Following the Southern summer holidays, the Australian Open final and the Australia Day long weekend, it’s time to roll up the sleeves and return to business in earnest.
What does 2013 hold for the Australian M&A market?
No doubt, 2012 was a tough year. Our 2013 M&A deal report shows there was a 35% reduction in large public company deals in Australia in 2012. Perhaps the Mayans were correct insofar as the M&A world was concerned. Maybe we should all view 2013 as a rebirth.
So, it’s clear we’re coming off a low base in 2012 but will this year be any better?
We’d like to think so. The macroeconomic picture and market sentiment seems to be on the improve: equity markets around the world are up, the US has averted a fiscal cliff (at least for now), Europe has avoided any further disastrous financial news and Asia (particularly with China having gone through generational leadership change) remains on the upswing. Nevertheless, we still appear to be short of a catalyst to get things going.
That being said, and at the risk trying to foresee the unforeseeable, we present our tips and forecasts for M&A in Australia in 2013.
1. SIMPLICITY AND SPEED WILL SUCCEED
Deals in recent years have, generally speaking, taken longer to complete. Separately, time and complexity can be the killer of M&A. Even more so, if the market and shareholders cannot understand the commercial rationale of a deal.
In this respect, we see the key to successful M&A in 2013 is to keep it simple and move quickly. This might be easier said than done. However, the following are some suggestions:
- acquiring pre-bid stakes outright up front gives bidders a strong strategic advantage (like Dulux did in its successful bid for Alesco);
- cash is preferable to scrip consideration. Our recent M&A deal report shows that 77% of larger public company deals had cash consideration;
- avoid deal structures which will attract regulatory scrutiny and lengthy approval processes; and
- obtain a target board recommendation early. Retail shareholders, in particular, look to their board’s views on a transaction.
We expect that those who adopt some or all of the above strategies in 2013 are more likely to succeed than those who do not.
2. SHAREHOLDER ACTIVISM: THE GOOD, THE BAD AND THE UGLY
Shareholder activism has undoubtedly increased world-wide. We expect this to continue in 2013.
Prominent examples in 2012 included a range of key institutional shareholders publicly supporting Pacific Equity Partners’ proposal to acquire Spotless Group – even threatening to spill the Spotless board if it did not open its books to the bidder. Others included Gina Rinehart’s move up the Fairfax register and then teaming up with Mark Carnegie and John Singleton who have been separately agitating for change in other companies such as Qantas (with the former CEO) and Soul Pattison/Brickworks. Echo Entertainment also saw key shareholders increase their shareholdings and comment publicly on its performance. Other companies have been battling board spill resolutions, like Penrice Soda following the two strikes rule or in the case of TFS because some shareholders were unhappy with the corporate governance of the company.
It’s clear that underperforming companies in 2013 can expect attention from shareholders who want to see the company managed differently to achieve better returns.
Shareholder activism may come via public criticism, demands for board change, protest votes on remuneration (which the misconceived two strikes rule facilitates), good old fashioned hostile bids or a combination of such strategies. There is also an increasing number of precedents where agitation by institutional shareholders has been unappeased, leading to frustration which culminates in such institutions being eager to cash out by facilitating bidders taking pre-bid stakes.
Whatever the case, share prices can move quickly these days in response to such attention. Unfortunately this may mean we see more of unscrupulous operators trying to manipulate markets via hoaxes like those for David Jones and Macmahon last year and financial terrorism like that which occurred when an environmental activist issued a false media release purporting to be from ANZ saying funding for Whitehaven mines had been withdrawn.
However, with shareholder activists, the tip for companies may be to engage early and constructively with them. Often activists and dissenters just want to have their view or opinion heard and taken into account and so constructive engagement can assist in diffusing the situation before it gets out of hand or attracts prolonged and unwanted media attention.
3. CHINA’S BACK AFTER REGIME TRANSITION, REIGNITING RESOURCES ACTIVITY
Chinese (and other Asian) M&A interest in Australia has underpinned activity in recent years.
The second half of last year saw bids or approaches by a number of Chinese companies including U&D Mining for Endocoal, Cathay Fortune for Discovery Metals, Zijin for Norton Gold Fields and Meijin for Western Desert.
Nevertheless Chinese M&A seemed to slow down or pause in the second half of 2012 at the same time as China’s ruling communist party focussed on its once in a generation change in leadership.
