Having reached the halfway point for 2012 it is an opportune time to reflect on the year to date and crystal ball gaze into the rest of the year.
There is little doubt that the global M+A landscape is challenging. Europe is gripped by political and economic instability, the economic revival in the United States is struggling to gain traction and even the Chinese economy is experiencing a slow down.
Against this backdrop, Australia is delicately trying to negotiate the challenges of a two speed economy. While the mining and energy sectors continue to underpin the national economy, manufacturing and retail face an uncertain future. All of this is leading to caution, fear and uncertainty – not an optimal environment for M+A.
Across the globe therefore, M+A deal flow is down, boards remain highly cautious and capital markets, while not totally dead, are only showing minimal signs of improvement.
Where then is Australian M+A at right now and where are we going?
Here are our top 10 observations at the midpoint of 2012:
- Deals are taking longer and are harder to complete
There is no doubt that M+A deals are taking longer and are harder to complete. Gone are the days when sale/auction processes could be expected to throw up 2 or 3 or more buyers to give competitive tension. Vendors and their advisers have to work very hard to get any buyer to sign at a reasonable price.
Even deals subject to substantive conditions risk terminating before completion if a buyer gets nervous or a third party takes actions adverse to the transaction. Of these perhaps Russia’s Magnitogorsk Iron and Steel Works takeover of Flinders Mines was the most curious, with the transaction collapsing earlier this month following a small shareholder in the acquirer taking injunctive action against the bidder in the Russian courts.
Nothing can be taken for granted.
There are a range of public company takeovers which are taking, or have taken, a very long time to reach a conclusion. APA’s bid for The Hastings Diversified Utilities Trust has been open for over 7 months first awaiting the outcome of the recent ACCC decision and then having to outbid a competing bid; the Hanlong takeover of Sundance by scheme has been public for over 12 months as the suitor obtains Australian and Chinese regulatory approvals and seeks confirmation of key agreements and laws in Africa; and the PEP acquisition of Spotless will close 9 months after PEP signed its pre-bid agreements and made its initial, fully funded approach. Foxtel’s takeover of Austar, which successfully completed in May 2012 following a thorough review by the ACCC, took 12 months from announcement to completion.
Nothing is easy or happens quickly in these M+A days.
- Not a good time to sell unless you have to....some have to
The lower level of M+A activity (which has decreased 22% globally and 50% in Australia when compared to 2011 levels)1 may be in part due to a continuing mismatch of buyer and seller price expectations.
Asset prices have, in many cases, fallen. While cashed up buyers may be looking for a bargain, vendors are generally only willing to sell if they need the money to spend on something else (for example James Packer’s proposed sale of Consolidated Media reportedly to increase funding for gaming acquisitions); to de-lever financially (for example Nine Entertainment Group); or to refocus priorities and/or discard underperforming assets. Sometimes – like in the case of Leighton’s sale of Thiess Waste Management - it’s a combination of these factors.
However, target boards need to be wary of dismissing takeover approaches too quickly.
For example, in recent times Billabong and Perpetual dismissed private equity takeover approaches only to have their share prices fall significantly below the price of the takeover approach. In the case of Billabong, it dismissed a takeover bid at $3.30 per share only to then need to raise capital 4 months later at $1.02 per share. TPG was recently allowed due diligence by Billabong with a revised conditional cash proposal of $1.45 per share which has the support of some major shareholders.
Other target companies under threat may do well to take note of this example so as to avoid their “Billabong moment”.
The lesson in all this seems to be that target boards should be careful not to say “NO” too quickly. Perhaps we might see more bear hugs in the coming months as target’s refuse to engage with unrealistic price expectations.
Through all the darkness and lower prices, there remain some shining lights. The highlight of the first 6 months being the takeover of Ludowici by FL Smidth for a price at a premium over 200% to the pre-bid price following a competing bid by Weir Group.
- Energy and resources keeps Australian M+A afloat
Notwithstanding the financial challenges facing the world, the energy and resources sector continues to be relatively strong.
Resources M+A continues to lead the Australian M+A market, representing 43% by number and 47% by transaction value of total Australian public M+A deals in the first half of 2012.
