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Capturing synergies in public market transactionsLessons from working with the UK Takeover Code

May 2017

1 Capturing synergies in public market transactions Lessons from working with the UK Takeover Code

1Capturing synergies in public market transactions Lessons from working with the UK Takeover Code

It has now been almost one year since the first issue of Capturing Synergies in Public Market Transactions was released. The report set out lessons learned following the revisions to the Takeover Code (the Code) rules that apply when statements are made regarding the quantification of synergies in transactions (quantified financial benefits statement (QFBS)).

What we have heard is that the first issue was helpful to management teams starting out with a QFBS, as well as to the directors of those businesses involved, in terms of understanding the requirements, the statements required and the differing views of parties involved in the transaction. It has also provided an excellent basis for discussions with the Takeover Panel, financial advisors and legal advisors.

To build on this positive response and encourage further discussions we wanted to provide an update to take into account transactions over the last 11 months. Over this period we have noted two developments of particular interest:

Since the changes to the Code, we have seen the emergence of revised QFBS statements following competitive tension in the transaction, with Sainsbury plc, Deutsche Brse AG and Groupe Fnac SA each issuing a second statement with an increased quantum of synergies. No doubt the extra time allowed the suitors to process new information or review information not gathered and prepared sufficiently previously, to tackle more difficult synergies and substantiate a further quantum or adjust categories where necessary in light of new information.

Secondly there has been a notable increase in the inclusion of revenue synergies. Previously only the Dixons/Carphone Warehouse merger included revenue synergies in the QFBS since the revisions to the Code. In the last eleven months, four parties issued a QFBS that included revenue synergies with Deutsche Brse becoming the first non-retail offeror to quantify revenue synergies in a QFBS since the revised Code.

As with the first issue we hope that this updated review provides further useful insights into emerging QFBS practice and aids effective discussions between advisers and their clients. If you would like to further explore any of the points raised please contact me or one of our team.

Best wishes,

Introduction

Michel Driessen

Partner, Head of Markets, Transaction Advisory Services, UK&I

2 Capturing synergies in public market transactions Lessons from working with the UK Takeover Code

Rules re-cap: Rule 28 provides a clear checklist of requirements for QFBS

The Takeover Code defines a quantified financial benefits statement as either:

A statement by a securities exchange offeror quantifying any financial benefits expected to accrue to the enlarged group if the offer is successful; or

A statement by the offeree company quantifying any financial benefits expected to accrue to the offeree company from cost saving or other measures and/or a transaction proposed to be implemented by the offeree company if the offer is withdrawn or lapses.

Rule 28.1 states that where a quantified benefits statement is published, the document or announcement including the statement must include:

A report from its reporting accountants stating that, in their opinion, the statement has been properly compiled on the basis stated.

A report from its financial adviser(s) stating that, in its (or their) opinion the statement has been prepared with due care and consideration.

QFBS definition Reporting requirements

Rule 28.6 Disclosure requirements for quantified financial benefits statements

The bases of belief supporting the statement (identifying the principal assumptions and sources of information)Bases of beliefA

An analysis, explanation and quantification of the constituent elements sufficient to enable the context and relative importance of those elements to be understoodConstituent elementsB

Details of the disbenefits expected to ariseDisbenefitsD

An indication of when the financial benefits are expected to be realisedTimingF

A base figure where any comparison is made with historical financial performance or with existing cost bases and structuresBase figureC

A statement that the expected financial benefits will accrue as a direct result of the success of the offer and could not be achieved independently of the offerDirect result statement*E

An indication of whether the expected financial benefits will be recurring, clearly identifying any non-recurring benefit(s)Recurring benefitsG

The recurring and non-recurring costs of realising the expected financial benefitsRealisation costsH

*Direct result statements are not required for statements by an offeree

Capturing synergies in public market transactions Lessons from working with the UK Takeover Code 3

4 Capturing synergies in public market transactions Lessons from working with the UK Takeover Code

Offeror QFBS published 2014 to March 2017* c. 170bn of deals with c. 3.9bn of financial benefits

Transactions with QFBS prepared by the offeror

* QFBS have been identified following a review of publically available sources as at 24 March 2017 ** Values expressed in other currencies converted to GBP at the rate quoted in the announcement (where provided)*** Revised QFBS statement1 Combined cost base is sum of offeror and offeree revenues minus sum of offeror and offeree EBITDA2 Financial benefits excludes 1,500mn of exploration expenditure savings which are assumed to be non-recurring benefits3 Financial benefits are recurring benefits only one-time capital expenditure synergies of c. $145mn (c 91mn) are not included

