"WHAT IS TOLD INTO THE EAR OF A MAN IS OFTEN HEARD A HUNDRED MILES AWAY"
In a fragile M&A environment concerned with deal completion risk, PRC bidders (whether state owned, private or otherwise) wishing to invest in Australia need to actively address market concerns about PRC regulatory approvals.
Commentators (including ourselves) have suggested that Chinese private investors are adopting a new and bolder approach to investment in Australia. While the recent announcements by Hanlong and Tianqi may suggest a tempering of this boldness – the focus and discipline displayed by Tianqi suggests an ongoing appreciation of what is required to get the deal done (see Chinese investment – a new bolder approach).
Hanlong’s prolonged pas de deux with Sundance has been well reported. To understand this slow dance it is important to appreciate that the scheme of arrangement between Hanlong and Sundance (Mark II) is conditional on Hanlong obtaining both provisional and final National Development and Reform Commission (NDRC) approval.
As would be well remembered from the aborted takeover by Zinjin of Indophil, a provisional NDRC approval is the first stage of the NDRC approvals process. It involves the applicant obtaining a confirmation letter under which the proponent is granted a right of exclusivity (as against other Chinese entities) to pursue an investment. It is not approval to invest. Its purpose is to identify the most appropriate Chinese investor for a transaction and to ensure that the Chinese investor undertaking a transaction has the requisite size, expertise and experience to enable successful execution. Hanlong has yet to be granted the right to pursue Sundance exclusively.
On 7 February, Sundance announced the NDRC had advised it will extend the provisional approval to 30 July 2013.
Importantly, the announcement notes any final approval to be granted by NDRC will be conditional on Hanlong securing a large Chinese partner to assist with the development of Sundance’s Mbalam-Nabeba Project. Since then reports suggest that Hanlong has entered into a confidentiality agreement with state-owned enterprise Magang (Group) Holding (also known as Masteel) to discuss cooperation to develop Sundance. The announcement and press is entirely consistent with the nature of the process for obtaining provisional NDRC approval.
In addition, the Hanlong scheme with Sundance (Mark I) and the announcement in January that CNOOC had been unable to obtain the final PRC Government approvals for its proposed deal to take an equity stake in gas junior Exoma Energy have fuelled speculation that PRC regulatory conditions represent a free option to renegotiate price.
The imposition of new investors into a transaction and the renegotiation of price do little to facilitate Australian investor confidence in an approach by a PRC bidder.
In contrast, Tianqi’s proposed acquisition of Talison by scheme of arrangement has represented a fast-paced and expertly executed allegro. As we have previously suggested, Tianqi demonstrated astute appreciation for the M&A game in gazumping Rockwood Inc’s existing offer by:
- securing pre-bid stake leverage
- obtaining majority shareholder support
- obtaining final PRC regulatory approvals before executing the scheme implementation agreement (no doubt facilitated by the ability to undertake due diligence on Talison on the basis of the scheme booklet which had been released for the Rockwood scheme of arrangement)
- offering reverse break fees as an upfront deposit payable into a trust account in Australia, see the new name of the PRC game.
On 26 February, Tianqi announced that its wholly owned subsidiary Winfield had struck an agreement with Leader Investment Corporation, a subsidiary of CIC, in relation to the acquisition of Talison. Tianqi announced that under the agreement CIC, through Leader, has committed to provide equity of CAD300 million to Winfield in exchange for a 35% non-controlling stake in Winfield.
In its announcement Tianqi notes that CIC has received formal FIRB advice that the Australian Government has no objection to CIC’s investment (presumably facilitated by the non-controlling stake acquired by CIC). Importantly, Tianqi states in the announcement that the equity arrangement between Tianqi and CIC does not impact on the NDRC, MOFCOM and SAFE approvals previously obtained by Tianqi for the transaction. In making the announcement Tianqi assured shareholders the deal will go ahead without potential delay or diversion. Admittedly, the announcement does not refer to CIC’s PRC regulatory approvals – presumably though as one of China’s most significant state owned enterprises such approvals have been obtained.
The confirmation by Tianqi about the status of PRC regulatory approvals demonstrates a keen understanding of the nervousness Australian investors about PRC bidders “revisiting” a deal. Given Tianqi’s ability to rely on the existing due diligence quality information about Talison, some may seek to distinguish Tianqi’s approach from other transactions. However, Tianqi has clearly demonstrated that PRC bidders can obtain final PRC approvals prior to going public. For the Australian market this is the benchmark against which future PRC bidders investing in Australia will be measured.
The message is clear for PRC bidders wishing to inspire the confidence of Australian targets and investors – minimise uncertainty and obtain PRC approvals upfront – anything less is likely to be considered a step back.