However, the Chinese New Year will start soon. It is the year of the snake. We think it is strong symbolism for China striking back with renewed M&A interest and increased activity. Recent reports of a rebound in the Chinese economy and general confidence supports this view. This in turn should reignite demand for resources (see 6 below). We also expect to see Chinese (and other Asian) interest in a number of other sectors including infrastructure, agribusiness and companies in the broader industrials sector– perhaps even a Chinese bid for Treasury Wine Estates???
4. BUYING DISTRESSED DEBT: THE NEW PRE-BID STRATEGIC STAKE
In companies burdened by highly geared structures of yesteryear the equity can be worth little. That is not to say the company doesn’t have a strong business. Under the right financial structure, owners of the debt can take control and make a killing by threatening to kill i.e. threatening to put the company into liquidation or receivership.
Recent examples of this include Nine Entertainment where US hedge funds including Oaktree and Apollo Global Management bought senior debt at a discount and following a court approved restructure will shortly take ownership of the media company. Before Nine, Centro, I-MED and Alinta were restructured via “loan to own” investments. Similarly, Blackstone has taken effective control of the Top Ryde Shopping Centre by purchasing 100% of its debt.
Similar events may follow in 2013 for overgeared toll roads like Rivercity Motorway and Brisconnections. We are sure there will be others.
5. M&A LAW REFORM ON THE AGENDA: BUT WILL ANYTHING CHANGE?
Takeover law reform is certainly on the agenda with Treasury considering various rule changes including creeping acquisitions, a “put or shut up rule” and association laws. Such considerations follow the ASIC chairman publicly questioning whether change was needed.
We question the need for change in most of the areas being looked at. Key transactions that seemed to set off the debate (Rinehart/Fairfax, Crown/Echo and PEP/Spotless) all involved shareholders agitating for change, which should be seen as a positive not as a need for law reform.
Some of the potential changes such as a put up or shut up rule may inhibit M&A activity by putting more constraints on bidders and frustrated minority shareholders, making it harder to get a successful bid up. Given the difficult financial and economic conditions, we don’t think it would help to further regulate bids.
In any event, given the political cycle with the federal election having already been called for 14 September this year and a potential change of government, we would be surprised to see any significant reforms this year - takeover reform is hardly a vote winner. Nevertheless, it is possible that we might still have piecemeal reforms which would be trumpeted as significant changes.
Separately we expect to see continued tinkering around the edges with ASIC updating old and outdated regulatory guides on takeover laws and the Takeovers Panel updating its guidance notes.
In 2012 the “Truth in Takeovers” policy attracted a lot of attention and comment (much of it misconceived). The formal ASIC regulatory guide on the policy is now over 10 years old. It would be a positive development to see the Takeovers Panel issue a guidance note or rule on the topic or for ASIC to formally update and reissue its policy. There is a real need for some bright lines in this area.
6. RESOURCES: AUSTRALIA vs AFRICA AND THE REST OF THE WORLD
2012 saw a marked downturn in resources M&A in Australia. Larger public company deals for mining and resource companies in 2012 were down about 40% on 2011 numbers.
The industry generally had a tough time in 2012: natural disasters interrupted activity, commodity prices were significantly off their peak (especially coal and for much of the year, iron ore), costs of production (particularly labour) remain high and infrastructure challenges remain.
Nevertheless, some significant deals did get done. For example, St Barbara’s $556 million takeover of Allied Gold, Chinese companies acquiring Extract Resources and Drillsearch’s takeover of Acer. It is also still the case that mining, resources and energy continues to contribute the greatest share of M&A deals in Australia (approximately 50% by number in 2012).
With renewed Chinese activity and demand for resources, we expect to see greater activity in the resources sector in 2013.
Perhaps, though, the bigger challenge for Australian resources M&A is the relatively lower cost of exploration and development (particularly labour costs) in places like Africa. It seems that many potential acquirers (including notably Chinese companies) are increasingly turning their attention to Africa for resources assets and are attracted to assets that have been sourced and developed by Australian listed companies.
Indeed, Australian listed resource companies have long had an interest in African projects. 2012 saw a number of bids for ASX listed resource companies to gain access to African assets, including Cathay Fortune’s $826 million bid for Discovery Metals (copper mine in Botswana), CGNPC/Taurus’ $2.2 billion bid for Extract Resources (uranium in Namibia), Exxaro’s successful $330 million bid for African Iron (iron ore in Congo) and Hanlong’s ongoing $1.3 billion takeover of Sundance (iron ore in Cameroon and Congo).
We expect to see further interest in African mining assets via ASX listed companies in 2013.
