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Companies and private equity groups pursuing takeovers of German businesses are shifting tactics to circumvent a popular trade pioneered by the likes of Elliott Management.
Hedge funds led by Elliott started making use of German corporate laws’ protections for minority investors more than a decade ago by taking stakes in listed companies that were set to be acquired with the aim of then seeking higher prices for their shares.
The so-called back-end trade complicated planned takeovers because the hedge fund investors would use legal proceedings to seek higher values for their shareholdings.
However, bankers and other advisers say that in the past couple of years the trade has evolved, with acquirers adopting tactics that have either delayed such situations or necessitated investors taking larger stakes.
“The German back-end trade is constantly evolving with fewer investors being able to play it,” said Thomas Schweppe, a former Goldman Sachs banker who now runs Frankfurt-based advisory firm 7Square.
Another senior European banker added that the trade was “a real hurdle to M&A”.
A broader slowdown in takeovers and shifting macroeconomic conditions has also made it less attractive, according to people familiar with the trade.
One of the most prominent examples of the trade was in 2013, when UK telecoms operator Vodafone announced a €7.7bn acquisition of Kabel Deutschland.
After the initial agreement, investors including Elliott amassed a 14 per cent stake in Kabel Deutschland and argued that Vodafone’s offer undervalued the company.
While Vodafone eventually took control of Kabel Deutschland by securing about 77 per cent of shares, the group failed to cross the 90 per cent threshold that would have allowed it to squeeze out investors who did not back the offer.
Elliott and other holdouts seized on German protections for minority investors that do not accept the offer, and then spent years pursuing litigation over whether the acquisition was fairly priced. Eventually, the sides settled, with Vodafone paying remaining investors up to €2.1bn to buy them out.
Similar situations have since played out at other takeover targets in Germany, including Deutsche Wohnen, Stada, Vantage Towers and Hella.
These dynamics have made German takeovers less attractive, according to market participants.
A 2022 survey of 32 listed companies by Deutsches Aktieninstitut and law firm White & Case found that public takeovers in Germany increasingly faced structural and tactical obstacles, including hedge fund manoeuvring, with more than half of respondents citing them as material impediments to deals.
“Acquiring companies have gone ‘this is just ridiculous’, and thrown the towel,” said Mark Kelly, chief executive of London-headquartered MKP Advisors. “The biggest issue is you don’t get much big German M&A any more”, except in cases where buyers are willing to pay an outsized premium.
Would-be acquirers are making tactical shifts in order to ease their path to a deal.
The evolving tactics are evident from a deal this July, when Chinese ecommerce group JD.com made a €2.2bn bid for German electronics retailer Ceconomy with a structure designed to pre-empt activist hedge funds. JD secured irrevocable commitments from key shareholders representing more than 31 per cent of voting rights, along with options for a further 25 per cent — giving the buyer effective control from the outset.
The group then announced that its takeover offer for the remaining shares would not be subject to a minimum acceptance threshold, and refrained from setting a timeline for a potential delisting.
“Of course, those were key points directed at the hedge funds,” said a person familiar with the transaction.