Hostile M&A Can Get Pricey in a Rising Market

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Private equity is struggling to impose order in the hostile battle to buy U.K. security company G4S Plc. A sweetened 3.7 billion-pound ($4.9 billion) bid on Wednesday has only nudged the target’s market value even higher. Aggressive tactics deployed by Canadian suitor GardaWorld and its backer, buyout firm BC Partners, have led them to offer a full price without getting the desired result. Instead of locking up G4S, they’re still in hot pursuit.

The 235 pence-a-share cash bid looks high enough to be acceptable. It’s 61% above September’s undisturbed price and 17% above G4S’s value before Covid-19 dragged markets lower. G4S shares last traded comfortably above this offer price in 2018.

If the company wants shareholders to support its continued independence, it could try arguing the takeover attempt nevertheless contains no “control premium.” The bid is worth 5.4 billion pounds after adding G4S’s net debt and pension deficit. That’s 8.7 times the company’s expected profit on the Ebitda measure next year, only modestly higher than where Swedish rival Securitas AB trades. Take-out valuations have been higher in this industry.

For its part, GardaWorld says the all-in bid value is 6.3 billion pounds (equivalent to 10 times estimated 2021 Ebitda) when you quantify the pension hole using the 770 million-pound support package it’s agreed to fund. But this may be necessary partly to assuage concerns about the company becoming more indebted under private ownership.

The snag is that a lot of shareholders would probably be quite happy to take cash valuing G4S at these levels. The U.K. company has traded at a discount to its Scandinavian peer for years and might continue to do so for some time if it stayed publicly listed. Some shareholders who bought into G4S long ago, paying more than the bid price, may still hold out. Whether that’s enough to stop GardaWorld getting the 50%-plus-one-share acceptances it needs to win is another matter.

G4S’s defensive efforts are better directed at trying to get an auction going. The stock price, just above GardaWorld’s offer, sees a chance that talks with U.S. peer Allied Universal Security Services LLC will come to something.

An interloper would really put GardaWorld and BC on the spot. Had they submitted this bid back in September, it might well have received G4S’s endorsement and deterred rival interest. Instead, the duo made a succession of inadequate approaches that failed to put real pressure on their target. Then vaccine progress helped rebuild investor confidence. Hostile deals are risky for private equity in the U.K. In a rising market, they can get expensive.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2020 Bloomberg L.P.

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