M&A
DEAL TRENDS
AND
DEVELOPMENTS
2013 EDITION
INTRODUCTION PG01
1. TOP TRENDS IN PUBLIC M&A PG02
2. LESSONS FOR TARGETS AND BIDDERS PG10
3. PUBLIC M&A ACTIVITY PG14
4. STRUCTURE AND EXECUTION OF DEALS PG16
5. CONSIDERATION PG25
6. CONDITIONALITY PG34
7. PRE-DEAL ARRANGEMENTS PG40
8. DEAL PROTECTION MECHANISMS PG46
9. DAMAGES AND LIABILITY PG52
10. REGULATORY ISSUES PG55
11. THE TAKEOVERS REGULATORS PG60
12. DEAL PROFILES PG68
13. SURVEY METHODOLOGY PG72
M&A KEY CONTACTS PG76
John Elliott
Head, Mergers & Acquisitions
Karen Evans-Cullen
Partner, Mergers & Acquisitions
Jonathan Algar
Partner, Mergers & Acquisitions
On the regulatory front, 2012 saw some greater clarity
from the regulators about the need to announce bear
hug approaches before any deal is agreed. However,
the changes of real significance for the M&A market
in Australia are yet to come: Treasury’s consideration
of various takeover reforms, and an update to the
Australian Securities and Investments Commission’s
Truth in Takeovers policy, which has not been revised
for over 10 years – something M&A participants will
be keeping a close eye on during 2013.
While 2012 was certainly not a stellar year for M&A
activity in Australia, it still gave rise to some interesting
developments. Despite the greatly reduced deal flow (both
in terms of number and value), many of the trends we saw
in the Australian market in 2012 were either continuations
of, or further developments to, trends that we identified
in 2011.
In this report, we discuss the trends for 2012 based on our
detailed analysis of announced public company mergers
& acquisitions with a deal value exceeding A$50 million.
Among others, this included: a high proportion of foreign
bids; dominance of the energy and resources sector; very
few scrip bids; very few hostile deals; continuing use of
the bear hug; and bidders seeking pre-bid stakes. When
you put a number of those trends together, it is clear to
us that 2012 was a year where the first mover in any bid
situation had a huge advantage.
Leading on from that, we also offer some key lessons for
both bidders and targets coming out of the way in which
deals were executed in 2012, drawing in particular on
our experience in some of the year’s most interesting
transactions, such as Pacific Equity Partners’ bid for
Spotless Group and Brookfield’s bid for Thakral Holdings.
In 2013, a return of confidence will be a key ingredient
for an uptick in M&A and we are seeing signs of
cautious optimism in the early months.
We hope that this report provides readers with some
valuable insight into the dynamics of the M&A market
in Australia and how major developments will inform
the nature of M&A transactions in the coming year.
The foundation of this report is a deals database created
by Clayton Utz containing comprehensive information on
the structure of each of the surveyed deals and tactics
adopted by both targets and acquirers, and it provides us
with an invaluable reference tool in advising Clayton Utz
clients on M&A transactions.
Special thanks go to senior associates Adam Foreman
and Jasmine Sprange, special counsel Stephen Magee
and lawyers Stephanie Bragg and Jonathan Augustus
for their contributions in preparing this report.
We welcome the opportunity to discuss our findings with
you further. If you have any questions about the content
of this report or our deals database, please contact us.
1. TOP TRENDS IN PUBLIC M&A
WHAT
WERE
THE TOP
TRENDS
IN 2012?
OUR SURVEY
PROVIDES US WITH
A UNIQUE INSIGHT
INTO THE TRENDS
AND DEVELOPMENTS
THAT SHAPED THE
AUSTRALIAN M&A
MARKET IN 2012.
MATERIAL DECREASE IN PUBLIC M&A
ACTIVITY: M&A activity fell significantly in
2012: only 41 deals above $50 million were
announced. This was a 31% decrease from
2011 and lower even than the number of deals
announced during the financial crisis and its
aftermath. Total deal value and average deal
value were also only a fraction of the numbers
we saw in the previous 5 years.
FOREIGN BIDDERS DOMINATE: Two thirds
of all deals in 2012 involved foreign bidders,
including 7 of the 10 largest deals for the year.
Bidders from the USA and China still accounted
for a significant proportion of the foreign bids,
but bids out of Canada showed the biggest
increase, rising from 3% of foreign bids in
2011 to 23% of foreign bids in 2012.
2/ 3
PRIVATE EQUITY INCREASINGLY ACTIVE:
As we predicted, 2012 saw private equity
bidders become increasingly active in the public
M&A arena. They took advantage of depressed
market prices and the vast amounts of capital
a number of funds had raised in the past few
years. The percentage of private equity bids has
more than doubled each year since 2010: 12%
of all 2012 deals involved private equity bidders,
up from 5% in 2011 and 2% in 2010. As well as
these announced deals, private equity funds also
made a number of bear hug approaches in
2012 which ultimately did not lead to
announced deals.
ENERGY AND RESOURCES THE DOMINANT
SECTOR: Deals in the energy and resources
sector represented over 50% of deals by number,
which is consistent with 2011 levels. All Chinese
bids were for targets in this sector.
BIG ADVANTAGE FOR FIRST MOVERS:
Bidders who were prepared to brave the
pervasive lack of confidence in the market were
in most cases rewarded with a successful deal,
especially if they reached agreement with the
target. A combination of factors drove this
outcome – the prevalence of bear hugs, the
continued growth in shareholder activism, the
focus by institutional shareholders on relative
value as opposed to fundamental or long-term
valuations, and the absence of competitive
tension caused by the lack of confidence.
1. TOP TRENDS IN PUBLIC M&A
MEGA-DEALS NEED AN INITIAL TARGET
BOARD RECOMMENDATION: 76% of all 2012
PRE-BID STAKES IMPORTANT FOR
MAJORITY OF BIDDERS: The lack of activity in
deals began with a target recommendation.
And the larger the deal, the more likely that it
would be recommended. All deals valued over
$1 billion were announced with an initial target
recommendation. This was a reflection of the
times: the lack of confidence and conservatism
in the market meant that bidders were unwilling
to proceed with a major deal without having
the increased deal certainty that a target board
recommendation provides.
the M&A market and the lack of confidence in
the corporate community generally meant that
bidders who were willing to take the plunge
wanted pre-bid stakes to increase deal certainty.
59% of bidders in all deals, and 83% of bidders
in off-market takeovers, entered into pre-bid
arrangements with target shareholders who
were eager to extract a takeover premium for
their stake.
POPULARITY OF BEAR HUGS CONTINUE,
ALTHOUGH THEY DON’T ALWAYS LEAD
TO A BID: Bear hugs continued to be a popular
M&A strategy in 2012. 27% of all announced
deals started with a bear hug approach. But
perhaps more relevant were the bear hug
approaches which did not result in an announced
transaction, such as the bear hugs received by
Billabong, Arrium, Pacific Brands and GrainCorp.
These examples demonstrate that bidders will
not always be willing or able to convert their
bear hug into an announced deal.
CASH IS KING: The popularity of cash continues
to grow. 78% of all 2012 deals offered cash only
consideration, with only 17% of deals offering
scrip only consideration.
TAKEOVERS REGULATORY REFORM HIGH
ON THE AGENDA: ASIC and Treasury were
particularly active in pushing for reform of key
aspects of the takeovers regime in 2012. In their
sights are the creep exception, the disclosure of
equity derivatives, the technicalities of proving
an association between shareholders, new rules
for dealing with social media and the possible
introduction of a “put up or shut up” rule.
4/ 5
2012 PREDICTIONS:
OUR SCORECARD
PREDICTING THE FUTURE IS THE EASY PART
— SEEING WHETHER YOUR PREDICTIONS
BECOME REALITY IS SLIGHTLY HARDER,
BUT WE ARE UP TO THE CHALLENGE.
IN LAST YEAR’S REPORT, WE MADE
A NUMBER OF PREDICTIONS FOR M&A
IN 2012. HERE’S HOW WE SCORED:
TARGET RECOMMENDATIONS STILL A HIGHLY VALUED
PRIZE: 76% of all deals started with an initial target
recommendation.
ENERGY AND RESOURCES DEALS WILL CONTINUE TO
DOMINATE: 56% of all deals in 2012 were in the energy
and resources sector, in line with 2011 levels.
GREATER SHAREHOLDER ACTIVISM ARISING OUT OF
SHORT–TERM OR RELATIVE VIEWS ON VALUE: Shareholder
activism continued to shape how target boards engaged
with bidders in 2012. A notable example of this was PEP’s
bid for Spotless (see our deal profile in Section 11).
SHAREHOLDERS PREPARED TO ACCEPT LOWER PREMIUMS:
The average premium in 2012 was 45% (or 37% excluding
outlying deals), compared with 47% in 2011.
PRIVATE EQUITY TO BE INCREASINGLY ACTIVE IN THE
PUBLIC M&A ARENA: 12% of all deals involved private equity
bidders, up from 5% in 2011 and 2% in 2010.
BEAR HUG PROPOSALS WILL CONTINUE TO BE USED IN
PLACE OF, OR AT LEAST AS A PRECURSOR TO, THE HOSTILE
TAKEOVER: 27% of all deals commenced with a bear hug
proposal, and only 24% of deals were announced without an
initial recommendation.
INCREASING NUMBERS OF STRATEGIC DOMESTIC MERGERS
AND SCRIP BIDS: Only 19% of deals in 2012 included scrip
consideration, which is broadly in line with 2011 numbers.
The majority of these deals had a foreign bidder, so were
not used for the purpose of effecting a strategic
domestic merger.
MINORITY TAKE-OUTS: “Traditional” minority take-outs,
by controlling shareholders, were down in 2012 from 2011,
with only 1 bid compared with 6 in 2011. However, a high
proportion of bidders had a pre-existing stake of less than
50% that had not been acquired in anticipation of making
a bid: 43% of takeovers and 56% of schemes involved
such bidders.
THE NEW ACCC: As predicted, there were no fundamental
changes in the ACCC’s processes in 2012. The ACCC focused
in 2012 on preventing “creeping” or incremental acquisitions
in the grocery, home improvement, liquor and petrol sectors
(which are regarded as relatively concentrated).
The ACCC also indicated that the continued push for
increased transparency from, and engagement with, the
ACCC during the course of merger reviews is likely to
extend the timetable for merger reviews.
INCREASED REGULATORY FOCUS ON MARKET INTEGRITY:
The Takeovers Panel has issued several warnings in
2012 about the inclusion of broad, illusory or vague
conditions in a deal. In addition, the Australian Treasury
is currently considering a number of regulatory reforms to
Australia’s takeovers laws, including the effect of bear hug
announcements on market integrity (see Section 10).
CERTAINTY OF FUNDS IMPORTANT: Acquisition finance was
not commonly used to fund cash deals in 2012. Instead, 71%
of cash deals were funded through the bidder’s existing cash
reserves. While there were 4 deals which were conditional
on the bidder obtaining finance, in each of those deals,
the bidder had secured highly confident commitments
or credit committee approvals from its financiers before
announcement, and none of those deals failed due
to financing.
1. TOP TRENDS IN PUBLIC M&A
WHAT
WILL
THE TOP
TRENDS
BE IN 2013?
WE’VE IDENTIFIED A
NUMBER OF TRENDS
WHICH WE PREDICT
WILL SHAPE THE
DYNAMICS OF
AUSTRALIA’S M&A
MARKET IN 2013:
6/ 7
FIRST MOVERS WILL CONTINUE TO HAVE A
STRONG ADVANTAGE: In a market where it is
MARKET INTEGRITY TO REMAIN FRONT
OF MIND FOR REGULATORS: We expect to
increasingly difficult for bidders to gain internal
support to publicly proceed with a transaction,
those who announce first will have a strategic
advantage. Any potential second mover will
need to factor in the possibility of a bidding war
for the target in deciding whether to announce
a competing bid, as well as being unable to
dictate the timetable for the transaction.
see further guidance from ASIC and/or the
Takeovers Panel clarifying their position on the
types of broad, illusory or vague conditions
which were the subject of proceedings in 2011
and 2012. We also expect to see guidance on
the use of conditions relating to regulatory
approvals, particularly in light of the revised deal
announced for Sundance Resources. The broader
takeover law reform agenda will continue to be
driven by the desire to maintain market integrity.
SCHEMES OF ARRANGEMENT AND TARGET
RECOMMENDATIONS WILL CONTINUE TO
BE A MUST HAVE FOR MANY BIDDERS:
The strong desire for certainty will continue to
mean that bidders will want an agreed scheme
of arrangement or a target recommendation for
a takeover bid.
STRATEGIC MERGERS WILL BE A NECESSITY
IN INDUSTRIES FACING FUNDAMENTAL
CHANGE: A number of industries are currently
facing significant regulatory, economic or
structural changes and are likely to consider
strategic mergers as a result. These include
manufacturing and retail industries (with the
changing economics of those businesses), the
telecommunications/media industry (with the
NBN, potential regulatory changes and the
continued evolution of digital technology) and
the financial services industry (with changes
to the regulation of financial planners).
1. TOP TRENDS IN PUBLIC M&A
OVERSEAS REGULATORY APPROVAL
PROCESSES WILL BE A KEY RISK FOR
TARGET BOARDS TO ADDRESS: Boards are
generally familiar with Australia’s regulatory
approval process for mergers. However,
Hanlong’s protracted bid for Sundance Resources
demonstrates the difficulty target boards may
face in dealing with the risks associated with
less well understood overseas regulatory
approval processes. We expect boards will
continue to look for new ways to address these
risks which may include structuring bespoke
reverse break fees and termination rights to
specifically deal with these types of conditions
and reassessing whether it is appropriate to sign
an implementation agreement, be subject to
exclusivity restrictions and/or commence
any scheme processes before these conditions
are satisfied.
SHAREHOLDER ACTIVISM WILL CONTINUE
TO PROVIDE BIDDERS WITH A POWERFUL
TOOL TO BRING TARGET BOARDS TO THE
TABLE: We saw that shareholder pressure
helped lead target boards to engage with
bidders in a number of deals in 2012, including
most notably Spotless. Having been emboldened
by these examples, bidders are likely to
increasingly employ shareholder activism as part
of their bid strategy in the same way in 2013.
CONFIDENCE WILL BE A KEY DETERMINANT
OF ACTIVITY LEVELS: If confidence in the
economic and market environment increases,
bidders may be willing to reassess their
valuations of target companies and be slightly
more bullish, with a likely increase in activity.
If the opposite happens, this is likely to have
a dampening effect on activity, although in this
environment, targets may become so pessimistic
about the outlook that they reassess their
fundamental valuations, and move closer to
the valuations being used by bidders and those
shareholders who compare deal premiums
to more short-term or relative valuations.
DEALS WILL TAKE LONGER TO ANNOUNCE
AND COMPLETE: As bear hug approaches
become more common, due diligence becomes
a necessity and target recommendations
are increasingly required by bidders before
proceeding. This means deals are going to take
longer to announce and complete.
FOOD/AGRIBUSINESS SECTOR LIKELY TO
SEE INCREASING ACTIVITY: Outside of
the energy and resources sectors, the food
and agribusiness sectors will see more M&A
activity in 2013 given current concerns in a
global context about food security and the
interest in securing access to those agricultural
commodities or businesses involved in the
production of food products.
IMPACT OF ELECTION: It is difficult to predict
what impact the federal election in 2013 will
have on M&A activity. While the uncertainty in
the lead-up to the election may further erode
confidence in the market, once the outcome
is known it could well stimulate activity, by
delivering the certainty needed to proceed
with deals predicated on proposed regulatory
changes or a particular regulatory landscape.
8/ 9
FIRST MOVERS
2012 SAW GREATLY REDUCED DEAL VOLUMES, BUT EXTREMELY HIGH SUCCESS RATES FOR
DEALS WHICH MADE IT TO THE ANNOUNCEMENT MILESTONE. 88% OF ALL DEALS ANNOUNCED
IN 2012 WHICH HAD COMPLETED BY THE END OF 2012 COMPLETED SUCCESSFULLY. AS A
RESULT, BIDDERS WILLING TO MAKE THE FIRST MOVE WERE VERY LIKELY TO BE SUCCESSFUL.
WHAT WERE THE FACTORS CONTRIBUTING TO THE SUCCESS OF THE FIRST MOVER?
PREMIUM TO TRADING PRICE
CONSERVATISM AND LACK OF COMPETITION
Certain institutional target shareholders assess bid
premiums in a different way to target boards. They
emphasise premium to trading valuations, short-term
returns and relative valuations over the medium-to-long
term fundamentals.
Very few bids involved competition – conservatism from
other prospective bidders in the current market climate
sees great reluctance to be involved in a bidding war,
navigate exclusivity provisions and play catch-up
on due diligence.
BEAR HUG
SHAREHOLDER ACTIVISM
Bidder uses bear hug to put pressure on the target
board to engage with the bidder by bringing
its proposal to the attention of
target shareholders.
Shareholders more willing to publicly support and
facilitate a bid including through media statements,
liaising with the target board and providing
pre-bid stakes.
BOARD ENGAGEMENT
DUE DILIGENCE AND EXCLUSIVITY
This places more pressure on target boards
to engage with potential bidders rather than
rejecting an offer outright.
