Summary

  • PR Finance’s scheme of arrangement provides for a potential further payment to selling shareholders if the acquirer subsequently sells the target company or its assets.
  • This structure continues a series of examples in our market of contingent consideration being used in an M&A deal.
  • Contingent consideration can be used in a variety of situations to protect the bidder and the selling shareholders.

The scheme of arrangement proposed by PR Finance Group Ltd provides a further example of how additional consideration payable on a contingency may be part of an acquisition structure.

In this instance, the additional consideration would be payable if, within 12 months of the scheme being implemented, the bidder subsequently on-sold the target company or a significant portion of its assets.

The transaction continues a series of examples in Australia where additional consideration has been available to shareholders depending on the outcome of acontingency.

This has included the following examples:

  • the Centrebet/Sportingbet transaction in 2011 where selling shareholders were entitled to receive $2.00 in cash per share plus a pro rata share of 90% of a potential GST refund
  • the First Data Corporation/Cashcard transaction in 2004 where some consideration was held back subject to the outcome of adjustment warranties
  • the White Energy/SA Coal transaction in 2010 where special shares were issued which would convert into additional ordinary shares calculated by reference to increases in coal resources for the target’s exploration mining tenements
  • the UXC/Ingena transaction in 2008 where special shares were issued which entitled the holder to additional ordinary shares based on the target’s business achieving certain NPAT targets in subsequent financial years
  • the partially protected shares issued by Wesfarmers in its acquisition of Coles in 2007, which provided for additional shares to be issued if the Wesfarmers share price did not reach $45 within four years
  • the CVR shares issued in the Yanzhou Coal/Gloucester Coal transaction in 2012, which provided for additional shares to be issued if the bidder’s share price was below $6.96 at the end of 18 months after the transaction was implemented
  • the Metcash/Mitre 10 scheme of arrangement in 2010 under which Metcash acquired 50.1% of the equity in Mitre 10 upfront and also acquired the right to move to outright ownership at a future point in time at a price based on the future performance of Mitre 10’s business, and
  • the Bupa/Dental Corporation scheme of arrangement in 2013 under which Bupa may be required to pay an ‘earn out’ to certain target shareholders – the quantum of the ‘earn out’ payments will depend on the future financial performance of Dental Corporation.

The PR Finance proposal

PRF had found itself in financial difficulty. It had a significant debt outstanding to Commonwealth Bank and also to a separate lender, Keybridge Capital Limited. There were a number of events of default under the lending facilities and Keybridge approached PRF with a proposal to acquire 100% of PRF under a scheme of arrangement. Given the dire financial position PRF was in, the directors accepted the proposal and recommended the deal to shareholders.

Under the proposed scheme, Keybridge will acquire 100% of the PRF shares in exchange for:

  • an aggregate cash payment of $1.35m, plus
  • a share consideration of the lesser of 2.5 million shares or such number of shares which has a value of at least $500,000, plus
  • the possibility of some further consideration if there is a subsequent change of control.

The contingent consideration arrangement works as follows:

  • on or before the date which is 12 months after the scheme is implemented, there must be an agreement by PRF or Keybridge to sell all or substantially all of the share capital of PRF or all or a significant portion of the assets or business of the PRF group
  • the transaction must be with a person listed in the scheme implementation agreement (the list being redacted for disclosure purposes in the scheme booklet), and
  • the price must be equal to or greater than the target consideration amount.

If these conditions are satisfied then Keybridge must, within 120 days after completion of the subsequent control transaction, either pay an amount equal to $1 million or issue shares that have an aggregate market value of that sum.

It is likely that including the possibility of the additional consideration becoming payable was to address possible concerns that PRF was being sold too quickly or too cheaply. The independent expert concluded that the price offered by Keybridge was ‘not fair’, but was ‘reasonable’ in the circumstances.

The scheme booklet goes to some length to emphasise that there is significant uncertainty associated with whether any additional consideration will be paid as it depends on the successful completion of a subsequent transaction with an independent third party. The independent expert does not attribute any value to that component in its independent expert’s report.

Conclusion

Clearly, the PR Finance transaction is not a major transaction by any measure.

However, it does demonstrate that contingent consideration structures can be adopted in situations where there is some uncertainty about the value of the target company and, as in this case, some apparent need to undertake a transaction quickly. Allowing for a component of additional consideration if there is a subsequent control transaction or on-sale may also provide an element of anti-embarrassment protection.

The PRF transaction was structured as a scheme of arrangement. This makes it more simple to effect compared to a takeover bid, as the law requires consideration under a takeover bid to be paid within 21 days of the offer closing – something that may not always be possible with contingencies. However, an identical economic effect can be achieved by the bidder issuing a special share or other security within the 21 day period, which in turns entitles the holder to the contingent consideration.