AUSTRALIAN UPDATE: Deal Landscape, Deal Structures and Foreign Bidders in Australian Public M&A in 2013
- The Australian public M&A market has seen a significant drop in activity over the 12 months to 30 June 2013.
- After a number of years where the energy and resources sectors were the primary drivers of public M&A activity in Australia, in FY 2013, most activity was in the utilities, industrials, financial services and agriculture sectors.
- Overall, success rates for transactions dropped to 63% in FY2013, down from 81% in FY2012.
- Success rates were notably higher for transactions announced with the support of the target board, and where the bidder offered an initial premium of more than 40%.
- Levels of inbound cross-border public M&A activity continued to decrease with 42% of bidders in FY2013 being based offshore, down from 46% in FY2012 and 51% in FY 2011.
Australian public merger and acquisition activity dropped in the 12 months to 30 June 2013 (FY2013), with just 59 deals announced and $11.6 billion committed by bidders, down from 83 deals and $63 billion in the previous 12 months (FY2012). This can be contrasted with the subdued but relatively steady volumes of M&A activity globally over the same period.
Unlike previous years, energy and resources deals did not drive public M&A activity in FY2013, accounting for significantly less than half of total deal value. Consolidation in the gold sector replaced coal sector consolidation as the source of deal activity in the resources sector, but with much lower transaction volumes. Although public M&A activity in the resources sector was limited, a large number of resources projects were put up for sale as stand-alone assets by private auction process, reflecting an increased focus by energy and resources companies on their core businesses and assets.
The industrial and utilities, financial services (including insurance, REITs and diversified financials) and agriculture sectors accounted for significant deal flow in FY2013 ($7.1 billion of announced transactions).
Consistent with the general decline in M&A activity, the number of private equity deals declined in FY2013, with only 8 transactions announced (of which only 3 had completed successfully as yet). However, FY2013 did see private equity acquirers entering into the previously untouched energy and resources sector.
After 3 years of steadily increasing success rates, in FY2013, success rates dropped to 63% (down from 81% in FY2012).
The correlation between initial target board approval (at the time of announcement) and transaction success rates was starker in FY2013 than in previous years, with 86% of transactions which were announced with target board approval being successful compared with a success rate of 31% for transactions which were announced without target board approval. The use of public ‘bear hug’ tactics to force target board approval dropped, with none of the bids which were announced in FY2013 as being conditional on target board approval being successful as yet.
Success rates in ‘hostile’ and friendly deals
Also, in contrast to previous years, there was a clear correlation between the size of the initial premium offered and deal success rates, with all transactions involving a premium of more than 40% being successful.
Success rates of deals based on share premium offered
Another significant contributor to success was the presence of lock-up arrangements (involving pre-bid commitments by significant shareholders in the target to support the bid), with 87% of deals with lock-up arrangements being successful in FY2013.
Bidders headquartered overseas accounted for 42% of total M&A activity in FY2013, down from 46% in FY2012 and 51% in FY2011, reflecting a continuing decrease in inbound cross-border M&A. Nevertheless, of the announced transactions exceeding $1 billion in FY2013, all of them were launched by foreign acquirers.
Asia-based bidders continued to account for a significant proportion of all foreign bidders. However, the number of bids originating from China reduced in line with overall deal activity, dropping from 10 in FY2012 to 6 in FY2013, of which only one has succeeded so far, 2 are ongoing and 3 have failed.
Origin of bidders
The number of scrip-based transactions increased in FY2013, mirroring the trend seen in 2009, with alternative uses of cash (reinvestment in existing assets or return to shareholders) taking priority. Of the cash bids, 76% were funded entirely using the bidder’s cash reserves, with external debt funding being the primary source of cash consideration in only 20% of bids.
The proportion of transactions by foreign acquirers that were scrip-only increased in FY2013 (36%, up from 15% in FY2012). However, in contrast to previous years, in just under half of these bids, the bidder offered scrip to target shareholders that would be listed only on a foreign exchange without any listing on the ASX. This suggests an increasing willingness by Australian investors to rely on overseas exchanges to provide liquidity.
Levels of conditionality in public M&A transactions remained consistent with previous years, with 95% of transactions in FY2013 being made subject to conditions. However, there was a significant decrease in use by bidders of minimum acceptance conditions (conditions requiring minimum levels of acceptance from target shareholders for the transaction to proceed) in FY2013, with only 71% of off-market bids having a minimum acceptance condition in FY2013, compared with an average of 88% for the previous 4 years.
Also, among foreign bids, conditions requiring overseas regulatory approval for the bid to proceed were rarer. This may reflect the experience in FY2012 where a number of relatively high-profile transactions involving overseas regulatory approval conditions were the subject of lengthy delays while relevant overseas regulatory authorities conducted their review processes, and in some cases were unable to be consummated.
Deal protection mechanisms, including no-shop/no talk provisions, break fees, lock-ups (eg, commitments by shareholders to accept a bid) and toe-holds (eg, acquisitions of pre-bid shareholdings) continued to play an important role in negotiated transactions. In particular, FY2013 saw a return to the use of lock-ups by bidders, and a strong correlation between use of lock-ups and deal success.
Forms of deal protection in negotiated transactions