At first glance, when looking at the statistics and trends from FY19 and comparing them to FY18, one could be forgiven for thinking that it’s been much of the same – after all, the similarities between FY19 and FY18 are striking. For example:
Likewise, the prospect of an announced deal being disrupted by shareholder activism continued into FY19. Rather than bemoaning any dramatic changes between FY19 and FY18, we see this consistency in the statistics and trends over the past two financial years as a positive sign. It demonstrates stability and continuity in the Australian market for corporate control. This predictability can provide a level of comfort and assurance within which companies feel confident transacting. If one scratches a little deeper beneath the surface of these similarities between FY19 and FY18, some key deal developments are discernible over the last financial year.
As auctions for control become more prevalent, and as announced deals become more susceptible to disruption by activist shareholders, dealmakers have responded to these challenges by becoming more creative. For example, the tactics for succeeding in auctions are becoming more sophisticated than just throwing more money at the target – which of course still remains a powerful tactic! However, target boards assessing competing proposals are rightly focusing on factors beyond the headline price. Likewise, private equity acquirers are becoming increasingly innovative and flexible to secure identified targets. This includes teaming up with superannuation funds and with senior management of the target. Similarly, we saw a number of examples where, in response to shareholder activism, acquirers and/or target boards were prepared to either ‘stare down’ the activist or be flexible in adapting transaction terms.
Three noteworthy key developments are:
With organic growth remaining challenging across many mature industries, any meaningful growth will need to be achieved by acquisition. For that reason alone, M&A levels in Australia for the remainder of FY20 are likely to remain steady. Strategic acquirers will always be prepared to ‘look through’ short-term geopolitical headwinds such as the eventual outcome of Brexit and the oscillating economic tensions between the world’s two largest economies, China and the United States.
Bidders will continue to move quickly to take advantage of quality targets whose share prices are depressed or languishing due to broader adverse industry sentiment rather than any fundamental problems with the underlying business.
Out of favour and heavily sold sectors such energy and aged care may now be on the radar of opportunistic bidders. Hostile bids that are put directly to target shareholders will remain a viable option for many opportunistic acquirers whose initial attempts at friendly engagement are rebuffed by target boards. See for example the hostile all-scrip bid launched by Independence Mining for Panoramic Resources on 4 November 2019, following unsuccessful initial attempts at friendly engagement with the Panoramic Resources’ Board. As this recent example illustrates, immediately transitioning to a ‘Plan B’ hostile bid – or even bypassing the usual ‘Plan A’ friendly engagement path and launching into a hostile bid from the outset remains open. This is despite the inherent execution risks of hostile bids (e.g. due diligence being confined to publicly available information, and no break fee or other deal protection if overbid).
Private equity buyers will continue to use innovative structures to secure a pre-bid stake, secure a target board’s recommendation or overcome obstacles to getting the deal done.
This will be either as co-investors with private equity or industry participants and/or as conduits to delivering a pre-bid stake. The sheer weight of Australian superannuation funds means they will no longer be passive in M&A deals, but will instead drive and shape M&A activity. Australian super funds may replicate the patterns seen overseas, such as in Canada, where pension funds are major direct investors in publicly listed companies, both locally and in overseas markets (such as Australia).
Dealmakers should seek FIRB advice early and plan for the potential need for FIRB approval including early engagement with FIRB. This is particularly the case given the complexity and breadth of our FIRB regime which captures many more deals than direct foreign acquisitions.
As boards of ASX listed targets and their shareholders become increasingly attuned to the global investment market, we expect to see an increased willingness by ASX listed companies to agree to friendly deals with foreign bidders where the consideration is or includes the bidder’s own foreign listed scrip.
As the timeframe from initial informal approach to a formally announced deal continues to increase, we expect to see a greater use of transaction process deeds. This reflects an increasing desire for certainty and protections in the preannouncement period including cost recovery mechanisms if a formal proposal does not eventuate.
Already we’re seeing shareholder activism in a number of announced FY20 deals. For example, we’ve seen Wilson Asset Management unsuccessfully campaigning for a higher offer from Nine in its takeover bid for the 45% of Macquarie Media that Nine does not already own; we’ve seen Thorney Opportunity Fund publicly criticise the directors of Aveo Group for recommending an offer from Brookfield at a price that was materially below Aveo’s most recent valuation of its net tangible assets (that deal ultimately succeeded); and we’ve also seen interests associated with media executive Antony Catalano increasing their existing stake in Prime Media Group from just below 5% to 10.3%, with a view to either thwarting Seven West Media’s proposed acquisition of Prime or using this enlarged stake to negotiate a commercial win for Mr Catalano’s newspaper business.
In August 2019, ASIC updated its guidance on climate change related disclosure, RG 228 (prospectus) and RG 247 (annual reporting), reflecting the climate change risks developed by the G20 Financial Stability Board’s Taskforce on Climate Related Financial Disclosure. This increased focus by companies on climate change reporting will continue to impact Board strategy, especially potential divestments and a more selective approach to the types of acquisitions Boards are willing to pursue as part of their longer term strategy. However, this may not deter private equity from capitalising on the vacuum of deal options in this space by stepping in to acquire unloved assets.
ASIC will continue to be vigilant in reviewing complex, novel or bespoke transaction structures. The ACCC will continue to closely monitor industry consolidation plays, as well as acquisitions by industry competitors of strategic minority stakes. FIRB will continue to closely review transactions in sensitive sectors including healthcare and agribusiness to ensure that they are not contrary to Australia’s national interest.