Cash is kin
24 July 2000
8 April 2014
27 January 2014
1 July 2013
3 June 2013
23 September 2013
The threatened takeovers of Blue Circle and Wickes were uncannily similar; two hostile cash bids, both repelled by share buy-backs. So in advising Wickes, how much did Linklaters borrow from Slaughter and May's defence of Blue Circle? Catrin Griffiths and Claire Smith report.
It is a bit like waiting for a bus. There has not been a hostile cash bid for years and then all of a sudden two come along at once. First French building materials company Lafarge launches an all-cash bid for UK cement-maker Blue Circle. After a bruising few months, in which institutional shareholders are lobbied by both sides, Blue Circle offers to buy back £800m worth of shares - and manages to stave off Lafarge.
Then, just as the fuss surrounding Blue Circle is dying down, DIY chain Focus Do It All (FDIA) makes a cash bid for its competitor Wickes. After a stressful few months, where institutional shareholders are lobbied by both sides, Wickes offers to buy back £74m in shares - and manages to stave off FDIA.
The similarities are spooky. What is more, only two law firms were involved: Linklaters & Alliance and Slaughter and May. Slaughters acted for Blue Circle on the defence, and for FDIA as bidder for Wickes. Linklaters, meanwhile, acted for Wickes on the defence and for Lafarge as bidder for Blue Circle. To make things even more complicated, Wickes used Linklaters' Tim Clarke, while FDIA used Slaughters' Tim Clark.
The achievement of fending off a hostile cash bid is not to be sniffed at. Quite apart from anything else, such bids usually succeed because cash is king.
"In a hostile cash bid there are fewer lines of defence because there are fewer lines of attack," says Linklaters' Tim Clarke. "It's much more difficult to defend."
Slaughters' William Underhill, Blue Circle's lead lawyer, agrees: "A generous cash bid cannot be defended against. The secret of a successful bid is to pitch it at a level where the board isn't comfortable defending."
Yet if the battleground of any hostile bid is shareholder value, then share buy-backs are a major part of the armoury. Buy-backs are becoming ever more fashionable in old economy stocks, in part because institutional shareholders are keen to liberate cash to put into new economy investments.
Despite this, they have been used less than might be imagined, according to several City lawyers. "It's a relatively recent defence tactic," says Clifford Chance corporate partner Adam Signy, while Freshfields corporate partner Tim Emmerson argues: "It's not a defence per se; it's just another way of returning cash to shareholders."
Yet M&A defence lawyers may want to thank Underhill in the future; after all, it was Underhill and his team who showed it was possible to defend a hostile cash bid - the first successful defence for decades. And it is telling that Blue Circle and then Wickes opted for buy-backs as opposed to dividends. Buy-backs are more strategically weighted. Shareholders have no choice in receiving a dividend, while with buy-backs shareholders can choose whether or not to surrender shares for cash. That element of choice - and competitive choice at that - certainly tipped the scales with Blue Circle.
Underhill may not be a man given to hyperbole, but after several exhausting months repelling Lafarge's hostile bid for Blue Circle, even he must have allowed himself a mental pat on the back when Wickes did exactly the same thing against FDIA - even if FDIA was being advised by his partner Tim Clark.
Clark is phlegmatic about coming second. "The buy-back was a well-trodden path with Blue Circle, so Wickes had a road map," he says.
Linklaters partner Tim Clarke admits that Wickes definitely had Blue Circle in mind when considering the share buy-back. "There were an extraordinary number of parallels, but we took enormous encouragement at the fact that Blue Circle got away," he says.
So much so, that the Wickes tender to buy back shares was made "with a copy of the Blue Circle defence document in our hands, to make it quicker", Clarke admits.
Yet despite the celebrations at Blue Circle and Wickes, the postscript is less rosy.
Ironically, the very fact of the buy-backs mean that unfriendly shareholders such as Lafarge and FDIA will have proportionally even more influence.
FDIA is now the largest shareholder of Wickes and recently demanded a seat on the board (a demand which was rejected by the Wickes management). Given that FDIA will not be participating in the proposed £74m share buy-back, its 29 per cent holding could rise towards 40 per cent, according to the Financial Times. "We came second," says Tim Clark, "but it's an interesting debate as to whether [we've] lost in the longer term."
And although Lafarge cannot make another offer for 12 months, the share buy-back will mean its holdings in Blue Circle will increase substantially.