7. INFRASTRUCTURE AND PENSION FUNDS: A PERFECT COMBINATION
One sector which saw a significant level of activity in 2012 was infrastructure including Future Fund’s proposed acquisition of Australian Infrastructure Fund, rival bids for HDUF and the sale of the NSW desalination plant.
We expect 2013 to see further activity in this sector as well. The $2 billion+ sale process for Port Botany and Port Kembla is coming up as well as potential privatisation in the NSW and Queensland electricity sectors. Rivercity in Queensland will potentially come up for sale. Fortescue is offering a minority interest in its infrastructure assets and then we have the usual need for more mining related infrastructure.
Another constant in this sector will be the interest from pension and super funds both local (including Future Fund, IFM, Hastings) and foreign (with the Canadian funds, as usual, leading the charge). In the past few years, Canadian pension funds including Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan and PSP investments have invested close to $30 billion in Australia.
There is no doubt that Australia’s relatively stable investment environment will continue to attract long term investment from foreign infrastructure funds.
8. FORTUNE FAVOURS THE BRAVE (AT LEAST THOSE WHICH PLAN WELL)
Even if deal flow is down, success rates are still good.
Our 2013 M&A deal report shows that approximately 90% of public company deals involving a firm offer announced in 2012 were ultimately successful. While this figure does not take into account potential bids (often prematurely announced by targets), the main point is if a deal can be agreed and announced it usually proceeds to a successful completion.
If last year is any guide, you’re unlikely to face a rival bid or get outbid if you find the right target. Rival bids in 2012 were few and far between, with the competing bids for HDUF, Ludowici and Talison Lithium being notable by exception.
It seems that in these uncertain times where company boards can be risk averse, those who venture forward are unlikely to face significant competition for targets.
Of course the key to successful M&A is meticulous planning and execution. While M&A in these times may require even greater planning to give acquirers confidence to deal with uncertainty and regulatory red-tape, those who can manage that in 2013 can expect to be successful.
9. REGULATORY RED TAPE: MORE OF IT
Deals in 2012 certainly seemed to take longer and were harder to do.
In this respect, regulatory scrutiny can have an enormous impact. Globalisation and the general inter-connected nature of the world means that foreign regulatory approvals can have an enormous impact on local M&A activity. For example, in 2012 the $5.9 billion Glencore takeover of Viterra experienced significant delays due to China’s MOFCOM. Here in Australia, the takeover of Sundance Resources has been delayed well over a year, in part, because of the time to get NDRC approval which was only given on the basis of a reduction to the original agreed offer price.
On the local front, the ACCC appears to be increasingly active in mergers and acquisitions. Reviews of merger clearances appear to be taking longer and the ACCC is showing a greater propensity to issue formal notices requiring the production of documents in connection with mergers.
ASIC also seems more interventionist, particularly in Truth in Takeover matters (e.g. Dulux/Alesco and Ludowici) and in its approach to scheme of arrangements reviews and consideration of requests for exemptions and modifications to the law.
FIRB continues to carefully scrutinise significant foreign acquisitions particularly those from state owned enterprises.
A new President will soon be appointed to the Takeovers Panel and this can be expected to result in renewed energy and vigour from the takeover regulator.
All in all, deals in 2013 can be expected to have no shortage of attention from regulators.
10. EQUITY MARKETS: MAYBE, JUST MAYBE A NEW BEGINNING FOR EQUITY MARKETS?
Australian equity capital markets continued their long hibernation in 2012.
No doubt 2012 was bleak with Calibre and Alliance Aviation being the only IPOs of note and potential IPOs for TruEnergy, Barminco, McAleese Transport Genworth and Vibrynt (among others) all being deferred. Only 44 companies listed in 2012 compared with 103 in 2011. The IPO market had its worst performance in at least the last 10 years.
While there was some mid year ECM activity from large listed companies (e.g. Bank of Queensland, AGL, SP Ausnet, Seven West) and Ten Network and Macmahon undertook rights issues late in the year to improve their balance sheets, there was very little M&A driven equity raisings (GrainCorp and Country Road being notable by exception).
However, perhaps we are now seeing the first stirring of stock market conditions more conducive to ECM? Will equity capital markets awaken from their slumber now that Australian interest rates are lowering, the US fiscal cliff has been averted at least for now and stock markets have had a strong December and January? It is too early to be certain.
However, if conditions remain stable for a few more months there may be time for one or two significant IPOs to get away which could in turn provide more confidence for others. Equity markets could also benefit from more acquisition driven equity financings.
Ultimately we need some self fulfilling confidence!