Key deals completed in the first 6 months include Yancoal Australia’s $8 billion acquisition of Gloucester Coal, Whitehaven’s $5.1 billion takeover of Aston Resources and Boardwalk Resources, Exxaro’s takeover of African Iron and St Barbara’s proposed acquisition of Allied Gold. In deals to come, Whitehaven has announced that it has allowed the Tinkler Group due diligence access so it can work up its takeover proposal for Whitehaven.
Apart from pure resources M+A some of the stellar deals in the market in the first 6 months of the year have been in the mining services industry e.g. FL Smidth’s takeover of Ludowici, GE’s proposed acquisition of Industrea by scheme and Orica’s joint venture with Yara and Apache to build an ammonium nitrate plant on the Burrup Peninsula in Western Australia and related marketing arrangements for the Pilbara.
While the energy and resources sector continues to be relatively strong the horizon is not necessarily so clear. Prices for some commodities, for example iron ore (iron ore prices being at a 9 month low) and thermal coal, are down and share prices for many resources stocks have accordingly been under pressure. Concerns over China’s continued growth are having an impact.
- Shareholder activism by billionaires focused on media and gaming action
While deal flow may be down, that hasn’t stopped some of Australia’s more prominent billionaires and tycoons from assessing opportunities and stirring up the share registers of prominent companies.
In particular, Gina Rinehart’s move up the Fairfax newspapers register (and stand-off with the chairman over board seats) and James Packer’s increased shareholding in Echo Entertainment - the operator of Sydney’s Star and Queensland based casinos, and his successful actions to remove the chairman of Echo have caught the attention.
Indeed the media sector has seen significant activity, including Foxtel obtaining regulatory approval to acquire Austar, News’ proposed acquisition of Consolidated Media (while at the same time, Kerry Stokes/Seven West Media seeks regulatory approval for further acquisitions of Consolidated Media), capital raisings for both Ten Network and Seven West Media and the ongoing speculation around the restructure of Nine Entertainment.
Interesting times indeed for media and gaming.
- Takeover law reform proposals come out of nowhere
Over the last few years, many commentators have noted deficiencies in our takeover laws and suggested reforms and other improvements. It had seemed this had fallen on deaf ears as the laws were well understood, working well enough and ultimately there are no votes in takeover reform. It has therefore come as somewhat of a surprise to see ASIC suggesting changes to our takeover laws. In particular ASIC proposes that the 3% creep rule be changed to limit creeping to 1% each 6 months (with an overall cap at 30%) and also suggested consideration of a “put up and shut up rule” (see: Gilbert + Tobin’s June 2012 article “Putting your money where your mouth is: is there a case for a “put-up or shut-up rule in Australia” - (for Internet Link click here)).
ASIC’s interest is all the more surprising given it had seemed to have vacated the takeover regulation arena in recent years with the advent of the Takeovers Panel. Notably, in the last 3 years, ASIC has been the applicant for matters before the Panel on only 1 out of 56 applications.
Whatever the case, it seems timely for Treasury to consider if our takeover laws need any change as this has not been done for well over 10 years.
Separately, it is understood that ASIC is also re-writing some of its takeover regulatory guides. We hope that ASIC also updates its “Truth in Takeovers” policy. Market practice in this area has significantly developed since that policy was last issued in 2002 (including with challenges at the Takeovers Panel most recently in relation to statements by FL Smidth in connection with the Ludowici takeover).
- Infrastructure opportunities
Apart from resources, infrastructure M+A is seeing significant activity.
The NSW government got away the desalination plant sale to a consortium including Hastings and the Ontario Teachers’ Pension Plan Board and the process for privatisation of the energy sector in NSW is firing up. In addition the sale process for the privatisation of Port of Botany and Port Kembla is on the near term horizon. South Australia and Tasmania sold forestry assets. AGL acquired 100% of Loy Yang A. There also should be opportunities to acquire Queensland motorway assets in the coming 12 months.
In public company deals, Hastings Diversified Utilities Trust (the owner of the Moomba-Sydney pipeline) is about the only target currently subject to competing bids with the joint UTA/Caisse $1.23 billion bid initially trumping the APA bid although APA intends to increase its bid. Australian Infrastructure Fund is subject to an internalisation proposal which some speculate may ultimately lead to M+A activity for that entity.
Apart from the above assets, there remains Australia’s need for the development of mining infrastructure, particularly rail and port connections in Queensland and WA, which should result in significant development in infrastructure for years to come.