"Lafarge retains a significant stake," says Linklaters' David Barnes. "I'm sure it hasn't lost sight of the original logic of the bid."
Blue Circle and Wickes may have won their battles but they may not have won the war. Either way, Linklaters and Slaughters stay on the winning side.
Hostile bids: the successful defences
In the brief history of successful defences of hostile bids returning capital to shareholders, Linklaters and Slaughter and May have dominated. No other firm gets a look-in.
Linklaters partner David Barnes, who advised Lafarge, also advised Trafalgar House on its 1995 bid for Northern Electric. Northern Electric was represented by Slaughters, led by Michael Pescod. "It was the first electricity industry defence and they came up with quite a major return of capital to shareholders," says Barnes. Northern Electric offered a package of incentives worth more than £5 a share to its shareholders.
But Slaughters was on the losing side last year when Martin Hattrell advised 3i on its £1.2bn bid for Electra. Electra, which was advised by Linklaters partner Steven Turnbull, thwarted 3i by an offer to buy back 40 per cent of its own shares for £544m. "It was an entire change in investment policy, effectively moving it to liquidation mode and returning cash to shareholders," says Turnbull. Linklaters was also involved on NatWest's ultimately doomed proposal to return capital to its shareholders, during its prolonged struggle with the Bank of Scotland and Royal Bank of Scotland last year. NatWest, advised by Linklaters partner Robert Elliott, announced plans to hand back up to £3.5bn to shareholders if they rejected the Scottish banks.
Blue circle versus Lafarge
Target: Blue Circle
Advisers: Slaughter and May (William Underhill, William Sibree, Jeff Twentyman)
Financial adviser: Lazards
Broker: ABN Amro Hoare Govett
Adviser: Linklaters & Alliance (David Barnes, Jean-Marc Lefevre, Roberto Cristofolini)
Financial advisers: BNP Paribas SA, Dresdner Kleinwort Benson
Lawyers to financial advisers: Freshfields (Tim Emmerson, Arnaud Peres, Gavin Darlington)
Looking back, it was almost inevitable. For cement company Blue Circle, 1999 had been a poor year and when it issued a profits warning in September, the company's new chief executive, Rick Haythornthwaite, came under extreme pressure in the City. So when Lafarge began stalking, few were surprised.
"I think that those who know the sector well were expecting some action," says Slaughter and May corporate partner William Underhill, Blue Circle's lead lawyer. "It wasn't a bolt from the blue."
Lafarge - the world's largest building materials company, with its headquarters in Paris - was the obvious candidate to launch a bid, having shown itself to be particularly acquisitive. Not only had it cast around for targets, it had cast around for advisers.
Whereas Blue Circle had used Slaughters for years, Lafarge had made a grand tour of the City for lawyers on its last three major deals. It used Freshfields on its takeover of ENNEMIX and Allen & Overy on its £1.8bn takeover of UK quarrying and tile company Redland two years previously. Now it was Linklaters' turn. Corporate partner David Barnes stepped in at the London end, with Jean-Marc Lefevre in Paris.
On 1 February, Lafarge launched a highly unusual preconditional bid. "It's not a usual tactic in connection with a hostile bid, because it gives the other side time to prepare," says Barnes.
In fact the Lafarge financing was unusual in a French context. Lafarge is listed in Paris with a secondary listing in London, so the financing was carried out under French law and led by Dresdner Kleinwort Benson (DKB). (DKB was advised by Freshfields, which used its strong M&A franchise among financial advisers to muscle its way back onto a Lafarge deal.)
Lafarge went for a trombone rights issue, whereby shareholders were given the right to subscribe to a debt instrument if the bid went ahead, to be converted into a share.
"It funded the acquisition on the basis that you can give the money back if the acquisition falls at a regulatory hurdle," says Freshfields partner Tim Emmerson.
"It hadn't been done before in Paris and was crafted from scratch," adds Barnes. Once the financing was complete, Lafarge made its offer - £3.4bn, or 420p a share.
One banker close to the bid says the first Blue Circle defence document was relatively conventional. It was only when Lafarge gave its response that things started to heat up. Lafarge used a Schroders forecast of Blue Circle's Asian businesses. "That enabled [Blue Circle] to negotiate with the [Takeover] Panel to produce a three-year forecast of the Asian businesses," says the banker. "It was a mistake on [Lafarge's] part - they didn't foresee the panel would let [Blue Circle] do that."
The Asian forecasts would be key to the direction of the bid - and Slaughters went in for the kill.
