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The growing valuation gap between UK-listed companies and their US peers has made take-private deals more attractive to private equity firms and it has led to a handful of companies delisting.
Additionally, the current geopolitical backdrop has also led to a number of companies being suspended from the London Stock Exchange.
But what happens if you’re invested in a company that has been bought out and delisted, or the company is removed entirely from the exchange involuntarily?
Companies can choose to be delisted from the stock exchange or suspended for failing to meet regulatory requirements
Why are companies delisted?
A company is delisted when it is removed from a stock exchange. Companies can choose to delist by choice, whether to reduce costs, particularly for smaller companies, or cut the time taken to make decisions.
If a company is delisted they no longer have to wait for shareholders and the board of directors to vote on proposals.
More often than not take-private deals occur when a company is taken over or merged with another company.
There has been a flurry of take-private deals over the past year including Clayton, Dubilier and Rice’s takeover of Morrisons, and the AA, bought by Warburg Pincus and TowerBrook Capital Partners.
Exchanges can also force companies to delist if they don’t meet the regulatory requirements.
The London Stock Exchange, for example, requires all listed companies to hold a minimum market cap of £700,000.
Other requirements include having a stock price above a certain value and filing annual reports on time.
What happens if a company is taken private?
The total value of companies bought out by private equity firms and delisted has rocketed to £29.3billion over the last 12 months, according to research by accountancy firm BDO.
When a company is approached by a private equity firm the board has to decide whether it wants to recommend the deal to shareholders. If it does the majority of voting shareholders then have to agree to the offer at the proposed price.
It usually happens at a premium to the company’s existing share price because PE firms tend to go after firms that look undervalued or are trading at a discount.
‘PE firms want to buy companies that they think can be run better than they’re being run now. Or at the very least, where they can strip the company of its assets and sell these for a profit.
‘After all, that’s how they get a return on their investment; unlocking or creating seemingly ignored value,’ said Freetrade analyst Gemma Boothroyd.
‘Existing shareholders can often walk away with a gain on their holdings. But that doesn’t mean the premium will be higher than where that share price has stood in previous months or years, assuming that the share price has declined in recent years which has led to the take-private approach in the first place.
‘So it’s no guarantee that all shareholders will benefit from a PE takeover.’
Everyday investors who oppose the proposal can make their position known by voting against it but it is unlikely to make much of a difference if institutional investors are largely in favour.
After a four month battle, private equity firm Clayton, Dubilier & Rice bought Morrisons for £10bn in a take-private deal
Generally, the acquirer will put forward a cash offer or a tender offer which are often financed using a mixture of cash and shares. Once the company has gone private it will be delisted from the stock exchange.
Boothroyd notes that investors can still gain exposure to a company if it’s taken private if the PE firm is publicly listed, like KKR.
It would not be a direct investment however but it could allow for some continued investment in the once-listed company.
Investment platform AJ Bell confirmed it will send a message to shareholders if a company is delisted.
‘This message will have a brief summary of what has happened and a link to the full statement from the company so customers are up to date with any proceedings. When we receive more information from the delisted firm, we pass this straight onto the customer, including any voting options that might be available.
‘The shares will remain in the customer’s portfolio online with a nil value until the delisted company comes to a final decision.’
What happens to shares if a company is merged with another public company?
A company could also be taken over or merged with a company that is already publicly listed.
In this scenario the holding will be swapped for either a new holding in the buyer or an amount of cash.
In 2017 Standard Life and Aberdeen Asset Management merged to form Standard Life Aberdeen in an £11billion deal.
Standard Life shareholders held 66.7 per cent of the new company and the remaining amount went to Aberdeen shareholders.
What happens if the company is still listed on another exchange?
Often a company will be listed on different exchanges but if a company delists from one exchange then investors won’t necessarily lose access to the shares.
A cross-listing allows companies to list shares on several exchanges. A company just has to meet the listing requirements of a local exchange and demonstrate it will treat its shareholders equally.
A dual listing also allows companies to list on different exchanges and usually happens when two listed firms merge.
WHAT HAPPENS TO SHARES IN PASSIVE FUNDS?
You may not invest in individual stocks and instead invest through a passive tracker.