Bidder gains access to due diligence on the
target. Deal ultimately struck with exclusivity
provisions and break fee.
TARGET AGREES TO RECOMMEND THE BID
76% of all bids are recommended when first announced and 87% of targets agree to exclusivity provisions.
DONE DEAL FOR FIRST MOVERS
Of deals which had completed by the end of 2012, 91% of deals which were recommended completed successfully.
2.
LESSONS
FOR
TARGETS
TOP 10 LESSONS
FOR TARGETS
1. HAVE AN ENGAGEMENT STRATEGY
FOR PRIVATE EQUITY BIDDERS Private
equity has become increasingly active in the
M&A market in the past 12 months. It has also
become increasingly common for private equity
firms to win the support of target shareholders
and use that to pressure the target board
to engage. Target shareholders have also
shown a willingness to offer private equity
bidders support in a form which recognises
the processes private equity bidders need to
undertake to put forward a binding proposal.
For example, in a number of instances,
shareholders have been willing to give bidders
options or pre-bid acceptance agreements with
a term of up to 6 months.
2. DON’T ASSUME YOU CAN RELY ON
COMPETITIVE TENSION TO DRIVE UP A BID
PRICE There is a distinct lack of competitive
tension in the M&A market at the moment,
evidenced by the fact that just 4 targets found
themselves the subject of competing bids in
2012. Target boards who receive bids which they
believe undervalue their company cannot rely
on a competing bidder to drive up a bid price,
and need to find alternative ways to justify
their valuation.
3. A RECOMMENDATION IS A KEY
BARGAINING CHIP TO USE DURING THE
NEGOTIATING PROCESS A bidder’s chances
of successfully completing a deal are greatly
influenced by whether or not its offer is
recommended by the target. Target boards
should use this to their advantage during the
pre-announcement negotiating process.
4. WHETHER AND WHEN TO ANNOUNCE
A BEAR HUG APPROACH IS A CRITICAL
PART OF ANY RESPONSE STRATEGY In 2012,
there were a number of high-profile bear hugs
which never led to a formal bid, but which had
a volatile effect on the target’s share price.
However, where a bear hug approach was
announced which did lead to an agreed deal,
we typically saw an increase in the
consideration offered by the bidder by the time
an agreed deal was announced. In addition to
their continuous disclosure obligations, target
boards need to ensure that their response to
a bear hug approach fits within their broader
response strategy.
10 / 11
5. THE CONDITIONS WHICH APPLY TO
ANY AGREED DEAL MUST BE OBJECTIVE,
CERTAIN AND CAPABLE OF SATISFACTION
8. FOREIGN REGULATORY APPROVALS
MAY NEED TO BE FACTORED INTO YOUR
TIMETABLE When dealing with foreign
It is now common market practice for any agreed
deal to be highly conditional. Target boards need
to make sure that conditions are defined with
certainty and they can satisfy the conditions
which apply to the target to minimise the
bidder’s ability to walk away from the deal.
bidders, target boards need to understand what
regulatory approvals the bidder may require
in its home jurisdiction and the process for
obtaining these. Targets also need to consider
what rights it needs to deal with the risks
associated with satisfaction of these conditions.
6. AS DEALS TAKE LONGER TO COMPLETE,
PROCESSES NEED TO BE IN PLACE TO MAKE
SURE THE TARGET’S BUSINESS IS NOT
AFFECTED In 2012, the average time taken
9. ANY PERMITTED CHANGE IN
RECOMMENDATION NEEDS TO BE
NEGOTIATED Target directors increasingly
to successfully complete a takeover was 133
days from announcement, while for a scheme
the average was 122 days. The timeframe is
even longer if the bidder is hostile or regulatory
approvals (particularly from the ACCC or other
foreign regulators) are required. Target boards
must have a plan for managing the company’s
business during this time to make sure that
its operations and profitability are not
adversely affected.
7. FOR AGREED DEALS, LOOK TO
MAXIMISE DEAL CERTAINTY For cash-only
deals, target boards need to be satisfied that
the bidder will be able to provide the bid
consideration. Where debt funding is used,
target boards should consider insisting that
bidders have committed funds available on
announcement of a deal. Deals which are
conditional on the bidder obtaining finance are
not market practice, featuring in only 4 cases
in 2012, and such conditions should be treated
with caution by target boards.
seek a general fiduciary duty carve-out to their
obligation to recommend a transaction to their
shareholders. This is not yet market standard,
being included in only 22% of agreed deals
in 2012. Target boards need to be prepared
to negotiate for its inclusion in an
implementation agreement.
10. BREAK FEES ARE NOW MARKET
PRACTICE, BUT EXCEPTIONS CAN BE
NEGOTIATED Break fees were payable by the
target in 81% of agreed deals in 2012 and are
now standard market practice. Before agreeing
to a break fee, target boards need to consider
the exceptions it considers reasonable to its
obligation to pay the fee. At the very least,
target boards should be seeking to cap their
liability to the fee.
LESSONS
FOR
BIDDERS
TOP 10 LESSONS
FOR BIDDERS
1.
DEAL SIZE AFFECTS STRUCTURE
In 2012, the larger the deal, the more likely it
was that the target was prepared to agree to a
scheme. Two-thirds of 2012’s 15 largest deals
were schemes.
2. SCHEMES ARE BECOMING HARDER
TO BLOCK Increasing levels of shareholder
turn-out at scheme meetings mean that stakes
of much less than 20% will struggle to block
a scheme vote. Accordingly, in circumstances
where bidders are seeking greater deal certainty,
schemes become a more attractive structure.
3. TARGET BOARD RECOMMENDATION
IS DIRECTLY LINKED TO THE SUCCESS OF
A DEAL Recommended deals are twice as likely
to complete successfully as deals which are not
recommended. Bidders may need to have more
extensive negotiations with the target board to
secure such a recommendation, but our survey
shows that this is almost always worthwhile.
4. MAJOR SHAREHOLDERS CAN BE
EVEN MORE IMPORTANT THAN A TARGET
BOARD RECOMMENDATION If there are major
target shareholders who can deliver control,
gaining the support of these shareholders will
be more important to a deal’s success than a
recommendation by the target board.
5. BEAR HUGS ARE STILL AN IMPORTANT
STRATEGY IN FORCING A TARGET TO DEAL
WITH A BIDDER, BUT ONLY IN THE RIGHT
ENVIRONMENT Bear hugs will not lead to a
successful deal if target shareholders need a
higher premium or support the board’s views on
value. Further, while a bear hug may get you in
the door to conduct due diligence, the bear hug
price does set a floor for the target board and its
shareholders – which may be problematic if due
diligence shows that the company is worth less
than you thought.
12 / 13
6. SPECIAL DIVIDENDS CAN DELIVER
ADDITIONAL VALUE TO TARGET
SHAREHOLDERS WITH LITTLE COST TO THE
BIDDER In 2012, the number of deals which
included a special dividend doubled from 2011
levels, with 20% of all targets declaring a
special dividend.
7. THERE IS NO MAGIC NUMBER FOR
DEAL PREMIUMS Our survey consistently
shows that, when it comes to premium, there
is no particular number above which a bidder
is guaranteed success. Instead, bidders need
to focus on the particular circumstances of
each target and the value expectations of
shareholders to determine what premium
needs to be offered in order to ensure a
successful transaction.
8. LAST AND FINAL STATEMENTS CAN
CREATE MOMENTUM FOR A BID Given the
lack of competitive tension in the market,
particularly once a deal is announced, a
statement by a bidder that its offer will not
be increased or extended or will be increased
conditionally, can be a useful way to encourage
target shareholders to accept the offer. 56% of
bidders making a takeover bid made no increase,
no extension and/or conditional increase
statements in 2012, which is double
the percentage in 2011.
9. BIDDERS USING A TAKEOVER BID NEED
TO CONTEMPLATE A MINIMUM ACCEPTANCE
CONDITION BELOW 90% While a lower
minimum acceptance condition presents greater
risks for bidders, bidders who have a 50%
minimum acceptance condition or who are
prepared to waive a 90% condition are 50%
more likely to get to 100% than those who don’t.
10. PRE-BID STAKES INCREASE DEAL
CERTAINTY Pre-bid stakes are much more
important for bidders proceeding by way of
takeover, since shares held by a bidder during
a scheme are effectively taken out of play
(because the bidder cannot vote on the scheme).
In 2012, outright acquisitions were more
common than pre-bid acceptance agreements.
This most likely due to two factors: the much
longer deal timeframes being experienced, and
the desire of many bidders to use the support
of shareholders to pressure the board into
giving a recommendation, or at least access
to due diligence.
Bidders proceeding by way of a scheme should
consider how they can obtain statements of
voting intentions from major shareholders.
3. PUBLIC M&A ACTIVITY
59 DEALS
2011
41 DEALS
2012
THERE WERE 41
ANNOUNCED DEALS
SURVEYED IN 2012 WITH
TRANSACTION VALUES
OVER $50M
14 / 15
Total Deal Value
2010
2011
2012
Billions
$80
Average Deal Value
$63.72
$1.36
$52.21
$60
$40
$1.5
$19.25
$20
$0.51
$1.0
$0.5
$0
$0
2010
ACTIVITY IN THE
AUSTRALIAN M&A
MARKET CRASHED TO
THE LOWEST LEVELS
SINCE 2008
$0.90
2011
2012
2010
2011
2012
2012 was a dismal year for activity in the Australian public M&A market. There were only 41
announced deals in 2012 with transaction values over $50 million. This represents a 31% decrease
on 2011. Not only was this a reversal of the increase in activity we saw in 2011, it was a return to
levels of activity below those seen since 2008.
A lack of confidence in the economy and in stability in financial markets and the economy was at
least partially to blame. Time and time again, bidders identified attractive opportunities and had the
financial ability to proceed, but were not ultimately prepared to take the plunge, given the prevailing
market uncertainty.
The number of deals in 2012 wasn’t the only lowlight. The deals that did happen were worth a lot
less than the deals done in 2010 and 2011. The total value of those announced deals was only
$19 billion - 63% less than 2011, and 70% less than 2010. The average deal value in 2012, which
was only $507 million, tells a similar story, being 44% and 63% below the average deal value in
2011 and 2010 respectively.
2010
2011
2012
100%
70%
80%
81% 83%
60%
40%
20%
Spread of Deal Size
0%
2% 3%
0%
Deals > $10bn
MEGA-DEALS MISSING IN
ACTION AS MID-MARKET
DEALS DOMINATE
15% 9%
2%
Deals between $2-10bn
13% 7% 14%
Deals between $1-2bn
Deals < $1bn
There was a large proportion of mid-market deals in 2012 and none of the mega-deals which we
saw in earlier years: no deals in 2012 had a transaction value above $10 billion; and only 2% of
deals in 2012 had a transaction value over $2 billion, compared with 9% in 2011 and 14% in 2010.
4. STRUCTURE
AND EXECUTION
OF DEALS
4.1 DEAL STRUCTURE
The 2 main transaction structures available to a bidder wishing to acquire all of the
shares in a listed Australian company are a takeover bid and a scheme of arrangement.
Takeovers are a contractual based offer by the bidder to acquire shares in a target,
the terms of which are regulated by the Corporations Act. A court approved scheme
of arrangement between a target and its shareholders usually provides for the transfer
of the shares in a target to the bidder.
The availability of 2 takeover mechanisms allows bidders to tailor the structure of their
deal to suit the particular circumstances. In 2012, schemes were marginally more popular
than takeovers. There were however some types of transactions where schemes were
noticeably more popular: the majority of deals with a value over $1 billion and all but
one deal involving private equity bidders were conducted by scheme of arrangement.
41
Number of Deals 45
40
35
30
25
20
44%
54%
51%
39%
15
10
5%
5
Deal structure
2%
0
Takeovers
(including
off-market and
on-market)
Schemes
(including
company and
trust schemes)
Off-market
takeover
On-market
takeover
Company
scheme
Trust scheme
Total
16 / 17
DIGGING DEEP Clayton Utz’s publication, Digging Deep (2013), provides an in-depth analysis of Chinese investment in the
Australian energy & resources industry over an eight-year period from 1 January 2005 to 31 December 2012 (including
both public and private transactions). It examines, among other things, the investment strategies, the focus of their
investment activity, the nature of projects invested in and the management structures used by Chinese investors.
Our analysis revealed that investments by Chinese investors has increased in the Australian energy & resources industry
by over tenfold since 2005. Up from three investments in 2005 to an average of 34 investments per year between
2008 and 2012. During this period, 23 announced investments we reviewed involved corporate takeovers with 57% of
investments successfully completed. In comparison, 105 announced investments involved an acquisition of an interest
of less than a 100% and these investments had a successful completion rate of 88%.
4.2 WHO’S BUYING?
TWO-THIRDS OF ALL
DEALS WERE BY
FOREIGN BIDDERS
The involvement of foreign bidders in deals in 2012 continued at the same high level we
saw in 2011. Two-thirds of all 2012 deals were by foreign bidders, and 8 of the 9 largest
deals involved foreign bidders.
The foreign bidders came from a range of countries, but mostly from China, Canada and
the USA. The percentage of bidders from the USA remained largely unchanged from 2011
and the percentage of bids by Chinese bidders increased. The most significant change
however was the increase in the percentage of bids from Canadian bidders (by number)
up from 3% in 2011 to 23% in 2012.
Foreign
Domestic
23%
37%
Proportion of
63%
deals with foreign/
domestic bidders
Number of deals
77%
Deal value
SIGNIFICANT INCREASE
IN DEALS BY CANADIAN
BIDDERS
4. Structure and execution of deals
By number
By value
35%
32%
31%
30%
25%
20%
19%
23%
23%
21%
19%
12%
15%
Proportion of foreign
bidders from particular
4%
5%
jurisdictions by number
and deal value
8%
8%
10%
2%
7%
6%
0%
USA
UK
PRC
Singapore
Hong Kong
Canada
Other
4.3 WHAT ARE THEY BUYING?
ENERGY & RESOURCES
DEALS STILL DOMINATE
AUSTRALIAN M&A
ACTIVITY
As expected, the energy and resources sectors continued to dominate Australian M&A in
2012. Over 50% of deals were in the metals and mining or oil and gas industries. Of those
deals, metals and mining accounted for more than the number of deals in the oil and gas
industry. All Chinese bids were for targets in these sectors, confirming that these sectors
are a particular focus for these bidders. There was no real standout for third place, with
the remaining deals distributed across a number of different industry sectors.
While deals in the food and agribusiness industries attracted a lot of attention in the
press, there were actually no takeovers or schemes announced in those industries with a
transaction value over $50 million in 2012. Given the current interest in these industries
from foreign bidders, and the logic of this in light of increasing global concerns regarding
food security, we expect that this will change in 2013 and we will see more public M&A
activity in this sector, particularly from foreign bidders.
All Deals
Foreign
Domestic
45%
40%
34%
35%
30%
25%
17%
10%
5%
Commercial/Professional
Services
General Industrials
0%
Retail
0%
2%
Healthcare
2%
Food
Real Estate
2%
7%
InformationTechnology
& Services
5%
5%
Oil, Gas &
Consumable Fuels
0%
5%
Metals & Mining
foreign/domestic
2%
Media
5%
Infrastructure
break down between
Financial Services
10%
Beverages
All deals by industry and
2%
Telecommunications
15%
Mining Services
20%
18 / 19
4.4 TARGET RESPONSE
76% OF ALL DEALS
WERE ANNOUNCED
WITH AN INITIAL TARGET
RECOMMENDATION
Target board recommendations remained a key priority in all types of deals in 2012.
76% of all deals, including 47% of takeovers, were announced with an initial target
recommendation, with a further of 40% of takeovers obtaining a recommendation
before they closed, a continuation of a key trend we identified in 2011.
120%
100%
100%
100%
76%
80%
60%
44%
40%
20%
Proportion of deals with
initial recommendation
0%
0%
Off-market
takeover
Initial recommendation
Recommended later
Not recommended
On-market
takeover
13%
Company
scheme
Trust
scheme
Overall
47%
40%
Hostile/friendly
takeovers
TARGET BOARD
RECOMMENDATIONS
GREATLY INCREASE
DEAL SUCCESS RATE
An initial recommendation is important to many bidders for a number of reasons: the
desire for greater deal certainty where bidders are generally adopting a conservative
approach to deals; the need for access to due diligence; the desire of bidders to achieve
100% control rather than just a majority stake meaning a scheme of arrangement is
preferred as it provides certainty of outcome; and the need for a board recommendation to
achieve 100% ownership, especially where there is a significant retail shareholder base.
A target board recommendation has a significant influence on the ultimate success of a
deal: 91% of completed deals which were recommended, whether at the outset or only
later, were successful, compared with only 50% of completed deals which never received
a recommendation.
4. Structure and execution of deals
TARGET RECOMMENDATION NOT AS IMPORTANT AS MAJORITY SHAREHOLDER Crescent Capital’s off-market takeover bid for
Clearview Wealth completed successfully with the bidder obtaining a final interest of around 80% in the target even
without a recommendation. This was despite the offer being pitched at a relatively low premium of 18% to the closing
price before announcement and the independent expert concluding that the offer was neither fair nor reasonable.