# Offeree OfferorOfferor domicile

Deal Value (m)**

Financial benefits (m)**

Realisation costs (m)**

Ratio of costs to benefits

Cost synergies as

% of combined cost base1 Date

1 Amec Foster Wheeler Plc

John Wood Group Plc UK 2,224 110 190 1.7 1.3% 13Mar17

2 Aberdeen Asset Management Plc

Standard Life Plc UK 3,776 200 320 1.6 2.1% 6Mar17

3 Booker Group Plc Tesco Plc UK 3,657 175 145 0.8 0.3% 27Jan17

4 William Hill The Rank Group Plc, 888 Holdings Plc

UK 3,000 100 69 0.7 7.0% 10Aug16

5 British Polythene Industries PLC

RPC Group PLC UK 261 23 5 0.2 1.5% 9Jun16

6 LSE Group plc*** Deutsche Brse AG DE 10,505 327 436 1.3 16.1% 1Jun16

7 Darty plc*** Groupe Fnac Socit Anonyme FR 637 109 90 0.8 2.1% 21Apr16

8 Home Retail Group plc***

Sainsbury plc UK 1,100 145 130 0.9 0.5% 1Apr16

9 Skyepharma PLC Vectura Group plc UK 441 10 9 0.9 9.6% 16Mar16

10 SABMiller ABINbev BE 71,000 923 593 0.6 3.4% 11Nov15

11 Gala Coral Group Ltd. Ladbrokes plc UK 925 65 81 1.2 3.2% 30Oct15

12 Betfair Group PLC Paddy Power plc IRE 2,870 50 65 1.3 16.7% 26Aug15

13 Partnership Assurance Group plc

Just Retirement Group plc UK 669 40 60 1.5 5.3% 11Aug15

14 Alent plc Platform Specialty Products Corporation

US 1,351 32 32 1.0 1.3% 13Jul15

15 BG Group plc Royal Dutch Shell plc UK 47,000 6802 660 1.0 2.4% 8Apr15

16 Rexam Plc Ball Corporation US 4,288 197 197 1.0 0.3% 19Feb15

17 Salamander Energy plc

Ophir Energy plc UK 314 8 6 0.8 2.5% 14Jan15

18 Catlin Group Limited XL Group plc US 2,790 133 166 1.3 7.3% 17Dec14

19 Friends Life Group Limited

Aviva plc UK 5,600 225 350 1.6 2.2% 21Nov14

20 Columbus Communications Inc.

Cable & Wireless Communications Plc

UK 1,158 533 69 1.3 0.6% 6Nov14

21 Synergy Health plc STERIS Corporation US 1,200 19 37 1.9 5.3% 13Oct14

22 Spirit Pub Company plc

Greene King plc UK 774 30 25 0.8 1.7% 4Nov14

23 Balfour Beatty Carillion plc UK 2,100 175 225 1.3 1.8% 14Aug14

24 Green Compliance PLC APC Technology Group plc UK 5 1 0 0.0 1.7% 30Jul14

25 TUI Travel PLC TUI AG DE 1,932 52 61 1.2 1.9% 27Jun14

26 Dixons Retail plc Carphone Warehouse Group plc

UK 1,900 80 60 0.8 0.2% 15May14

5Capturing synergies in public market transactions Lessons from working with the UK Takeover Code

Offeree QFBS, revenue synergies, revised statements and transaction analysis

# Offeree OfferorOfferor domicile

Deal Value (m)

Financial benefits (m)

Realisation costs (m)

Ratio of costs to benefits

Cost savings as % of cost base Date

1 Cable & Wireless Communications

Liberty Global plc UK 3,600 82 110 1.3 1.2% 16Nov15

2 SABMiller ABINbev BE 71,000 686 17 0.0 2.6% 9Oct15

Transactions with QFBS prepared by the offeree

62%15

23UK

Europe (excl. UK)

US

Revised QFBS

Prior to 2016, since the revision of the Code there had been no revised QFBS statements. In 2016 there were three revised QFBS from Sainsbury, Groupe Fnac and Deutsche Brse. All of the revised statements showed an increased quantum of synergies, on average an increase of 50%.

Whilst these developments may simply be the product of specific competitive pressures requiring Management to broaden the number of categories being reviewed, no doubt the additional time that was available has allowed potential acquirers to process new and/or additional information to substantiate further synergies. This development perhaps points to the importance of early development of the synergy model as well as early involvement of advisers with knowledge of QFBS reporting to