If a company that is delisted is held in a fund it will be removed from the fund. If it is tracking an exchange like the S&P 500 the fund is realigned and will be replaced with an existing company.
Susannah Streeter, senior investments and markets analyst at Hargreaves Lansdown said: ‘When a share held in a passive fund is delisted, its value is typically reduced to zero before being removed from the fund. This is likely to have a negative impact on the tracking error versus the benchmark.’
For example, when US cruise operator Carnival bought P&O Princess in 2002 it kept its listings in both London and the NYSE. While they act as one company they’re set up as two separate legal entities which means the shares are not interchangeable.
However with a cross-listing if you buy shares in a company on the LSE they’ll be the same as those listed on the NYSE.
‘Talks of the US delisting foreign companies that fail to comply with their auditing standards could mean these companies are taken off the US exchanges,’ said Boothroyd.
‘But if investors still wanted access to the companies, they could theoretically invest wherever they’re cross-listed.’
AJ Bell said if a stock’s main listing moves from London to another HMRC recognised stock exchange – which includes Stockholm, Tel Aviv and Euronext – it will keep customers informed and update their portfolios accordingly.
Interactive Investor said if a UK company is taken over by a foreign company listed on another exchange it will do its best to ensure the customer can sell the shares at some stage.
‘We feel this is an advantage of a platform like ii that chooses to access these exchanges rather than rely on CREST settled securities. Be aware however that it can take some time and there is also a possibility that in some cases it may not be possible to trade the shares depending where they are listed.’
What happens if the company goes bankrupt?
Things get a little more complicated if a company is delisted because it has gone bankrupt.
It is very rare for a large public company to delist because of bankruptcy but it has happened and it can be confusing.
Susannah Streeter, Hargreaves Lansdown’s senior investment and markets analyst said: ‘If a company is delisted because it’s gone bankrupt, gone into liquidation or into administration, it doesn’t always mean the end of the road for shareholders, as in some cases, a company can emerge from this situation and resume trading.
‘However, for the most part, the shares will be cancelled, meaning shareholders get no return on their investment.’
Usually, an insolvent business will go into administration and a consulting or accounting firm is appointed to manage the company and settle its remaining debts.
The administrators distribute the remaining assets to pay off the debts but shareholders tend to be at the bottom of the pile. Secured creditors like banks and institutional lenders, unpaid employees and suppliers are paid before investors.
‘Unfortunately, the shareholders of a company that’s gone bust will find themselves at the bottom of the list of debtors, meaning that quite often they don’t get anything back at all,’ says Streeter.
The outcome is dependent on how much the company is worth and how much debt it has accrued. If the assets are smaller than the debt pile the creditors take everything and can shut down the business or continue as a new private company owned entirely by the creditors.
If the assets are greater than the debt the creditors get paid and shareholders get the value of anything left over in cash.
A company might survive and issue new stock but it is unlikely as the debt pile tends to strip out any remaining value.
Streeter adds: ‘Debenhams’ shareholders had their investments wiped out when the company fell into administration, and there was a domino effect for shareholders of Sports Direct International, now Frasers Group, given the company’s 30 per cent stake in the business evaporated.
‘Shareholders in Patisserie Valerie also saw their holdings eaten up after it collapsed. It represented a double blow, given that just months before institutional investors in the company had stumped up £15million in an emergency fundraising round in a bid to keep it afloat.’
What happens if the shares are suspended?
In extraordinary circumstances, trading in shares of certain companies is suspended.
This is usually because the Financial Conduct Authority thinks it is necessary to protect investors or the company has failed to meet its obligations including publishing financial information.
You maintain your shareholder rights if shares are suspended but you will be unable to execute or place any trades for the company.
Recently the LSE suspended trading in 27 companies with links to Russia, including energy and banking firms Gazprom and Sberbank.
AJ Bell told us that with suspended shares, such as Evraz or other Russian-linked stocks, the holdings will show in customer portfolios, valued at the price the stock was suspended at.
Hargreaves Lansdown added: ‘If a company’s shares have been suspended, it won’t be possible to trade. However, shares can continue to be held digitally and the value shown on the app or online will be as at the day they were suspended.’
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