What ultimately convinced retail shareholders to sell into the bid was the fact that Crescent Capital had a 12% pre-bid
stake and after the initial offer was increased, the Guinness Peat Group, who had a 48% stake in the target, committed
publicly to accept the offer. This put Crescent Capital in a position to control the target and retail shareholders risked
being left as minority shareholders if they didn’t accept the offer.
This deal demonstrates the fact that the target’s response is less important where there are significant shareholders
which have the capacity to deliver control to the bidder.
4.5 INDEPENDENT EXPERT REPORTS
Independent expert reports were commissioned by the target in 100% of schemes and
50% of takeovers in 2012.
An independent expert’s report is required if the bidder is entitled to at least 30% of
the voting shares in the target (or 30% of the shares in a class of voting shares), or if
the bidder and target have one or more common directors. However, they are a common
feature of public M&A transactions even when not required by law.
For schemes, ASIC and the court will normally expect such a report to be included in the
explanatory memorandum in any event, and it is therefore standard market practice to
include one.
In a takeover, where a target board is not recommending an offer they will often
commission an expert’s report to justify their decision: this was the case for 66% of
takeovers which did not obtain an initial recommendation from the target’s board.
Target boards also often commission an expert’s report to support their recommendation
of a takeover: 75% of targets who recommended takeover bids commissioned an
independent expert’s report.
The independent expert must give an opinion as to whether the deal is in the best
interests of the target shareholders and give the reasons for that opinion (based on
whether the offer is fair and reasonable).
It would appear that the expert’s opinion has little bearing on the ultimate success
of a deal. In 5 deals the expert found that the offer was not in the best interests of
target shareholders, or was not fair but reasonable - of these deals, 3 have completed
successfully and 2 remain current.
4.6 BEAR HUGS
27% OF DEALS
COMMENCED
WITH A BEAR HUG
The high number of deals which are recommended when initially announced does not
mean that a large number of target boards willingly came to the table to recommend
these transactions. In fact, the real reason is the continued success of the bear hug as a
strategy for getting the target board to engage with a bidder and ultimately recommend
the transaction on announcement. A bear hug is an unsolicited proposal (usually
20 / 21
indicative and conditional) which is made by the bidder to the target. That unsolicited
proposal is subsequently made public (usually by the target but sometimes by the bidder)
before any transaction is actually announced.
27% of deals commenced with a bear hug in 2012, with larger deals much more likely to
commence with a bear hug. Seven out of the 10 largest deals in 2012 began with a bear
hug approach.
Off-market takeover
31%
Scheme
27%
Overall
27%
Proportion of deals
initiated by “bear-hug”
Proportion of deals successfully completed
approach and proportion
75%
of those which
successfully complete
0%
REJECTED BEAR HUGS
OR THOSE COMPETING
WITH TAKEOVERS WERE
FOLLOWED UP WITH A
TAKEOVER BID
10%
20%
30%
40%
50%
60%
70%
Bear hugs are driven by the bidder’s desire for target co-operation, particularly those
bidders who wish to use a scheme of arrangement or who need to gain access to due
diligence before committing to a deal.
One of the changes in the surveyed deals this year was the increased use of takeover
bids following a bear hug approach. In 2011, 45% of all schemes were preceded by a
bear hug, whereas only 15% of takeover bids were. This reversed in 2012, with 31%
of takeover bids starting with a bear hug, and only 27% of schemes starting this way.
The increase in the proportion of takeover bids that were preceded by a bear hug is in
part due to the context in which those bear hug approaches were made. In two deals,
the target was already the subject of a takeover bid by a different bidder, making a
takeover the preferred structure to compete with the existing bid. Further, the bear hug
approach was rejected in two deals, leaving the takeover as the only practical way of
putting an offer to shareholders without the target’s support (Weir Group Plc’s bid for
Ludowici and Cathay Fortune Corporation’s bid for Discovery Metals).
80%
4. Structure and execution of deals
BEAR HUG OR BARE HUG? In June 2012, David Jones responded to media speculation by announcing that it had received an
unsolicited takeover approach from an unidentified entity. Its share price immediately increased by 14% even though the
company recommended that its shareholders act cautiously. David Jones later announced that the entity was EB Private
Equity and gave further details of the terms of its proposal.
Following these announcements, there was extensive media speculation about EB and its capacity to make a bid for the
company, leading some to describe it as a “hoax” bid. This publicity led to EB withdrawing its proposal. David Jones
share price rapidly fell to pre-announcement levels.
These events demonstrate that a considerable degree of caution is required before announcing approaches which appear
purely speculative.
ASX has tried to discourage immediate disclosure of such proposals with its revised guidance note on continuous
disclosure (discussed below), but the problem for many targets – like David Jones – is that it is very difficult to keep
such approaches confidential.
David Jones was an extreme example. Another included the fake emails which were circulated about Macmahon
Holdings receiving a takeover approach. There were a number of other genuine bear hug approaches during the year
which still never resulted in a binding deal, for example, TPG’s approach to Billabong, KKR’s approach to Pacific Brands,
Steelmakers Australia’s approach to Arrium and Archer-Daniels-Midland’s approach to GrainCorp.
What these events demonstrate is that, before engaging in a bear hug by making a takeover approach public, companies
need to take great care to ensure that the market is clearly informed about the uncertainty that surrounds such an
approach, particularly where that uncertainty goes to the identity and credibility of the purported bidder.
The continued popularity of bear hug approaches and increasing levels of shareholder
activism have seen calls for regulatory reform due to concerns about the adverse impact
the announcement of a bear hug approach has on market integrity. These concerns focus
on 2 issues:
>> fi rst, the vague, highly conditional and non binding nature of such proposals, with the
bidder having no obligation or timeframe within which to proceed with an offer; and
>> s econd, the disclosure of these proposals which may apply inappropriate pressure to the
parties in dealing with and responding to the proposal and fuel speculative trading in the
target shares.
REGULATORS
CONCERNED
ABOUT IMPACT
OF BEAR HUGS ON
MARKET INTEGRITY
The revised guidance on continuous disclosure that was issued by ASX on 17 October
2012 will go some way to alleviating the second issue. In that revised guidance, ASX
has expressly stated that confidential takeover proposals do not need to be announced
to the market until the parties are committed to proceed with the transaction. The clear
intention of this guidance is to give target companies the comfort that they can receive
and consider such proposals without being required to immediately disclose them
under the continuous disclosure rules. The ability to do this is however conditional on
the approach remaining confidential. While this new guidance has been welcomed as
giving target boards some more flexibility in determining whether to disclose takeover
approaches, we do not expect that this new guidance will see the end of the bear hug.
22 / 23
The reality is that, irrespective of the technical position, many target boards will still
choose to disclose bear hug approaches at a time and in a manner of their choosing
and consistent with the response strategy they adopt. If they do not, target boards will
be exposed to the tactical disadvantages which will flow from losing control of the
disclosure of the approach if confidentiality is lost, whether due to disclosure by the
bidder, significant movements in the target share price or the need to respond to
market speculation.
The Chairman of ASIC, Greg Medcraft, has during 2012 advocated for the introduction
of a “put up or shut up” rule as applies in the UK to deal with these issues. In the UK,
the “put up or shut up” rule imposes a timeframe within which a bidder who makes an
indicative takeover proposal is required to proceed with a binding offer for the company,
or be forced to withdraw from making any offer for the company for 6 months. Treasury is
now consulting with the market to gather views on the need for such a rule in Australia.
DO WE NEED A PUT
UP OR SHUT UP RULE?
While 2013 will continue to see debate on the need for a “put up or shut up” rule in
Australia, with Treasury continuing its consultation on this issue (amongst other potential
takeover reforms identified by ASIC), we do not believe that there will be particularly
strong support for the introduction of such a rule here. It would not find favour with many
institutional investors given the current low levels of M&A activity and the likelihood
for such a rule to further dampen activity. In any event, we suggest that it is shareholder
activism, particularly where driven by the short-term performance benchmarks many fund
managers are trying to meet in a flat or declining market, which is the most significant
factor causing the prevalence of bear hug proposals and the siege on targets which
results from them. The current disconnect between the views of investors and target
boards on valuation won’t be fixed by requiring proposed bids to be more certain or by
imposing a “put up or shut up” rule. That is something which will only be corrected
by a change in market dynamics.
4.7 COMPLETION AND COMPETING OFFERS
88% OF DEALS
COMPLETED
SUCCESSFULLY
While the level of M&A activity in the Australian market in 2012 was very low, for the
deals that did get announced there was a very high success rate. Of the deals which
were announced in 2012 and had completed by year end, 88% completed successfully,
with schemes having a higher success rate than takeovers.
While deals may be enjoying a high success rate, the average time taken to complete a
successful deal increased in 2012 by 15% from 2011. However there was little difference
between schemes and takeovers or deals which kicked off with a recommendation and
those which were only recommended after announcement. Deals which had an initial
recommendation when announced completed within an average of 117 days whereas
deals which were only recommended later took an average of 159 days to complete. This
difference disappears when you add to these timeframes the time taken to negotiate an
initial recommendation – in many cases, after a bear hug proposal had been announced.
The average time between the announcement of a bear hug proposal and the
announcement of a transaction was 67 days.
4. Structure and execution of deals
Number of days
300
263
263
250
200
200
150
100
50
minimum, maximum)
51
42
completion (average,
123
122
74
78
Period from
announcement to
106
133
42
0
Off-market
takeover
On-market
takeover
Scheme
Overall
BLOCKING STAKES The higher the level of shareholder participation at scheme meetings, the larger the shareholding that
is needed to block a scheme proposal at the shareholder vote.
Shareholder participation levels for schemes increased by 5% in 2012 to almost 70%.
With a 70% shareholder turn-out at a scheme meeting, a 17.4% stake would be required to defeat a scheme.
This is significantly higher than the 10% stake needed to prevent a takeover bidder acquiring 100% of the target.
120%
98.60%
99.93%
93.22%
98.77%
100%
82.00%
94.00%
80%
97.67%
69.54%
60%
40.00%
40%
Voting at scheme
20%
meetings (average,
minimum, maximum)
0%
Percentage of
votes in favour
Percentage of
shareholders in favour
Percentage of
votes present
Only 3 deals were unsuccessful due to the failure of a condition or termination of an
implementation agreement. They were Pipeline Partners Australia’s bid for the Hastings
Diversified Utilities Trust, Weir Group plc’s bid for Ludowici and Rockwood Holdings’ bid
for Talison Lithium. In each case, the deal was not successful because of a competing
proposal. This highlights the importance of meaningful deal protections.
The successful bidder in two of those three cases had an outright pre-bid stake of around
20% which will obviously deter another bidder from getting into a bidding war for the
target (neither bidder had a pre-bid stake in the third case).
24 / 25
5. CONSIDERATION
5.1 NATURE OF CONSIDERATION OFFERED
CHOICE OF CASH AND SCRIP FORMS OF CONSIDERATION
CASH ONLY
CONSIDERATION WAS
OFFERED IN MORE THAN
THREE QUARTERS OF
ALL DEALS IN 2012
The percentage of deals offering cash-only consideration increased by almost 20%
in 2012. This increase on 2011 resulted from a greater proportion of domestic bidders
offering cash consideration. The proportion of foreign bidders offering cash was
essentially unchanged from 2011 levels but remained substantial.
Cash-only consideration was this year offered in 78% of all deals, compared with 61%
in 2011. The popularity of cash is due to a combination of factors including the desire for
certainty of value in a challenging deal-making environment, ongoing market volatility
resulting from economic conditions, the discount at which prospective bidders’ shares
have been trading, the strong balance sheet positions of Australian bidders and the
substantial proportion of foreign bids for Australian assets.
Only 17% of deals in 2012 offered scrip only consideration. However, in the metals
and mining sector, 71% of deals offered scrip only consideration due to the ongoing
consolidation and relative stability of share prices in that sector throughout most of
the year.
Cash only
Cash and scrip combination or alternatives
Scrip only
Other
2%
17%
2%
Type of consideration
78%
5. Consideration
Cash only
Scrip only
Other
4%
15%
81%
Type of consideration
offered by foreign bidders
UNLISTED SCRIP/STUB-EQUITY
Bidders did not offer unlisted scrip or stub-equity to target shareholders as consideration,
consistent with the trend towards transparent and certain consideration we saw
throughout 2012.
SCRIP DOWNSIDE PROTECTION
No scrip downside protection mechanisms were used in any deals in 2012.
An adjustment mechanism was used in the Nabi merger with Biota Holdings by
way of scheme of arrangement but this involved only an adjustment in the Nabi scrip
consideration following the consolidation of Nabi’s share capital prior to implementation.
OTHER STRUCTURES
There was little to note in relation to novel consideration structures in 2012.
One exception was the bid for the Charter Hall Office REIT. Unitholders of Charter Hall
were paid cash consideration and distributions in multiple instalments including after
implementation of the scheme. The main scheme consideration and implementation
distribution were paid, as usual, on the scheme implementation date as well as a
distribution from part of the proceeds of a separate asset sale in the United States.
However, further cash instalments were distributed to former unitholders over 6 months
later, made up of the remaining proceeds of the US asset sale less any US taxes and
liabilities, through the use of an escrow account structure.
26 / 27
SPECIAL DIVIDENDS AND OTHER DISTRIBUTIONS
2012 saw a doubling in the number of targets declaring special dividends or undertaking
reductions of capital in connection with a deal. A special dividend was declared in
connection with 8 deals in 2012 and capital reductions were proposed in connection
with a further 2 deals.
Both types of distribution can assist the bidder by reducing the cash consideration
payable under the bid and reducing the bidder’s own funding requirements (assuming
that the bidder does not fund the distribution). Dividends can also be a useful means of
providing additional value to some target securityholders if the target has surplus franking
credits which the bidder may be willing to forgo if they are worth more in the hands of
target securityholders than in the hands of the bidder (because, for example, the bidder
is foreign).
In both cases, the tax treatment of the distribution is important and is usually the subject
of an ATO ruling (see next page).
PROPORTION OF DEALS WHICH INCLUDED SPECIAL DIVIDEND
Deals where
consideration included
special dividend
38%
Funded by bidder
63%
20%
Funded by target
SPECIAL DIVIDENDS
WERE USED IN TWICE THE
NUMBER OF DEALS IN 2012
COMPARED WITH 2011
5. Consideration
TAX TREATMENT OF DIVIDENDS / CAPITAL REDUCTIONS There are usually two reasons for seeking ATO rulings in relation to the
tax treatment of a distribution.
Certain securityholders may prefer consideration in the form of capital (either a capital reduction or consideration for the
securities) rather than dividends, because there are concessional tax rates on capital gains for resident individuals, trusts
and super funds and zero tax rates for non-residents where the target is not land-rich. However, in certain circumstances,
all or part of a capital reduction that is paid by a target in substitution for a dividend may be treated by the ATO as a
dividend that is both taxable as income and unfrankable by the target.
Dividends declared in connection with a deal are taxed as income in the hands of the securityholders and are generally
frankable by the target. However, if a dividend is characterised as forming part of the consideration received by the
securityholders for their securities, then it is possible that certain securityholders could be in effect double taxed on the
distribution (double taxation will arise only to the extent a capital loss would be made if the distribution did not form part
of the consideration received for the securities).
The Dulux takeover of Alesco featured a notable special dividend. In this deal, Dulux included a provision in its takeover
bid that entitled it to reduce the bid price by the value of any franking credits attributable to any dividend declared by
Alesco as well as by the value of the dividend. Dulux ultimately made a “last and final statement” stating that it would
increase the cash offer and allow Alesco shareholders to receive up to $0.18 per share in franking credits. The parties
entered into negotiations following this statement culminating in a potential revised proposal which would have provided
an increase in the dividend payable to Alesco shareholders and attached franking credits. Alesco then sought orders from
the Takeovers Panel that the “truth in takeovers” policy not apply, and that Dulux be prevented from deducting from its
offer the value of franking credits, in respect of the potential revised proposal. The Panel declined to conduct proceedings
on the basis that no agreement had been reached between the parties on the potential revised proposal. However, the
Panel indicated that, had there been such an agreement there would have been no reasonable prospect of the revised
proposal being permitted and that ASIC would have commenced proceedings to prevent Dulux from departing from its
“last and final statement”.
The Dulux/Alesco deal put a particular focus on the value of franking credits. The value of franking credits attributable to
any dividend will depend on each shareholder’s individual tax circumstances and will not be available to all shareholders
(including non-Australian resident shareholders). Further, a company’s share price will not usually attribute much, if any,
value to franking credits attributable to dividends.
For an Australian resident shareholder to receive full value for franking credits, in the form of a tax offset, refund, or
carry forward tax loss, the shareholder must hold the share sufficiently at risk for a minimum period at a specified time.
Essentially, the shareholder must retain at least 30% of the risks of ownership (determined using the “delta” of the
share and other positions) for a continuous period of at least 45 clear days. Where, in the context of a deal, the value
of the dividend effectively accrues to the bidder through a reduction in the bid price, the test must be satisfied in the
90 day period straddling the day following the dividend record date. In the case of Alesco, its dividend record date was
8 December 2012 so the 90 day period ran from 24 October 2012 to 22 January 2013. Alesco shareholders receiving the
additional discretionary dividend ceased to hold their shares at risk on the date of acceptance of Dulux’s unconditional
offer or upon compulsory acquisition. Consequently, only those shareholders who had held the shares at risk for 45 clear
days between 24 October 2012 and the earlier of the date they accepted Dulux’s offer and 22 January 2013 qualified for
the full benefit of franking credits on that distribution. A tax ruling to this effect was also obtained by the parties for the
benefit of target shareholders.
