Between a Rock and a Hard Place: Carlyle v PMI​

By Rachel Strickland​

The Story

In what will prove to be an acid test for shareholders, the board of directors at Vectura, a medical company known for respiratory drugs, has recommended a £1.1 billion takeover by tobacco company Philip Morris International (PMI). The recommendation comes after rival bidder US private equity behemoth Carlyle stated they would not increase their offer - cutting short a rare auction process due to be governed by the UK Takeover Panel (Financial Times).

Critics condemn the idea of PMI profiting from treating the very illnesses that its products cause (BBC). However, PMI may prove that ultimately cash is king, as it has offered 165p-a-share, whereas Carlyle offered 155p-a-share (Financial Times). In addition, PMI view the takeover as part of a transition, stating they want to derive half their revenue from non-tobacco products within a decade (BBC).

What it Means for Businesses and Law Firms

A plethora of health companies, charities and research organisations pressed Vectura’s board of directors to "put sustainability and ethics first”, in a move that urges stakeholder capitalism - where corporations consider not just their shareholders, but the wider interests of all their stakeholders, including employees, suppliers, customers, and the local community (BBC).
Importantly, despite lobbying from health companies over PMI’s perceived greenwashing*, Carlyle is unlikely to be viewed as a white knight (Financial Times). Private equity investment into UK-listed companies is a similarly contentious topic; in the first half of 2021, private equity bidding for UK-listed companies was at its fastest pace in over two decades (Financial Times). Further, US-based private equity firms Blackstone, KKR, and Carlyle have appointed additional dealmakers to focus on British companies (Financial Times).

Fuelling concerns over a “raid on corporate Britain” (Financial Times), ultra-low interest rates facilitate cheap borrowing for highly leveraged deals, which could leave large UK companies vulnerable to collapse. In addition, UK equities are currently seen as undervalued (CMC Markets) and the onerous regulations imposed upon UK public companies arguably make them harder to defend from takeovers (Financial Times).

From a regulatory perspective, as a UK listed company, Vectura’s shareholders are the ultimate owners and must approve any proposed takeover. With that said, the directors have duties under the Companies Act to act diligently and promote the success of the company in making recommendations. The idea of higher returns for shareholders at the expense of alignment of strategy presents a dichotomy on how ‘the success of the company’ should be perceived.

Law firms will advise both the bidder and the listed company on the timetable and deadlines for the deal. They will also advise on the announcements required by The Takeover Code – the main regulation governing the takeover of UK-listed companies. Clifford Chance LLP is advising Vectura on the deal terms (Law.com), whilst DLA Piper is advising PMI (DLA Piper website). Linklaters LLP advised the Bidco (investment vehicle) created by Carlyle, and Latham & Watkins LLP and Ropes & Gray LLP are advising on regulatory and anti-trust matters (Linklaters website; Investegate.co.uk).

*greenwashing involves misleading attempts to promote a company’s perceived environmental impact