Our annual top 10 M&A predictions for the coming year are set out below. We also look back at how accurate our predictions for 2012 were as well.
1. More successful China inbound M&A
Success rates for Chinese inbound M&A into Australia have been steadily increasing. In FY2010, only 40% of Australian public M&A deals involving bidders from China were successful. This has been increasing, so that by FY2012, 83% of Australian M&A deals involving bidders from China were successful. We see this trend continuing. It is clear that Chinese bidders have become increasingly sophisticated and comfortable with the Australian M&A landscape. A tangible demonstration of that is the fact that Chinese regulatory approvals are now beginning to be obtained upfront, prior to deals announcing. In the Discovery Metals deal, NDRC (National Development and Reform Commission) approval was obtained up front. In the Tianqi proposal to acquire Talison Minerals, NDRC, MOFCOM (Ministry of Commerce) and SAFE (Safe Administration of Foreign Exchange) approvals were also all obtained up front. This demonstrates a preparedness to listen to and address concerns from targets that, rightly or wrongly, viewed an unsatisfied Chinese regulatory approval as an option for the bidder.
2. Takeover reform is back
It is unusual for takeover reform to grab the front page headlines, but that is exactly what happened in 2012. While the creep exception, the put up or shut up rule and the disclosure of equity derivatives may not be topics of conversation at every weekend barbeque, they certainly achieved prominence in 2012. Unless interrupted by the Federal election due next year, we expect to see the ASIC/Treasury consultation process deliver outcomes and reform on some of these topics in 2013.
3. Takeovers to remain truthful
Truth in takeovers had a significant year in 2012. There were two critical matters in the Panel. The first involved the contest for control of Ludowici. There was a debate about whether a particular statement was indeed a last and final statement, but some were left to wonder what future there was for truth in takeovers. Those questions were answered in the Dulux/Alesco deal, where the Takeovers Panel made it very clear that truth in takeovers had an important role to play. We expect parties in takeovers to take heed of that message in 2013.
4. Foreign investment rules front and centre
2012 proved to be an interesting year for foreign investment regulation. There was no shortage of policy discussion. We also had a Senate Standing Committee to examine the role of the Foreign Investment Review Board. The report of the Committee is scheduled to be released in February 2013. The Federal Coalition released its own policy discussion paper on agricultural land and agribusiness. The Government’s announcement that it will create a national register of foreign ownership of land was also significant. We expect these trends to continue. Parties in sensitive sectors will need to apply time and effort into considering foreign investment issues and addressing them through conditions or other means.
5. Swaps in the spotlight
As mentioned above, one area that is on the menu for takeover reform is the disclosure of equity derivatives in takeover situations. In 2012, we saw swaps in the spotlight in relation to the Crown / Echo Entertainment scenario as well as the Archer Daniel Midlands / Graincorp situation. Swaps have become an increasingly familiar part of the landscape. While we expect reform to include a more certain requirement for the disclosure of long positions over 5%, we also expect to see continued use of swaps by bidders below 5%.
6. Shareholder activism to be active
As shareholders chase better and better investment performance, we expect that shareholders will be more willing to get involved in encouraging or securing improved terms for control transactions and in securing, or alternatively refusing to support, board and management change proposals, whether they arise from dissatisfaction with a Chair, CEO or the board or other shareholders seeking board representation. While shareholder activism has been a notable feature of US M&A practice, 2012 saw this come to the fore in Australia and was a key factor in transactions and proposals affecting Spotless, Fairfax, Echo, HDUF, Paperlinx, Tassal and Centro. There is now talk of others developing a similar business model and 2013 may see Australian’s “two strikes” rule affording them opportunities. We expect the shareholder activism trend will continue in 2013, much to the consternation of boards focussed on what they see to be long term value creation.
7. Distressed debt is the new equity
‘Loan to own’ has been a feature in various deals over the last 12 months, including Centro, Alinta, and Channel Nine. In each situation, investors purchased debt in the secondary market and then forced the company to undergo a creditors’ scheme of arrangement where the debt was cancelled in exchange for an issue of equity, thereby taking any minority creditors along for the ride. This style of transaction has occurred in overseas markets for some time and we expect that the success of the transactions here will ensure it remains a feature of our market into 2013.
8. Change the Panel President and you change the Panel
According to Yes, Prime Minister, ‘Bring in a new broom and if you're not very careful you find you've thrown the baby out with the bathwater. If you change horses in the middle of the stream, next thing you know you're up the creek without a paddle.’ While we would not subscribe to that view as it applies to the imminent appointment of a new President of the Takeovers Panel to replace Kathy Farrell, we think that the appointment of new President will necessarily impact how the Panel performs, though not detract from the solid reputation it has forged over the last 12 years.
9. Longer time periods for deals
2012 saw transactions taking a long time to progress. Our Public M&A report reported that transactions, whether by takeover bid or scheme of arrangement, were taking longer than in previous years to reach finality, even after being announced. The reasons are hard to pin-point, but we suspect it is due to additional caution being taken by bidders, targets and shareholders to agree to accept the terms of the transaction. If the time period before a transaction is announced is added, it is clear that the gestation period for M&A deals in Australia is stretching out to all time highs. We expect this to continue, lowering the over all volume of transactions occurring in the market.
10. Announcing an approach
The proposed ASX guidance that target companies need not disclose confidential approaches if they are indicative and conditional should reduce the pressure on boards to make immediate disclosure. We think this will be positive for the market and should give serious bidders more confidence that their approach can be kept confidential until a transaction is ready. We expect this to stem demands for a put up or shut rule in Australia.
Review of our 2012 predictions
Looking back, it is interesting to see some of the trends that we predicted for 2012 at the end of last year. The categories where we think the predictions came true included the following:
- Resources, resources, resources,
- Other sectors to watch – food security,
- Inbound investment rules,
- The Year of the Dragon,
- The Panel continues its restraint,
- The ACCC at the crossroads,
- Deal structures - joint bids and takeovers, and
- Creditor schemes and restructures.
On the other side of the ledger, our call for the ‘consideration in many forms’ seemed premature, and 2012 won’t be remembered as ‘the year of the demerger’, though perhaps 2013 will see more of this type of activity