Having passed the halfway point for 2013 it is an opportune time to reflect on the year to date and crystal ball gaze into the rest of the year.
There is little doubt that the M&A landscape in Australia is uncertain. Activity has been down significantly, particularly at the larger end. So far there have only been 12 takeover or schemes this year for ASX listed companies valued over $50 million. Only one – ADM/Graincorp – has a value over $250 million.
Australia seems pre-occupied with the forthcoming federal election (now locked in for 7 September) and the accompanying political shenanigans, anxiety that the mining boom has ended and concerns about China’s growth slowing (notwithstanding it’s still over 7% per annum).
However, times seem different in the US. Over there, stock markets are at an all-time high, the economy is improving day by day and M&A activity, anecdotally at least, seems to be on the rise. However, this does not seem to have translated into statistics just yet. The main concern in the US seems to be the US Federal Reserve thinks things are going so well they want to wean the economy off its quantitative easing drugs.
The US recovery, the ongoing shifting of economic strength to the east and Asia and a lower A$ making assets cheaper must mean things should start to change for Australian M&A….at least in the medium term? Maybe, maybe not.
Here are our top 10 market and legal observations at the midpoint of 2013:
One sector in which activity has been high is infrastructure. We expect this to continue.
The sale of Port Botany by the NSW Government to an IFM led consortium including other super funds and the Abu Dhabi Investment Authority for $5.1 billion certainly caught the attention of other states. We can expect to see further privatisation of state owned infrastructure in coming months including NSW and Queensland electricity assets.
Electricity and gas pipelines and transmission assets have also been the subject of M&A activity. APA having acquired HDUF (and selling the Moomba to Adelaide Pipeline System as required to do so by the ACCC) has recently announced an all scrip proposal to acquire Envestra for $2 billion. In addition, the world’s largest utility, State Grid of China agreed to buy a significant portion of Singapore Power’s Australian assets, namely a 60% interest in Jemena and a 19.9% interest in SP AusNet in a multibillion dollar transaction which remains subject to regulatory approval.
In terms of mining infrastructure, Fortescue’s sale process for a minority interest in its Pilbara rail/infrastructure assets is coming to an end although potentially with no sale being the result. Separately, Aurizon has publicly announced increased borrowing against its regulated below rail network assets and the potential for it to sell a minority interest in such assets. At the same time, Aurizon seems keen on M&A opportunities in Western Australia and elsewhere.
Several road projects are also on the horizon including WestConnex in NSW and the East-West road link in Melbourne. While these projects will take many years to come to fruition, investment decisions in relation to them will be made over the coming financial year. Separately, Rivercity in Queensland is up for sale.
One thing is very clear in all of this: pension and superannuation funds, both foreign and domestic, will continue to remain actively interested in infrastructure M&A and greenfield opportunities in Australia due to the stable cash flows and the relatively stable regulatory environment. With their long term investment horizon, the pension funds are real competitors for these assets.
Mining and resources – the end of the good times or just a pause?
The last 10 or so years of the mining boom have been great years for Australian M&A.
However, it seems such times are now ending or indeed, some would say, they have already well and truly ended. Commodity prices are generally down (in particular gold and coal), expenses and costs of mining projects remain high (notwithstanding extensive cost cutting), job losses are mounting as mines get mothballed and development projects or expansions are shut down and mining stock prices have fallen greatly. Large takeovers have fallen over altogether eg Sundance Resources and Discovery Metals, with severe consequences for their share prices.
Australia is nervous about the level of demand from China and others for our resources. This is notwithstanding that China’s annual growth remains above an enviable 7% and Fortune’s recently released list of the world’s 500 largest companies found room for no less than 89 Chinese companies (second only to the US).
In this context, some true believers consider that the ongoing rise of Asia must mean this is just a temporary pause for the mining boom. We are not so sure. Perhaps the current times are symptomatic of the usual boom/bust cycle of resources. One thing is certain, there always will be demand from China, the question is just how much?