- Alternative capital providers – vultures by another name
Distressed and over-leveraged assets lead to opportunities for buyers to pick up good businesses on the cheap. Sometime ago the parties who did this were called vulture funds. Today we call them “alternative capital providers”. Loan-to-own transactions are another name for their primary trades.
There has already been high profile activity in this sector over the last 12-18 months, including the restructures of Alinta, Griffin Coal and Centro and potential restructures including River City, Reliance Rail, Top Ryde, Nine Entertainment and Brisconnect.
A feature of the alternative capital provider’s new arsenal is not only the size of some of their funds (many tens of billions of dollars compared to the shrinking single digit billion levels of private equity funds) but the ability to deploy those funds across the capital structure (from fully priced senior debt to derivatives of ordinary equity). This flexibility and dexterity is changing the dynamics of global M+A markets given the paucity of other sources of liquidity. It also looks certain to play an increasingly important role in Australia.
In recent months, our restructuring group has seen a significant increase of interest in this area and we expect to see more of it as the ongoing global financial crisis takes its toll on over-leveraged assets. For example, the likes of Hastie, Brisbane’s Rivercity Motorway, Top Ryde and Brisconnect are all expected to come on the market soon. Other infrastructure assets are maturing as targets in this space too.
- Equity capital markets: still in intensive care but there is Tru hope of a recovery of some Calibre
If we had written this a month earlier we might have talked about turning off the life support systems on IPOs, if not equity capital market transactions in general.
That being said this year has seen some significant rights issues (e.g. AGL, Brambles, Ten, Seven West) typically for the purposes of reducing debt and some hybrid issues (e.g. Westpac). Nevertheless until very recent times the IPO market has been dead.
However, the IPO market seems to be showing some signs of life for selected deals. Early July saw engineering services company Calibre Group become the equal-largest IPO in Australia this year by raising $75 million, which values Calibre at a market capitalisation of $478 million on completion of the IPO. This is a resources related transaction as the company services the infrastructure and bulk mineral commodity markets.
Calibre shows that there is ECM appetite for the right transactions. Hopefully this will build some momentum to allow other IPOs to go forward, including the proposed IPO of TRUenergy, the Australian unit of Hong Kong-listed CLP Holdings. The IPO of TRU, which is expected to be for more than $3 billion, has been much talked about and would be the first large offering for some time.
- Housing market under a cloud, but the sun is starting to shine on A-REITs
While even the most casual observer of the Australian residential property market would have noticed a downturn in market activity, particularly in the Sydney and Melbourne markets (traditional blue blood suburbs down as much as 20%), Australian real estate investment trusts, or REITs, have enjoyed a solid start to 2012.
With strong performance relative to other asset classes, a post global financial crisis focus on capital management (including the lowering of gearing levels and the sale of non-core assets off-shore) and the fact that many REITs are now trading at a discount to their net tangible asset values, this sector is primed for further activity in 2012.
Already this year we have seen the $1.7 billion acquisition of the Charter Hall Office REIT by a consortium of institutional investors, including the Singaporean sovereign wealth fund (GIC) and the Public Sector Pension Investment Board of Canada.
- Disclosure best practice may not always be best for shareholders
We have previously written about the trend of target companies making early disclosure of 'confidential' and incomplete approaches by potential bidders. Recent examples of this include David Jones, Consolidated Media and PMP.
Often these approaches are, strictly speaking, not legally required to be disclosed assuming they are confidential and incomplete. Nevertheless, it increasingly seems that potential targets prefer to disclose early – whether it is to avoid later criticism and regulatory scrutiny (including infringement notices from ASIC) or to achieve a more strategic objective is open for debate and the reasons will vary from case to case.
However, targets might now think twice about the wisdom and “best practice” of such early disclosure after the curious case of David Jones, where DJs thought it necessary to disclose a potential takeover approach from a little known UK private equity firm called EB Private Equity. No sooner was the announcement made then the bid went away when the mysterious EB withdrew early the following week...apparently because the public attention made a transaction more difficult to implement. This was not before the share price took a wild ride. ASIC says it is investigating.
Historically, companies have generally been reluctant to disclose these confidential approaches in part to avoid the added pressure of negotiating a deal in the public spotlight. We are already seeing a trend back to the more traditional approach until deals are signed up or at least more certain, which is the approach Gerard Lighting took on their recently announced deal with CHAMP Private Equity.