Guangdong Rising Assets Management’s unconditional takeover of PanAust Limited

Consistent with the trend of Chinese bidders becoming more competitive in 2015, we saw our Chinese clients become more agile in their outbound investment tactics, with even SOEs adopting innovative M&A tactics to pursue and acquire high-quality assets.

One of the most audacious Chinese offshore investments of 2015 was the takeover of ASX-listed PanAust by Chinese provincial SOE, Guangdong Rising Assets Management Co (GRAM). PanAust has copper/gold projects in Laos, Papua New Guinea and Chile. GRAM’s offer was unsolicited and followed a rejection from PanAust’s board in 2014. The market called it “hostile” – GRAM described it as “friendly but firm”.

Hostile takeovers are common in Australia and many western markets, but remain a relatively rare option for Chinese bidders, especially SOEs – the first ever hostile takeover within China itself was launched in December 2015. One reason they have been rare has been the need for due diligence access, in order to obtain regulatory approvals and acquisition financing. It is also a matter of style.

GRAM broke with this trend, announcing an unconditional off-market takeover bid, the first significant transaction in the Australian market to use this tactic since Xstrata interloped on Resource Pacific in 2007. The structure gave GRAM speed, stealth and flexibility.

GRAM was the best-prepared Chinese bidder to launch a public takeover in Australia. The offer documents went out the morning the offer was announced which, combined with the offer being unconditional, permitted GRAM to begin buying shares on-market immediately. GRAM moved to 25% before the market knew what had hit it.

Why was GRAM willing to go unconditional?

No due diligence, no financing, regulatory approval or minimum acceptance conditions were required.

It helped that GRAM knew the asset, having held 20% since 2009. GRAM’s initial approach in 2014 got bogged down in diligence and market volatility. In the meantime, the share price drifted down and GRAM waited for the opportunity to strike – using the time to get bid-ready.

Committed funding from Chinese banks was prearranged and fully documented, even before the target or bidder was approached with the final offer. Usually, Chinese banks are only willing to sign a highly-confident letter but the canny GRAM and King & Wood Mallesons teams moved straight to full-blown loan documents and security, side-stepping the traditional two-week holding period for Chinese acquisition finance.

Chinese and Australian regulatory approvals were also obtained in advance of the bid. The relatively open jurisdictions of Laos, Papua New Guinea and Chile require limited approvals which GRAM shrewdly navigated.

GRAM’s 25% blocking stake protected it against an interloper.

The takeover was ultimately successful, and the preparedness of GRAM, as well as its willingness to play an aggressive game in a high-pressured situation, enabled it to get to 90% in under two months – less than half the time of other hostile bids in the past two years.

Perception vs reality: A cross-cultural approach to acquisition financing

There is a perception in some parts of the market that deals involving Chinese SOEs and banks have a higher- than-usual execution risk. Indeed, some Western financiers talk about there being a market for provision of backstop financing (financing to close a transaction, where there is doubt that the full-form financing will be made available on time for closing).

This perception need not be a reality however, as the certain funds takeover financing for GRAM’s unconditional takeover offer for PanAust shows.

GRAM sought the support of its relationship banks in China for the takeover of PanAust, from its Guangdong and Yuexiu branches. Nevertheless, GRAM’s bid on 30 March 2015 was launched with:

  • A fully-documented facility agreement with the PRC branches of PRC banks, with all conditions precedent to initial drawdown satisfied;
  • Typical Western certain funds provisions for subsequent drawdowns; and
  • A procedure for pre-positioning funds in Australia before acceptances. To support the unconditional nature of the bid, it was critical that payments to accepting shareholders were made quickly (within seven business days of acceptances), so drawdowns were made in advance of acceptances, and paid into a bank account in Australia. Withdrawals from the bank accounts were subject to provision of evidence of acceptances.

Chinese and Western elements

The financing package combined elements of:

  • PRC companies providing an outbound security or guarantee (so- called “Nei Bao Wai Dai” or 内保外贷);
  • and Western-style APLMA/LMA acquisition facility, and Australian and Hong Kong share security.

GRAM entered into PRC law facilities, under which Chinese bank branches provided letters of credit or undertakings to their offshore branches. These facility agreements were secured primarily by PRC security.

The letters of credit and undertakings were then used to support the acquisition facility.

The Chinese aspects of the structure

This structure was developed as a way of avoiding the need for approval from SAFE for PRC cross-border security. However, foreign exchange controls were relaxed in mid-2014, SAFE pre- approval is no longer needed (it’s only necessary to register such security or guarantee with SAFE after execution of the finance documents).

Nevertheless, the structure is still popular as:

  • Chinese banks can enforce securities and guarantees locally within China (which remains the preference for Chinese banks); and
  • Loans can be made from branches with lower funding costs.

Credit approvals and timing

In any acquisition financing, the term sheet can take significant time to negotiate, particularly if there are differing expectations as to the length and detail of the term sheet, depending on the market. This would have significantly affected timing, as the internal credit approval procedure of Chinese banks is usually initiated after the execution of a term sheet. In this case, a decision was made to proceed straight to the Facility Agreement stage, and initiate credit approval without a negotiated term sheet.

Click here to view the image