"The first Lafarge document contained charts showing the return on investment of the Asian businesses," says Underhill. "There was a projection of Blue Circle's Asian businesses way into the future, and we were allowed by the panel to present Blue Circle's own projections. I think [Lafarge] should have thought quite carefully before putting in projections of that kind. They must have known we'd want to come back and deal with it."
"The Asian document was the turnaround when market sentiment went in Blue Circle's favour," says the banker involved on the bid.
In the meantime, a regulatory row was brewing in Canada. Both Lafarge and Blue Circle had major holdings in the country and the Canadian competition authorities intervened, bringing to a head the clash between UK and Canadian regulatory timetables. "They [Lafarge] wanted to extend the timetable to get regulatory clearance," says Underhill. "But the processes don't work with the UK bid timetable. We made sure the panel were well aware that the timing was going to be a real issue."
Then, on 19 April, Lafarge and DKB went on a dawn raid. Within hours, they had snapped up 20 per cent of Blue Circle's shares plus DKB picked up another 9.6 per cent in the open market.
"We thought we were completely dead," says a source close to Blue Circle. "But they'd made a mistake." What Lafarge and DKB had done was buy shares from the arbitrageurs, or 'arbs' - market players who make it their business to buy and sell shares in the event of a takeover.
"When you buy in the market you don't buy shares from the arbs, you cream off the non-natural sellers," says the source. "But they went for the easy option."
It was at this point that the buy-back strategy made perfect sense. "Buy-backs give an opportunity for arbs to sell the shares in an orderly way," says Underhill. "It's a useful technique when you've got arbs involved."
The buy-back was substantial. Along with £116m in cost savings, Blue Circle promised to return £800m to shareholders. The tender was made up of two tranches of £400m ranging from 432p to 450p a share. "One was surprised by the buy-back in a way, in that it was an industrial company with quite a significant investment programme," says Linklaters' Barnes.
The final weeks of the bid saw Lafarge raise its offer to 450p per share. Even in these dying days of the takeover attempt, say participants, most were unsure of which way the bid would go.
But Blue Circle had a late showing among investors - Schroders, Standard Life, Foreign & Colonial and Morgan Stanley all vowed to back the British manufacturer. Lafarge's offer of 450p was simply not enough. Blue Circle had managed to make the first successful defence of a UK company against a hostile all-cash offer for decades.
"The defence worked because the company had a good story to tell and it told it," says Underhill. "It's not rocket science - it's just a well-executed defence."
Wickes Versus Focus Do it All
Advisers: Linklaters & Alliance (Tim Clarke, Angus Rollo)
Financial adviser: UBS Warburg
Bidder: Focus Do It All, backed by Duke Street Capital.
Advisers: Slaughter and May (Tim Clark, Andrew Balfour)
Financial advisers: Deutsche Bank AG, ING Barings
Broker: Cazenove & Co
Linklaters partner Tim Clarke was getting very twitchy. It was Friday 3 June, and having spent several months advising Wickes on its defence of Focus Do It All's (FDIA's) hostile bid, he was just about to find out whether all Linklaters' work had been in vain. That Friday was the day when Wickes would know whether its institutional shareholders were on its side or not.
Clarke was sitting in UBS Warburg - on another transaction - with the announcement imminent. "We were expecting it at 2pm," he says. "They said [they'd] bring in a message on a silver tray if we'd won." But 2pm came and went, with no sign of a silver tray, and Clarke became increasingly nervous. Finally, several hours later, the announcement came. Wickes had done it. Against all the odds, it had staved off FDIA's hostile cash bid.
It was not the first time that DIY chain Wickes had turned to Linklaters in a crisis. It originally came to the City firm in 1996 after a major accounting irregularity had been discovered and had used Linklaters over its period of restructuring. So when FDIA launched its hostile bid at the end of March, with an offer of 375p a share, Linklaters corporate partner Tim Clarke - the Wickes relationship partner since 1998 - was drafted in by Wickes chief executive Bill Grimsey.
By contrast, private equity house Duke Street Capital had not long been using Slaughter and May. Duke Street, FDIA's largest shareholder with a 60 per cent stake, effectively ran the hostile bid for Wickes but up until then had used its regular law firm Clifford Chance.
Slaughters got a foot in the door when Clifford Chance had been conflicted out of any action on the Wassall bid some months previously, but this was the first time Slaughters had done a major deal for the private equity house. So corporate partner Tim Clark stepped in, while fellow corporate partner Andrew Balfour handled the bid financing aspects.
