There is no doubt that M&A transactions are taking longer and are harder to complete these days.
The difficulties can arise in many different shapes and forms. Bid funding can be hard to obtain, the perceived risks can be high, regulatory issues can get in the way and significant shareholders may not be sellers.
What is the panacea for these problems?
Unfortunately we cannot claim to have a universal remedy. However, it does seem that in recent times many acquirers have found a solution to pre-bid concerns, risks and other jitters in the form of a joint bid. Recent high profile examples include:
- Peabody Energy Corporation and ArcelorMittal S.A joining forces for a bid for Macarthur Coal;
- Santos and TRUenergy coming together to carve up Eastern Star Gas;
- The bid by FOXTEL (being a partnership comprising Telstra, News Corporation and Consolidated Media) for AUSTAR;
- CP2 and friends bidding for ConnectEast; and
- Rio Tinto and Mitsubushi bidding for Coal & Allied.
Joint bids come in different shapes and sizes eg the establishment of a bidco to make a bid or an on-sale or spin-off of some assets on completion of a bid. However, whatever the form, these structures have the advantage of lowering cost, spreading the risk and can also mean there is one less competing bidder to worry about and therefore a more certain path to completion.
There is, however, a flipside to the joint bid coin. Like the risks and costs, the benefits of a joint bid must also be shared amongst the bidders. Moreover, some benefits that would have been available if the bid had been a solo mission may not be able to be realised under a joint bid structure.
In addition, there are legal considerations with the 20% rule and disclosure issues and, of course, one needs to agree a deal with their partner.
The legal concerns with the 20% rule can be avoided with an ASIC modification. However this is given only on standard conditions, including a requirement to accept a higher bid which is not matched which can be problematic. The recent bid for Coal & Allied proceeds in a novel manner which avoids the troublesome condition. We discuss this later in the article. Before that, we consider the advantages and disadvantages of joints bids and also some of the other legal issues which may arise.
There might be a number of drivers and advantages with a joint bid.
- Funding – funding and the costs associated with making a bid can be shared. Reducing the funding requirement can be important for a bidder with cash limitations.
- Risk sharing – spreading the risk can be important, particularly for the junior partner. Private equity bidders often join forces for larger bids eg Carlyle and TPG for Healthscope.
- Increased certainty and unlocking the target share register – teaming up with a significant shareholder in the target can provide a valuable head start and increase the prospects of success. The Macarthur Coal example in particular is interesting as the joint bid technique is being used to help unlock a complicated share register which stifled 3 separate bids for Macarthur in 2010. No doubt ArcelorMittal's 16% holding in Macarthur Coal made it an attractive co-bidder for Peabody. However, there can be complications with joining with an existing shareholder which are discussed below.
- Different parties interested in different target assets – the classic recent example is AXA SA of France and its interest in the Asian business of AXA-APH which saw it team up with AMP which took the Australian business of AXA-APH.
- Competition/regulatory issues – bidders may also not be able to acquire 100% of a company on their own for competition or other regulatory reasons. For example, the foreigners involved in the APA Partners bid for Qantas in 2007 would not have been able to bid alone because of the Qantas foreign ownership restrictions.
However, before deciding to make a bid with one or more others, there are some potential drawbacks and complications which should be taken into account.
- Complications and confidentiality – co-bidders need to work out the bidding agreement up front. This may be easier said than done. Separately, with 2 parties discussing a bid with 2 sets of legal, financial and accounting advisers, the risk of leaks inevitably spreads.
- Shared benefits – the more bidders, the smaller your piece of the pie and the upside!
- Lost benefits – benefits that you may have been able to realise had you bid alone may not be available to you if a joint bid structure is used. These could include tax benefits and operational benefits derived from synergies.
- Less control – decisions during the bid need to be taken jointly. Interests can diverge. The junior bidding partner can sometimes get dragged along and have less say. While a bidding agreement can give some protection against these matters it is usually difficult for a junior partner to expect to run the bid.
- Extracting value – the success of the bid will depend greatly on the ability to work together with the other bidders. It will be important that there is a clear understanding between the bidders as to how the target will be run or carved up post bid. These matters should be formalised pre-bid.