28 / 29
5.2 PREMIUM FOR CONTROL
AVERAGE PREMIUMS
RETURNED TO A MORE
MEASURED 37% IN 2012
(EXCLUDING OUTLIERS)
The average premium to trading prices for surveyed deals in 2012 (excluding mergers of
equals) was 45%, compared with 51% in 2011. The two highest premiums were offered
in the two takeover bids for Ludowici Limited (by Weir Group plc, which offered a 186%
premium and FLSmidth & Co. A/S, which offered a 198% premium). If these two outliers
are removed, the average was a more conservative 37% compared with the 47% average
in 2011 (after removing the outlier deal in 2011).
198%
200%
150%
100%
50%
45%
Basic statistics on
deal premia
37%
0%
Average
Average
(excluding both
bids for
Ludowici)
Max
7%
2%
Min
Proportion of
deals which are
mergers of
equals
In 2012, a 45% premium (or a 37% premium excluding the premia offered in the Ludowici
deal), was generally enough to secure a board recommendation and the ultimate success
of the transaction.
45%
40%
37%
41%
37%
35%
35%
30%
25%
Average premium
20%
offered for different
15%
recommendations
10%
(excluding both bids
5%
for Ludowici)
0%
17%
Initial
recommendation
Not
recommended
Recommended
later
All without initial
recommendation
All with
recommendation
5. Consideration
2012 SAW LOWER
PREMIUMS OFFERED FOR
RECOMMENDED DEALS
In 2012 bidders did not have to pay a higher premium to secure a recommendation after
announcement than was paid with an initial recommendation. The average premium for
transactions recommended later was the same as that for an initial recommendation.
Contributing to this was the general lack of competition for assets in the market in 2012.
Interestingly, lower premiums were offered for recommended deals than for the few
deals that were not recommended. This somewhat strange outcome results from the fact
that most deals were unsuccessful or withdrawn due to the presence of a competing
bid – meaning that competition had driven the premium offered up, before one bidder
ultimately withdrew.
Average premia per industry sector was fairly consistent across all sectors. The significant
144% average in the mining services sector again reflects the Ludowici deal and was a
more modest 48% excluding this transaction.
160%
144%
140%
120%
100%
80%
38%
Oil, Gas & Consumable
Fuels
Real Estate
38%
Information Technology
& Services
35%
40%
12%
Telecommunications
Commercial/Professional
Services
Mining Services
General Industrials
Media
Infrastructure
0%
Financial Services
different industries
30%
15%
20%
Beverages
Average premium for
35%
39%
Metals & Mining
40%
56%
55%
60%
5.3 CHANGES IN CONSIDERATION
In 30% of deals that were announced and completed in 2012 the consideration on
offer was increased (by an average of 13%) following the initial announcement of the
transaction. In 2011, only 15% of deals involved a price increase following announcement.
There were a range of reasons why the price was increased, including to gain the support
of shareholders, whether by accepting an offer or voting in favour of a scheme, to secure
a target board recommendation or to match a competing offer.
30 / 31
30%
46%
13%
PROPORTION OF
DEALS WHERE INITIAL
CONSIDERATION INCREASED
AVERAGE INITIAL
PREMIUM FOR
THOSE DEALS
AVERAGE
LEVEL
OF INCREASE
Half of the bids which were announced following a bear hug approach were announced
at a higher price than the price at which the bear hug approach was made, which was
broadly the same as 2011. The average increase in price between the bear hug approach
and the announced deal was 9% which was again broadly in line with the trend in 2011.
5.4 NO INCREASE, NO EXTENSION STATEMENTS AND
CONDITIONAL INCREASES
The comparative lack of bidders in 2012 and the absence of competitive tension in
many deals saw bidders make no increase, no extension and/or conditional increase
statements in 56% of the surveyed deals in 2012 to clearly signal their positions
to target shareholders. This was over double the percentage in 2011.
56%
60%
50%
40%
30%
28%
22%
20%
6%
10%
Statements to encourage
acceptances in takeovers
0%
No increase
statements
No extension
statements
Conditional
increase in
consideration
Either no increase,
no extension or
conditional increase
5. Consideration
A LACK OF COMPETITIVE
TENSION IN 2012
EMBOLDENED BIDDERS
TO USE TRUTH IN
TAKEOVERS STATEMENTS
AS ULTIMATUMS FOR
TARGET SHAREHOLDERS
Brookfield’s takeover bid for Thakral Holdings was one such case. In order to secure a
board recommendation, Brookfield made use of truth-in-takeovers statements to state
that it would increase its offer price if it achieved 90% acceptances – the threshold
for compulsory acquisition. The offer period was also extended to facilitate these
acceptances. This tactic was successful and resulted in acceptances of significantly more
than 90%, enabling Brookfield to move to compulsory acquisition of Thakral. More details
about this transaction are set out in Section 11.
This deal highlights the flexibility of an announced conditional increase over a no increase
or no extension statement. If a no extension or no increase statement does not achieve
the desired result, a bidder can be left with limited options to pursue the deal (consider
APA’s bid for Qantas in 2007 where insufficient acceptances were received by the no
extension date).
5.5 JOINT PROPOSALS
Joint bids accounted for 15% of all surveyed deals in 2012, almost exactly the same
as in 2011.
71%
Proportion of joint proposals which involve target
shareholder with +20% holding
PROPORTION OF DEALS WHICH ARE JOINT PROPOSALS
Joint proposals
15%
86%
Proportion of joint proposals which involve target shareholder
From a regulatory perspective, parties have flexibility to pursue such joint proposals under
the Corporations Act, subject to obtaining ASIC relief or obtaining target shareholder
approval if the joint bidders control in aggregate more than 20% of the shares in the
target. In these circumstances, careful consideration is always given to the structure of
any such proposal, whether to seek shareholder approval or obtain ASIC relief and the
terms of such approval or relief.
32 / 33
JOINT PROPOSALS
ARE NOW A CONSTANT
FEATURE OF THE
AUSTRALIAN M&A
LANDSCAPE
Joint proposals vary in what they seek to achieve. Some are structured as simple joint
ownership proposals for the target, while others are structured as target acquisitions
by one party and then on-sales of certain target assets to another party.
5.6 FUNDING OF CASH CONSIDERATION
In a continuation of what we saw in 2011, approximately half of all cash deals were
funded solely by the bidder’s existing cash reserves or existing general purpose facilities
(47% in 2012 compared with 53% in 2011).
4 deals were announced conditional on financing. However, the bidder had secured highly
confident commitments or credit committee approvals from its financiers in each of these
deals and no deals failed in 2012 because of a failure to obtain financing.
80%
71%
70%
60%
50%
40%
32%
30%
18%
20%
Proportion of deals
10%
3%
funded in whole or in
part by different sources
0%
Existing cash
reserves or
corporate
facilities
Acquisition
finance facility
Equity capital
raising
12%
0%
Debt capital
raising
Other
ACQUISITION
FINANCE WAS AGAIN
UNDERUTILISED IN 2012
Deal conditional
on financing or
bidder has ability
to terminate if
not available
6. CONDITIONALITY
6.1 HIGHLY CONDITIONAL DEALS
The highly conditional offers which started appearing in 2011 (in response to the volatile
economic climate) have in 2012 become standard practice as economic turbulence has
become the new normal.
Overall
Off-market takeover
Scheme
100%
90%
80%
70%
60%
50%
40%
30%
20%
There is a tension between these high levels of conditionality and parties’ desire to
complete deals quickly. Our prediction that deals in 2013 will take longer to complete
reflects this growing reliance on a long checklist of conditions.
No material acquisitions
Minimum acceptance
Market out
Director recommendation
Bidder warranties
Target warranties
Bidder POs
Target POs
Bidder MAC
Target MAC
Exclusivity
Due diligence/information
Change in control/third
party consents
No restraint
General/soft regulatory
FSSA/IATA
0%
FIRB
surveyed deals
10%
ACCC
Conditionality of
34 / 35
6.2 MINIMUM ACCEPTANCE CONDITIONS
70% OF MINIMUM
ACCEPTANCE
CONDITIONS WERE
SET AT 50.1%-89.9%
The majority of off-market bids continue to contain a minimum acceptance condition.
However, the level of the acceptance threshold seems to be falling.
70% of minimum acceptance conditions in 2012 were set at 50.1-89.9%, with the
remaining 30% at 90-100%. This is in contrast to 2011, where there was an even split
between 90% conditions (the level at which a bidder can to move to compulsorily acquire
any outstanding minorities), and 50.1% conditions (which allows the bidder to gain
control of the board).
63%
70%
30%
OFF-MARKET TAKEOVERS
WITH MINIMUM
ACCEPTANCE CONDITION
THRESHOLD
50%-89%
THRESHOLD
90%-100%
80%
60%
Waiver of minimum
acceptance condition in
off-market takeovers
50% OF MINIMUM
ACCEPTANCE
CONDITIONS
WERE WAIVED
89%
75%
100%
50%
50%
50%
Proportion
overall waived
Proportion of
50-89% waived
Proportion of
90-100%
waived
50%
39%
40%
20%
0%
If waived,
proportion
which complete
with 100%
ownership
If not waived,
proportion which
complete with
100% ownership
Average interest Average interest
when 50%
when 90%
condition waived condition waived
There has also been a significant change in how minimum acceptance conditions play
out. More bidders are waiving the condition (50% in 2012, compared with 30% in 2011).
Bidders are also taking considerably longer to waive this condition, waiting an average of
129 days from announcement of the deal compared with 79 days in 2011 (although this
average is inflated by the protracted bid by Dulux for Alesco).
6. Conditionality
There were only two takeovers which were subject to a 90% minimum acceptance
condition. One of those failed due to a competing proposal. The other deal was Dulux
Group’s bid for Alesco. In that case, when Alesco agreed to recommend the transaction,
Dulux Group agreed that it would waive the 90% minimum acceptance condition once the
sum of acceptances of the offer (including instructions in the acceptance facility) and the
number of securities held by a list of “index funds” agreed between the parties reached
90%. Index funds typically have a mandate which prevents them from accepting (or
tipping into an acceptance facility) until the offer is unconditional or the target is removed
from relevant indices. Dulux announced that it would waive the condition when it had
reached 85.79% acceptances including instructions in the acceptance facility and went
on to reach the 90% threshold within 6 days of the offer being declared unconditional.
The deal provides a good example of how a minimum acceptance condition can be
waived and the bidder successfully reach the compulsory acquisition threshold where
an analysis of the register shows the outstanding securities are held by index funds
with particular mandates.
6.3 MARKET-OUTS
MARKET-OUTS INCREASE
IN POPULARITY
Market-outs allow bidders to withdraw a bid if falls in equity or other markets mean that
the deal is no longer commercially advantageous to them. The use of such conditions has
increased in recent years, appearing in 20% of deals in 2012, up from 15% in 2011.
At the same time, bidders are becoming more sophisticated in the wording of these
market-outs. It is becoming common to see them tied to specific commodity prices
or other markets particularly relevant to the target.
6.4 REGULATORY CONDITIONS
While foreign regulatory conditions posed some challenges to bidders in 2012 (see over
the page), obtaining foreign investment approval from the Australian Treasurer proved to
be a relatively straightforward process. In 2012, all of deals which had foreign investment
approval conditions obtained such approval. While this is good news for bidders and
targets, some politicians and media commentators believe this high approval rate
indicates that the approval process is too lax.
With a Senate Committee currently conducting an inquiry into a range of issues relating
to foreign investment in Australia (see Section 9) and a Federal election to be held on
14 September this year, it will be interesting to see whether unconditional approvals
remain the norm.
36 / 37
DEALING WITH FOREIGN REGULATORY APPROVALS In 2012, over half of all deals involving foreign bidders had a condition
that the bidder receive all necessary regulatory approvals in their home country. While in most cases this proved to
be a straightforward process, there were some notable exceptions in 2012, highlighting how drafting these conditions
appropriately is critical.
By far the longest-running deal in 2012 was the bid by private Chinese company Hanlong for iron-ore producer
Sundance Resources.
Sundance Resources first announced it had received a bear hug approach from Hanlong in July 2011, and a binding offer
was made by Hanlong in October of that year. Hanlong made its offer conditional on it receiving the necessary approvals
from Chinese regulators.
At the time of writing, the deal has yet to complete because of Hanlong’s failure to obtain unconditional approvals.
In August 2012, China’s National Development and Reform Commission approved the deal, but imposed a number of
conditions, including that Sundance and Hanlong agree a “reasonable acquisition price”. This is believed to be the first
time the NDRC has granted approval subject to renegotiating a publicly disclosed price. Sundance subsequently agreed
to a reduction in Hanlong’s offer consideration.
This example demonstrates how navigating the regulatory approval process in the foreign bidder’s home jurisdiction can
be a protracted process, adding considerable timing and execution uncertainty. When negotiating a foreign regulatory
approval condition, an Australian target should engage its own legal counsel in the bidder’s jurisdiction to ascertain
precisely which regulatory approvals are required, the assessment criteria, the level of information and review that will
be involved and the expected timeframe for receiving the approvals.
We expect that targets will continue to look for ways to address the risk that these approvals are not obtained. Possible
strategies include requiring reverse break fees with triggers which are linked to the relevant conditions, negotiating
more specific termination rights which may be relied upon where the conditions are not satisfied, or steps taken towards
their satisfaction, within a specified timeframe (see Section 8.2) or otherwise insisting that these conditions are satisfied
before any implementation agreement is signed or before any exclusivity restrictions or obligations to commence the
scheme process apply to the target (for example, News Limited and Consolidated Media Holdings delayed entering into
an implementation agreement until ACCC approval was obtained).
TARGETS FOCUS ON
RISK ASSOCIATED
WITH SATISFACTION OF
REGULATORY CONDITIONS
6. Conditionality
6.5 MAC CONDITIONS
76% OF DEALS HAD A
TARGET MAC CONDITION
Material adverse change (MAC) conditions continue to be common market practice.
76% of deals allowed a bidder to walk-away because of a target MAC. Target MAC
conditions are key for bidders who want a walk-away right as protection against
macroeconomic and company specific events that could affect the target. Bidder MAC
conditions are predominantly found in agreed deals involving scrip consideration, as
targets seek to protect the value of the consideration being offered to their shareholders.
In 2012 bidder MAC conditions were used in 27% of all deals, and in 88% of agreed deals
where scrip consideration was offered.
One of the most heavily debated issues in any agreed transaction is the scope of the
target MAC condition. Our analysis has allowed us to build a picture of the standard
market practice for a target MAC condition.
Inclusions
Exclusions
52%
Specifically referred to the effect of an
event on a target’s “prospects”
94%
Included forward-looking language
68%
Included references to past events which
subsequently became known to the bidder
71%
Did not refer to effects which were
specific to the target’s business
61%
Included quantitative thresholds (such as
EBITDA/net asset)
90%
Did not exclude short-term effects
77%
Did not exclude matters set out in
a disclosure letter
52%
74%
Excluded matters disclosed in information
generally disclosed or discovered prior to signing
55%
61%
90%
MAC condition in 2012
Contained an exception for changes in markets
Contained an exception for general changes in
economic conditions
Did not contain an exception for natural disasters
55%
The standard Target
Excluded matters disclosed in due
diligence information
52%
Contained an exception for changes in law
Did not provide that exceptions apply only where,
or additional exception if, change disproportionately
effects target compared with rest of industry
38 / 39
As MAC conditions become broader in scope, target boards need to consider carefully
how observable the effects set out in a MAC condition are and how enforceable the
clause is. It may be appropriate for a target board to test a MAC condition against
something readily observable and within its control such as its management accounts,
before agreeing to its terms.
6.6 DUE DILIGENCE CONDITIONS
Due diligence conditions (making a bid conditional upon the target providing the bidder
with due diligence information) were rarely used in 2012. They featured in only 5% of
2012 deals, a broadly similar picture to 2011.
This is partly due to the high proportion of recommended deals, where the target usually
allows due diligence as part of the negotiating process. Due diligence conditions are also
a relatively unsophisticated way for bidders to deal with uncertainty about the value of
the target. Taking advantage of increased shareholder activism will generally be a far
more effective approach, because major shareholders are often able to put pressure on
a company to co-operate with a bidder, including by providing a prospective bidder with
access to due diligence.
6.7 REGULATORS CLAMP DOWN ON BROAD CONDITIONS
As predicted, Australia’s regulators have issued several warnings this year that bidders
and targets cannot rely on broadly drafted, vague or illusory conditions to walk away from
announced deals. For more details, see Section 9.
CONDITIONS WERE
THE SUBJECT OF
CLOSE SCRUTINY
FROM REGULATORS
7. PRE-DEAL
ARRANGEMENTS
7.1 MAJORITY OF BIDDERS HAVE AN INITIAL STAKE IN THE TARGET
BIDDERS IN MORE THAN
80% OF OFF-MARKET
TAKEOVERS STARTED
WITH AN INITIAL STAKE
Volatile market conditions in 2012 encouraged bidders to acquire an initial stake in the
target before proceeding with a deal.
