Summary

  • Cirrus Business Investments (Cirrus) held 45.2% of Careers Australia Group (CAG), an unlisted public company, and made a takeover bid to acquire all remaining shares at 66 cents per share.
  • The CAG independent directors engaged in discussions with other interested parties.
  • The independent directors agreed a recommended alternative bid by Crescent BidCo (Crescent) at 80 cents per share. Some key aspects of Crescent agreeing to make a competing bid (which are discussed in this note) were the provision of cost recovery and break fee arrangements for Crescent and the establishment of a target shareholder acceptance facility by CAG.
  • Following a series of counterbids, Cirrus was ultimately successful in acquiring 100% of CAG at 87 cents.
  • The transaction demonstrates that, even if a bidder has a substantial existing holding, there are mechanisms which can be deployed by target boards to create an auction process which delivers real value for shareholders.

Background

CAG is an unlisted public company. Chapter 6 applied to it because it had more than 50 shareholders.

Cirrus, a subsidiary of private investment company, White Cloud Capital, held 45.2% of CAG’s ordinary shares, and also held convertible notes in CAG which, if converted, would have given it a 47.2% stake in CAG.

CAG made a takeover bid to acquire all of the remaining ordinary shares in CAG at 66 cents per share.

The independent directors of CAG recommended that CAG shareholders reject the offer. An independent expert valued the CAG shares at 85 to 96 cents per share.

The Cirrus offer was declared unconditional on 27 June 2013 and was due to close on 6 July 2013.

Given that Cirrus already held 45%, and its offer was unconditional and due to close in a week, the environment for obtaining a counter-bid to the Cirrus offer appeared very unfavourable. In particular, Cirrus only required a small number of shareholders to accept its offer to gain control of CAG.

However, on 27 June 2013, the independent directors announced that they had agreed a recommended alternative bid by Crescent, a subsidiary of Australian private equity manager, Crescent Capital Partners, at 80 cents per share.

The Crescent bid was conditional on a 50.1% minimum acceptance condition and certain other limited conditions.

In response, Cirrus increased its offer from 66 cents to 85 cents. Following a series of counterbids by Crescent and Cirrus, Cirrus was ultimately successful in acquiring 100% of CAG at 87 cents.

The final offer price of 87 cents represented a premium of approximately 31% to the original price offered by Cirrus.

This note discusses three particular mechanisms which were deployed by the CAG independent directors to give Crescent comfort that it was worthwhile launching a competing bid, creating an auction process for CAG shareholders – the use of cost reimbursement and break fee arrangements and a target shareholder acceptance facility.

Cost reimbursement arrangement

Following receipt of the original Cirrus offer, the CAG independent directors engaged in discussions with a number of other interested parties.

An aspect of public (and private) sale processes which is becoming more common in recent times is for potential bidders to request cost reimbursement from target companies in relation to their due diligence enquiries.

This is generally relevant where a target is keen to solicit a binding offer from a potential bidder, but the potential bidder is not prepared to expend significant time and expense on undertaking due diligence to finalise its proposal in circumstances where there may be a relatively low prospect of any proposal succeeding.

The terms of any cost reimbursement arrangement will generally depend on the relative bargaining positions of the parties. However, there are a number of considerations that a target company should bear in mind to ensure that its shareholders are receiving value for the cost reimbursement arrangement.

  • The potential bidder ought to have submitted an indicative proposal to the target with its offer price, to demonstrate its bona fides.
  • The cost reimbursement should be limited to out-of-pocket external due diligence costs which are properly incurred (and for which supporting evidence of the external costs incurred is provided).
  • The maximum amount of the cost reimbursement payable by the target should be very clearly articulated. The amount can comprise a weekly limit and/or a limit on the overall costs of the bidder in undertaking due diligence. Ideally the arrangement should include a pre-estimate of the expected costs.
  • The arrangement should be able to be terminated by the target at its election, and have other clearly defined termination events such as the submission of a binding proposal and a specified end date.
  • In certain circumstances, the target may be able to negotiate that the cost reimbursement is only payable if a binding proposal is submitted.

In the current case, CAG and Crescent agreed a cost reimbursement arrangement broadly along the lines above. This was a critical aspect in obtaining Crescent’s agreement to undertake due diligence, which ultimately enabled it to go on to make a binding offer for CAG at a premium to the original offer by Cirrus.

Break fee and other deal protection arrangements

In a similar vein to the cost reimbursement arrangements, the provision of a break fee and other deal protection was also an important element in Crescent proceeding to make a bid for CAG.

