LONDON British security firm G4S Plc (GFS.L) scrapped its planned 5.2 billion pounds ($8.4 billion) acquisition of Denmark's ISS on Tuesday, caving into pressure from investors opposing the deal.
G4S's decision avoided a potentially embarrassing defeat in a shareholder vote scheduled for Wednesday and reflected a growing culture of activism among investors prepared to flex their muscles amid the global financial crisis.
It was also the biggest shareholder revolt over takeover activity since the UK's Prudential (PRU.L) failed in its bid for AIA last year.
"We respect the importance of shareholders' views and, on the basis of feedback received since the transaction was announced, we have decided not to proceed," G4S Chief Executive Nick Buckles said on Tuesday.
The collapse of the takeover, which would have created the world's second-biggest private sector employer, and the cancellation of a 2 billion pounds rights issue to help fund it, was a blow to Buckles, who had held frantic meetings to try to bring investors on side.
Resistance to the plans of the world's biggest security firm came from shareholders opposed to the strategy and financing behind the bid for the Danish outsourcing firm.
"Three cheers, absolutely three cheers," one top 25 shareholder told Reuters, adding he still supported Buckles.
"We would not wish any change (in the G4S board), the issue was the price being paid and the execution risk. If boards can recognize they should not be wowed by investment bank advisors in paying high prices for assets and actually think more about valuations and shareholder interest, then three cheers."
Another top 20 shareholder told Reuters the deal was the wrong acquisition at the right time but said that the company had been right to look for a transformational deal.
"Nick Buckles should be congratulated both for thinking along these lines and then listening to the views of his shareholders and deciding to abort the deal," the shareholder said.
Harris Associates, the company's second biggest shareholder with a 5 percent stake, said on Monday it had voted against G4S plans to take over ISS, placing the deal in jeopardy after Schroders (SDR.L) and Artemis had already indicated they were planning to reject it.
Activist hedge fund group Parvus led opposition to the takeover, calling it "an untested vision."
Parvus founder and portfolio manager Edoardo Mercadante told Reuters on Tuesday that G4S chairman Alf Duch-Pedersen should now resign.
"I didn't speak to a single shareholder who didn't share our views. That's why from the middle of last week we were highly confident that the deal would not go though. I am very surprised that the chairman has not stepped down yet. His position is unsustainable," Mercadante said.
Aside from balking at the size of the fundraising -- the biggest rights issue in Britain since a 3.4 billion pound cash call by Standard Chartered last November -- shareholders raised concerns over G4S moving away from its security services roots into areas such as cleaning and catering.
"In our view, it was the scale of change in risk profile and direction which deterred support for ISS," said Espirito Santo analyst David Brockton.
Shares in G4S were down 0.49 percent to 243 pence at 1411 GMT -- still some 14 percent below the price of the shares before the deal was announced.
The shares slumped by over 20 percent after G4S announced the deal, reflecting both dilution from the planned rights issue and resistance from investors.
"We're relieved that they've pulled out," said Panmure analyst Mike Allen. "We were concerned about the execution risk and the quality of future earnings. It's not what the shareholders wanted. They (management) have done well so far but that wasn't the right move for them."
ISS, owned by Swedish private equity investor EQT EQTPRK.UL and Goldman Sachs (GS.N) Capital Partners since 2005, ditched a planned $2.8 billion IPO in March due to market turmoil.
Its two private equity owners had also broken off talks in January over an $8.5 billion takeover by private equity firm Apax after they disagreed on price. EQT and Goldman bought the business in 2005 for around $3.8 billion.
The Danish outsourcer's chairman, Ole Andersen, said it was back to work for the firm, adding that the company had no other sale plans on its agenda.
The IPO market was still not attractive, he said, though he did not expect ISS' current owners to stay forever.
The advisers to the sale, including rights issue underwriters Deutsche Bank and RBS, will miss out on a rare pay day in a quiet deals market. They had been in line to share a total fee pot of around 128 million pounds, but G4S said these costs would now total just 50 million pounds.
G4S was advised on the deal by Deutsche Bank and Greenhill. Goldman Sachs and Morgan Stanley advised ISS.
($1 = 0.620 British Pounds)
(Additional reporting by Sinead Cruise, Sophie Sassard and Neil Maidment in London, and Teis Jensen in Copenhagen; Editing by David Cowell and Andrew Callus)