kingman review and the CMA’s market study. 

Latest developments

EU adapts company law to digital age

The EU has decided to revise its company law rules so they remain fit for purpose in the digital age, with the aim of achieving greater efficiency, transparency and legal certainty through the use of digital tools. The Romanian presidency of the Council of the EU reached a provisional agreement on 4 February 2019 with European Parliament representatives on a draft directive to facilitate and promote the use of online solutions in a company’s interactions with public authorities throughout its lifecycle. For more on this story see our news article: EU adapts company law to digital age - (a subscription to Lexis®PSL Corporate is required).

BEIS updates for businesses and sectors trading or operating in the EU—no deal Brexit guidance

The government has published new guidance pages for UK businesses collating existing stakeholder and sectoral guidance on Brexit, focusing on preparing for the no deal scenario. The majority of the guidance within the new webpages is not new, but has been collated by sector, or subject, for ease of reference and bookmarking. Some of the guidance may change depending on the terms upon which the UK leaves the EU, so stakeholders are advised to monitor these pages for updates. For more on this story see our news article: BEIS updates for businesses and sectors trading or operating in the EU—no deal Brexit guidance - (a subscription to Lexis®PSL Corporate is required).

FCA explains how it will use the temporary transitional power if there is a no-deal Brexit

The Financial Conduct Authority (FCA) has set out how it would use the temporary transitional power in the event the UK leaves the EU without an agreement. The FCA intends to use this power to ensure that firms and other regulated entities do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit. The FCA has also set out the areas where it would not make transitional provision and consequently expects firms and other regulated persons to start preparing now to comply with these post-exit regulatory obligations. For more on this story see our news article: FCA explains how it will use the temporary transitional power if there is a no-deal Brexit - (a subscription to Lexis®PSL Corporate is required).

FCA CEO makes diversity speech

Andrew Bailey, Chief Executive of the FCA, made a speech on diversity at the PIMFA Wealth of Diversity Conference 2019, highlighting the importance of diversity and inclusion to both regulators and employers. He noted that ‘fostering an inclusive and diverse culture can contribute to changing the behaviour of firms for the better’ and reiterated targets on gender and Black, Asian and Minority Ethnic (BAME) diversity.

 

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