BAA takeover saga ends as Goldman Sachs bows out to victorious Ferrovial

The battle for BAA has ended with Ferrovial – and Freshfields – as the winners. Husnara Begum reports

Freshfields Bruckhaus Deringerpartners Will Lawes and Laurie McFadden were looking rather pleased with themselves last week. Last Monday (26 June), their client, a consortium led by Spanish construction group Ferrovial, bagged BAA following a fiercely fought £12bn takeover battle that lasted the best part of five months.

The race to take over the UK airports operator kicked off on 8 February after Ferrovial was forced to confirm that it was considering making a bid for BAA, advised by Herbert Smith deputy head of corporate Gareth Roberts. BAA’s board consistently rejected Ferrovial’s advances but eventually succumbed on 6 June (see timeline) when it recommended the group’s 950.25p a share (including a 15.25p dividend) offer, despite a higher offer from the Goldman Sachs-led consortium.

It remains unclear why BAA’s board eventually sided with Ferrovial. Some reports suggest that relationships between Goldman Sachs and the BAA board broke down when the New York-based investment bank pitched to lead the company’s defence. Other sources, meanwhile, claim that it was simply down to Ferrovial being better placed to deliver its offer. Herbert Smith declined to comment.

What is clear, however, is that Freshfields and Ferrovial’s financial adviser Citigroup led a robust attack, enabling their client to outmanoeuvre rival bidder Goldman Sachs, advised by Ashurst partner Adrian Clark.

Although the BAA board recommended Ferrovial’s bid on 6 June, Goldman Sachs still had a chance, albeit a slim one, of victory. Consequently, the following two days were critical for the Ferrovial camp because one of the keys to its success was arguably the dawn stock market raid it carried out on BAA shares between 7.10am and 8.05am on 8 June, which took its stake in the airports operator to 28.7 per cent. To do this, it was essential for Ferrovial to obtain consent from the Foreign Investments Review Board in Australia to enable the Spanish-led consortium to buy more than 15 per cent of stock.

“On the night of 7 June we knew the other consortium was still in the game. It was absolutely key for us to make further market purchases of BAA shares the following morning when the market opened, so we worked through the night on a couple of alternative structures that would allow this even if the Australian regulatory consent didn’t arrive on time,” says McFadden.

Indeed, the deal climaxed on the morning of 8 June. While Citigroup swallowed up a sizeable chunk of BAA shares, Goldman Sachs, which is understood to have been preparing its own stock market raid, rushed out an announcement at 7.44am claiming that it was still in discussions with BAA. But just 21 minutes later, BAA announced that its discussions with the Wall Street investment bank had terminated. Indeed, this was followed by another announcement from Goldman Sachs at 12.52pm saying that it would not be proceeding with an offer.

“By the time we got to lunchtime on 8 June, the other consortium knew it was game over,” says Lawes.

Another key feature of Ferrovial’s tactics was the offer of ‘stub equity’, which enables BAA shareholders to retain an ongoing stake in the business by holding shares in Altitude Assets, the AIM-listed vehicle launched specifically to facilitate the takeover. According to reports, the stub equity proved to be attractive to some of BAA’s biggest shareholders.

One of the last times this type of structure was used was on Brascan’s unsuccessful bid for Canary Wharf two years ago. Interestingly, Freshfields also masterminded (albeit in vain) the stub equity structure on that deal.

“One advantage of the Brascan stub equity structure is that you don’t share the same vehicle as the public shareholders. It therefore provides some separation of interests,” explains McFadden. The Ferrovial stub equity broke new ground in that it was done under the new Prospectus Directive, which required Freshfields to get the prospectus relating to Altitude Investment’s AIM listing to be approved by the UK listing authority within the constraints of a takeover timetable.

“There was commentary the other day in the press to the effect that it takes the best part of a year to prepare for an AIM IPO. We had three weeks,” says McFadden.

The break fee BAA agreed to pay for Ferrovial was a further obstacle for the Goldman Sachs camp. Effectively, for Goldman Sachs to compete, it would have had to absorb the fee in its pricing. Lawes says: “The break fee was somewhat controversial because of its absolute size. We never thought it was vulnerable. The rules permit a 1 per cent break fee, and when it was challenged, the [Takeover] Panel reaffirmed it.”

After a string of roles advising the target, it was a nice change for Freshfields to be on the winning side of a bid.

Date Event8 Feb Ferrovial announces that it is considering
making an offer for BAA.
17 MarchBAA rejects an indicative 810p-a-share offer
from Ferrovial.
22 MarchTakeover Panel issues a ‘put up or shut up’
statement to Ferrovial.
7 AprilBAA rejects Ferrovial’s 810p-a-share offer.
16 AprilBAA confirms that it did receive a preliminary
approach on 30 March from Goldman Sachs to make
a cash offer at a price of 870p a share.
17 AprilGoldman Sachs confirms that it has made a proposal
to BAA regarding a possible alternative offer.
20 AprilFerrovial posts offer document.
21 AprilBAA rejects Ferrovial’s offer for the third time.
3 MayBAA announces that it is posting a defence circular
stating why shareholders should reject Ferrovial’s
810p-a-share offer.
30 MayBAA board rejects Ferrovial’s increased 900p-a-share
offer.
2 JuneTakeover Panel issues a ‘put up or shut up’
statement to Goldman Sachs.
6 June Ferrovial makes its 950.25p-a-share bid (including a
Date Event15.25p dividend), despite a higher 955.25p-a-share offer from Goldman Sachs, lodged late on 5 June. Goldman Sachs announces that it is reviewing its options. Ferrovial confirms that it has bought
150 million BAA shares, representing approximately 13.9 per cent of the company.
8 June
6.30am Ferrovial obtains Australian regulatory clearance to buy more than 15 per cent of BAA shares.
7.44amIn an effort to stop Ferrovial, Goldman Sachs rushes
out an announcement claiming it “was in discussions
with the board of BAA” and urging shareholders not to
take any action.
7.10am- Citigroup snaps up 140 million shares, representing a
8.05amfurther 14 per cent of BAA.
8.15amThe game is over for Goldman Sachs as BAA announces
that its talks with the US investment bank have ended.
12.24pm Ferrovial announces that it now owns 28.7 per
cent of BAA.
12.52pm Goldman Sachs throws in the towel,
26 JuneFerrovial offer is declared wholly unconditional as to acceptances.