Freehills has acted for Metcash in connection with its acquisition of a controlling stake of 50.1% in the Mitre 10 Group.
This transaction:
- represents another manifestation of traditional features of private acquisitions being used in a public acquisition implemented by way of scheme of arrangement, and
- illustrates the greater structural flexibility afforded to acquisitions by way of scheme of arrangement and could not have been accomplished through a takeover bid.
Overview of the transaction
The Mitre 10 Group consisted of two separate and independent unlisted public companies: Mitre 10 Australia Limited (M10A) and Mitre 10 Limited (M10L). As each holding company had hundreds of members they were subject to Chapter 6 of the Corporations Act.
The transaction involved the following inter-conditional three-stage process:
- the acquisition of M10L by M10A by way of scheme of arrangement, with the former M10L shareholders receiving new M10A shares
- the subscription by Metcash for partly paid ordinary shares in NewCo (the proposed new holding company of the Mitre 10 Group), which ultimately conferred 50.1% of the voting power in NewCo, and
- the acquisition of M10A by NewCo by way of scheme of arrangement, with the former M10A shareholders (including the former M10L shareholders) receiving unlisted, but freely transferrable, redeemable convertible preference shares in NewCo (RCP Shares) which, in aggregate, conferred 49.9% of the voting power in NewCo.
The initial earn-out and true-up pricing structure
The consideration payable by Metcash for its 50.1% stake was based on the Mitre 10 Group’s earnings for the 12-month period ending 30 June 2010 less its net debt at completion.
As the acquisition was completed before the Mitre 10 Group’s 30 June year end, the amount to be paid by Metcash for its initial controlling stake could not be determined at the time. Accordingly, it was agreed that Metcash would pay an estimated amount for its stake. This amount is subject to a true-up adjustment based on actual earnings for the year and actual net debt as at completion once the Mitre 10 Group’s 2010 accounts have been finalised.
To accommodate this flexible payment structure, Metcash subscribed for partly paid shares in NewCo. These shares will become fully paid following completion of the true-up exercise, and at the time the appropriate true-up payment is made in respect of the difference between the estimated consideration and the actual consideration.
The option to move to 100%
The RCP Shares were issued to address the parties’ two-fold commercial objective of giving:
- former M10 shareholders the ability to participate in any upside in the performance of the Mitre 10 Group following the acquisition of Metcash’s initial controlling interest, and at the same time
- Metcash the option to move to a 100% holding of the Mitre 10 Group in the future.
The RCP Shares give Metcash the right to move to 100% ownership of the Mitre 10 Group by requiring NewCo to redeem the RCP Shares in either 2012 or 2013 for a price based on an earnings multiple less net debt at the relevant time. If Metcash does not exercise this right, the RCP Shares will convert into ordinary shares and the holders will have the opportunity to request NewCo to pursue an IPO or trade sale.
This article was written by Martin Shakinovsky, Partner and Andrew Rich, Senior Associate, Sydney.
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