Western Australia’s mining sector has seen a wave of consolidation in recent times. The consolidation has been brought about by a combination of depressed valuations, a legacy of decline in exploration expenditure in the wake of the global financial crisis, and renewed confidence in the sector. These factors are driving a push for companies to strengthen their asset portfolios.
Acquiring a nearby mining project can help a company take advantage of increased efficiencies by expanding its operations within a set geographical area. An uneconomical resource for one entity can immediately become viable feedstock in the hands of a nearby producer. Or sometimes, a company’s current valuation can be too attractive for an opportunistic bidder with an eye on the future, to pass up.
There are a number of options available for companies looking to consolidate, in order to get a bigger, and more profitable piece of the pie. Senior Associate, Ryan White and Associate, Alina McNess review the following options:
The best choice will ultimately depend on the circumstances of the company and its target, which can be seen in a cross section of public transactions on which HopgoodGanim advised. Red 5 Limited (Red 5) recently joined the ranks of Australian gold producers by consolidating the Darlot Gold Mine (by way of share acquisition from Gold Fields Limited) and the nearby King of the Hills tenements (by way of asset acquisition from Saracen Mineral Holdings Limited). The choice between a takeover bid or scheme of arrangement is typified by contrasting Metals X Limited’s (Metals X) 'hostile' takeover bid for Aditya Birla Minerals Limited (where Metals X needed to overcome an initially unwilling majority shareholder) with the 'friendly' scheme of arrangement that saw Norton Gold Fields Limited (Norton) co-operate with its major shareholder in their proposal to acquire the remaining shares in Norton.
Asset or project acquisition
A company may consider acquiring an individual asset or project in order to expand or complement its existing operations. Depending on how the asset is held, this can occur either by direct acquisition of the relevant asset, or by acquiring the shares of a subsidiary entity that holds the asset. In both cases, the acquirer only takes on the specific part of the target’s operations that the acquirer is interested in.
An acquisition is a relatively straightforward process involving:
- a due diligence review of the specific asset(s) or project(s), to ensure they are suitable to the company’s needs and are 'as advertised'; and
- negotiating an asset purchase agreement or share purchase agreement, as applicable.
Taking this approach allows the company to acquire individual asset(s) without any of the administrative baggage that can sometimes accompany the parent entity (such as disgruntled former employees, bad debts or ongoing litigation). This also allows a company to selectively choose which assets or projects it wants to take on, rather than being saddled with the good, the bad and the ugly.
If a target’s operations as a whole are attractive, or it refuses to sell its asset(s) or project(s), a takeover may be the best approach to consolidation. This can happen when a larger company (the bidder) is looking to expand its operations by taking advantage of the hard work that a smaller company (the target) has already undertaken. For example, a mining project that has just begun to develop results but has not yet moved into the production phase.
Takeovers of Australian entities are regulated under Chapter 6 of the Corporations Act 2001 (Cth) (Corporations Act) and the listing rules of the company’s stock exchange (if they are listed on one). A takeover bid can be undertaken as either an off-market bid or an on-market bid.
In an off-market takeover bid:
- the bidder makes an offer to all shareholders of the target to acquire their securities outside of the stock exchange trading platform; and
- upon acceptance of the offer, an agreement for the acquisition of the securities is completed.
Off-market takeover bids are often made conditional upon the satisfaction or waiver of a number of conditions. These include the bidder reaching a minimum level of acceptances (key levels often being 50% or 90%) or obtaining specified regulatory approvals (such as approval from the Foreign Investment Review Board (FIRB) when a foreign-owned entity is looking to acquire an Australian entity).
To make an on-market takeover bid:
- quoted securities of the target are acquired through the company’s stock exchange; and
- a bidder will, during the bid period, ‘stand in the market’ and offer to acquire all of the target’s securities at the specified offer price.
An on-market takeover bid must be cash only and unconditional. It therefore requires additional work upfront, such as obtaining any regulatory approvals.
If, at the end of the offer period, the bidder has acquired at least 90% of the target’s securities, the bidder may compulsorily acquire any remaining securities in the bid class, on the same terms as the takeover bid.
Takeovers can be either friendly or hostile, and the level of ‘friendliness’ can often dictate how much time and effort needs to be put in by the bidder to achieve success. A hostile majority shareholder can make a successful bid difficult (but not impossible). Once successful, a bidder will then have full control over the target entity and can undertake as many or as few changes to the entity as suits the overall strategy and vision of the bidder company.
Scheme of arrangement
In situations where both companies are generally friendly, consolidation can occur via a scheme of arrangement. A scheme provides more certainty to a bidder than a takeover bid, but requires a higher level of cooperation between the parties.
Schemes of arrangement, involving the merger or acquisition of an Australian entity, are regulated under Chapter 5 of the Corporations Act. A scheme of arrangement:
- is a court approved arrangement between a target company and its shareholders;
- which involves the transfer or cancellation of the target’s shares;
- in consideration for cash, securities or a combination of both from the bidder company; and
- which receives shareholder approval.
As with off-market bids, a scheme can be made conditional upon the occurrence or non-occurrence of specified events or actions.
A successful scheme requires the approval of 75% by value and 50% by number of each class of shareholder present and voting at a scheme meeting. It also requires the court to exercise its general discretion to approve the scheme.
A scheme has an ‘all or nothing’ outcome, and the bidder will have the certainty of knowing that it will either acquire 100% of the securities of the target company, or nothing if it is unsuccessful. Once approved by target shareholders and the court, the scheme is binding on all shareholders whether they voted in favour of it or not. The court has discretion to approve a scheme, and in exercising that discretion, will consider whether the scheme as a whole is fair and reasonable.
A scheme requires the on-going support and co-operation of the target throughout the process because of the positive obligations imposed on the target. These include, among other things, the sending of scheme documentation to target shareholders. As a result, schemes of arrangement generally proceed on a friendly, rather than hostile, basis. This will often involve targets and bidders entering into a formal scheme implementation agreement and setting out the terms upon which the scheme will be proposed to shareholders and supported by the target’s directors.
Companies may look to consolidate nearby assets and expand their operations in a number of different ways. The best choice will ultimately depend on the circumstances of the company and its target.