Thinking about taking a listed company private?

The question is not just “Do we want to own this business?” It is: “Can we acquire this business, at a price that works for our investment case, with sufficient certainty and taking into account the likely shareholder, board and competitive dynamics?”

Considering these questions early can help an investor determine whether to proceed, evaluate the need for any refinements to their approach strategy and identify potential execution risks before committing significant time and capital to the process. Here are five key questions to consider before making your approach.
 

1. Right business, right price?

A target may look attractive, but it is only a compelling investment if the numbers stack up. How does the target’s current valuation compare with its performance, growth prospects and comparable transactions? Is there scope to create additional value through operational improvements, add-on acquisitions or, where you already hold a portfolio company in the sector, synergies? What could the business be worth on exit? The price also needs to be one that the target board and shareholders are willing to accept, and offers commonly need a significant premium to the undisturbed share price, assessed in the context of the share price over a reasonable period before the approach. Establishing a realistic valuation range and a clear walk-away point early in the process can help you to focus on opportunities that offer the right returns and avoid pursuing deals that simply don’t add up.
 

2. Can we secure shareholder support?

Understanding the shareholder register is an important early step in assessing whether a deal is achievable. Who are the major shareholders, how much influence do they have and are they likely to support an offer? An experienced financial adviser can help analyse the register and, where appropriate, make early soundings to gauge whether key shareholders might be receptive to a sale and at what price. A concentrated institutional register, significant founder or management holdings, or shareholders with strong views on the company’s future can all shape the prospects of a deal. Getting a clear picture of the likely level of support, and where any opposition or resistance may come from, can help you to identify which shareholders to engage with and whether the transaction has a realistic chance of success.
 

3. Will the board engage?

A compelling offer doesn't guarantee a receptive board. Understanding the target's strategic priorities, recent performance and confidence in its future prospects as a standalone business can help you to anticipate whether the board is likely to engage constructively, negotiate for a higher price or resist an approach outright. What might persuade the board to recommend a transaction? How might management's interests, including any proposed rollover or incentivisation arrangements, influence its position? And is the proposed offer sufficiently attractive and credible? Price matters, but so does the deliverability of the key offer terms and the certainty that the transaction will complete. An early understanding of the board’s likely response can help shape your approach and gauge the prospects of securing a recommended deal, which is usually the more straightforward route to completion. Alternatively, it can prepare you for a hostile or contested process, with the added cost, uncertainty and execution risk that brings.
 

4. Can we fund and execute the deal with sufficient certainty?

Public M&A places particular emphasis on deal certainty. Funding needs to be worked out before an approach is made, not left until a deal starts to take shape. Can you secure the necessary equity and/or debt financing, and will your proposed funding arrangements deliver the level of certainty expected by the target board and required under the Takeover Code? Will the funds be available in time to meet the offer timetable and pay the consideration when due? Co-investor and lender soundings must be carefully controlled, as widening the circle of those aware of a possible offer increases leak risk and may require an announcement. For a cash offer, the required confirmation of available funds is a key consideration before a firm offer is announced. Be prepared for some disclosure around your structure and ownership, as well as others who may be collaborating with you on the bid. Working through these points early helps you understand what is achievable and identify any potential obstacles, enabling you to approach the target with a credible proposal.
 

5. What could derail the transaction?

Even the most carefully planned and compelling proposal can be derailed by events outside your control. A credible approach can attract competing interest, particularly where the target operates in an attractive sector or has strategic value to potential buyers. Think about what could go wrong before you make an approach - consider the risks of confidentiality being lost, an announcement being triggered or a rival offer emerging. Each of those scenarios could affect your negotiating position, the timetable, the price you need to pay to secure the target and potentially the returns available to you. Unlike private M&A, the Takeover Code generally prohibits break fees and other deal protection arrangements with the target, and information you receive must be shared by the target with competing bidders on request. Irrevocable undertakings from key shareholders, and potentially stakebuilding (within the Rule 9 mandatory offer threshold), are tools you can use to protect and strengthen your position. Consult with your advisers to decide in advance how you would respond to a competing offer. Agree the maximum price you would be prepared to pay and when you would walk away. Anticipating potential obstacles early can help you stay in control of the process and avoid becoming a stalking horse for a competing bidder.