Delisting

This interview with Monica Macheng was originally published for HealthInvestor magazine. The original link can be found on their website.

In a curious trend, many listed companies are experiencing a significant disparity between their share price and underlying value. This intriguing phenomenon sees share prices lagging behind the true potential of companies, which subsequently opt for delisting as a strategic move. 

Global healthcare-focused advisory firm Cello Health, in August 2020, was acquired by a portfolio company of Arsenal Capital Partners. The shareholders of Cello Health received 161p for each share which represented a 28.3% premium to the volume weighted average per Cello Health share of 125.4p in the 6 months to 30 June 2020.

More recently, digital health provider Babylon Health announced plans to merge with Swiss digital therapeutics firm MindMaze in a move that will see it de-list from the New York Stock Exchange. Also, Civitas Social Housing is currently involved in an M&A deal with Hong Kong-based property developer CK Asset Holdings, a £485 million take-private offer.

A listed company’s share price can be greatly impacted by market conditions, which is why the share price may not accurately reflect the company’s underlying value. Global economic, political, and market challenges, such as the war in Ukraine, the energy crisis, concerns about recession, rising inflation, and interest rates, can all cause caution among investors, leading to a negative impact on share prices.

Delisting may be an attractive option for a company with a low share price and where there is a lack of liquidity in the market for the company’s shares. It may be possible for shareholders in some companies to realise an improved price for their shares as a private company and raise capital in the private markets. Delisting also offers potential cost and management time savings as the company will no longer be required to comply with applicable Alternative Investment Market (AIM) Rules or Listing Rules. Additionally, a private company may benefit from less onerous provisions in the Companies Act 2006 than a public company.

And so, delisting may create an opportunity for private equity firms to acquire high-quality companies at a reduced valuation. Private equity firms typically pay a premium of approximately 20-40% over the current share price of a public company. This premium is justified, in part, by public companies generally having less debt than private companies. Furthermore, in a private company, management can focus on long-term growth rather than short-term share price pressures from investors. Public companies are often attractive to private equity investors due to their added transparency in reporting and disclosure requirements, making them easier to analyse compared to private companies.

The process for acquiring a delisted company differs from acquiring a private company. Instead of a share purchase agreement, there will be an offer document or scheme of arrangement document with limited warranty or indemnity protections for the buyer. The applicability of the Takeover Code [designed to ensure fair treatment for shareholders] and other regulatory considerations need to be assessed. Understanding the motivation for delisting, potential insolvency concerns, and directors’ duties under the Companies Act 2006 [the piece of legislation that serves as the main source for company law governing the UK] is vital. Additionally, delisted companies lack a public market for their shares, affecting liquidity and exit strategies.

The process of delisting, however, depends on the market on which the company’s shares are traded and whether it is taking place in conjunction with a takeover offer. If the company’s shares are traded on the AIM market of the London Stock Exchange plc (LSE), the company must follow the delisting process set out in AIM Rule 41. On the other hand, if the company’s shares are listed on the premium segment or standard segment of the LSE’s Main Market, the delisting process is governed by the Listing Rules. The requirements vary, including obtaining shareholder approval and satisfying notification and voting conditions.

But what are the potential implications for shareholders and other stakeholders? Depending on their percentage shareholding in the company, the shareholders may not have any influence over the decision to delist or accept a takeover offer from a private equity bidder. If the company does not delist and the share price stays low the shareholder may have difficulty realising the value of its shares. Furthermore, on delisting, non-executive directors may lose their roles as they may no longer be required for a private company.

Given there is still a lot of uncertainty in the market, particularly concerning rising interest rates and concerns of a recession, we believe there will be a sustained disconnect between the share price and underlying value for some time to come. Delisting and going private may well remain an attractive option for companies seeking better valuations, particularly where there is ‘dry powder’ in private equity firms.