While there has been a lack of high profile resources M&A, there are still opportunities to be had. BHP and Rio Tinto have announced asset sales. The Rio sale process for 80% of Northparkes copper and gold mine resulted in an agreement to sell to China Molybdenum for $820 million. This shows that Chinese buyers remain willing and able to invest in mining assets. It remains to be seen if they have bought at a good price.
Opportunities abound for juniors to be acquired (particularly those that have a lack of funding). We expect to see some consolidation amongst juniors. It has already started with deals like Troy Resources takeover of Azimuth. As some of our more entrepreneurial clients say: now is the time where you make your money - you just have to wait until the good times to collect.
We also expect to see some consolidation in the multiple Queensland LNG projects.
The dawn of the dining boom….with associated law reform
While mining M&A may be down, there is an increasing interest in Australia’s agricultural assets. For example, the takeover of Graincorp progresses as Archer Daniels seeks FIRB and Chinese regulatory approvals and several primary production assets undergo sale processes with even more foreigners, from across the globe including US, Europe and of course Asia looking for quality Australian assets to acquire.
We expect M&A in the agricultural sector to increase as food security becomes an increasing issue in Asia and also as the Australian dollar devalues, making A$ assets cheaper to foreigners.
The only wrinkle in this forecast appears to be a growing focus on the foreign investment laws in this sector. We have had a recent Senate enquiry as well as the Liberal/National Coalition’s policy musings in this area putting a greater focus on the laws on foreign acquisitions of agricultural assets. It appears that the future may include a foreign ownership register and a lower threshold for approval which is currently $248 million.
In previous editions of this publication we have often been sceptical of the likelihood of M&A law reform. However, it seems to us that regulation of foreign investment in agriculture is out of step with community concerns and we expect to see law reform in this area post the 2013 federal election. Having said that, given the importance of foreign investment to Australia and the pressing need for capital investment in the agricultural sector, we hope that sanity prevails and the regulatory attention focuses on increased disclosure rather than unnecessary prohibition of foreign acquisitions.
Corporate law reform and updated ASIC regulatory guidance – much ado about nothing
Speaking of law reform, as forecast in our January edition, the much heralded takeover reform process has come to nought. A victim of our federal politic stalemate perhaps. Nevertheless, some would argue that there wasn’t a need for any significant reform anyway.
Disappointingly, there seems to be a long graveyard of CAMAC, ASIC, Treasury and other papers on takeovers and scheme reform which has come to little. Maybe a new government might have some better luck. If they do, there seems to be a general consensus that legislative reform regarding disclosure of economic interests above 5% through cash settled equity swaps is needed: swaps are definitely on the rise in M&A eg Crown/Echo, ADM/Graincorp and Dexus/Commonwealth Property Office Fund (the last one is particularly interesting as the target has issued court proceedings alleging defective disclosures).
While there has been no change in the laws, ASIC has tried to fill the void by refreshing and consolidating its longstanding guidance on takeovers. The updates are largely helpful, involving the consolidation of 17 former regulatory guides into 4 new regulatory guides. Having said that ASIC’s policy setting on takeovers remains substantially the same as that under its old guides. However, some notable points include the application of ASIC’s joint bids policy to schemes of arrangement, a more technical and hard line approach to the issue of collateral benefits (which at times may be at odds with the Takeover Panel guidance) and some observations on the content of substantial shareholders notices. Disappointingly, ASIC chose not to update its Truth in Takeovers policy.
Separately, ASIC has also recently undertaken a new project which focuses on communications between companies and investment analysts particularly in respects of their results this reporting season. The apparent aim is for ASIC to get a better understanding of the manner in which companies communicate with the investment community. The regulator’s activity in this area comes at a time of heightened concern about selective disclosure of market-sensitive information following the disclosure controversy involving Newcrest. Given the very public warning, we expect all companies will be on their best behaviour. The warning shot will no doubt immediately lift standards in this area. Care needs to be taken that the project doesn’t inhibit well established and legitimate communications practices.