- Exiting your investment – with successful bids where the co-bidders form an ongoing joint venture (as opposed to a post bid split of assets), the ability of a co-bidder to exit the investment may depend on the other bidders also agreeing to sell their stake in the company. In any case these matters are best worked out and agreed beforehand.
2 important legal considerations arise in respect of joint bids for public companies. These concern the substantial shareholding disclosure threshold at 5% and the 20% rule or takeover prohibition.
(a) Avoiding premature association
Where joint bidders collectively have voting power in the target of more than 5%, they need to take care to not prematurely act in a manner as would give rise to an association between them. That is not act in concert or come to an agreement, arrangement or understanding to make a bid.
Once an association is formed, a party's voting power will include the voting power/shareholding of the associate. If this increases a party's voting power beyond 5% or if above 5%, increases it by 1% or more, that party will need to lodge a substantial shareholders notice together with a copy of any agreement giving rise to the association (or if there is no written agreement, a summary of the key terms or facts giving rise to the association).
The entry into an agreement by joint bidders in relation to a bid would give rise to an association. This is generally why such agreements are not entered into until the bidders are committed to proceeding with each other and ready to announce their bid.
Having said that there may be occasions where it is preferable for co-bidders to become associated sooner rather than later. This may be the case where it is publicly known that the parties are considering a joint bid. In this scenario becoming associates before any formal agreements are negotiated and/or agreed would mean that at the time of becoming associated there is less to be said about the association (eg perhaps only an MOU or a summary of the understanding). This may be preferable to lodging a full form agreement at a later stage.
(b) Joint bid relief
Where the bidders collectively have more than 20% voting power in the target care needs to be taken that the 20% rule or takeover prohibition is not breached.
To avoid breaching the 20% rule, ASIC grants an exemption/modification of the Corporations Act to co-bidders which collectively have more than 20% of the target to facilitate legitimate joint bids. ASIC's now long established policy on this topic (set out in its Regulatory Guide 159) states that relief will generally be granted subject to the following conditions:
- Acceptance by non-associated shareholders – the bid must be subject to a non-waivable condition that acceptances must be received in respect of at least 50.1% of the target shares in which none of the joint bidders have voting power.
- Independent expert's report – the joint bidders must use their best endeavours to have the target engage an independent expert to prepare a report on whether the joint bid is fair and reasonable to target shareholders who are not associates of the bidders.
- Termination of joint bid – the joint bidders must immediately terminate any arrangement between them relating to the bid if the bid does not proceed or fails because of the non-satisfaction of a defeating condition.
- Higher rival bid – the joint bidders must accept a rival bid that is higher than their bid if they do not match that rival bid. ASIC may not impose this condition if one of the joint bidders has no (or a very small) relevant interest in target shares.
It is this last condition that can give joint bidders the jitters. This is particularly the case if a joint bidder has a significant shareholding and/or is a long term shareholder – the prospects of success and upside of moving to full control with a co-bidder needs to be weighed against the risk of losing all of one's shareholding?
(c) Shareholder approval as an alternative to joint bid relief
Interestingly it is this concern over the last condition to joint bid relief which appears to have driven Rio Tinto and Mitsubishi to avoid seeking such relief in their recent takeover proposal for Coal & Allied. Rio currently owns 75.7% and Mitsubishi owns 10.2% of Coal & Allied. To avoid the need for ASIC relief and the troublesome condition to sell into a higher bid, the co-bidders asked Coal & Allied to convene a shareholders' meeting to approve the joint bid arrangements under item 7 of section 611 of the Corporations Act.
This method seems to make sense in a friendly transaction given target co-operation. It could also conceivably be used in a hostile transaction if the bidder requisitioned a meeting of target shareholders – having said that the form and extent of the disclosure for the notice of meeting for such meeting would no doubt give rise to various disputes and debates between co-bidders and targets.
It remains to be seen if the item 7 of s 611 route is used more often in future transactions but we think it will be in friendly transactions where one or both bidders have significant shareholdings.