AUSTRALIAN UPDATE: Deal Landscape, Deal Structures and Foreign Bidders in Australian Public M&A in 2014
- The Australian public M&A market has seen a resurgence in deal activity over the 12 months to 30 June 2014.
- The resurgence has been particularly strong in large transactions.
- FY2014 also saw an increase in competitive bid scenarios.
- Overall, success rates for transactions remained relatively steady at 64% in FY2014, up from 63% in FY2013.
- Success rates were notably higher for transactions announced with the support of the target board, and where the bidder already had a stake in the target when they announced their bid.
- Levels of inbound cross-border public M&A activity continued to decrease with 39% of bidders in FY2014 being based offshore, down from 42% in FY2013, 46% in FY2012 and 51% in FY 2011. However, foreign bidders were particularly active at the top end of the market representing 69% of bidders for targets worth more than $1 billion.
Australian public merger and acquisition activity has seen a resurgence in the 12 months to 30 June 2014 (FY2014), with 77 deals announced and $44 billion committed by bidders, up from 59 deals and $12 billion in the previous 12 months (FY2013). The Australian experience is consistent with the global trend in M&A activity over the same period, although activity levels in Australia remain comparatively subdued.
The resurgence has been particularly strong for transactions involving targets with market capitalisations exceeding $1 billion, with such deals accounting for approximately 21% of all bids made during FY2014. Foreign bidders have been particularly active in this market segment.
FY2014 also saw an increase in competitive bid scenarios with 8 targets attracting multiple public bidders. Target shareholders invariably benefited from the competitive scenarios with the final price being offered being more than 40% higher than the amount initially bid, on average.
Energy and resources deals accounted for most of the M&A activity in FY2014 (52% by number of transactions). Activity in the oil and gas sectors increased markedly during this period, reflecting an increased interest in standalone oil and gas players who are competing against the majors. After a quiet FY2013, REIT M&A also saw a resurgence accounting for over 25% of total deal value.
The proportion of Australian M&A deal activity initiated by private equity remained relatively consistent with past experience. FY2014 also saw continued focus by private equity bidders on smaller companies operating in the energy and resources sector.
Success rates in FY2014 (64% by number of deals) remained relatively consistent with FY2013 (63% by number of deals). However, of the ‘failed’ bids, 33% were unsuccessful because the target was acquired by a competitor.
The relationship between initial target board approval (at the time of announcement) and transaction success rates was consistent with the experience in FY2013, with 83% of transactions which were announced with target board approval being successful, compared with a success rate of 43% for transactions which were announced without target board approval.
Success rates in ‘hostile’ and friendly deals
In a return to the experience in FY 2010 to FY 2012, there was not a strong correlation between the size of the initial premium offered and deal success rates, with transactions involving a premium of 20-40% being the most successful.
Success rates of deals based on share premium offered
Bidders headquartered overseas accounted for 39% of total M&A activity in FY2014, down from 42% in FY2013. However, foreign inbound activity remained strong in relation to announced transactions exceeding $1 billion, with foreign bidders making 69% of offers in that category.
Asia-based bidders again dominated inbound cross-border M&A, particularly in relation to larger transactions. China-based bidders played a significant role in public M&A activity, particularly in energy and resources, where China-based bidders accounted for more than 50% of deal activity (by value). There was also a marked increase in interest originating from Africa, with South African bidders being particularly active.
Australia’s Foreign Investment Review Board was in sharp focus early in FY2014 following its decision to block the Archer Daniels Midland bid for GrainCorp on national interest grounds. Since that time, there have been no material rejections by FIRB despite significant inbound bid activity.
Origin of bidders
The number of cash-based transactions increased in FY2014, with 60% of bids involving cash-only consideration, although use of cash has not returned to previously high levels seen 2-3 years ago. Of bids involving cash, more than half of the bidders used at least some external debt to fund the bid consideration, although external debt funding was the primary source of cash consideration in only 26% of bids. Use of consideration contingent on post-bid events was less prominent than in previous years, with only one bidder offering contingent consideration.
In all of the competitive bid scenarios announced in FY2014, the initial bidder offered either scrip-only consideration or consideration involving a scrip component. A significant majority of rival bidders (71%) made cash-only offers, reinforcing the perception that the simplicity of a cash offer can give a bidder an advantage in a competitive bid situation.
Levels of conditionality in public M&A transactions remained consistent with previous years. FY2014 saw increased use by bidders of minimum acceptance conditions (conditions requiring minimum levels of acceptance from target shareholders for the transaction to proceed), with 80% of off-market bids having a minimum acceptance condition in FY2014, compared with 71% for FY2013. Material adverse change conditions relating to the target remain popular, although their effectiveness is increasingly being eroded through extensive carve-outs, including for changes in economic or political conditions, changes in the target’s industry and changes to the stock market.
Also, among foreign bids, conditions requiring overseas regulatory approval for the bid to proceed were present in 58% of bids. Despite increased foreign regulatory approval conditions, in only one case did a failure to obtain foreign regulatory approval lead to the bid being withdrawn.
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. FY2014 saw a continuation of the strong correlation between use of lock-ups and toe-holds and deal success. The resurgence in competitive bid scenarios in FY2014 indicates that, ultimately, the extensive use of deal protection mechanisms is not preventing competing bidders from emerging.
Forms of deal protection in negotiated transactions
The U.S. Chamber Institute for Legal Reform recently published an essay, as part of a report on the litigation of foreign disputes in the U.S. federal courts, detailing the extraordinary impact that the Supreme Court’s landmark decision in Morrison v. National Australia Bank has had on transnational securities litigation.
After describing how Morrison sprang from the Supreme Court’s increasing concern about the extraterritorial application of U.S. law, the essay explains how the lower courts have applied Morrison to preclude plaintiffs from recovering damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 for losses suffered on foreign securities exchanges. The essay goes on to explain how courts have determined what constitutes a domestic securities transaction under Morrison, and how courts applying Morrison have refused to allow claims seeking recovery of losses on foreign transactions in domestically cross-listed securities.
The essay also surveys the case law applying Morrison to other kinds of securities litigation—to claims involving derivative securities transactions, to cases under the Securities Act of 1933, to whistleblower-retaliation claims under the Sarbanes-Oxley and Dodd-Frank Acts, and to criminal prosecutions under Section 10(b). Finally, the essay discusses the ineptly and inaptly drafted “extraterritorial jurisdiction” provision of the Dodd-Frank Act, Section 929P(b)—a provision apparently intended to overrule Morrison in criminal and SEC enforcement cases—and explains why it is increasingly unlikely that this provision will have any effect at all.
This survey of the case law illustrates how Morrison—by reestablishing the traditional understanding that U.S. law ordinarily applies only to domestic, not foreign, matters, and by fashioning a standard that avoids the interference with foreign regulation that the extraterritorial application of U.S. law would produce—has enduringly changed the way the federal courts address transnational securities litigation.