“Loan-to-own” transactions hit the mainstream
The Australian “loan-to-own” market continues to build momentum and attract headlines through high-profile transactions such as the debt for equity restructure of Nine Entertainment Co. which was successfully implemented earlier this year (see: Gilbert + Tobin’s February 2013 article “Creditors’ schemes in the hot seat: the Nine Creditors’ Scheme of Arrangement”).
While such transactions have long formed part of the M&A landscape in the US (where the structure of Chapter 11 of the Bankruptcy Code encourages loan-to-own investments) and the UK (often through the use of pre-packs), it is only a relatively recent trend in the Australian market. The increasing willingness of the traditional Australian banks to sell impaired loans since the collapse of Lehman Brothers has been a significant factor, as well as the global perception that the Australian market is comparatively stable. Some notable restructures involving a ‘debt for equity’ element include those involving Alinta, Centro, Colorado and most recently Nine.
The larger Australian transactions have each been heavily influenced by US hedge funds such as Oaktree Capital Management and Apollo Global Management. They have shown a willingness to acquire debt to take control of distressed companies and implement management and other structural changes.
We expect that offshore funds will continue to play a key role in the Australian loan-to-own market (eg US funds’ recent interest in Billabong). We also expect to see Australian distressed debt funds increasingly making their presence felt by acquiring debt of embattled Australian companies.
To date, debt trading and the focus of US funds in Australia has been on industrial sectors such as retail, property and media. However, with commodity prices down, projects cancelled or postponed and balance sheets stretched, it will be interesting to see whether overleveraged resources and mining services companies attract attention. We think they will.
Shareholder activism remains on the rise
Shareholder activism in the form of high-profile disputes between publicly traded companies and vocal minority shareholders has been front page news in the US in recent times. Shareholder activism has long been a feature of the US market where activist hedge funds are increasingly targeting the largest of all companies including Apple, Dell and Sony.
Australian listed companies are starting to see a similar rise in the assertiveness of their shareholders – both large and small.
This assertiveness can be seen in a series of ‘first-strikes’ being recorded under the controversial ‘two-strikes’ law under which an entire board of directors can face re-election at a spill meeting if 25% of shareholder votes are against the remuneration report for executives at consecutive annual general meetings. A small but significant number of companies have now had second strikes.
In addition, some Australian corporates are starting to experience more direct acts of shareholder intervention. This includes concerted public campaigns directed at boards and management which are ultimately designed to change the officers and/or unlock unrecognised value by means of recommended control transactions and corporate restructures/spin-offs.
Separately, important institutional shareholders like Perpetual and AFIC are increasingly letting companies know if they are unhappy with management decision making.
Critics of shareholder activism claim that it encourages an unhealthy focus on short-term profits at the expense of shareholders who have a longer investment horizon. Supporters retort that long-term shareholders are well served by activist investors who demand performance and accountability. Either way, it seems like shareholder activism is here to stay. We expect it to increase. Boards and management need to be on alert.
The competition regulator has also been churning out the paper, but are merger clearances taking too long now?
For those mergers that require ACCC approval, timelines seem to be getting longer.
ACCC recently released a draft of the updated Merger Review Process Guidelines which reflects its current policy. Seeking clearance in Australia continues to be voluntary, but the ACCC has flagged its intention to use a 20% market share as an indicative notification threshold.
In cases where clearance will be sought, the draft Guidelines provide for a process that contemplates three stages:
- the “pre assessment” stage, which typically takes approximately two weeks;
- the “public review” stage, which will now take between 6 to 12 weeks to be completed; and
- if the ACCC decides that a merger will not be cleared by the end of the second stage a further, and more targeted, review of the issues of concern is undertaken. Previously ACCC used to try to complete this third stage in 4 weeks. However, it is now expected to take 6 to 12 weeks.
The net result is that the clearance process for a complex transaction can now be expected to take approximately 26 weeks to be completed (if not more).
The ACCC also make clear that in international mergers the timetable can be suspended pending the outcome of the review of a foreign competition regulator.
