Finance

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

It's been the week of trying to "take back control" in Britain. Days after the formal process of leaving the European Union began, private equity is getting in on the act.

Pollen Street Capital and BC Partners Ltd. are making a bid for Shawbrook Group Plc, a specialist lender to smaller businesses. The 827 million-pound ($1 billion) offer they announced on Friday cleverly appeals to both shareholders who wish to leave, and to those who would rather remain.

Pollen Street took Shawbrook public in 2015, and investors came on board, hoping for capital growth from buy-to-let lending and dividend increases. But the company has slipped on one banana skin after another: a merry-go-round of mangers, improper loans to small businesses, and unfavorable regulation.

Brexit Battering
Shawbrook's shares have only just climbed back above their IPO price
Source: Bloomberg

Unable to sell its current 39 percent stake at an acceptable price, Pollen Street now wants to buy Shawbrook back with the help of BC Partners.

Their 330 pence-a-share offer is aggressively pitched. The price is the same as the tentative proposal they made for the company earlier this month. The lender's board rejected that approach, but permitted the bidders to conduct due diligence.

For the deal to go ahead, it needs the support from investors owning a minimum of 50 percent of Shawbrook plus one share -- just enough to give the buyers control.

Assuming that happens, it's a chance for shareholders to exit at a price last reached in January 2016.

And those who choose to remain would be fellow travelers behind two private equity investors firmly in the driving seat. That might not be such a bad thing.

Pollen says it would "adopt a more flexible approach to changing market dynamics." That may be code for reducing cutting and chasing loan growth less aggressively as the U.K. navigates Brexit. Forget about the company being run for the share price in the short term.

But would life change that much under Pollen and BC's control? They appear to want to keep the management, which was already hinting at a more conservative strategy at recent results. Given the uncertainties facing the U.K. economy, it would be wise to review the dividend policy anyway.

Shrinking Returns
Shawbrook's return on equity has slipped since its IPO
Source: Bloomberg

So the battle boils down to price. At 2.2 times tangible book value, the offer is merely fair -- but not generous for a lender analysts at Barclays expect to deliver an average return on tangible equity of 20 percent between 2016 and 2019.

Meanwhile, investors who got stuck as minorities in a potentially unlisted company would have to console themselves that they were getting the benefits of private equity's aggressive management without the high fees.

Shawbrook's shares hovered above the offer price on Friday. The remainers may need a bigger incentive to be won over.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net