THE PROBLEM OF funding pension shortfalls dominated the UK financial headlines again last month when separate bids for two well-known retail names fell through. The stand-off between the pension trustees at WH Smith and private-equity group Permira, and the collapse of Philip Green's highly indebted bid vehicle to buy Marks & Spencer, highlighted the fact that pension deficits can now dictate the success of takeovers. These poison pills are coming higher up the agenda for any predator eyeing up a target.
There are plenty of other instances of this problem. For example, speculation over private-equity target MFI, another UK retailer, recently uncovered an additional £40 million shortfall, which could account for the discounted number of bids. But the failure of all these potential takeovers springs from the aggressive changes in UK pension fund legislation since last year and a growing willingness on the part of trustees to step in and flex their muscles.
"There have been and still are deals being delayed or frustrated where a defined benefit pension scheme exists," says Gary Wilson, a corporate finance partner at Ernst & Young who specializes in refinancings and restructurings.