In 2012 bidders had an initial stake in 61% of all deals and 89% of off-market takeovers.
What is interesting is that the percentage of schemes where the bidder had an initial
stake decreased in 2012 to 41% compared to 59% in 2011. This is probably due to a
reduction in the number of joint bid schemes in which a bidder partnered with a major
shareholder (see Section 5.5).
Bidders are more likely to acquire an initial stake under a takeover bid than a scheme,
and there is good reason for that. In a scheme, shares which are actually held by the
bidder are effectively taken out of play in the sense that the bidder cannot vote on the
scheme with the main body of shareholders.
Consistent with what we saw in 2011, the most common initial stake for off-market
takeovers was between 10.01% and 20%: 67% of off-market takeovers in 2012 had
an initial stake of this size.
Overall
Off-market takeover
Scheme
70%
67%
59%
60%
50%
40%
41%
39%
30%
23%
20%
15%
11%
10%
2%
Size of pre-bid interest in
target securities
0%
No initial holding
17%
14%
6%
5%
2%
0%
Less than 5%
0%
0% 0% 0%
Between 5%
and 10%
Between 10.01%
and 20%
Between 20.01%
and 50%
Between 50.01%
and 90%
40 / 41
There were no initial stakes between 5% and 10%. Together, these figures are
consistent with bidders either wanting to remain below the 5% disclosure threshold
or, once over that threshold, trying to obtain as large an interest as feasible under
the 20% takeovers threshold.
7.2 FORM OF INITIAL STAKE
As we predicted in THE REAL DEAL 2012 edition, there were a significant number of deals
in 2012 where bidders had a pre-existing stake (not acquired in anticipation of the bid).
This reflects the fact that many strategic shareholders considered it a good time to take
the company private to pursue initiatives for growth without the pressure of shareholders
focused on short-term returns.
OUTRIGHT
ACQUISITIONS NOW
MORE POPULAR THAN
PRE-BID ACCEPTANCE
AGREEMENTS
A pre-existing stake was the most common form a bidder’s initial interest in a target took
in 2012 and was already in place before the bid was announced in 43% of off-market
takeovers and 56% of schemes.
Stakes acquired by bidders in anticipation of making a bid took different forms, depending
on whether the bid was structured as a scheme or a takeover.
In the case of takeovers, the most common form of pre-bid stake, other than a preexisting stake, was an unconditional outright acquisition. This is a significant change to
what we saw in 2011, where pre-bid acceptance agreements were the most common
way of acquiring a pre-bid stake for takeovers. In 2012 these stakes were acquired by
strategic bidders which are more likely to be willing to hold a minority interest in the
target should the takeover fail. Takeovers which were preceded by the outright acquisition
of a significant stake included Dulux Group’s bid for Alesco Corporation and Drillsearch
Energy’s bid for Acer Energy. A significant outright stake will be the most effective
deterrent to competing offers. However, the outright acquisition of a stake will sometimes
give the impression that the bidder needs to complete the takeover “at all costs”, which
is a perception that the Dulux Group sought to refute, arguing that it would be happy to
continue as a minority shareholder.
43%
45%
40%
35%
21%
30%
25%
20%
15%
Pre-bids for off-market
takeovers
10%
7%
7%
Pre-bid
acceptance
On-market
7%
7%
Conditional
off-market
Call option
7%
0%
5%
0%
Unconditional
off-market
Pre-bid
voting
Pre-existing
stake
Joint bid
arrangement
7. Pre-deal Arrangements
VOTING INTENTION
STATEMENTS MORE
COMMON FOR SCHEMES
IN 2012
For schemes, there was no clearly preferred form of pre-bid stake and there was a fairly
even use of outright on-market acquisitions, unconditional off-market acquisitions and call
option agreements. Call options continue to be used as a means of acquiring some level
of control over a shareholder’s stake, particularly in the event of a competing offer, as they
generally do not preclude the stake from being voted at the scheme meeting along with
the general body of shareholders.
While there were no voting agreements as such entered into between bidders and major
shareholders in connection with schemes in 2012, it is becoming increasingly common
for bidders to instead obtain voting intention statements from those shareholders.
These statements were made by target shareholders (other than directors who would
usually make such a statement in connection with their recommendation) in 36% of
schemes (compared with only 14% in 2011) and in more than half of all schemes where
the target had a 20% plus shareholder on the register.
56%
70%
60%
50%
40%
30%
20%
Pre-scheme
arrangements
10%
11%
22%
33%
11%
22%
22%
0%
0%
Pre-bid
acceptance
On-market
Unconditional
off-market
Conditional
off-market
Call option
Pre-bid
voting
Pre-existing
stake
Joint bid
arrangement
In a somewhat unusual example, LionGold Corp obtained an approximate 15% pre-bid
stake by way of an issue of shares by the target, Castlemaine Goldfields, which was
announced contemporaneously with a recommended off-market takeover. Share issues
are often thought of as something which can be used as a defensive mechanism to thwart
a takeover, however, in this case the issue by the target to the bidder would have assisted
the bidder and the prospects of the takeover by making it easier for it to reach the 90%
compulsory acquisition threshold and deterring rival offers.
42 / 43
UPSIDE SHARING — KEEP IT SIMPLE Bidders and shareholders can agree a range of matters in relation to how the purchase
price for a stake will be adjusted for changes in the bid price or rival offers and, in particular, the sharing of any upside
associated with a higher rival offer, provided that the arrangements do not contravene the rule prohibiting bidders from
giving shareholders the benefit of so-called “escalator” payments.
In 2012, only 4 pre-bids, or 16% of all pre-bid arrangements, included mechanisms to share the value associated with
higher offers between the bidder and the shareholder.
These arrangements vary in complexity from quite simple to very complex. The high water mark in terms of complexity
was probably the pre-bid call options entered into by Wesfarmers with Premier Investments Limited in connection with
its bid for Coles in 2007. The options provided that the value associated with higher offers would be shared according
to a complex formula in different ways depending upon the relevant circumstances.
However, the clear trend is now for these arrangements to be kept very simple. The most common agreement is simply
that the bidder must pass on a portion of any proceeds it receives on a subsequent sale of the stake. This is what PEP
agreed with the Spotless shareholders with whom it entered into pre-bids. The proportion which is shared varies and is
a matter for commercial negotiation. For example, PEP agreed to pass on all of the upside to the Spotless shareholders
whereas Exxaro only agreed to pass on 50% of the upside to shareholders in African Iron Limited.
7.3 MINORITY TAKEOUTS
Minority takeouts were again a key feature of the Australian M&A market in 2012.
This was something which we identified as a trend in 2011 and which we predicted
in THE REAL DEAL 2012 edition would continue.
Examples in 2012 include Lion’s bid for Little World Beverages Limited in which it held
a 36% stake, Whitehaven’s bid for Coalworks in which it had a 17% stake and ESK’s bid
for National Can Industries in which it held a 71% stake.
35%
30%
29%
25%
20%
15%
15%
10%
Proportion of all deals
where bidder had a
5%
2%
significant pre-existing
stake
0%
Pre-existing
stake above
10%
Pre-existing
stake above
20%
Pre-existing
stake above
50%
7. Pre-deal Arrangements
7.4 IMPACT OF INITIAL STAKE ON DEAL SUCCESS
Given the small number of deals in 2012 and the fact that all 3 deals which failed did so
only because of a competing offer, it is difficult to draw any conclusions about the impact
of an initial stake on the success of a deal.
However, as in 2011, while pre-bid stakes demonstrate shareholder support for the
transaction and build momentum for a deal, they had no positive effect on a bidder’s
chances of getting an initial recommendation from the target board.
With pre-bid stake
67%
Without pre-bid stake
76%
Proportion of deals with
pre-bids which had an
initial recommendation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Having said that, the average time to complete a deal after announcement was shorter for
those deals where the bidder had an initial stake, which does suggest that an initial stake
may help close the deal more quickly. This average is even lower if the outlying bid by
Dulux for Alesco, which took a marathon 263 days to complete, is removed from
the average.
Conversely, the prolonged bid for Alesco illustrates well the fact that a 20% pre-bid stake
is not going to be the silver bullet that will get the deal across the line where the offer
price is not viewed by shareholders as sufficient. The pre-bid is more often a defensive,
rather than an offensive, tool.
44 / 45
7.5 JOINT BID ARRANGEMENTS
As noted in Section 4.5 there were 6 deals in 2012 which involved “joint proposals”.
Of those, 3 involved a partnering with a major shareholder: the bids for Discovery Metals,
Charter Hall and Talent2.
Only the bid for Talent2 involved a shareholder with a stake above 20%. In Talent2,
the joint bidders elected to seek shareholder approval for the arrangements which were
agreed under a joint bidding agreement. They also obtained from ASIC an extension of
the period for which they could restrict disposal before obtaining that approval from
a 3 month period to 4 months to allow time to complete the steps required to be taken
before the scheme meeting. The parties elected to seek shareholder approval and an
extension of the lockup period instead of joint bid relief which would seem to have
been available in this case.
ASIC’s extension of the 3 month period to accommodate the scheme process may well
encourage other joint bidders to take this route where joint bid relief would impose
conditions not acceptable to the parties. See Section 10.2 for a summary of the proposed
changes to ASIC’s policy on joint bids.
ASIC EXTENDS 3 MONTH
LOCK-UP PERIOD FOR
JOINT BIDDERS
8. DEAL PROTECTION
MECHANISMS
Deal protection mechanisms can work to the advantage of both bidders and targets.
They help to protect the bidder from being used as a stalking horse whose bid simply puts
the target in play. The bidder doesn’t want its offer to be easily topped by a marginally
higher price offered by an interloper who is comfortable piggybacking on the first buyer’s
due diligence and implementation agreement negotiations.
Deal protections help ensure a higher degree of closing certainty for a deal that the target
board has recommended to its shareholders. By enhancing closing certainty they can also
help protect the target. If properly negotiated, deal protections can (and should) be used
to help the target exact the best available purchase price and overall deal terms from
the buyer.
There is typically a correlation between the strength of the deal protection package that
is negotiated and ultimately agreed to, and the target’s process that led to signing the
merger agreement. Generally, the more comprehensive the pre-signing market check is,
in both depth and duration, and the higher the deal premium is, the more likely the target
will agree to a robust package of deal protections.
8.1 BREAK FEES
81% OF DEALS HAD
A BREAK FEE PAYABLE
BY THE TARGET
Break fees featured in 81% of deals in 2012, which is in line with 2011 numbers.
Break fees are now a generally accepted practice in Australia, which is in contrast
to the position in the UK.
In the UK, there is now considerable caution around the use of break fee clauses for two
reasons: firstly, in September 2011, the UK Takeovers Panel introduced provisions which
generally prohibit break fees (except where agreed with a “white knight” or following a
formal sale process).
Further, in March 2012, the UK High Court ruled that a break fee was unlawful because
it involved the target giving the bidder financial assistance to acquire shares in itself.
The Court found that because the break fee in question “smoothed the path” towards the
acquisition, it was financial assistance, even though the bidder did not ultimately acquire
any shares in the target.
46 / 47
71% OF BREAK FEES
WERE SET AT OR AROUND
1% OF DEAL VALUE
Australia’s regulation of financial assistance differs in some respects from the UK, but
it’s not impossible that an Australian court could make a similar finding. In Australia, the
statutory test is whether giving the financial assistance materially prejudices the interests
of the company or its shareholders or the company’s ability to pay its debts. A very large
break fee may well have such an effect and could therefore be unlawful. Accordingly,
parties negotiating a break fee clause need to evaluate its effect on the company or its
shareholders or its ability to repay debt.
Equally importantly, they need to take account of the Takeover’s Panel’s guidance that
break fees should not usually exceed 1% of the deal value. The high degree of conformity
with this policy is reflected in the fact that 71% of deals in 2012 with a target break fee
had a break fee at or around 1% of deal value, 21% had a break fee below this range and
only 8% had a break fee above this range.
2.00%
1.80%
1.60%
1.40%
1.20%
71% OF BREAK FEES
1.00%
0.80%
0.60%
0.40%
Target break fee size
0.20%
as percentage of
transaction value
0.00%
Deals where break fee agreed
8. DEAL PROTECTION MECHANISMS
8.2 BREAK FEE TRIGGERS
In 2012, we saw target boards negotiate for a high number of exceptions to their
obligation to pay the bidder a break fee. As the graph below demonstrates, a number
of these triggers and exceptions have become market standard, appearing in all,
or close to all, break fee provisions in implementation agreements.
Triggers
Exceptions
33%
Superior proposal recommended/completed
95%
Any competing proposal completes within period
Change of director recommendation
92%
Material breach by target
92%
42%
Breach by target of warranties/POs
100%
Conditions become incapable of satisfaction
100%
Scheme becomes effective
75%
Target break fee
triggers/exceptions
89%
Bidder MAC
Bidder material breach
8.3 REVERSE BREAK FEES
45% OF DEALS HAD
A BREAK FEE PAYABLE
BY THE BIDDER
The use of reverse break fees has increased in recent years. 36% of 2011 deals included
break fees payable by bidders; in 2012 this figure increased to 45%. This increase is
likely attributable to the increased conditionality of deals and, in particular, the use of
regulatory and financing conditions which the bidder is responsible for satisfying and
which carry a higher risk of not being satisfied.
48 / 49
90%
80%
81%
70%
60%
45%
50%
45%
40%
Proportion of agreed
deals where break fee
19%
30%
20%
10%
payable
0%
Target break fee
Bidder break
fee
Both
target/bidder
break fees
None
Interestingly, reverse break fees for second movers are generally far more onerous than
the terms which applied to the first mover. For example, Chengdu Tianqi agreed to pay
Talison a break fee of C$25 million if it failed to pay Talison’s shareholders the scheme
consideration or secure funding for the bid. The first mover for Talison, Rockwood
Holdings, did not agree to any similar fee. This agreement is particularly interesting
because the maximum break fee payable by Talison to Chengdu Tianqi was only
C$8.4 million.
8.4 EXCLUSIVITY PROVISIONS
EXCLUSIVITY PROVISIONS
NOW MARKET PRACTICE
IN AGREED DEALS
In the current market environment, there are not a lot of potential bidders with
the confidence to make a first move. For those that do, exclusivity provisions are
an important reward.
In 2012, exclusivity provisions such as no shop, no talk and notification and matching
rights for competing proposals were almost a given in recommended deals.
These provisions featured in 92% of deals where there was a target break fee,
and in 87% of recommended deals overall.
REVERSE BREAK FEES
USED TO ADDRESS
BIDDER FUNDING OR
REGULATORY RISK
8. DEAL PROTECTION MECHANISMS
90%
87%
87%
85%
80%
74%
75%
70%
Exclusivity in
agreed deals
65%
No shop
No talk
No due diligence
In 83% of agreed deals the target was required to notify the bidder of a competing
proposal. 75% of agreed deals then gave the bidder an express right to match the
competing proposal.
90%
80%
76%
83%
70%
60%
50%
32%
40%
30%
43%
20%
Notification and
10%
matching rights
0%
0%
Ability to terminate
where superior
proposal
Notification right
Matching rights
– 3 or less days
Matching rights
– 4 or 5 days
Matching rights
– greater than
5 days
A breach of exclusivity provisions by the target generally allows the bidder to terminate
the arrangements and be paid the break fee (if one has been agreed). Where there is
no break fee, the bidder would have to sue for damages for breach of contract.
Before a target can be released from the various no talk and similar restrictions it has
agreed to, the bidder will usually require that there is a rival proposal on the table. In 88%
of deals with those restrictions, a rival proposal was required that must be superior to the
first bidder’s (or be reasonably expected to lead to a superior proposal). In the remainder
of those deals, the target board secured a general fiduciary duties exception
to its exclusivity obligations.
50 / 51
A “superior proposal” was defined with varying degrees of specificity for the purpose
of these agreements.
55%
60%
50%
40%
30%
20%
19%
10%
13%
10%
Definition of “superior
proposal”
0%
0%
Requirement for
funding
certainty
Requirement for
closing
certainty
Requirement
that be
“financially
superior”
Must be breach
of duties to not
respond
Proposal must
not be subject
to due diligence
8.5 CHANGE IN TARGET DIRECTOR’S RECOMMENDATION
In 82% of agreed deals, target directors could only change their recommendation in
limited circumstances. As with 2011, the most common circumstance (in 78% of agreed
deals) was the existence of a superior proposal. In past years, there has been a trend
for target directors to seek a general fiduciary duty carve-out to their obligation to
recommend a transaction to their shareholders. While this trend was still evident in
2012, it is clear this is not yet market standard and is still subject to negotiation between
bidder and target. Only 24% of agreed deals where directors could only change their
recommendation in limited circumstances included a general fiduciary duty carve-out
to the target directors’ obligation to recommend the transaction.
