Buoyed by surplus cash reserves, negative bond yields, availability of credit and foreign exchange volatility and a seeming scarcity of off-market targets, we are seeing take privates forcefully driving the de-equitisation of the Australian capital markets. 2019 is the first time the ASX has experienced de-equitisation, and we think it will continue to be a primary force across markets.
How do take privates work?
'Take private' is a colloquial term given to the process of taking a publicly listed company through a control transaction process to become a privately owned entity. This process requires the company to be formally delisted from the relevant stock exchange and is usually achieved by way of the bidding company completing a takeover or scheme of arrangement with respect to the target. The process has increasingly involved the use of stub equity, which we discuss below.
A change to the way capital markets work
While 2019 is the first year in which the ASX has experienced de-equitisation (amount of equity issuance being less then equity retirement), US markets have seen this for some time. Take privates are one of the factors (along with buy backs) driving de-equitisation.
The trend in favour of privately held companies is being led by private equity funds, family funds, industry-based super funds and the ability of these forces to co-invest.
Examples of take privates in 2019
Take privates in 2019 have had a significant impact, including:
- Legend Corporation Ltd (ASX code: LGD)
Delisted: 02/09/2019
PE Firm/Super Fund/Company: Greenland BidCo Pty Ltd (owned by Adamantem Capital).
- Dulux Limited (ASX code: LTD)
Delisted: 22/08/2019
PE Firm/Super Fund/Company: Nippon Paint Holdings Co Ltd *(Tokyo listed)
- Navitas Limited (ASX code: NVT)
Delisted: 09/07/2019
PE Firm/Super Fund/Company: BGH and AustralianSuper
- Verdant Minerals Ltd (ASX code: VRM)
Delisted: 21/06/2019
PE Firm/Super Fund/Company: CD Capital Natural Resources Fund III LP and Washington H Soul Pattinson & Company
- Healthscope Limited (ASX code: HSO)
Delisted: 11/06/2019
PE Firm/Super Fund/Company: Brookfield Business Partners
- MYOB Group Limited (ASX code: MYO)
Delisted: 08/05/2019
PE Firm/Super Fund/Company: Kohlberg Kravis Roberts
- Trade Me Group Limited (ASX code: TME)
Delisted: 08/05/2019
PE Firm/Super Fund/Company: Apax Partners
- Watermark Global Leaders Fund Limited (ASX code: WGF)
Delisted: 29/04/2019
PE Firm/Super Fund/Company: Watermark Absolute Return Fund
- Watermark Market Neutral Fund Limited (ASX code: WMK)
Delisted: 29/04/2019
PE Firm/Super Fund/Company: Watermark Absolute Return Fund
- Century Australia Investments Limited (ASX code: CYA)
Delisted: 06/03/2019
PE Firm/Super Fund/Company: WAM Leaders Limited
- Greencross Limited (ASX code: GXL)
Delisted: 28/02/2019
PE Firm/Super Fund/Company: TPG Capital Asia and TPG Growth
The downsides of take privates
There are significant drivers for PE Firms and Super Funds assuming complete ownership and control of listed companies by way of a take private, including:
- Increased access to cheaper debt financing (as opposed to equity financing);
- Eliminating trading liquidity differentials;
- Removing the administration costs of being ASX listed;
- Full control;
- Flexibility of structuring and ease of de-merger/asset sales; and
- Ability to pursue more longer term initiatives, whilst eliminating the need to meet shareholder driven short term performance targets.
Take privates do have some drawbacks including:
- Inability to trade stock on the open market;
- Potential for 'toxic' liabilities within the 'take private' company;
- Debt/leverage issues;
- Stub equity issues; and
- Ongoing public reporting requirements for private companies (if large).
Stub equity and why it's important to take privates
Stub equity structures have been used in recent take private transactions, particularly by private equity bidders.
Stub equity is an equity structure which allows a target company shareholder to remain a shareholder in the target or the Bidco following completion of the control transaction. For example, a bidder may allow shareholders to opt for unlisted scrip in Bidco instead of taking a cash offer, allowing the shareholder to stay in for the upside in the company going forward.
ASIC is currently proposing to prohibit the use of stub equity structures in a scheme or takeover. MinterEllison's position is that all shareholders should have the opportunity to choose whether to accept company scrip consideration as part of a control transaction using stub equity, provided the risks involved are clearly disclosed.
For further information regarding stub equity and our recommendations to ASIC, please refer to our articles below:
Next steps
We think take privates will continue to strongly impact on ASX companies. Founders or significant shareholders of these companies involved in the original IPO process are often prime candidates for take privates, alongside sophisticated fund investors.
This new force sets to grow stronger in the prevailing macro-economic conditions. Get ready by:
- Reviewing your takeover defence strategy;
- Conducting register analysis;
- Watching developments in your industry, particularly your comparatives;
- Discussing at board level your likely response to a take private proposal;
- Heightening readiness during share price weakness; and
- Looking at doing the things within your company private equity might do, before they do.
We think take privates will continue to forcefully shape the market in 2020.
