At first glance conditions seem ripe for a vibrant M&A market in 2015, with strong equity markets, cash interest rates at a 50 year low and an Australian dollar in freefall. It all points to more inbound M&A activity.
But domestically, it’s a different story. Business and consumer confidence are plumbing new lows. Political instability at both state and federal level is contributing to the uncertainty, as is a perception of increasing sovereign risk and general lack of confidence. These factors could deter potential bidders and targets in pursuing deals.
There has been commentary suggesting record breaking M&A activity in recent months – a “deal frenzy”. Indeed, on paper there was a dramatic improvement in public M&A in 2014 – with a 60% increase in deal numbers and total deal value up 170%. However, this is only an improvement against 2013, the most subdued level of public M&A in more than a decade, and still does not reflect by any means an M&A “boom”.
We expect investors to remain cautious with continued uncertainty around the long tail effects of the GFC and the potential global market impacts of unwinding years of quantitative easing.
Bidders and targets are also exercising caution with high profile examples of major acquisitions not delivering expected returns (for example, the $50 million sale of Riversdale by Rio, which was acquired 3 years before for close to $4 billion).
While conditions are favourable in theory, it is not until confidence and stability return that we expect this will translate into a more vibrant public M&A market....to quote Henry V, “All things are ready, if our minds be so.”
The Corrs M&A team analysed all takeovers and schemes in 2014 involving an Australian target with a deal value over $25 million.
Below are our ten key findings on M&A activity and the trends shaping the market.
1. Resources still dominating
Resource sector deals represented the largest proportion of M&A deals, accounting for almost half (49%) of the deals in our 2014 sample. Plummeting commodity prices and tough capital markets are driving M&A activity as smaller players in particular struggle to survive in the current environment.
Continuing tough conditions are presenting opportunities for would-be acquirers, domestic and international alike, and it seems likely that 2015 will see more tie-ups in the sector.
2. More private equity involvement in 2015
There was a lot of commentary last year about the return of private equity to Australian public M&A. At first glance, this is not borne out in the statistics, with private equity accounting for only a handful of deals, and only one completed deal in 2014.
However, there were a number of publicly disclosed approaches by private equity for public listed targets (and rumours of significant private equity participation in public sales processes) which did not ultimately result in a transaction, or which remain ongoing coming into 2015. We therefore expect increased activity by PE in public M&A in 2015.
3. Importance of foreign bidders to Australian M&A confirmed
2014 saw the return to the norm of a higher proportion of foreign bidders than Australian bidders. About two-thirds of deals involved a foreign bidder. This was coupled with a significant increase in foreign bidders offering their own securities as consideration.
Given the importance of foreign investment to M&A activity in Australia, we are closely monitoring the Government’s new proposal to make changes to Australia’s foreign investment policy, including potentially introducing significant fees for applications.
4. Return of Chinese SOEs to public M&A
2014 was a year of consolidation for Chinese State Owned Enterprises. Most deals by Chinese buyers were from existing holders seeking to “average down” their resources sector investments.
In 2015, the falling Australian dollar and long awaited China Australia Free Trade Agreement should see more inbound PRC investment, especially in agriculture and large scale residential property.
5. A positive recommendation is the key influencer for deal success
Once again, the number one factor that will influence the success of a deal is a positive target recommendation. Bidders looking to acquire 100% will have a tough time reaching their goal without a target recommendation. Not one deal in the last four years has reached 100% without a target recommendation.
6. Pre-bid stakes - valuable but not essential
Pre-bid stakes continue to be a common feature in transactions and having a stake of 10% or more correlates with increased prospects of success, particularly in takeover bids. However, they were less prevalent than in prior years and are certainly no assurance of success.
7. Disclosure tactics - indicative approaches on the rise
Truly “hostile” takeovers continue to be rare with a steady increase in recommended deals. We are seeing an increase in bidders preferring to test the water with indicative approaches rather than committing to a takeover without a recommendation. This trend is reflected in market practice around the increased use of implementation agreements and due diligence.
8. Hot competition
Competition remained fierce in 2014 with contested deals comprising a quarter of our deal sample. There was a high failure rate - around a third of the deals (with results known at the time of the report) were unsuccessful and a large portion of these involved bidders missing out due to superior proposals emerging. Price was not the only trump card in contested deals with type of consideration, truth in takeover statements, deal structure, timing, pre-bid stakes and disclosure tactics all strategies adopted by bidders and targets in contested deals.
9. A shift towards more target friendly deal protection
2014 saw a continuation of relatively standardised deal protection and break fee provisions in compliance with Takeovers Panel guidance. However, there were a few developments that suggest a shift towards more target friendly deal protection provisions and a particular focus by the Panel and Courts on not fettering target directors fiduciary duties during a control transaction.
10. End game
The use of truth in takeover statements (such as “our offer is best and final and will not be increased” or “this offer will not be extended”) remain an effective way to close a takeover, potentially increasing the likelihood of the success of a takeover and reducing the time it takes to get to closing. The use of “best and final” price statements by bidders increased significantly in 2014.