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Private equity’s M&A tactics are proving unusually testing in Spain. Buyout firm Apollo’s lengthy pursuit of €1.6bn industrial certification group Applus has descended into a complex regulatory stand-off — a warning of how aggressive acquisition strategies can backfire. The regulator has rightly intervened to prevent a situation where the lower bid in a contested deal might have won.
The wrangling over Applus dates back to June, when Apollo offered €9.5 per share for the company. In September, a rival bidding team made up of I Squared Capital and TDR Capital entered the fray with a €9.75 a share offer. Throughout, merger arbitrage hedge funds had built their own positions hoping for a bidding war.
Apollo in January bought the equivalent of 21.85 per cent of Applus shares from these funds. These shares, acquired at €10.65, in effect raised Apollo’s offer price. Moreover, an earnout clause by Apollo would pay the funds extra to match the eventual winning bid. Even if Apollo sold its position to the other bidders, it still promised to pay 75 per cent of any difference to the winning price.
Things didn’t work out as hoped for Apollo’s team. Spain’s takeover laws allow for a contested process to close via sealed bids. These were presented last week. The highest price wins — and that was the I Squared/TDR side with €12.78 a share. Not only did Apollo lose out, so did the merger arb funds: they would receive only 75 per cent of the €2.13 difference between the January sale to Apollo and the winning price.
Some of these funds took matters into their own hands, buying more shares in the market above the winning bid price. The idea, presumably, was to ensure Apollo’s tender offer was successful. Apollo denies any involvement in this. But CNMV, Spain’s stock market watchdog, baulked at this outcome. It suspended share trading, aiming to block any arb fund selling to Apollo.
The regulator has it right. Once the sealed bid process is done, takeover rules prevent either side in the deal from buying shares higher than 2 per cent above the highest bid. The hedge funds paid just over this threshold. If Apollo had won the auction in this way, the lower bid price would have triumphed.
The majority of shareholders — including local pension funds and retail holders — would have received Apollo’s price while arb funds got their pay out.
Apollo has yet to decide on its next move but has signalled dissatisfaction with the outcome. Regardless, this is a test that the Spain’s regulator has passed.
https://www.ft.com/content/2cb96821-0c27-4f47-a993-bf9cbed9b38c