Top 10 M&A developments in 2007
07 January 20081. Deals get bigger and resources and foreigners run hot
Following on from a frenetic 2006, 2007 sees the biggest ever Australian acquisition by scheme of arrangement – being the acquisition of Coles Group by Wesfarmers (A$20 billion), as well as the largest completed takeover – that of Rinker by CEMEX (A$16 billion). However, it didn’t stop there with the announcement of the BHP Billiton approach to Rio Tinto—potentially the biggest global M&A deal ever.
Resources M&A generally continues to run hot. Apart from BHP/Rio, the year sees a large number of significant resources deals announced or completed, many involving multiple suitors and competing bids. These included activity in coal, uranium, gas and other minerals. Foreign entities show a particular interest, with bidders from Russia, China and other countries making regular appearances in Australian M&A. We expect this trend to continue in 2008.
Through all this, one thing has remained constant: Freehills has topped the Australian and New Zealand Thomson Financial completed M&A league tables for the sixth successive half-year – the first law firm to achieve this.
2. More Takeovers Panel policy as it battles for survival
The Panel has a big year. It commences with Guidance Note 19 concerning the participation by insiders in management buyouts; it refreshes a number of policies including lock-ups and, most controversially, it puts out a position paper on the disclosure of equity derivatives—including disclosure where there is no takeover on foot.
In breaking news, the High Court decides the Panel is okay. Alinta had challenged the constitutional basis for the Panel after it made a divestment order. However, the High Court said the Panel was not exercising ‘judicial power’. So it’s back to the future for the Panel. Expect the Panel to have more impact on the market in 2008.
Separately, the former counsel of the Panel, George Durbridge, joins the Freehills M&A team, and Freehills partner, Rodd Levy, is appointed to the Panel.
3. Institutions are restless
A number of deals see institutions take very public positions against transactions. Most notably, the press given to institutions in the APA bid for Qantas, and the voting down of a number of deals (for example Flight Centre) on the basis of institutional unhappiness with price.
4. Truth in takeovers gets teeth…although just baby ones
CEMEX, in its bid for Rinker, declared its offer final but then allowed Rinker shareholders to keep a subsequent dividend. ASIC took action before the Panel and obtained a declaration of unacceptable circumstances with a possible compensation order for CEMEX to pay A$30 million—perhaps a small price to pay to assure success in the context of a A$16 billion deal. Query if an order keeping CEMEX to its statement and denying shareholders the dividend would have been a better result for market integrity.
Similarly, the Panel is very unhappy with statements about voting intentions in the Paladin bid for Summit (which were resiled from) but in the circumstances, there was no sensible order that could be made.
Other deals see proactive uses of the truth in takeovers doctrine; for example, virtual variations and statements of voting intentions in schemes.
Increased focus and reliance on truth in takeovers is likely to continue in 2008.
5. The advance of private equity…followed by the retreat
In some respects, 2007 is a tale of two halves for private equity and leveraged deals at the top end of the market.
Fuelled by covenant lite debt packages and a seemingly never-ending supply of investment money looking for homes, the first half sees an explosion of large scale leveraged M&A deals or potential deals including the Qantas bid, the private equity approach to Orica and the KKR/TPG consortium approach for Coles. However, very few actually succeed (Morgan Stanley’s buy out of Investa, Brookfield’s takeout of Multiplex, CVC/PBL media assets and KKR/Seven being among the few exceptions)…and as the US subprime problems start a northern hemisphere credit ’crisis‘, the amounts which leveraged players could bid for assets diminishes, giving opportunities for trade buyers to buy assets at more reasonable valuations.
Nevertheless, while private equity/leveraged deals at the top end of the market seem difficult in current times, the mid market remains strong.
Its hard to predict what may happen in this space in 2008 if the rocky credit markets continue.
6. More early disclosure of M&A discussions
Early disclosure of potential M&A deals became more prevalent as listed companies seek to stay on the right side of the continuous disclosure laws. Notable examples of disclosure of approaches and discussions in 2007 include Orica’s rejection of a private equity approach, Multiplex, Nufarm’s discussions with Chinese and private equity interests, and BHP/Rio.
Early disclosure is encouraged in part because of ASIC’s increasing scrutiny of compliance with continuous disclosure requirements, issuing infringement notices for what it considered to be delayed disclosure of takeover proposals which were no longer confidential.
7. Increased use of swaps despite disclosure rules
2007 sees the increased use of swaps and derivatives in M&A deals by potential bidders, spoilers and hedge funds. The lower cost of derivative holdings, as opposed to physical holdings, often being the key driver. Most notable examples include US hedge funds into Qantas and, more recently, the 9.9 per cent interest taken in Symbion by Healthscope (presumably as a prelude to getting a seat at the negotiating table with Primary).
Meanwhile, the Panel issued its draft guidance note on the topic, which proposes disclosure of long equity derivatives/swaps as if they were a physical holding (ie disclosure required when a person’s combined holding of derivatives and securities themselves reaches five per cent). Unlike the position in the UK, the Panel proposes disclosure being made whether or not a takeover is on foot or proposed.
8. Deal protection gets creative
In 2006, deal protection features such as no talk and no shop provisions are commonplace and allow Peabody Energy to trump Anglo in the A$2 billion contest for control of Excel Coal.
In 2007, further refinements to deal protection emerge:
- while issues remain, the first voting agreements in schemes are seen
- grace periods and matching rights allowing an initial bidder a short time to match or overbid a higher competing proposal before the competing proposal is recommended becomes common, and
- in an environment where institutions have been more critical of deals, the ‘go shop’ makes its way from the US to Australia in an attempt to give target boards comfort that they can sign up to the deal now.
9. Schemes under scrutiny
The Mincom scheme in the Supreme Court of Queensland sees a close and perhaps surprising examination of a number of common aspects of schemes. These include lock-ups and a re-emergence of the takeover avoidance debate.
In the APN scheme, detailed evidence concerning the need for the lock-up arrangements is required.
Despite these decisions, the pragmatic approach of the Victorian Supreme Court in the Coles Group and IWL schemes in November suggests that while schemes may need a little more thought in 2008, they will continue to be a popular transaction structure.
10. Top up gets thumbs down
In a win to the school of thought that suggests that really interesting ideas should be road tested before they are unleashed on deals, Pallinghurst declares it will pay an amount that matches any higher bid for Consolidated Minerals. The details of precisely how this is to be achieved take some time to emerge. When they do, the Panel declares Pallinghurst’s ‘top up note’ to be unacceptable. And so, while it was not a raging success, it demonstrates the spirit of creativity in Australian M&A is alive and well. In a market where competition for assets is high, expect more creative features to emerge in 2008 as market participants test the boundaries of what can be achieved on transactions.
This article was written by Tony Damian and Neil Pathak of the Corporate group.
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Office : Sydney
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Email : tony.damian@freehills.com
Title : Partner
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Email : neil.pathak@freehills.com