In the present case, CAG agreed to a break fee of approximately 1% of the value of Crescent’s proposed offer, in line with Takeovers Panel guidance.

The break fee was payable in relatively customary circumstances, such as if the Cirrus offer became unconditional and it acquired more than 50% of CAG (rendering Crescent unable to satisfy its own 50.1% minimum acceptance condition), a change of recommendation, termination of the implementation deed for unremedied material breach by CAG or a competing transaction being completed within 12 months.

The break fee payable was reduced by any amounts paid by CAG to Crescent under the cost reimbursement arrangements referred to above. The break fee was also expressed to cap the liability of CAG under the implementation deed, such that CAG would have no further liability if the break fee was payable.

The provision of break fees has recently been in the spotlight with the Takeovers Panel’s recent decision in Billabong International Limited [2013] ATP 9. In that case, the Panel considered certain break fees and other lock up devices provided to lenders under a recapitalisation proposal for Billabong.

The Panel concluded that the size of certain finance facility termination fees and “make whole” premiums were far in excess of the 1% equity value recommended by the Takeovers Panel, and would be likely to deter rival proposals for Billabong, and so were unacceptable.

It is also interesting to note that in 2011, the UK Takeovers Panel made amendments to the UK City Code on Takeovers and Mergers to include a general prohibition on break fees. The UK Takeovers Panel was concerned that the tactical advantages a bidder may have over a target with a break fee may lead to outcomes which are unfairly skewed against targets and their shareholders.

While there has been renewed focus on the appropriateness of break fees and other deal protection measures in recent times (and concern that target boards are sometimes too quick to agree to a ‘formulaic’ deal protection package, without fully considering whether it is really need to secure a proposal), the CAG transaction demonstrates that there are definitely circumstances in which agreeing to a break fee is clearly in target shareholders’ interests. In the current case, if Crescent had not been sufficiently incentivised to make a competing offer, in circumstances where its prospects of success appeared low, shareholders would not have received the benefit of a significantly higher offer price which arose from the ensuing auction process. The arrangements agreed with Crescent also included a full suite of other deal protection measures, including a matching right, and these were also integral in securing the Crescent proposal.

Target shareholder acceptance facility

A final key aspect in Crescent agreeing to make a competing bid was an offer by CAG to establish a target shareholder acceptance facility.

Institutional acceptance facilities have become a common feature of takeover bids in Australia where bidders have facilitated institutions indicating their willingness to accept a bid without formally tipping into the bid until it is unconditional and certain of success.

More recently, a ‘target shareholder’ acceptance facility was used unsuccessfully by Alesco in relation to DuluxGroup’s takeover bid. Under the Alesco facility shareholders could tender acceptances into the facility, and those acceptances would be provided to DuluxGroup if it agreed to increase its offer to a specified higher level. The aim of the facility was to demonstrate shareholder support for the DuluxGroup bid, but only at a higher offer price.

In the current case, a target shareholder acceptance facility was used by CAG to maximise the prospects of the Crescent offer becoming unconditional and providing a viable alternative to the Cirrus offer.

CAG shareholders were unlikely to commit to the Crescent offer in circumstances where the Crescent offer was subject to a 50.1% condition and the Cirrus offer was due to close in one week, since if they accepted the Crescent offer but Crescent did not get to 50.1% they would not receive Crescent’s higher price, and they would also miss the opportunity to accept the lower Cirrus offer.

Accordingly, the shareholder acceptance facility enabled target shareholders to demonstrate their support for the Crescent offer (and ‘build’ towards satisfying its 50.1% condition) while still being able to withdraw from the facility and accept into the Cirrus offer if the Crescent bid did not reach 50.1% by the end of the Cirrus offer period.

The acceptance facility provided Crescent with momentum and demonstrated a clear path to achieve 50.1%, notwithstanding that Cirrus already held 45%. The fact that the facility was established by CAG, and was maintained by an independent share registry, also provided shareholders with enhanced comfort about the operation of the facility and their ability to deal with their CAG shares in accordance with its terms.

Ultimately following the announcement of Crescent’s offer, Cirrus increased its bid, and as a consequence extended its offer period (and further rounds of bidding, and extension, occurred). However, the target shareholder facility provided an important mechanism to generate a real auction in circumstances where this would otherwise have been impossible.

We believe that target facilities are an important tool for targets in making rival transactions or opportunities viable, and thus in fostering a credible auction, and that they will become more common in takeover transactions.

Conclusion

The CAG transaction demonstrates that, even if a bidder starts at 45%, there are mechanisms which can be deployed by the target board to create an auction process which delivers real value for shareholders.