Interestingly, the longer review times have not yet resulted in an increased level of oppositions. Currently, the rate of oppositions since Rod Sims became chairman of the ACCC is lower than the rate under his predecessor. Two of the most recent oppositions (HJ Heinz proposed acquisition of Rafferty’s Garden (infant food) and Woolworths proposed acquisition of supermarket site at Glenmore Ridge Village Centre) reflect some common themes including that the ACCC:
- will take a long time to review difficult transactions - the clearance process for the Heinz transaction took around 7 months and the Woolworths transaction took around 12 months;
- continues to be reluctant to approve mergers in industries that are considered to be concentrated; and
- continues to be very interested in exploring all possible scenarios for a transaction (including any possibility that an alternative buyer that might create a more favourable competitive environment post transaction).
Cross border mergers - Chinese merger clearance: the long pole in the tent?
Chinese regulatory authorities have also found themselves on the front pages of the financial press with increasing regularity. This is particularly true of the Ministry of Commerce People’s Republic of China (MOFCOM), the authority responsible for enforcing China’s Anti-Monopoly Laws.
Due to the relatively low turnover thresholds which trigger a mandatory competition filing in China, MOFCOM has quickly become one of the key regulators of cross-border M&A transactions.
In addition, the merger clearance process in China is notoriously slow (simple mergers can take 4 to 6 months; more complex mergers take upwards of 6 months and, as we saw with Glencore/Xstrata, sometimes over a year).
The combination of low thresholds and a slow process means that one of the first questions asked on any cross border merger (particularly one where China’s access to commodities is at issue) is: “Do you intend to notify MOFCOM?”
The recent publication by MOFCOM of its Draft Interim Regulations relating to simple cases has raised hopes that clearance times for such cases will become shorter. However, it remains the case that if a merger requires filing in several jurisdictions (including China), file in China first.
Equity capital markets: some momentum starting? Or just Groundhog Day?
What can we report on equity capital markets? It seems a bit like Groundhog Day here.
Activity has been slow and low for the first 6 months of 2013. Having said that, IPO volumes in 2013 are 4 times higher than for the first 6 months of 2012. Admittedly a very low base. Even so, this is the highest first half since 2008.
Prominent IPOs have included the large $3 billion partial privatisation of NZ electricity company, Mighty River, as well as the IPOs of Virtus Health, iSelect and Steadfast in the Australian market. Each of these Australian companies having a market capitalisation of circa $500 million. Post listing trading for these Australian companies have been mixed yet the key issue is they managed to IPO notwithstanding the challenging conditions.
Private equity is also beginning to stir again on potential dual track exits (choosing between an IPO and trade sale).
Beyond that there has been little else to report. The ASX undertook a $550 million rights issue to meet new capital rules affecting clearing houses, repay debt and fund “growth initiatives”. The Australian banks have been making hybrid issues to assist with meeting their capital management requirements. Rights issues to fund M&A activity have been very few and far between, although it wouldn’t surprise if activity levels increase here.
It is hoped that the stirrings of IPO activity might be the green shoots of a stronger equity capital markets. There is certainly a better outlook for the second half of this year and beyond, with media reports speculating about some potential high profile offers on the horizon including Genworth, Nine Entertainment, TruEnergy, McAleese Transport, OzForex and Centuria Property.
What do you do when M&A is tough and you want to find a way to unlock value?
There have been some notable demergers announced or implemented in the past 6 months including:
- the split of News Corporation into its traditional publishing assets (which retains the News Corporation name) and separately its entertainment and TV assets into 21st Century Fox;
- the proposed split of UGL between its engineering operations and its property services;
- Brambles spinning off its $2 billion Recall filing and storage business, the final step in its transformation from a conglomerate to a globally focused logistics company. This spin off coming after a prolonged and unsuccessful effort to sell the business last year; and
- Amcor’s proposed demerger of its Australasia packaging and distribution business.
Australian demergers have a good track record in recent years with DuluxGroup flourishing since its demerger from Orica in 2010 and Fosters being taken over by SAB Miller at a significant premium after spinning off Treasury Wine Estates.
In this respect with assets harder to sell at an acceptable price, the solution may be a demerger. We expect to see some more announced in the next 6-12 months.
We trust you found our State of the M&A Nation piece to be of interest.
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