M&A activities will depend on scheme deficits

Private equity house Permira suspended talks on its 371p per share bid for WHSmith following disagreements over the £215m pension fund deficit.

The scheme currently has an agreement with WHSmith that any shortfall will be paid off in the next 12 years. Permira wanted similar terms but WHSmith Pension Trust chairman Martin Taylor says the majority of the deficit must be plugged immediately to safeguard the scheme’s future.

Meanwhile, billionaire Philip Green’s £9bn bid for high street giant Marks & Spencer is dependant upon a number of conditions, including confirmation that the Marks & Spencer Group Pension Scheme is fully funded, following the firm’s £400m bond issue in March.

Green – who has made his offer through his Revival Acquisitions vehicle – also wants details of the current and future annual cash contributions M&S will have to make to the scheme.

Norton Rose partner Lesley Browning said: “Pension issues are normally high up the agenda, and I wouldn’t be surprised if they scupper a deal as people are not prepared to take on the risk.“

Freshfields Bruckhaus Deringer partner Ken Dierden agreed: “If you’ve got a DB scheme – and most are underfunded – for purchasers, pensions is top of the agenda. That is equally so if you are the seller, where you’ve got to think about how you deal with deficits as buyers are often wary of the cost of DB schemes.”

Hewitt Bacon & Woodrow principal Raj Mody believes it will become accepted practice for companies to review pensions during M&A activities.

“What we’re seeing is a situation where pensions will always be high on the corporate agenda when it comes to these big M&As. Because over time schemes have got bigger relative to the size of companies – you’ve got a small rudder to steer a big ship.”

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