Creeping acquisitions, the surreptitious building of a very large position in a public company with neither the consent of the target, nor the prior launch of a tender offer, are a familiar feature of the market for corporate control in Europe. Just to mention a few examples, in the last twenty years, the European M&A market experienced cases such as LVMH’s attempt to buy Gucci, NASDAQ’s attempt to buy the London Stock Exchange Group, Schaeffler’s acquisition of Continental, and Lactalis’ acquisition of Parmalat. Most recently, Mediaset, the media company controlled by former Italian Prime Minister Silvio Berlusconi, has been subject to a similar attack by Vivendi, a French conglomerate controlled (following a creeping acquisition) by Vincent Bolloré. This is just the third act of a drama that promises many plot twists.
Act I started with a friendly joint venture agreement involving a 3.5% stock swap and putting Mediaset’s pay-TV business underneath Vivendi’s umbrella (April 2016). In Act II, the relationship between Berlusconi’s and Bolloré’s companies turned sour when Vivendi decided to walk away from the deal (July), which prompted Mediaset to sue the French company for breach of contract. In Act III, which is presently unfolding, there are all the appearances of a full-blown hostile deal with the shape of a creeping acquisition: the attempt to obtain tremendous influence, if not control, of Mediaset by coordinating open-market purchases of significant blocs. Such a strategy allowed the French group to become the second largest shareholder (as I write, 25.7%, representing 26.7% of the voting rights, given the presence of non-voting treasury shares) of the Italian commercial broadcaster after the Berlusconi family (which owns 41.3% of the shares).
A coup on Mediaset comes as no surprise—at least to those who have warned in the past about the vulnerability to creeping acquisitions of European companies, and Italian ones in particular (think again of Parmalat, but also Antonveneta, and Montedison, to name but a few). While across the pond poison pills have successfully shielded US counterparts from such technique by making it de facto impossible to cross certain ownership thresholds without either securing the consent from the sitting board or replacing it altogether (so much so that the technique has virtually disappeared since the 1980s), the main tool in Europe to protect companies against such tactics is still the quite ineffective mandatory bid rule (‘MBR’).
Just consider what role the MBR is performing in the Vivendi/Mediaset case. The Italian version of the rule leaves Vivendi free to increase its stake up to the 30% threshold; in fact, on December 19 Vivendi all but confirmed this is its strategy. On the other hand, the MBR is precluding Berlusconi’s holding company (Fininvest) to secure a firmer hold on control: Italian rules prohibit holders of more than 30% but less than 50% of the voting stock to increase their stake by more than 5% within a 12-month period, on a rolling basis. Since Fininvest has essentially already maxed out on that rule, it will have to wait until April 2017 for incremental purchases of some significance.
From many perspectives, Vivendi’s Blitzkrieg on Mediaset is no ordinary creeping acquisition. First and foremost, Vivendi is not trying to get control outright, not now at least. After all, Fininvest’s stake in Mediaset would seem to guarantee a relatively solid grip on control. Currently the Berlusconi holding owns 41.3% of the stock and 42.9% of the voting rights in Mediaset. Normally, this would look like an uphill battle for Vivendi: at 43% v. 26.7%, Fininvest would only need a little more than 7% to obtain full control, whereas Vivendi would need to get another 23.3%, more than three times as much. Upon closer inspection though, because of the MBR, Fininvest cannot increase its stake in any material respect until April 2017 without launching a mandatory bid. Vivendi, on the other hand, will likely go as high as 30% and then decide whether or not to launch a tender offer on the 27% remaining on the market (at which point Vivendi will still have to secure roughly 74% of such pool). True, that would still look pretty ambitious, unless either Vivendi is somehow betting on Fininvest’s inability to launch a rival bid for the rest of Mediaset, or Bolloré believes he will manage to break the Berlusconi family consensus (and this is not too remote a possibility, judging from previous experience: the Anheuser-Busch/InBev and the Dow Jones/News Corp deals went through exactly that way). And if Berlusconi eventually launches a successful bid on Mediaset, Vivendi could still be consoled with a lucrative exit since its initial purchases took place when Mediaset stock was trading well below €2.5 (it is now above the €4 mark).
Win-win for Bolloré? Wait, there is more. Before we get too excited with an auction war (it is quite likely that shares that have not been bought yet by the two sides are now, or will soon be, held by ‘patriots’ who want to maintain Mediaset’s italianità), Vivendi might be just as happy to simply be a significant minority shareholder. First, Vivendi would be able to appoint some directors pursuant to mandatory rules on minority shareholder representation in boards of Italian listed companies: imagine having one of your main competitors sending its appointees to all your board meetings. Moreover, under Italian law, a shareholder with 1/3 of the voting stock present or represented at a meeting can veto all resolutions to be taken at an extraordinary meeting of shareholders. Vivendi has arguably already reached that level, and if it keeps buying up to 30%, Fininvest would need to go as high at 60% to overcome that veto. That means that for mergers, spin-offs, and capital increases, among other things, Vivendi will always be at the negotiating table to ask, and possibly exert, its preferred terms.
What can Mediaset do to defend itself? Not much, by now: not only does Italian law give very little ammunitions to target companies, but what in theory might work (a defensive recapitalization, or a merger with a white-knight first come to mind) would have to be passed with a resolution by the extraordinary meeting of Mediaset shareholders, which does not look like a promising route because of Vivendi’s veto power. This is why Mediaset is not even in a position to try to engineer a Delaware-styled poison pill, something that other similarly situated companies should seriously consider: if the US experience has taught us anything, those are the only reliable defenses to chill creeping acquisitions. Also, pills do not thwart the market for corporate control too dramatically, given that their standard form must leave open the possibility for an acquirer to still succeed via a proxy contest.
Yet, in Europe national company laws sometimes make poison pills unavailable to companies. To be takeover proof, European companies have to fall back on more invasive defensive strategies, such as dual class shares structures, which make companies uncontestable without any possibility of reversal by a hostile buyer (that is particularly the case in France with the tenured voting mechanism affording doubled voting rights after two years of holding the stock), selling even smaller stakes at the IPO stage, which makes the market much less liquid, or, in the most extreme cases, avoiding capital markets in the first place.
It is only ironic now that a good portion of takeover regulation in Italy was amended by Berlusconi’s government in late 2008 to provide better defensive tools for companies, amidst fears that depressed stock prices in the aftermath of the financial crisis had rendered many Italian companies (including, of course, Mediaset) more vulnerable to potential hostile attempts. However, Berlusconi and his government did not consider poison pills—something he might regret now, because with poison pills available, Vivendi’s creeping acquisition would have never happened.
Matteo Gatti is Associate Professor of Law at Rutgers Law School.