As is traditional at this festive time of year, we present our top 10 M&A developments. We have split this into two parts. We start with a look back on the top 5 of 2009 which is followed by some crystal ball gazing for what the top 5 for 2010 may look like.
1 Inbound investment (…often with a capital ‘C’…) continues at a fast pace
A major focus of the year has been Chinese investment and, in particular, FIRB’s attitude to these investments. The results for Chinese acquirers in high profile deals varied. However, the reality is that it has been rare for FIRB to reject applications for approval outright.
In 2009 we had the recutting of the China Minmetals / OZ Minerals deal when the Government required Prominent Hill (the operations of which are within the Woomera weapons testing range) to be carved out of any acquisition. The China Non-Ferrous Metal Mining Co proposal to acquire a majority interest in rare earths minerals company Lynas Corporation was rejected by FIRB, but in this case China already controlled 93 per cent of rare earths minerals production. Nevertheless, a number of other high profile Chinese acquisitions obtained FIRB approval, including Yanzhou / Felix Resources and Hunan Valin / Fortescue, albeit usually subject to a number of conditions. Given the number of policy announcements, both formal (including the increase of the general threshold from $100 million to $219 million) and informal, made throughout 2009, it is clear that FIRB’s policy in this area is evolving.
It would be remiss of any commentary on inbound investment in 2009 to fail to mention the series of $1 billion plus transactions involving Canadian acquirers, including Eldorado Gold / Sino Gold, Vittera / ABB and Canadian Pension Plan / Macquarie Communications Infrastructure Group and the proposals by two Canadian pension funds to acquire Transurban.
2 Resources – stronger for longer indeed
Without any doubt, resources remained one of the 2009 M&A highlights. Following a tough second half of 2008, the mining and resources sectors rebounded well. Many would say it was the main reason why Australia has avoided the worst of the GFC.
The resources sector provided a broad range of deals, across different sectors (iron ore, coal, CSG, gold, copper, nickel—you name it) and across different deal types (ranging from cornerstone investment deals, friendly mergers, hostile takeovers and reverse takeovers). Landmark deals included the proposed BHPRio iron ore joint venture, the continued race to build LNG plants out of coal seam methane deposits resulting in further acquisitions, such as BG’s acquisition of Pure Energy (ultimately paying almost double the initial bid for Pure by Arrow Energy), China Minmetals / Oz Minerals, Felix / Yanzhou, Eldorado Gold / Sino Gold and Gloucester Coal / Noble Group / Whitehaven Coal.
3 The end of a managed era?
If the previous decade or so saw the evolution of a headstock and satellite managed fund model, then 2009, in some commentators’ views, may come to be seen as marking its end. At the very least, 2009 saw a great reduction in the model’s attractiveness to many investors. The downfall of groups such as Babcock & Brown, Timbercorp and Great Southern, following the collapse of debt markets, saw the unwinding of many structures involving the headstock managing satellite listed entities.
For many M&A practitioners, the unwinding of such structures in 2009 involved getting to know the administrators, liquidators, and receivers who were charged with running distressed sales processes. Buyers got used to court processes and ‘as is where is’ deals with no-one to give or stand behind warranties.
This made due diligence even more critical (and often drawn out). Separately, Macquarie Group took proactive steps to unwind or restructure many of its managed investment structures, including Macquarie Airports, Macquarie Communications Infrastructure Group and Macquarie Media, with a proposal for a restructure of Macquarie Infrastructure Group currently being considered. The Macquarie transactions have generally been well received by the market.
4 Cornerstone investments got PIPE-ing hot
2009 saw a number of prominent cornerstone or PIPE (private investment in public equity) investment transactions, including Warburg Pincus / Transpacific, Singapore’s Government Investment Corporation / GPT and China Investment Corporation / Goodman Group.
Many more were keenly negotiated, such as Asciano, but ultimately never saw the light of day. While the drivers were varied, the component common to most was the target company’s need for cash and the continued unavailability of debt markets. The transactions were generally structured as a placement coupled with a broader capital raising.
The structuring of these transactions is quite complex. No two deals are quite the same. This meant that investors, targets, advisers and regulators had to grapple with, and come up with unique solutions for, a number of issues relating to the type of security to be issued, governance issues, directors’ duties issues around conflicts and confidentiality and drags and tags in the context of Australia’s 20 per cent takeover rule.
5 The return of the IPO exit
The recent IPOs of Myer Group and Kathmandu, both private equity exits, saw a very welcome opening of the IPO market in the last quarter of 2009. Myer, in particular, was a great success story for TPG following its acquisition of Myer from Coles a few years ago and its subsequent turnaround.
The Myer prospectus was certainly clear and concise, not to mention prettier and more stylish, than most other IPO prospectuses which have gone before. It is perhaps too early to tell if the IPO market is now open for good. At the time of writing both Myer and Kathmandu remain below their issue price. Separately some blockbuster IPOs, like Clive Palmer’s Resourcehouse, originally scheduled for late 2009 have been deferred to 2010. Nevertheless, a number of IPOs are being worked on and the opening of Australian (and Asian) IPO markets was a very welcome development and opportunity, particularly for private equity houses.