On day 15 after the bid was announced, Wickes responded. "It majored on questions of value," says Linklaters' Clarke. "The valuation at this point was interesting because of dotcom companies compared to old economy shares, which were taking a dive."
However, FDIA was assiduously wooing major shareholders. More than most companies, Wickes was institutionally owned and the company's fate would lie in the hands of 19 major shareholders. "Schroders had a significant shareholding, so the next obvious step was to talk to them about whether they'd sell," says Slaughters' Clark. Cazenove & Co, the broker to the bid, attacked the job with gusto. FDIA scored early when Schroders Investment Management sold out 20 per cent - followed quickly by Hill Samuel's sale of its smaller stake. All of a sudden, FDIA was up to a strategically impressive 29.9 per cent. The pressure on the besieged Wickes was now considerable.
It was in these straitened circumstances that the Wickes defence began. "There'd been a certain amount of sniping at that stage but the phoney war was over," says Linklaters' Clarke. Wickes put out a profits forecast which suggested that the restructuring the company had undergone over the past few years was beginning to bear fruit. It stated that profits were expected to grow 34 per cent to £28.5m from 1999 to 2000.
It also hit back at two FDIA documents which alleged that 'footfall' (retail industry parlance for number of visitors) had dropped and that market share and returns on the renewal programme in Wickes' stores were unimpressive. "There was quite a clear difference of view between FDIA and Wickes about the performance of the company and the key indicators," says Slaughters' Clark.
The Wickes team spent many hours combing through the figures, and finally hit pay dirt. Verdict, the authoritative retail industry source on the footfall statistics, had - unusually - made an error in its figures. The original statistics suggested that Wickes had the largest decline in footfall in the DIY sector. "Humorously enough," says Clarke, "the biggest decline in footfall was actually Focus Do It All's. They also did calculations on the returns on our renewal programme of Wickes stores. [We took issue with] the methodology and calculations. They made comparisons on growth in market share and there were one or two errors in that."
Slaughters' Clark adds: "They [Wickes] got quite upset."
Wickes also had to face the issue of white knights. There had been several press reports linking Wickes with Homebase. When the Takeover Panel insisted on a statement, Wickes said that although it had had exploratory talks with a number of potentially interested parties, these talks were not active.
"We were forced by the panel to disclose that we were not in discussions with white knights," says Linklaters' Clarke. "Anyway, one of the features of the defence was how successful the company had been, so [we] portrayed Wickes as a success story." In other words, the entrance of a third bidder, or white knight, would have undermined Wickes' entire strategy.
Wickes, Linklaters and UBS Warburg continued to fight back over the next few weeks. The share buy-back was the key part of the defence strategy. "You look at a lot of things and you try to home in on one," says UBS Warburg director Nic Hellyer. "Blue Circle was helpful because it was a cash bid with the same value arguments. Our options were either to return cash to shareholders or not. If not you are very much more dependent on the value arguments. A share buy-back helps focus shareholders' minds on the value of your business. It's a fairly obvious route to pursue, especially when you have a company which can take on more gearing."
The tender offer for the buy-back would return up to £74m in cash to shareholders - funded by debt. There were few other options open to Wickes, says Clarke, precisely because of its restructuring programme. "Theoretically we could have disposed of peripheral businesses, like other targets, but Wickes had already done that."
Wickes' chief executive Bill Grimsey and finance director Bill Hoskins spent their entire time in front of institutional shareholders, persuading them of the validity of their arguments. Over that period, the ground began to shift.
"The institutions started coming out [for us] to a degree which I have never seen," says Clarke. "Every other day we were announcing yet another institution. By the time we'd got to day 60 we'd got publicly announced commitments amounting to 43 per cent."
Grimsey says: "It's important to note that a defence of that nature is a team effort, it comes basically from the investment banks. [Linklaters] advised us on the legal aspects in this, but the investment bankers tend to lead the exercise and co-ordinate it."
Much of the City's warmth towards Wickes was put down to the perception that its new management - Grimsey and Hoskins - had delivered consistently on the company's restructuring proposals.
Cash, in the end, was king. The buy-back which returned £74m to shareholders swung it. As Slaughters' Clark notes: "Some bids have been won or lost by the ability to win a regulatory debate. On a cash bid, what decides it for you is what you're going to pay in the end."