A recent wave of consolidation in the telecommunications sector has seen TPG Telecom acquire iiNet for $1.6 billion, Vocus Communications acquire Amcom Telecommunications for $653 million and Vocus acquire M2 Group in a 'merger of equals' valued at $3.0 billion. These three transactions have now created two industry powerhouses – TPG and Vocus.
All three transactions were implemented by way of a scheme of arrangement between the notional target and its shareholders. Schemes are often regarded as relatively inflexible compared to a takeover bid in responding to changing circumstances (including the emergence of rival proposals). However, these transactions show otherwise – schemes can readily deal with the complex and fluid developments that often arise in contests for control of publicly listed target companies.
A scheme structure has potential advantages for a prospective acquirer (and the target) compared to a conventional takeover bid structure, including:
- certainty of outcome, with an 'all or nothing' result – i.e. if a scheme is approved by target shareholders and the Court, 100% control of the target will pass to the acquirer; on the other hand, if the scheme fails, the target's current ownership structure continues;
- certainty of timing - i.e. if a scheme is approved by target shareholders and the Court, it will be implemented on a fixed date, with 100% control passing to the acquirer on that date; and
- a less onerous shareholder approval threshold to achieve 100% control, compared to the 90% compulsory acquisition threshold for a takeover bid.
TPG's acquisition of iiNet and Vocus' acquisition of Amcom, both structured as schemes, were contested by other industry participants. Ultimately though:
- TPG successfully exercised a 'matching right' under its scheme implementation agreement with iiNet to defeat a rival proposal for iiNet by M2; and
- Vocus' acquisition of Amcom made corporate history as the first time that a scheme has succeeded in the face of a 19.9% blocking stake; in this case, held by TPG.
MinterEllison acted for TPG on its acquisition of iiNet, for Vocus on its acquisition of Amcom and again for Vocus on its subsequent merger with M2. Here we share our insights on these first two transactions and discuss some of the strategies that were employed to deliver a successful outcome for our clients.
Matching rights in the battle for iiNet
The contest for control of iiNet demonstrates that the use of the scheme structure in no way diminishes the efficacy of the customary exclusivity arrangements in favour of a bidder in a friendly transaction. Any subsequent competing proposal can be addressed within the framework of those arrangements. Accordingly, an acquirer is not disadvantaged in its ability to respond to a rival proposal by initially proposing a scheme to a friendly target.
Background to the transaction
In March 2015,TPG and iiNet announced a proposal under which TPG would acquire 100% of iiNet by way of a scheme of arrangement, with iiNet shareholders being offered $8.60 cash per share, valuing iiNet at $1.4 billion. The iiNet Board recommended that iiNet shareholders support this proposal, in the absence of a superior proposal.
iiNet's strong retail presence made it a compelling target as evidenced by a competing proposal being announced by M2 on 27 April 2015. Under M2's proposal, also structured as a scheme, iiNet shareholders would receive 0.803 M2 shares for each iiNet share plus a $0.75 special dividend to be paid by iiNet but funded by M2, implying a value of approximately $1.6 billion for iiNet.
TPG's matching right
iiNet notified TPG that its Board had determined that the value of M2's competing scrip proposal was superior to TPG's all cash offer. As part of that notification, the iiNet Board issued a formal notice to TPG under the scheme implementation agreement. This notice triggered TPG's matching right – meaning, TPG had the right, but not the obligation, to submit a counterproposal for the iiNet board's consideration within three business days. Importantly, at no time within that three business day period did the iiNet board change or withdraw its public recommendation in favour of TPG's original cash offer. Any such change or withdrawal of recommendation would have triggered an obligation on iiNet's part to pay a break fee of $14 million to TPG.
In response to the matching right notice, TPG submitted a sweetened proposal for iiNet under which the consideration increased by 11% to $9.55. iiNet shareholders could elect to receive their consideration either as cash of $8.80 per share (an increase of $0.20 from the original 'all cash' offer) or a scrip alternative of 0.969 TPG shares per iiNet share, plus a $0.75 dividend to be paid by iiNet but funded by TPG.
The iiNet Board carefully reviewed TPG's revised 'cash or scrip' proposal relative to M2's 'all scrip' proposal. The iiNet Board concluded that TPG's revised proposal was superior to M2's proposal. Accordingly, the iiNet Board maintained its public recommendation of the TPG proposal. That proposal, as amended, was ultimately approved by iiNet shareholders and implemented, with iiNet now being a wholly owned subsidiary of TPG.
But suppose, in different circumstances, the iiNet Board had instead recommended M2's competing proposal (which as noted above was also structured as scheme). In that scenario, TPG would have been free to abandon its initial scheme structure for its initial 'all cash offer' and to launch a rival takeover bid the next day – the same as if TPG had initially proposed a takeover bid. Accordingly, an acquirer is not disadvantaged in its ability to respond to a rival proposal by initially proposing a scheme to a friendly target.
Vocus and Amcom – divesting a pre-scheme stake and overcoming a blocking stake
The Vocus/Amcom scheme illustrates that:
- a prospective acquirer may dispose of a pre-scheme stake so that these shares are eligible to be voted at the scheme meeting, provided appropriate precautions are taken; and
- a 19.9% blocking stake is not necessarily fatal to the approval of a scheme provided the target can buy enough time to mobilise its remaining shareholders and can engage effectively with them to persuade them of the merits of voting in favour of the scheme.
