Further to the reform of the squeeze out introduced by the French so-called “Loi Pacte” in 2019, and the unusual year that was 2020, what can be anticipated for 2021 for takeover offers and P2P? Will these transactions drive the market and what will their key features look like? What trends can we already see in France?
2. A legal environment favorable to P2P transactions
The reduction of the squeeze out threshold from 95% to 90% introduced by the so called “Loi Pacte” in 2019 intended to support the attractiveness of the Paris stock exchange in promoting IPOs while facilitating exits, with the purpose of harmonizing the French system with the threshold level already in place in most European jurisdictions.
This reform fully completed in February 2020 with the change of the general regulations, instructions and recommendations of the French Financial Markets Authority (Autorité des Marchés Financiers or “AMF”) in relation to independent experts and fairness opinions, to strengthen the protection of minority shareholders. These concrete measures have been implemented to empower minority shareholders’ voice and enhance pricing transparency, notably through the extension of the rules in relation to the floor price, and the inclusion of the bidder’s strategy in the offer terms. In addition, other provisions aimed at ensuring independence and transparency of the independent financial experts’ process.
3. Volume of transactions: a partial success
With the above measures creating a more favorable legal environment, the expected effects of such squeeze out reform were to accelerate delisting transactions. However, this has not been the case to date: the reform entered into force immediately before the unprecedented Covid-19 pandemic, and, with 30 takeover offers filed with the AMF, the year 2020 will not go down in history. The volume of squeeze-out transactions initiated in 2019 and 2020 was almost flat (approximately 20 transactions per year). The health crisis and resulting uncertainty seem to have delayed the expected wave of takeover offers and P2Ps.
Clearly, the pandemic and the related uncertainties that occurred in 2020 affected the nature of transactions:
• the downturn affecting public M&A was particularly significant during the H1 2020 (with only five takeover offers), including the takeover offers followed by a squeeze out initiated by Andromeda Investments, a CVC-sponsored vehicle, on APRIL Group in March/April 2020, or initiated by Winnipeg Participations (indirectly controlled by funds managed by Five Arrows Managers SAS) on Harvest in May 2020;
• the transactions initiated in 2020 mostly concerned resilient sectors that have been less affected by the crisis, such as the medical and healthcare sector (e.g. Auralux’s takeover offer (sponsored by PAI partners) on Amplitude Surgical, Callitidas Therapeutics’ offer on Genkyotex or Covivien Group’offer on Medicrea) or the digital sector (offers initiated by Castillon – by its founders with the support of KKR – on Devoteam, Sopra Steria on Sodifrance or initiated by Worldline on Ingenico). This was no coincidence and mostly reflects tech and health as hot sectors.
4. 2021: The rise of P2P?
In 2020, corporates were extremely cautious on cash burn, and multiple measures enabled them to remain solvent in a context of economic downturn, including partial-unemployment schemes, State-guaranteed loans (so-called “PGE”), and deferrals of tax and other social security contributions, at least temporarily. But these temporary measures must at some point come to an end.
In such a context, we would expect a strong renewed interest in P2P transactions once the environment is stabilized and once there is a better visibility on market trends. Looking at the actual pipeline, there is already a great interest in such transactions.
In addition to the recently-stabilized and P2P-friendly legal environment, other factors may support the market:
• First, investment funds have considerable amounts of dry powder and may use debt to finance P2P transactions; and
• Secondly, certain listed corporates ultimately make little, or no use of the financial markets to raise funds and may well have an interest in a delisting. This is all the more true for some corporates still largely family-owned and that are aware of ever increasing securities law and disclosure constraints, which are often perceived as complex and costly to implement. Such corporates are increasingly willing to consider alternatives to being listed, such as being backed by private equity houses to support their growth.
5. SPACs: new players?
Finally, alongside financial sponsors, new types of players, such as SPACs – acquisition vehicles created in order to acquire public or private targets – are becoming more and more of interest and may well support the market going forward.
2020 proved to be an amazing year for SPACs in the United States, where nearly 234 SPACs that IPOed. There is also strong interest in Europe as evidenced by the success of 2MX Organic, the recent SPAC created by Niel-Zouari-Pigasse early December 2020, the acquisition of EV Charged BV by TPG Pace SPAC and previously the Mediawan SPAC back in 2017.
6. An increasing complexity:
However, P2P transactions will also be more complex to implement.
Firstly, transactions may be more complex as such transactions are often subject to campaigns from activist or active shareholders. There is no doubt that lowering down the squeeze out threshold from 95% to 90% mechanically doubled the financial resources that shall be secured to prevent a squeeze out, making such campaigns more difficult or costly to launch. However, such campaigns remain feasible and the trend is toward the generalization of active shareholder interventions in large-cap transactions. P2Ps may be affected too, and it will be more necessary than ever to anticipate such situations to ensure success of transactions.
2020 has also seen several successive reforms concerning the control of foreign investments, whose scope has been widen and focused on listed companies. The list of sensitive sectors subject to foreign investment control has been extended since 1 April 2020. This strengthening of economic protectionism has been reinforced as the health situation worsens, with the introduction of defense tools against potentially hostile takeovers on French-listed companies. As a first step, the French parliament extended the application of the procedure to the biotechnology sector. Then, the French Minister of Economy introduced further measures in August 2020 through a specific and temporary mechanism that reduces from 25% to 10% the voting rights threshold triggering the control procedure for listed companies. This new temporary measure initially scheduled to apply until 31 December 2020, has already been extended to 31 December 2021. Once again, the ability to anticipate will be key to success.