80%
100%
80%
68%
60%
Reasons for changing
recommendation where
40%
24%
20%
change permitted in
limited circumstances
0%
0%
General fiduciary
exception
With superior
proposal
If independent
expert concludes
not in best interests
Otherwise where
specified
intervening event
9. DAMAGES AND
LIABILITY
9.1 CONDUCT OF BUSINESS AND ACCESS TO TARGET BUSINESS
ALL IMPLEMENTATION
AGREEMENTS CONTAIN
BROAD CONDUCT OF
BUSINESS RESTRICTIONS
Bidders often put restrictions on how a target can conduct its business during
the bid period.
All 2012 deals which had an implementation agreement included conduct of business
restrictions which extended beyond the basic undertakings not to allow a prescribed
occurrence to occur and to conduct the business in the ordinary course. This is markedly
different to the practice in 2011: then, almost half of the implementation agreements had
only the basic undertakings, and many had no contractual restriction at all (although there
may have been a prescribed occurrence condition).
Implementation agreements were also used by bidders to get access to target
information, even before there was certainty that the deal would complete. 77% of
implementation agreements gave the bidder the specific right to access target information
and/or personnel for integration purposes before the scheme became effective or the
takeover completed.
9.2 TERMINATION RIGHTS
Termination rights are a feature of scheme implementation agreements rather than
takeover bids. That’s because, once a takeover is proposed by a bidder, the bidder is
obliged by law to proceed with the takeover and make the offer available to shareholders.
The termination rights included in implementation agreements in 2012 were relatively
standard: the target board qualifying its support, a material breach of the agreement,
a material adverse change or prescribed occurrence, non-satisfaction of defeating
conditions and non-completion of the deal by the sunset date.
More interesting or unusual termination rights which were agreed are described below.
DirectCash Payments’ bid for Customers Limited was structured as a scheme. However,
the parties agreed that DirectCash Payments could elect to abandon the scheme and
instead make a takeover offer on the same terms as a competing bidder if such a takeover
were announced.
52 / 53
In 2011, we saw that implementation agreements increasingly incorporated elements
found in private M&A. An example of this is in 2012 was the agreed merger between
Nabi Biopharmaceuticals and Biota Holdings. The implementation agreement for that deal
included a long list of warranties usually only sought in private deals. While it is difficult
in practice to agree post-completion purchase price adjustments similar to those which
might be seen in private M&A, the parties did agree termination rights which would
arise where the closing net cash balance or other similar metrics were below
a threshold amount.
The most unusual termination right was that agreed for the benefit of Sundance
Resources as part of a revised deal with Hanlong Mining at a reduced offer price
following the bidder’s failure to obtain certain Chinese regulatory approvals in respect of
the initial deal. The right allowed Sundance to terminate the agreement in the event that
Hanlong sought to further reduce the offer price. This right is clearly something which
was unique to this particular deal. It would provide Sundance with a greater range of
options should any other approvals not be obtained or only obtained subject to conditions
which required the offer price to be reduced.
9.3 DAMAGES — LIMITED TO BREAK FEE
TARGETS ARE CAPPING
LIABILITY TO AMOUNT OF
BREAK FEE IN TWICE AS
MANY CASES
There was a significant increase in 2012 in the practice of capping a target’s liability
for breaching the implementation agreement.
In two-thirds of all 2012 deals which included a target break fee, the target’s liability for
damages for breach was limited to the break fee. The proportion of deals with such a
cap has nearly doubled since 2011. This reflects a higher level of conservatism and the
fact that targets are insisting that the risks of doing deals need to be minimised to the
greatest extent possible.
However, consistently with what we saw in 2011, around 20% of all agreed caps were
subject to exceptions such as wilful breach by a target or breach by a target of its
exclusivity obligations to the bidder.
A bidder does not have any direct liability to target shareholders under a scheme
of arrangement before the scheme becomes effective.
In 2010 and 2011 a small number of implementation agreements for deals by way of
scheme sought to make the bidder liable to shareholders in broadly the same way that
a bidder would be liable to shareholders under the takeover laws in relation to a takeover
bid if the bid did not proceed on the same terms and conditions as announced.
None of the surveyed schemes in 2012 had these provisions. This type of provision
is still very unusual and would probably only be accepted by bidders in exceptional
circumstances, such as deals where there are good prospects of a competitive process.
9. DAMAGES AND LIABILITY
62 %
PROPORTION OF DEALS WITH
TARGET BREAK FEE WHERE
LIABILITY LIMITED TO THAT FEE
NO LONGER
UNCOMMON
TO CAP
LIABILITY AT
BREAK FEE BUT
EXCEPTIONS ARE
INCREASINGLY
NEGOTIATED
20 %
PROPORTION OF THOSE DEALS
WITH EXCEPTION TO THE CAP
54 / 55
10. REGULATORY
ISSUES
10.1 FIRB
Australia’s Foreign Investment Review Board (FIRB) administers the legislation and
policy which governs foreign investment in Australia. As part of this role, it advises the
Treasurer on whether he should exercise his power to block a foreign investment proposal
on the grounds that it is contrary to Australia’s national interest.
In April 2012, Brian Wilson was appointed as the new chair of FIRB. With his investment
banking background, Mr Wilson is expected to take a commercial approach to foreign
investment proposals. There were further movements in personnel in October 2012 when
former Australian Tax Office Commissioner Michael D’Ascenzo joined FIRB as a nonexecutive member. Given Mr D’Ascenzo’s background, we expect FIRB will be closely
scrutinising the tax revenue impact of foreign investment proposals in 2013, making it
critical for foreign bidders to address this point in their submissions to FIRB.
There was increasing pressure in 2012 from politicians and media commentators for FIRB
to make its decision-making process more transparent. While we have seen FIRB take
some measures on this front, including holding a series of briefing sessions for lawyers,
investment bankers and other advisers to familiarise them with their approach, it has yet
to provide any real insight into how and why it has reached its decisions on proposals
involving acquisitions of Australian companies.
CONDITIONS IMPOSED
TO PROTECT NATIONAL
INTEREST
FIRB CONDITIONS
The Treasurer can impose conditions and accept undertakings when granting approval for
a foreign takeover. Most approvals are granted without any conditions. Where conditions
are imposed, they most commonly relate to:
>> the future location of the target company’s headquarters and key management.
>> commodity sales and marketing arrangements.
>> continuity and operation of business.
Conditions requiring divestments of assets and re-listing (on ASX) of assets or the target
entity have also been imposed in the past.
10. REGULATORY ISSUES
In 2012, conditions were imposed in two high-profile deals:
1. Yancoal Australia Limited was given approval to merge with Gloucester Coal Limited,
in what was the biggest investment by a Chinese state-owned enterprise in Australia’s
coal industry. The approval was subject to a number of conditions. These required Yancoal
and its parent company, Yanzhou Coal Mining Company Limited, to:
>> list on the ASX by the end of 2012 and reduce the ownership of Yanzhou below
70% by the end of 2013.
>> m
arket coal produced at their Australian mines on arms-length terms with reference
to international benchmarks and in line with market practices.
>> o perate Yancoal as an Australian incorporated and headquartered company managed
in Australia using a predominantly Australian management and sales team.
2. Shandong RuYi Scientific & Technological Group Co. Ltd and Lempriere Pty Ltd were given
approval to jointly acquire the assets of Queensland’s Cubbie Station, Australia’s largest
cotton grower and holder of water licences. In order to obtain FIRB approval,
RuYi undertook to:
>> s ell down its interest in Cubbie from 80% to 51% to an independent third party (or
parties) within three years of completing the proposed acquisition, and investigate
the possibility of publicly listing Cubbie in order to achieve this sell down.
>> e nsure that its board representation remained no more than proportionate
to its shareholding following the sell down.
Both acquirers also gave a number of further undertakings in relation to employees
marketing arrangements, corporate governance and water usage.
FIRB CONDITIONS REQUIRED
CHINESE ACQUIRERS TO
REDUCE INTEREST IN
TARGET OVER TIME
56 / 57
AGRICULTURAL INVESTMENTS There were some mixed messages in 2012 for foreigners interested in acquiring agricultural
assets in Australia.
On the one hand, the Federal Government released two policy papers which are strongly pro-foreign investment: the
Australia in the Asian Century White Paper states that “Maintaining Australia’s reputation as an attractive place to invest
is crucial to our future. We will ensure that Australia remains open for investment from across the region and the globe.”
The Government’s Green Paper on Australia’s National Food Plan expressed similar sentiments in the context
of agricultural investment.
On the other hand, the sale of Queensland’s Cubbie station (described above) generated plenty of mainstream
media attention.
A Senate Committee has been conducting an inquiry into a number of issues relating to FIRB, including:
>> h ow the national interest test was applied to purchases of Australian agricultural land and agri-businesses
by foreign acquirers in the past year
>> the role of the Government and regulators in upholding the national interest test
>> the global food task and Australia’s food security in the context of sovereignty
>> the role of the foreign sovereign funds in acquiring Australian sovereign assets
>> h ow similar national interest tests are applied to the purchase of agricultural land and agri-businesses
in countries comparable to Australia
In November 2012 the Committee released an interim report. The interim report was primarily focused on preventing tax
revenue leakage and market distortions relating to foreign investments and acquisitions in the agricultural sector.
Based on transcripts from the Committee’s hearings, we expect that the final report will contain broader
recommendations for reform in foreign investment. A number of members of the Committee are clearly concerned about
the high number of applications approved unconditionally and, where conditions are imposed, alleged failures to comply
with such conditions.
We expect the Committee will make a number of recommendations designed to make the application procedure a more
rigorous process. Just how the Committee’s recommendations are dealt with from there remains to be seen: with 2013
a federal election year, we expect foreign investment to be a hot topic of debate. In the meantime, market participants
in this sector need to carefully think through their regulatory engagement strategy.
10.2 ACCC
ONLY 2 SURVEYED DEALS
HAD AN ACCC CONDITION
The Australian Competition and Consumer Commission (ACCC) is responsible for
considering whether a particular acquisition raises competition concerns in Australian
markets. The legal test is whether the merger will be “likely” to have the effect of
substantially lessening competition in any Australian market. The role of the ACCC is
not to “approve” a merger but rather to decide whether or not to oppose the transaction,
after conducting a public pre-closing review. If the ACCC finds concerns, it may commence
Federal Court proceedings to block the transaction, unless the parties negotiate remedies
which are acceptable to the ACCC.
10. REGULATORY ISSUES
ACCC’S REVIEW OF SURVEYED DEALS IN 2012
Only two surveyed deals in 2012 included an ACCC condition, compared with 9 deals
in 2011. The ACCC gave informal clearance for both deals.
The ACCC also conducted an informal review and confirmed it had no objections in
respect of one additional surveyed deal in 2012 which was not subject to an ACCC
condition, News Corporation’s acquisition of Consolidated Media Holdings Limited.
The ACCC did not issue a statement of issues in respect of any surveyed deals in 2012
(although it did issue a statement of issues in respect of a hypothetical proposal for
Seven Group Holdings to acquire 100% of Consolidated Media Holdings).
THE ACCC’S RECENT APPROACH TO MERGERS
In confirming the ACCC’s commitment to ensuring that mergers do not result in structural
changes leading to a substantial lessening of competition, the Chairman of the ACCC has
stated that the ACCC will closely scrutinise mergers in concentrated markets, particularly
when a merger reduces the number of key players in a market from three to two.
This is because with only two principal players remaining in a market, each will learn to
anticipate the actions and reactions of the other. In these circumstances, the ability of the
two remaining firms to raise prices or reduce quality for consumers generally increases.
The ACCC has also focused on preventing “creeping” or incremental acquisitions in the
grocery, home improvement, liquor and petrol sectors (which are regarded as relatively
concentrated). In 2012, the ACCC opposed a number of small acquisitions on the grounds
that they had the potential to substantially lessen competition at a local level.
The ACCC has acknowledged calls for increased transparency from, and engagement
with, the ACCC during the course of merger reviews, and has continued to improve its
processes in this area. However, the ACCC has noted that such measures may affect
the length of time taken by the ACCC to complete its merger reviews.
In 2013, the ACCC will review the Informal Merger Process Guidelines which govern the
clearance process and information requirements of parties. During 2011/12, 250 of the
340 matters considered by the ACCC were cleared without public review on the basis
that the “substantial lessening of competition” risk was considered low. As a result,
87% of the matters considered by the ACCC were completed in 8 weeks or less.
MATTERS OF INTEREST
ACQUISITION BY APA OF HASTINGS DIVERSIFIED UTILITIES FUND
The ACCC did not oppose the proposed acquisition by APA Group of Hastings Diversified
Utilities Fund (HDF) after accepting an undertaking from APA to divest the Moomba to
Adelaide Pipeline System.
Before reaching this conclusion, the ACCC consulted extensively on the proposed
acquisition, with a strong focus on the extent to which APA and Epic Energy Pty Ltd (a
wholly-owned subsidiary of HDF) imposed competitive constraints upon each other.
The ACCC examined whether the proposed acquisition would be likely to result in higher
prices for the transportation of gas or more costly or difficult developments of new
pipelines. It ultimately decided that the divestiture of the pipeline addressed the primary
competition concerns by ensuring that there is a separate owner of gas pipelines servicing
Adelaide and Moomba.
58 / 59
SEVEN GROUP HOLDINGS PROPOSED ACQUISITION OF CONSOLIDATED
MEDIA HOLDINGS LTD
The ACCC opposed a proposed acquisition that would give Seven Group Holdings a
100% interest in Consolidated Media Holdings Ltd, because it was concerned that
the transaction would result in a “substantial lessening of competition in the market
for free to air television services”. Rod Sims noted that Seven Network would gain an
“advantage over other free to air networks in relation to joint bids and other commercial
arrangements with Fox Sports for the acquisition of sports rights.” The ACCC considered
that access to premium sporting content is vital to the ability of free-to-air networks to
compete strongly, and that the proposed acquisition would significantly reduce the ability
of Seven’s competitors to acquire such content.
10.3 MEDIA OWNERSHIP PROPOSALS
The regulation of the media sector was a key issue in 2012 as the findings of the
Convergence Review Committee, commissioned to examine the policy and regulatory
frameworks that apply to the converged media and communications landscape in
Australia, were released. The Convergence Review Final Report recommended significant
and broad reaching reforms and, in particular, an overhaul of Australia’s media
ownership rules.
Specifically, the Convergence Review Final Report recommended:
>> t he removal of a number of statutory control and media diversity rules that currently
apply under the Broadcasting Services Act 1992 (Cth);
>> the introduction of:
>> a ‘minimum number of owners’ rule; and
>> a public interest test, to be administered by a new regulator that will replace
the Australian Communications and Media Authority.
PROPOSED MEDIA
REFORMS TO CREATE NEW
M&A OPPORTUNITIES
Following the release of these recommendations, the Federal Government’s response
to the Convergence Review Final Report was keenly anticipated. A part response to
the numerous recommendations was released on 30 November 2012, in the form
of a package of proposed reforms. The package dealt with issues as such television
broadcasting licence fees, Australian content requirements and the removal of one
statutory control rule (the 75% audience reach rule). However the Federal Government
is yet to respond on the balance of the media ownership recommendations, including
the controversial public interest test. The Federal Government has indicated further
announcements will be made in 2013. The proposed reforms already on the table will
likely facilitate M&A transactions which are not currently possible, such as mergers of
regional and metropolitan broadcasters.
11. THE TAKEOVERS
REGULATORS
11.1 BACKGROUND
The three key enforcers of Australian takeovers law are ASIC, the Takeovers Panel
and the Courts.
ASIC is the corporate regulator, responsible for policing the law and, where necessary,
modifying the law as it applies to both individual takeovers and takeovers in general.
Because of its policing function, ASIC’s policy and interpretations of the law
(called “Regulatory Guides”) are almost treated as de facto statements of law
by takeovers planners.
ASIC cannot impose sanctions for breaches of the law. Rather, it can act against alleged
breaches by commencing enforcement proceedings before either the Takeovers Panel
or the Courts.
The Takeovers Panel is a tribunal which has a wide brief to enforce the policy underlying
the law. This means that the Panel can make orders against conduct that, although
legal, is “unacceptable”. Although ASIC has the power to bring proceedings in the Panel,
most applications are made by private parties (such as bidders, target companies and
target shareholders).
The Panel also issues “Guidance Notes”. These are statements of how the Panel views
the acceptability (or otherwise) of various market practices. “Guidance Notes” are not
law, but do provide useful rules of thumb when planning takeovers or takeover defences.
The Courts have a dual role in takeovers. They can rule on alleged breaches of the
law governing takeover bids. They also have a specialist supervisory role in relation
to schemes of arrangement.
60 / 61
11.2 ASIC IN 2012
PROPOSALS TO TREASURY
TAKEOVER REFORMS
NOW BEING CONSIDERED
BY TREASURY
One of the most significant moves that ASIC made in the takeovers space in 2012 was to
raise a number of reform proposals to fix what ASIC perceived to be failings in the current
regime. Treasury has now released an initial scoping paper in respect of those proposals.
The areas identified for reform are:
>> C reeping acquisitions: The creep exception to the 20% takeover threshold allows a
shareholder to increase its shareholding above the 20% threshold by 3% every 6 months.