Background to the transaction
A tie-up between Vocus and Amcom made sense – they operated in highly complementary businesses along the east and west coasts of Australia respectively, and a combination of the two would create a new national telecommunications infrastructure player. With this in mind, Vocus began acquiring Amcom shares using a physically settled equity swap with the Commonwealth Bank of Australia and, prior to approaching Amcom with the proposed offer, Vocus had already acquired an approximate 10% shareholding. In December 2014, Amcom and Vocus entered into a scheme implementation agreement under which Vocus would acquire all of the remaining Amcom shares, for which Amcom shareholders would receive 0.4614 Vocus shares for each Amcom share.
On 30 April 2015, TPG announced that it had increased its shareholding in Amcom from approximately 5% to 18.6%, through on-market purchases (and later increased to 19.9%). TPG also announced that it intended to vote those shares against the Vocus/Amcom scheme but that it would not be making a competing offer for Amcom.
Amongst other things, a scheme resolution must be passed by a majority of 75% of the shares (in each class) voted on the resolution at the scheme meeting. With TPG increasing its holding in Amcom to 19.9%, almost all of the remaining Amcom shares would have had to be voted in favour of the scheme for it to be approved. Market analysis shows that voting participation rates in takeover schemes is typically only around 60% of eligible votes. Further complicating the picture for Vocus and Amcom, the shares held by the scheme proponent (here, Vocus) typically cannot be counted towards approval of the scheme resolution. With Vocus holding 10%, and TPG's announcement of its intention to vote its 19.9% stake against the scheme, this meant it would be almost impossible to achieve the requisite majorities to approve the scheme.
With the advice of its financial and legal advisors, Vocus took the novel and controversial step of disposing of its 10% stake in Amcom. This had significant implications for the course of the transaction, as set out below.
Enlarging the voting population
There were multiple commercial reasons for Vocus' decision to dispose of its 10% stake in Amcom. However, one key effect of the disposal was the freeing up of 10% of Amcom's share capital so that it was eligible to be voted on the scheme resolution.
Vocus' decision to dispose of its 10% stake in Amcom initially concerned ASIC, resulting in ASIC closely examining Vocus' sale process to look for any association between Vocus and the purchasers of its 10% stake. In the context of the scheme, a purchaser of these shares would be considered an associate of Vocus if they had reached any understanding on how the purchaser would vote on the scheme or what might happen to the Amcom shares if the scheme vote failed. If such an inference could be shown, there would be a significant risk that a Court would consider the interests of those purchasers and other Amcom shareholders so dissimilar, making it impossible for them to consult together with a view to their common interest. The consequence would be that those purchasers would form a separate 'class' of Amcom shareholders, meaning that any votes cast by those purchasers would not be counted towards determining whether a sufficient number of disinterested Amcom shareholders had voted in favour of the Scheme.
This issue was also contested at an interlocutory Federal Court hearing, in which TPG argued that any votes cast on the scheme resolution by entities that had acquired Vocus' 10% interest should be 'tagged' – thus establishing a basis for further legal challenge if those votes carried the day.
Ultimately, Vocus demonstrated to both ASIC and the Federal Court's satisfaction that its sale process for the 10% stake did not prejudice the outcome of the scheme vote. In delivering his decision, McKerracher J of the Federal Court noted that ASIC had not identified any improper conduct, and in particular the disposal:
"… was completed in accordance with precise parameters intended to ensure that Vocus would not constitute an associate (as defined in the Act) of any purchaser. It was conducted with considerable care on arm's length terms with a willing, but not anxious, purchaser, and no residual rights were exercisable by Vocus. There were no discussions between Vocus and any potential purchasers in relation to how any purchaser would vote. Certainly, there was no agreement, arrangement or understanding with any purchaser to control or influence the composition of Amcom's board or the conduct of Amcom's affairs."
ASIC subsequently commented as to the degree of inquiry it was likely to make in similar future circumstances. This reinforces that a high degree of care must be taken by a prospective acquirer in a scheme structure when seeking to divest a pre-scheme stake. It is also a reminder that a prospective bidder should carefully assess the merit of acquiring a large pre-bid stake in the first place, if it intends to employ a scheme structure.
Supplementary disclosure and shareholder engagement
Due to the material changes in circumstances (ie. TPG's announcement and Vocus' disposal), Amcom made supplementary disclosure to its shareholders and, in accordance with ASIC's stated policies, gave shareholders additional time to consider the disclosure prior to voting on the scheme resolution. As a result, the scheme meeting was adjourned twice and the final court hearing was postponed.
These delays worked in favour of Vocus and Amcom by giving them additional time to engage with Amcom shareholders, including an intensive campaign of phone calls, mail-outs, e-mails and social media (featuring video messages from the chairman and key shareholders), to mobilise Amcom shareholders to vote en masse at the scheme meeting.
Excluding TPG, Amcom shareholders almost unanimously supported the scheme – 99.8% of non-TPG votes were cast in favour of the scheme. This was sufficient to see the scheme resolution passed with a narrow majority of 77.19%.
On 28 September 2015, barely two months after its acquisition of Amcom, Vocus announced a proposal to merge with M2 via a scheme of arrangement between M2 and its shareholders. M2 shareholders were offered 1.625 new Vocus shares for each M2 share they held. This 'all scrip' merger scheme was overwhelming approved by M2 shareholders (with none of the complexities that arose in the previous two schemes covered in this article), and was implemented on 22 February 2016. In just over 12 months, the consecutive, successful acquisitions of Amcom and M2 have transformed Vocus from a challenger with a market capitalisation of $550 million to being the fourth largest fully integrated telecommunications services provider in Australia with a market capitalisation of over $4.0 billion.