London is a seller’s market. Many are looking to maximise the price they can achieve by adopting a more formal bid process, particularly for high profile assets such as the former Canadian Embassy last year and, currently, the Gherkin.
The benefit of such a process to the seller is clear, but for prospective buyers it can be a very costly way of failing to spend that £100m. The main cause of this is that the structure of most bid processes requires bidders to undertake substantial amounts of due diligence before they know whether they are going to be the chosen one. The ease of the process depends on how well organised the seller’s team is and how transparent they are prepared to be over timing and selection criteria.
Most bid processes will follow a two stage approach, with an initial round of offers and then a shortlist of bidders. Those shortlisted will be expected not only to fine tune their price offer, but often also to mark up the purchase contract and confirm that they have completed their due diligence on the asset. So serious bidders will have done most of the work at the point they submit their best offer, as they will be expected to exchange the purchase agreement within a couple of days of the chosen offer being accepted.
One of the initial decisions to make, therefore, is how much due diligence to undertake at each stage. Most bidders will want to limit how much they spend at the initial stage and reserve the bulk of the work to be done if they are shortlisted. At the initial stage it is mostly a question of identifying key issues that impact on value and, as ever, there is a risk/reward balance.
Buyers’ costs could be mitigated if sellers were prepared to make Certificates of Title available to bidders, but they often avoid even that effort (and cost) and only provide access to a website on which title information is available for bidders to review. Some such websites are clear and comprehensive, but not all.
It is also essential to check the requirements of the process and make sure they are followed, so in addition to due diligence on the asset, prospective buyers need to prepare their bid carefully to try to get an edge – it is not just deciding on the bid price. This includes preparing appropriate background material on themselves and their track record. Financial substance will be key, so if the proposed bid vehicle is for example, a special purpose vehicle with no substance in itself, buyers should consider providing guarantors.
Proof of funds will usually also be needed, so bidders will need to get letters from their bankers confirming the sums available. The more reputable the bank providing such a letter, the better. It all adds to the credibility of the bid. Ultimately, what the seller wants to know is that the bidder can exchange and complete quickly, if its bid is accepted.
An earlier version of these top tips appeared in the Autumn 2014 EG London Investor Guide.