ASIC believes this exception is contrary to the spirit of the takeover laws because it
allows a shareholder to acquire a controlling stake without making a formal takeover bid,
avoiding having to pay a full control premium, without all shareholders having an equal
opportunity to participate in the transaction and without the target having the opportunity
to respond. However, there is no real evidence that this exception has in the past been
used to allow a surreptitious acquisition of control in circumstances where the market
remains in the dark as to the ability of the shareholder to creep. Acquiring control using
the creep exception is a very slow process – it takes over 5 years to move from 20% to
50% relying only on the creep exception. And each 1% acquired by the shareholder needs
to be disclosed to the market. If the exception is being used in this way, it will be very
clear to the market what is happening, allowing the target to advise its shareholders as
it considers appropriate, and the market can take this into account in pricing the shares
available for sale. In the absence of compelling evidence that the creep exception is being
used to avoid the general intent of the takeover laws, we believe it should be retained as
a useful and important exception to the 20% threshold which supports efficient capital
markets and promotes greater liquidity for companies that have major shareholders.
>> E quity derivatives: It is proposed that equity derivatives which don’t otherwise give rise
to a relevant interest (for example, because they are compulsorily cash settled), should
be disclosed under the substantial holding provisions of the Corporations Act. The current
practice is based on Takeovers Panel guidance and requires disclosure of such equity
derivatives where they are entered into by a person who has a control purpose. The real
issue for consideration therefore is whether this guidance needs to be taken further and
made part of the law. If it is made part of the law, it may be that the control purpose
qualification to the Panel’s guidance will be forgone, on the basis that it is too vague and
uncertain a concept to have in what is otherwise a black letter law disclosure obligation.
>> C larity of takeovers proposals: While the press reported that the Chairman of ASIC was
pushing for the introduction of a UK-style “put up or shut up” rule, the issues identified
by Treasury fall somewhat short of suggesting that such a rule might be desirable.
Instead, Treasury is focusing on the issues caused by the current market practice of
bidders delivering indicative, non-binding and highly conditional takeover proposals to
targets, forcing their public disclosure and thereby engaging the target in a bear hug. The
concerns here are based on the effect of these proposals on market integrity and focus
on 2 issues: the vague, highly conditional and non-binding nature of such proposals, with
the bidder having no obligation or timeframe within which to proceed with an offer; and
the public disclosure of these proposals, which may apply inappropriate pressure to the
parties in dealing with and responding to the proposal and fuel speculative trading in the
target’s shares. For further discussion on the merits of this proposal, see Section 3.5.
11. THE TAKEOVERS REGULATORS
>> A
ssociations: Treasury has put on the table an issue which the Takeovers Panel has been
wrestling with for some time now – the difficulty in proving whether an association exists
where the evidence is merely circumstantial. If the association rules cannot be effectively
enforced, the concern is that shareholders who individually hold less than 20% of a
company will be able together to exert control over the company in breach of the takeover
laws. There is no suggestion that the current laws which define when an association
exists are inadequate. Accordingly, any fix is likely to centre around the test for proving
the existence of an association and will perhaps see the proposal of a rebuttable
presumption or some other reversal of the onus of proof if circumstantial evidence points
to the existence of an association.
>> Impact of new media: ASIC and ASX are concerned about the ability of listed companies
to properly manage their continuous disclosure obligations given the increasing number
of media channels through which rumours can now be spread. It is not clear whether any
law reform proposals will be necessary to address this concern, and it is certainly not
clear whether any law reform is even capable of doing so.
ASIC UPDATES OLD
TAKEOVERS POLICIES,
MAKES A FEW
POLICY TWEAKS AND
FORMALISES EXISTING
POLICY
UPDATE TO TAKEOVERS POLICY
ASIC continued to update and revise policies relevant to takeovers in 2012. It released a
suite of draft regulatory guides which updates some very old policies, tweaked its policy
in a number of places and otherwise regularised existing de facto policy or recognised
Takeovers Panel policy. The main points are:
>> S ubstantial holding notices: The proposed new policy now includes a detailed guide
on how to complete substantial holding notices. Importantly, it also includes a warning
against trying to avoid disclosure by entering into broad heads of agreement or
preliminary agreements which trigger the disclosure requirement before later entering
into documents containing the substantive terms of the transaction which are not then
disclosed to the market.
>> U
nderwriting exception: The new policy, reflecting a slew of Takeovers Panel decisions,
includes an increased emphasis on the unacceptable use of the underwriting exemptions
to change the control of a company. It also states that arrangements that depend on
sub-underwriting (where default by a sub-underwriter relieves the underwriter of its
obligations), or are subject to termination events within the underwriter’s control are not
considered to be “underwriting” for the purposes of the exception.
>> C ollateral benefits: It can sometimes be very difficult to determine whether a side-deal
between a bidder and a target shareholder has resulted in the target shareholder’s
receiving a prohibited collateral benefit. ASIC’s draft policy focuses on whether the
benefit is “likely to induce” the recipient or an associate to accept the bid or dispose
of target securities, and sets out a “balance of factors” approach which it will take.
Importantly, there is no reference to the “net benefits” test which the Takeovers Panel
applies and ASIC has previously endorsed. The “balance of factors” approach to the test
of inducement will in practice be wider than the “net benefits” test.
>> B id funding: The new policy on funding continues and fleshes out ASIC’s existing policy
of requiring extensive disclosure of the bidder’s funding arrangements. However, it also
picks up and expands upon the Panel’s insistence that bidders should have a reasonable
expectation that they will have sufficient funds to pay for acceptances.
62 / 63
>> A
cceptance facilities: The new policy proposals formally recognise the role played by
acceptance facilities in modern bids and proposes to grant standing technical relief to
facilitate acceptance facilities but only if the facility is open to either all shareholders
or only to institutions which are actually restricted by their investment mandate
from accepting a conditional bid – a very narrow class. Given the narrow category of
institutions to which the policy will apply, it may be that this proposal will cause bidders
to consider extending acceptance facilities (where they are used) to all shareholders
(rather than a narrow class of institutions), as was the case in the bids this year for
Thakral and Alesco.
>> J oint bids: Two of the key changes proposed in relation to joint bids (ie. situations in
which joint bidders together control more than 20% of the target before the bid has even
begun) reflect existing ASIC practice. ASIC will formally drop the “match or accept any
higher bid” requirement where one of two joint bidders starts off with less than 3% and
will extend its joint bid policy to schemes. However, ASIC has for the first time proposed
that new conditions will apply in relation to joint scheme bids. ASIC proposes that joint
bidders and their associates should not vote against a higher rival scheme even where
the rival scheme will not be unconditional at the time of the vote. This proposal, like the
“match or accept” requirement, will not apply where one of the two bidders starts off
with less than 3%.
11.3 THE TAKEOVERS PANEL
MARKET INTEGRITY A KEY
FOCUS FOR THE PANEL
As predicted in THE REAL DEAL 2012 edition, the Takeovers Panel has continued to
emphasise the importance of market integrity in its regulation of takeover bids. In 2012,
we have seen the Panel do so in the context of its consideration of bid conditions and the
Truth in Takeovers policy.
WHEN CAN BID CONDITIONS BE RELIED ON?
The Panel has always been concerned about defeating conditions that are too easily
triggered. This concern reflects and expands upon the statutory policy that bids cannot
be subject to conditions that are under the bidder’s control. The concern is that these
conditions can effectively give the bidder a “free option” as to whether to proceed.
In 2012, this issue first arose in the strange case of Elena Nikolayevna Egorova and
Flinders Mines.
Ms Egorova owned a very small parcel of shares in Magnitogorsk Iron and Steel Works
(MMK). When MMK agreed on a merger with Flinders Mines, under which it would
acquire Flinders, Ms Egorova obtained an interim injunction from a Russian Court to
prevent MMK’s proceeding with the deal. The merger was conditional upon there being
no court orders which would prevent the consummation of the deal. Accordingly, Flinders
and MMK announced that the merger would be terminated.
11. THE TAKEOVERS REGULATORS
A Flinders shareholder asked the Panel to order Flinders and the Russians to proceed with
the scheme, on the basis that:
>> Ms Egorova didn’t exist; or
>> e ven if she existed, “it was not in the public interest or conducive to takeover efficiency
that a small shareholder with poor information could block a mutually agreed and highly
beneficial transaction between two parties”.
The Panel was not convinced that Ms Egorova didn’t exist. However, even if she didn’t, it
was unwilling to force the parties to override a defeating condition that had been freely
agreed to and publicly disclosed.
Despite this, it issued a warning to other target boards about defeating conditions that
are too easily triggered:
“[The defeating condition] is drafted broadly, and catches injunctions in foreign
jurisdictions that may be made on grounds that would not be recognised as appropriate in
this jurisdiction. With the benefit of this experience, it may be wise for target directors in
future to consider very carefully the drafting of these conditions”.
This warning is of more than theoretical interest, given the high number of foreign bids
for Australian companies (see Section 3.2). However, our analysis of the terms of deals
announced following this decision shows that there has in general been no change
in the approach of targets in agreeing to these types of “no restraint” conditions.
These conditions were just as common in agreed deals with foreign bidders after the
decision as before and the drafting of the condition has remained relatively standard.
Having said that, the scheme bid by Rockwood Holdings for Talison Lithium provides
at least one example following this decision where the target managed to negotiate
an implementation agreement with a foreign bidder which was not subject to any
“no restraint” condition.
The broader concern – that defeating conditions may be too easily triggered – is relevant
to all takeovers no matter where they originate, as the Austock Group case illustrates.
VAGUE, UNCERTAIN OR
ILLUSORY CONDITIONS
WILL NOT BE ACCEPTABLE
Although it was not central to its decision, the Panel took the opportunity of a challenge
to Mariner’s cash bid for Austock to comment on Mariner’s defeating conditions.
The Panel had some concerns about the conditions to Mariner’s bid:
>> a requirement that Mariner obtain any necessary approval from its own shareholders
under ASX rules – the Panel was concerned because this did not specify what might
need approval;
>> a requirement that the net tangible assets per share of Austock not rise or fall more
than 10% – the Panel did not think that a rise in the target’s NTA was an appropriate
defeating condition;
>> a requirement that Austock not acquire or dispose of any assets or business, or change
the composition of its capital – although the heading to this condition did contain a
reference to materiality, the Panel was concerned that a lack of a reference to materiality
in the condition itself might make it an inappropriate hair trigger condition.
64 / 65
TRUTH IN TAKEOVERS
ASIC’s Truth in Takeovers policy was an issue in two bids in 2012: the FLSmidth scheme
bid for Ludowici and Dulux’s hostile bid for Alesco.
In a nutshell, the Truth in Takeovers policy is that a bidder (or other player) should not
be allowed to change its mind after making a public statement of its “last and final”
intentions in relation to a bid.
The Ludowici scheme confirmed two important aspects of Truth in Takeovers:
>> it is applicable to scheme bids as well as to Chapter 6 takeovers;
>> it applies to statements attributed to the bidder (or target), even if they are misquoted
and even if published outside Australia (Ludowici Limited [2012] ATP 3).
The former point should not be surprising: Truth in Takeovers is based on Section 1041H of
the Corporations Act, which prohibits misleading conduct in relation to securities. Its logic
is, therefore, as applicable to schemes as to Chapter 6 bids, even though the different
structures may mean that the policy is triggered by different actions. The latter point
requires expansion. Ludowici shows that there are two essential requirements before
Truth in Takeovers will apply to foreign misquotations of statements by a bidder or target.
The first is that the misquotation must be published in a place where it is accessible to
the target shareholders; in Ludowici, this was satisfied by the fact that the misquotation
appeared in an international news service which was available to Australian investors
and advisers.
TRUTH IN TAKEOVERS
IS A KEY POLICY FOR
MAINTAINING MARKET
INTEGRITY
The second is that the misquoted bidder or target is only expected to correct the
misstatement promptly once it becomes aware of it.
The Panel decision was criticised by some in the market as diverging from ASIC policy on
one important issue: the appropriate remedy for a breach of the policy. In Ludowici, as
it had done in relation to the 2007 CEMEX bid for Rinker, the Panel allowed a bidder to
depart from the purported last and final statement on condition that it compensated those
who had incurred a loss by relying on the statement. This is in contrast to ASIC’s
belief that:
“A bidder cannot depart from a no increase statement, even if it compensates
those who have sold on-market, or accepted into a market bid or competing bid.”
(Regulatory Guide 25)
If you look at the basis for the Panel’s decision, it is apparent that it is not actually
inconsistent with ASIC’s policy. This was not a case were the bidder had made a
statement with the intention of attracting the Truth in Takeovers policy. Rather, this was
a case of a bidder failing to correct a statement made by a third party. It was for that
reason that the Panel decided a compensation order was appropriate. The purpose of the
Truth in Takeovers Policy is to protect market integrity, not to deprive shareholders of the
opportunity to receive a higher bid.
In the case of the Dulux bid for Alesco, an application was made to the Panel after the
bidder had made a statement of its “best and final price” but before the bidder had made
any formal move to deviate from that statement.
11. THE TAKEOVERS REGULATORS
After Dulux had made its best and final statement, it engaged in negotiations with
Alesco about the bid price. ASIC raised a concern with the Panel that the best and final
statement had led the market to believe that there would be no change to the bid price.
The Panel’s response was that, until Dulux changed the bid price, there was no Truth
in Takeovers issue:
“It is impossible to make any determination about whether and how truth in takeovers
policy will apply in the absence of a concrete proposal. We therefore indicated to the
parties that any departure from a last and final statement, and the application of truth
in takeovers policy, was not a matter before the Panel.” (Alesco Corporation Limited 01
and 02 [2012] ATP 14)
Despite this, the Panel did go so far as to say that, on the current evidence, it did not
see how a revised offer price would be permissible under Truth in Takeovers:
“So far we have seen nothing that provides us with any confidence that the [revised]
Proposal would be permitted. “ (Alesco Corporation Limited 03 [2012] ATP 18)
Alesco ultimately recommended the Dulux bid at the price which was declared “best and
final” so the question of whether the revised offer price would be permitted was never
required to be finally determined.
ASIC published a major restatement of its commitment to Truth in Takeovers a few
months after the Ludowici and Dulux affairs (“Final must really mean final”, Australian
Financial Review, 17 January 2013). ASIC took the opportunity in this statement to
reiterate its view that compensation orders for misled shareholders is an inadequate
recompense for the greater damage done to the market’s ability to believe that last
and final statements really are last and final.
Consistent with the position outlined by ASIC, the Takeovers Panel has on a number of
occasions, including in 2000 in relation to Taipan Resources NL and in 2007 in relation to
CEMEX’s bid for Rinker Group Limited, clearly stated that its strong preference is to hold
bidders to their Truth in Takeovers statements. What it appeared to be saying in Ludowici
was that there are sometimes exceptional circumstances where this will not
be appropriate.
11.4 THE COURTS AND SCHEMES
In THE REAL DEAL 2012 edition, we commented on the increasingly liberal attitude that
the Courts have taken to the definition of “classes” in a scheme, particularly in relation
to benefits provided to shareholders outside the scheme, including pre-deal scheme
protections entered into with shareholders who grant the bidder call options over
their shares.
The Whitehaven/Aston scheme appears to bear this out. Whitehaven was to take
over Aston by scheme. The consideration was scrip.
At the same time, Whitehaven entered into a side deal which benefited two of Aston’s
directors. Those directors owned shares in another company. Under the side deal,
Whitehaven would buy that other company for scrip, at a price that was greater than the
valuation of the company that had been made by the independent expert appointed to
66 / 67
report on the scheme. Whitehaven rejected the views of the independent expert in the
explanatory memorandum and claimed that the price paid under the side deal represented
fair value. The side deal was conditional upon the scheme going ahead.
The Court held the directors were not in a separate class from the other shareholders.
Any benefits that the directors were receiving from the side deal were commercial ones,
arrived at by arm’s length negotiations (taking into account the disclosures made by
Whitehaven in the explanatory memorandum). They would only constitute a separate
class if the scheme (not the side deal) affected their legal rights differently from
those of other shareholders. However, the decision on the classes was ultimately not
important to the outcome because the two directors had undertaken not to vote at the
scheme meeting.
COURTS CONTINUE
LIBERAL APPROACH TO
DEFINITION OF CLASSES
IN SCHEMES
ASIC’s position would have been that the side deal represented a collateral benefit on
the basis of the valuation made by the independent expert. ASIC has in previous cases
not objected in this situation if the shareholders receiving the collateral benefit either
vote as a separate class or undertake not to vote at all on the scheme and there is a
valuation of the benefit (if not cash) by an independent expert disclosed in the explanatory
memorandum. Consistent with those cases, the shareholders in Aston who would benefit
from the side deal undertook not to vote on the scheme.
Another important issue was that Aston’s largest shareholder had granted Whitehaven a
call option over 19.9% of Aston. Among other things, the call option would be triggered
by a rival bid. The exercise price would be 15% greater than the scheme consideration.
The Court characterised this as a kind of exclusivity provision which had been adequately
disclosed in the scheme booklet and which did not make the major shareholder a separate
class. Although the Court compared the call option in this case to those considered in
other cases, this call option differed from previous examples in an important respect
which is that the exercise price was not the same as the scheme consideration.
However, the Court did not think that this difference was relevant to the analysis
of whether the holder should form a separate class.
But ASIC would presumably have taken the view that the call option had the potential
to give the shareholder a collateral benefit and that the shareholder should therefore
vote as a separate class or not at all.
