Private Equity Non-binding Indicative Offers in Public M&A

To dispel the scepticism, our data suggests that a private equity NBIO is just as likely to be successful as an approach from a strategic bidder, which is about 40% of the time. This statistic does ebb and flow, for the 2.5 years to June 2023, the success rate was closer to 25%, but that captured a period of severe dislocation in share prices following anticipated interest rate rises (where share prices declined rapidly against target views on fundamental value). Of course, these statistics do not cover approaches that were rejected and never made public – which would reduce the success rate (which would also apply for other bidder types). 

Of the NBIOs that were disclosed due to a ‘leak’ (i.e. media speculation), 46% involved PE bidders. We conclude that, overall, the risk of a leak is not heightened where the approach is from private equity, quelling suggestions that, as a general rule, private equity are more likely to leak an approach to put pressure on a target to engage. 

Only 14% of deals that were first announced on an agreed deal involved a private equity bidder. This compares to 31% for non-PE bidders. We conclude that private equity bidders are half as likely to remain confidential all the way until transaction documents, relative to non-private equity bidders. This was primarily driven by PE bidders being over-represented in disclosures caused by the bidder acquiring a pre-bid stake above 5%, with PE bidders representing 75% of the forced disclosures in this category. This supports the conventional wisdom that private equity bidders are more likely than strategic bidders to take a pre-bid stake before an agreed deal.

In 36% of situations the target Board did not grant due diligence at the offered price – presumably the bidder did not reach the Board’s view on fundamental value. For example, in June 2024, Bapcor was subject to an NBIO from Bain Capital for $5.40 a share which was leaked and the target ultimately rejected the proposal for not representing fair value. Bapcor’s share price had declined from about $5.70 to a low of $4.20 in the lead-up to the NBIO, following management instability caused by an announced candidate for CEO deciding not to join the company. Since the rejection, Bapcor’s share price has predominantly traded below the offer price in a range of $4.27 to $5.36.

In 64% of cases, the Board was willing to grant due diligence. We conclude that, unsurprisingly, where the offer clears fundamental value, target Boards are open to engaging. 

45% of the time the bidder was granted due diligence but then withdrew the offer during due diligence. This statistic raises an age-old debate. Targets use it to argue that private equity offers are unreliable. Bidders may rebut this by arguing it indicates inadequate continuous disclosure rules or practices, meaning it is difficult to accurately formulate a view on price from ‘outside-in’ analysis alone. We think the truth lies in the middle, being that underwriting debt and equity in a leveraged buyout at fair value is very challenging, given there are no (or minimal) synergies or business strategy justifications to rely on for completing the deal. This makes private equity bids more sensitive to findings during due diligence that undermine price assumptions. While this is not reason alone for a target not to engage with a private equity bidder that clears the Board’s view on fundamental value, targets should be attuned to this heightened risk. It supports a general conclusion that retaining confidentiality is best for targets approached by private equity in order to avoid unwanted price instability and the risk of unwanted attention over a failed bid. 

Targets are often concerned that private equity will offer a price to gain access to due diligence and then seek to renegotiate downwards during due diligence. However, the data does not support that scepticism. In only 9% of private equity NBIOs was the price reduced downwards. In a majority of instances (55%), PE bidders stood by their initial offer and in more than a third of the cases, they had to increase their price either due to a rival bid (24% of cases) or a unilateral price increase (12% of cases). We conclude that private equity is overall quite reliable in sticking to their offer to gain access to due diligence.

An example of a rare price reduction during due diligence was TPG Capital’s bid for InvoCare. TPG initially approached at $12.65 a share in March 2023 and having amassed an ~18% pre-bid stake (later increased to 19.9%). While InvoCare did not consider the proposal to represent fair value, the company was willing to grant limited due diligence to allow TPG to reach an acceptable price level. By late-April 2023, TPG and InvoCare could not agree the terms of confidentiality, presumably because the terms of the standstill were not acceptable to TPG, and TPG withdrew its proposal. The parties re-engaged and in mid-May 2023, InvoCare secured a revised proposal from TPG at $13.00 a share (reduced by a special dividend of up to $0.60 to release franking credits) and granted due diligence. After months of exclusive due diligence, an implementation agreement was entered into at a reduced price of $12.70 (reduced by a special dividend of up to $0.60 to release franking credits). During this time, InvoCare’s financial performance had continued to deteriorate. While there was ultimately a price reduction during due diligence in this case, target shareholders received superior value to TPG’s initial approach, notwithstanding TPG’s strong pre-bid position with a 19.9% stake.

In short, where the PE bidder takes a pre-bid stake. A private equity bidder that took a pre-bid stake was likely to ultimately acquire control in two thirds of the cases over the last three years. This statistic supports the conclusion that taking a pre-bid stake shows conviction that the private equity bidder wants control and will go through with the offer.

While the pre-bid stake is a powerful tool to dissuade or overcome a rival bid, in ~20% of instances the PE bidder with a pre-bid stake was ultimately successful only after overcoming a rival bid. Again, this shows the conviction of a private bidder that takes a pre-bid stake. 

The most compelling example of this conviction was BGH Capital’s acquisition of 19.9% as part of its $7.10 a share NBIO for Virtus Health. A rival bidder, CapVest, emerged and was granted due diligence at $7.60 a share (scheme) or $7.50 a share (takeover bid with a 50.1% minimum acceptance condition). The dual scheme-takeover structure was designed to apply pressure to BGH to vote in favour of the scheme or risk being stuck in a minority position. However, this did not dissuade BGH. BGH was willing to proceed with an off-market takeover bid and was ultimately successful in acquiring control, without gaining access to due diligence from the target. This example highlights the high level of conviction of a private equity bidder that acquired a pre-bid stake and their resolve to acquire control.