Stub equity appears to be a technique with more style than substance. It was much talked about a couple of years after its success with Canary Wharf but following a number of subsequent aborted attempts to use it, all went quiet. But now it is hitting the headlines again – so are we to expect a successful renaissance of the technique?
I think the answer to this lies in a simple analysis of what it means. “Stub equity” as a term came into the public eye, as mentioned, with the Canary Wharf deal. Spencer Summerfield, head of corporate finance at law firm
In a public-to-private situation a partial/private structure enables shareholders of a publicly listed company to retain a stub stake in a listed vehicle once the company has been taken private. It provides an alternative to shareholders that do not want to take cash but prefer to remain exposed to the business and share in any potential upside.
In the Canary Wharf transaction the acquisition vehicle, called Songbird, has done very well. It is now trading at more than three times its IPO price.
However, this is the first and last example of it being used in Europe. It was mooted as a possibility in Philip Green’s thwarted bid for Marks and Spencer and later in the Ferrovial-led consortium’s offer for BAA. In the latter instance, the offer of stub equity was completely ignored – the shareholders all went for cash instead.
In theory, these structures are a good way of neutralising the lack of alignment between public and private interests – especially at a time when the public markets are very wary of large take-private deals. But it does come with its own set of problems.
For one, partial/private stub equity offerings in reality are relatively small and will not offer much of an upside to individual shareholders. Also, these vehicles are often listed on AIM due to the less onerous listing requirements, and this itself poses another problem.
The institutions often have limitations placed on them as investors trading in illiquid stocks on junior markets. Even those institutions that can invest are often not interested in the longevity of a private placement. And also, it is ultimately an expensive process.
Spencer Summerfield at Travers Smith says: “Institutions and boards use it as a tool to better the deal. But although it is quite often mooted, it very rarely transpires.
“It is used to negotiate to try and say that the business is worth more – we can’t get there so we will put in stub equity. But it is expensive and it will only be used in large public-to-privates to bridge the gap in pricing expectations. Although the stub is listed there is only limited liquidity – listed or not you are only ever going to get the real value once the private equity house has exited.”
However, stub equity is not a new concept to private equity and the more traditional private stub equity stakes have long been used in the mid-markets – both by private equity houses keeping stakes when selling businesses and management keeping stakes after selling out to private equity houses.
And it is in this private space that stub equity looks to have a more robust future. Not only can it be used in smaller deals as well as large ones, but it is also a less expensive route. Last year, a high profile example saw
More recently, we saw it in the long drawn out battle for
Polygon, which has been increasing its stake in Countrywide since 3i made its failed approach in January, now holds 29.9% of the business.
Apollo announced an improved offer of 530p in cash and 0.16487 Rightmove PLC shares per Countrywide share on April 12 after the target received an approach from a third party. The revised offer values Countrywide at £1.054bn.
More pertinently, the new proposal increased the amount that could be taken as stub equity in the acquisition vehicle rather than cash by 37.5% from £100m to £137.5m. This was intended to satisfy Polygon and other hedge funds, which wanted to ride any upside.
Apollo then raised the amount of available stub equity further to £152.5m, or 49.1% of the bid vehicle. By the time this offer expired, shareholders owning £513.6m worth of the company had applied for this alternative.
This kind of stub equity is also taking off in the US. Last month, a
It therefore appears that stub equity might well have a future, especially in bigger take-private deals, but it has to be carefully defined and at the moment it is likely to be the more traditional private version rather than the partial/private type that has made the term so recognisable that will be more popular.
However, as Summerfield argues: “If there is juicy cash on the table, then shareholders will always take that.”