At the end of the day, the question was again not in practice important because the
shareholder had already indicated that it would not vote at the scheme meeting because
it was related to an entity which would benefit from the side deal discussed above.
However, this case does highlight the potential for there to be a divergence between
the views of the Court when it comes to assessing as a technical legal matter whether
a particular shareholder should be in a separate class and the views of ASIC in deciding
whether a shareholder should vote as a separate class or not at all for the reason that
it is receiving a collateral benefit (regardless of the legal analysis on classes).
12. DEAL PROFILES
Clayton Utz has one of Australia’s leading M&A practices. Our team has acted on many
of Australia’s largest and most complex M&A transactions and has significant expertise
in cross-border transactions. Set out below is a selection of the most significant deals
our team advised on in 2012.
1. BROOKFIELD’S TAKEOVER OF THAKRAL HOLDINGS GROUP
In April 2012, Brookfield announced an unsolicited off-market takeover for all of the
stapled securities in the Thakral Holdings Group at $0.70 per security.
The independent directors of Thakral recommended that securityholders reject the initial
offer and mounted a defence of the bid. Their independent expert concluded that the
offer was neither fair nor reasonable and valued Thakral in the range of $0.88 - $0.96
per security.
Ultimately and following Brookfield being provided with due diligence access, Brookfield
announced a conditional increase to $0.81 per security subject to Brookfield reaching the
90% compulsory acquisition threshold. However, Thakral was only willing to recommend
that securityholders accept the new offer if they would receive the increased offer price
(i.e. if the 90% threshold was reached).
Brookfield was able to address this issue by establishing an acceptance facility which
was open to all securityholders including both retail and institutional holders and which
would only result in binding acceptances of the offer in the event that the 90% threshold
was reached and the conditional increase became effective. Thakral recommended that
securityholders accept into the acceptance facility.
This represented an innovative adaptation of the traditional acceptance facility (which
is ordinarily made available only to institutional securityholders) and the first time such
a facility had been used to support a conditional increase by the bidder. It also fairly
enabled retail securityholders to participate in the facility. As a result, Brookfield quickly
proceeded to achieve the 90% threshold and the successful completion of the deal.
Clayton Utz acted for long-standing client Brookfield in relation to the takeover.
Sydney-based M&A partner Jonathan Algar and senior associate Adam Foreman
advised on the deal.
68 / 69
2. PACIFIC EQUITY PARTNERS’ ACQUISITION OF SPOTLESS
In Pacific Equity Partners’ (PEP) acquisition of Spotless Group Limited, we saw two of
our key deal trends for 2012 in action: an initial bear hug by the private equity suitor and
shareholder activism from Spotless’s institutional investors. The deal also demonstrates
that deals are taking increasingly longer to complete: Spotless was the subject of a bear
hug proposal by US private equity firm Blackstone in May 2011, setting the stage for
PEP’s bear hug approach in November 2011. The deal did not complete until July 2012,
following extensive negotiation between the parties.
PEP initially offered a price of $2.62 per share. When Spotless announced PEP’s bear
hug, it came under pressure from a number of major shareholders who supported PEP’s
offer and wanted Spotless to engage with PEP. A number of those shareholders had also
entered into pre-bid arrangements with PEP, increasing the pressure on Spotless’ Board.
Spotless rejected PEP’s bear hug offer, but did so in a novel way: the Spotless Board
chose to actively promote the basis for its view that PEP undervalued Spotless by
delivering a series of presentations to the market to substantiate its reasons for
rejecting PEP’s bear hug offer as too low.
The Spotless Board eventually agreed to the sale of Spotless at the end of April 2012 –
but only after it had achieved an additional 11 cents per share of value (approximately)
for its shareholders. The recommended offer gave Spotless an enterprise value of
$1.083 billion when the deal was completed in August 2012.
Clayton Utz acted for long-standing client Spotless. M&A partner Rod Halstead and
Sydney-based M&A partner Karen Evans-Cullen with senior associates Jasmine
Sprange and Peter Debney advised on the deal, with support from Melbourne-based
M&A partner Andrew Walker.
12. DEAL PROFILES
3. SUNDANCE RESOURCES SCHEME OF ARRANGEMENT
In October 2011 Sundance Resources Limited, an ASX listed company, announced that it
had entered into a Scheme Implementation Agreement (SIA) with Hanlong (Africa) Mining
Investment Limited, a privately owned Chinese enterprise, in relation to the acquisition of
all of the shares in Sundance for A$0.57 per share by way of a scheme of arrangement,
valuing Sundance at A$1.65 billion.
Sundance’s flagship asset is the $4.7 billion integrated mine, port and rail MbalamNabeba Iron Ore Project located in Cameroon and the Republic of Congo.
Completion of the scheme is conditional on the satisfaction of a number of complex
conditions precedent involving, inter alia, the need for regulatory / sovereign
involvement in:
>> C hina – Hanlong’s country of incorporation and from where all funding for the acquisition
and on-going project is to be sourced using a combination of debt procured from the China
Development Bank and Chinese private bank(s);
>> C ameroon – where signing (by the Prime Minister’s office) of a detailed Convention
covering the key commercial, legal and fiscal terms upon which the port, railway line
and iron ore mine would be constructed and operated was a key requirement under the
SIA (satisfied in December 2012);
>> R epublic of Congo – where a mining permit was required to be procured (satisfied
in December 2012); and
>> A
ustralia – as the transaction is subject to FIRB approval (satisfied in June 2012)
and Australian scheme of arrangement laws.
In 2012, the terms of the SIA were renegotiated including a reduction in the scheme price
from A$0.57 to A$0.45 per share (following changes in the financial markets since the
deal was struck in 2011 and a specific PRC National Development Reform Commission
condition that there was a “reasonable acquisition price”). Various extensions to the
original timetable have also been agreed to since the original SIA was executed and
the transaction is now expected to complete in the first half of 2013 (subject to Hanlong
completing its PRC financing arrangements and obtaining final approvals from PRC
regulatory authorities).
Clayton Utz continues to act as Australian counsel to Sundance as the Scheme
progresses. A Perth-based team comprising of corporate partner Mark Paganin,
senior associate Andrew Hart and lawyer Elizabeth Maynard is advising Sundance.
70 / 71
4. COMPETING SCHEME PROPOSALS FOR TALISON LITHIUM
In August 2012, the Australian-incorporated, TSX listed Talison Lithium announced a
scheme implementation agreement with the U.S. incorporated, NYSE listed Rockwood
Holdings, Inc., a speciality chemicals and advanced materials company for the acquisition
of all of the shares in Talison Lithium at C$6.50.
Some interesting issues arose from the transaction, including by reason of the fact that
Talison Lithium is an Australian incorporated company (and therefore subject to the
Australian scheme of arrangement regulations) but is listed exclusively on TSX. As with
other recent ASX / TSX mergers (eg. Mantra Resources scheme in 2011, CGA Mining
scheme in 2012), the challenging depositary / intermediary / beneficial holder structure of
Canadian shareholdings needed to be navigated for the purposes of recording votes. For
Talison Lithium, the issue was particularly acute due to the absence of the pool of shares
that would ordinarily be available for direct voting in a conventional ASX structure.
In mid-November 2012, 2 weeks prior to the scheduled scheme meetings for the
Rockwood proposal, Chengdu Tianqi, a privately owned Chinese company and a
significant customer of Talison Lithium, announced that it had acquired 14.9% of Talison
Lithium, intended to move to a 19.9% stake following FIRB approval and intended to make
a superior offer for all of Talison Lithium by way of scheme of arrangement.
Tianqi subsequently obtained all necessary Chinese regulatory approvals and FIRB
approval, and announced a proposal at C$7.15 per share. Following a “best and final
offer” statement from Rockwood in response, the Talison Lithium board relied on the
“fiduciary carve out” in the Rockwood SIA and proceeded to engage with Tianqi on its
competing proposal.
In order to deal with the financing risk associated with Tianqi’s proposal, the Talison
Lithium negotiating team extracted a US$25m deposit in the nature of a reverse break
fee, payable in the event that Tianqi fails to secure funding.
Tianqi and Talison executed a “pre-conditional” SIA on 6 December 2012 (the preconditions designed to deal with the 5 business day “right to match” conferred on
Rockwood under the pre-existing Rockwood SIA) contemplating a scheme of arrangement
priced at C$7.50 per share and valuing Talison Lithium at approximately C$850 million.
Talison proceeded to the first court hearing on 19 December 2012, which was an
extremely short period during which to obtain independent experts’ reports, finalise the
scheme booklet and have it reviewed by ASIC. The scheme was approved by Talison
shareholders on 27 February 2013.
Clayton Utz’s advisory role on the competing scheme proposals continued the long-term
relationship between our lead E&R / M&A partner on the transaction, Heath Lewis, and
Talison Lithium.
13. SURVEY
METHODOLOGY
13.1 SOURCES
Note that information on deals included in the Clayton Utz Survey has been drawn entirely from public documents
disclosed to the market in connection with the deals.
We explain below the circumstances where we have produced further information by making calculations or
assumptions based on that public information.
13.2 SURVEY METHODOLOGY
Clayton Utz conducted a detailed survey of selected deals announced during the 2012 calendar year which has been
used extensively throughout this report.
Surveyed data in respect of deals announced during the 2010 and 2011 calendar years and selected on the same basis
is also referred to in the report.
As a general comment, we note that deal terms differ between different deals depending upon the particular
circumstances of each deal and that we have exercised our own judgment in interpreting and categorising those terms
for the purposes of the survey where they are not directly comparable. It is possible that different people may make
different judgements in interpreting and categorising these terms.
SELECTION OF DEALS
Deals included in the survey were selected according to the following criteria:
>>
announced between 1 January and 31 December (inclusive) in respect of the relevant year;
>>
included a takeover offer, company scheme or trust scheme to acquire securities in an Australian entity to which
Chapter 6 of the Corporations Act applies;
>>
implied a transaction value for all of the securities of the target of at least $50 million (see below regarding this
calculation); and
>>
a binding announcement of a formal takeover offer or an announcement of an agreement to propose a scheme was
made (as applicable) in respect of the deal (ie. more than just a non-binding unsolicited bear hug announcement was
released in respect of the deal).
We note the following specific inclusions:
>>
t he Future Fund’s bid for the Australian Infrastructure Fund has been included in the survey for 2012 despite that
transaction not being structured as a takeover or scheme on the basis that it is a proposal for the acquisition of all of
the target’s assets which requires approval of the public securityholders; and
>>
anlong’s bid for Sundance Resources which was announced in 2012 is a revised form of the deal announced in 2011
H
but has been nonetheless included in the survey for 2012 as a new and separate transaction announced in 2012.
72 / 73
NOTES ABOUT THE METHODOLOGY USED FOR SPECIFIC SURVEY ITEMS
The methodology used for particular items is summarised below:
>>
Date of announcement: The date of initial announcement was taken to be the date a binding announcement
of a formal takeover offer or an announcement of an agreement to propose a scheme was made (as applicable)
in respect of the deal.
>>
V alue of consideration: The value of the consideration, for the purposes of calculating the transaction value and
consideration increases, was calculated as follows:
>>
here the consideration included non-cash consideration this was valued as at the date of announcement using
w
the same methodology as that adopted in the initial announcement and where there was no value cited in the
initial announcement the value was calculated using the closing market price of the bidder scrip prior to the initial
announcement (or other appropriate date to reflect the undisturbed share price) where listed and/or the FX rate on
the day of announcement (as applicable);
>>
here the final consideration depends upon the movements in the value of bidder scrip or a relevant FX rate, the
w
value of the final consideration is recalculated using the value of the bidder scrip or FX rate as at the time any such
adjustments are made.
>>
T ransaction value/deal size: For consistency, the transaction value or deal size was calculated using the value of
the final consideration offered per issued share or unit in the target under the proposal multiplied by the aggregate
number of those securities on issue at the end of the offer period for a takeover or record date for a scheme. Where
the deal was still current as at 10 January 2012, the value of the consideration offered as at that date and the number
of securities on issue on that date was used in the calculation. Options and performance rights were excluded from
this calculation, even if it was proposed that those securities be acquired/cancelled as part of the deal, unless the
underlying shares/units were issued before the end of the offer period or record date (as applicable).
>>
Premium: The premium for each deal was taken to be that cited in the initial announcement of the deal unless the
consideration subsequently changed in which case it was the premium cited in the announcement of the change in
consideration. If no premium was cited in the relevant announcement, then the premium was calculated by reference to
the closing market price of the target securities prior to the initial announcement (or other appropriate date to reflect the
undisturbed share price). Mergers of equals were excluded from all premium statistics along with Elph Pty Ltd’s bid for
Engenco Limited (given the discounted rights issue announced in conjunction with that bid).
>>
Implementation agreement terms: Statistics regarding terms of agreed deals, such as break fees, termination rights
etc, have been calculated as percentages/averages etc of only those deals where an implementation agreement was
agreed. In cases were some terms were not disclosed in sufficient detail to be reviewed and surveyed, those deals were
excluded from the statistics regarding those terms.
>>
efinition of successful completion: A takeover was treated as having successfully completed if any securities were
D
acquired under the takeover offer if it was unconditional or after the satisfaction or waiver of all conditions in the case
of a conditional offer. A scheme was treated as having successfully completed if the scheme became effective (or the
constitutional changes became effective in the case of a trust scheme).
>>
R ounding: Note that numbers have been rounded in various places throughout this publication, which may mean that
some percentages, for example, do not add to 100%.
13. SURVEY METHODOLOGY
13.3 LIST OF DEALS INCLUDED IN THE SURVEY
2012 DEALS
TARGET
1
Accent Resources NL
2
Acer Energy Ltd
3
African Iron Limited
4
Alesco Corporation Ltd
5
Australian Infrastructure Fund
6
Biota Holdings Limited
7
Castlemaine Goldfields Limited
8
Cerro Resources NL
9
CGA Mining Limited
10
Charter Hall Office REIT
11
Clearview Wealth Ltd
12
Coalworks Limited
13
Consolidated Media Holdings Ltd
14
Customers Ltd
15
Discovery Metals Ltd
16
Endocoal Ltd
17
Engenco Limited
18
Eureka Energy Limited
19
Exco Resources Ltd
20
Extract Resources Ltd
21
Gerard Lighting Group Ltd
22
Hastings Diversified Utilities Fund
23
Industrea Ltd
24
Integra Mining Ltd
25
LinQ Resources Fund
26
Little World Beverages Ltd
27
Ludowici Ltd
28
Ludowici Ltd
29
National Can Industries Ltd
30
Nexbis Limited
31
Norton Gold Fields Limited
32
Premium Investors Limited
33
Rocklands Richfield Ltd.
34
Spotless Group Limited
35
Sundance Resources Limited 2012
36
Talent2 International Limited
37
Talison Lithium
38
Talison Lithium Limited
39
Texon Petroleum Ltd
40
Thakral Holdings Group
41
Westgold Resources Ltd
BIDDER
Xingang Resources (HK) Ltd
Drillsearch Energy Ltd
Exxaro Resources Limited
Dulux Group Limited
Future Fund Board of Guardians
Nabi Biopharmaceuticals
LionGold Corp Ltd
Primero Mining Corp
B2Gold Corp
Reco Ambrosia Pte Ltd, Public Sector Pension Investment Board (PSP) and Charter Hall Funds Management Limited
Crescent Capital Partners Ltd
Whitehaven Coal Limited
News Ltd
DirectCash Payments Inc
Cathay Fortune Corporation Co Ltd and the China-Africa
Development Fund
Daton Group Australia Ltd and Yima Coal Group
Elph Pty Ltd
Aurora Oil and Gas
Washington H Soul Pattinson & Company
CGNPC Uranium Resources Co., Ltd. and the China-Africa Development Fund
CHAMP Private Equity
Pipeline Partners Australia Pty Limited
General Electric Company
Silver Lake Resources Ltd
IMC Resources Holdings Pte Ltd
Lion Pty Ltd
FLSmidth & Co A/S
Weir Group plc
ESK Holdings Pty Ltd and Michael Wesley Tyrrell
Agathis Capital L.P.
Zijin Mining Group Co., Ltd
Wam Capital Limited
Shandong Energy Group Co Ltd
Pacific Equity Partners Pty Ltd
Hanlong (Africa) Mining Investment Limited (2012)
Morgan & Banks Investments Pty Limited and Allegis Group, Inc.
Chengdu Tianqi Industry (Group) Co., Ltd
Rockwood Holdings, Inc.
Sundance Energy Australia Ltd
Brookfield Asset Management Inc.
Metals X Limited
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IN-DEPTH KNOWLEDGE
OF THE AREA AND
THE ABILITY TO FIELD
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+61 2 8220 6700
E
jalgar@claytonutz.com
Rod Halstead
Partner
T
+61 2 9353 4126
F
+61 2 8220 6770
E
rhalstead@claytonutz.com
Andrew Hay
Partner
T
+61 7 3292 7299
F
+61 7 3221 9669
E
ahay@claytonutz.com
Rod Lyle
Partner
T
+61 3 9286 6176
F
+61 3 9629 8488
E
rlyle@claytonutz.com
PERTH
Mark Paganin
Partner
T
+61 8 9426 8284
F
+61 8 9481 3095
E
mpaganin@claytonutz.com