German public takeover rules protecting minorities increasingly invite event-driven interlopers – advisors

22 June 2020 - 02:46 pm UTC

The rate of success for German public company takeovers has declined in recent years, in part due to the market becoming a playground for activist and event-driven hedge funds, according to a banker and a lawyer specialising in the area.
Germany’s takeover regime seeks to protect minority shareholders by requiring acquirers to compensate them above and beyond the initial takeover premium, for instance via payments or dividends given in return for control of the company, by Domination and Profit & Loss Transfer Agreement (DPLTA) or squeeze-out.

Arbitrage opportunities, as well as legal challenges to the adequacy of those payments, are a natural consequence of these laws and have been increasingly taken advantage of by sophisticated investors and, in some cases, created an impediment to deals being completed.
 
Successful closing of deals involving companies valued at more than EUR 1bn is down 28%, comparing the period from 2005 to 2017 with the two year period since, said Cai Berg, senior managing director at ParkView Partners in Frankfurt, who specialises in public takeovers.
 
ParkView’s research (in collaboration with the HHL Leipzig) indicates that just 43% of deals in that top echelon have been successful since 2017, noting that Bain Capital and Cinven’s takeover of Stada Arzneimittel in 2017 marked a seachange for how professional investors view Germany’s minority shareholders protections.
 
Only recently, on 9 June, Bain/Cinven’s acquisition vehicle, Nidda Healthcare, announced that it would be squeezing out the remaining Stada shareholders at a price to be determined by Nidda and “confirmed by a court-appointed expert auditor”.
 
The squeeze-out move represents one of the final steps in a process that saw the acquirer fail in its initial offer, refile it with new conditions, then offer compensation in exchange for a DPLTA, and then a delisting. The level of squeeze-out compensation can be, and is often, challenged in court.
 
The Stada process exemplifies the cost of doing public company M&A in Germany, or the “total cost of ownership,” as Berg and ParkView term it. 
The average total weighted cost of ownership is about 40% on top of the company’s undisturbed share price, according to ParkView’s research. On average, around 25% of that cost is represented by the initial takeover offer premium, an additional increase of 10% through the DPLTA, squeeze-out and delisting processes (the “back-end game”), and a further increase of 7% due to the court proceedings challenging those processes. Fewer shareholders participate in each round, hence the weighting towards the initial phases.
 
To view the full article, please email Kasia Koslowska.
 
by William Mace in London