AUSTRALIAN UPDATE – deal landscape, origin of bidders and deal structures
- The Australian public M&A market has seen steady activity levels, with modest growth in deal volumes (by value) in the 12 months to 30 June 2016 (FY16).
- Success rates have remained steady, with 73% of deals announced in FY16 being completed.
- The level of contested bid activity rebounded in FY16 with 6 targets attracting multiple bidders.
- The industrials and utilities sectors dominated activity, with deals in those sectors comprising 70% of deal value.
- Inbound public M&A remained steady, but with a significant increase in bid activity originating from North America.
Levels of public M&A activity in FY16 remained steady, with 50 deals announced and $33 billion committed by bidders, compared with 55 deals announced and $28 billion committed in the previous 12 months. The proportion of deals exceeding $1 billion remained steady, with 6 deals announced in this category in FY16, including one contested bid (compared with 7 in FY15), and deals in this category accounting for 80% of all deal activity by value.
Success rates also remained steady in FY16 at 73% (FY15, 70%).
Overall, the proportion of bids launched in FY16 without support from the target board from the outset (45%) was consistent with previous years (FY15, 44%). Of the unsolicited bids, 61% were ultimately successful. All of the unsolicited bids which were successful were recommended by the target board (either in the board’s initial response, or following negotiations). None of the unsolicited bids which were resisted by the target board throughout the bid period were successful.
The number of contested bids rebounded in FY16, with 7 targets the subject of multiple bidders, up from 2 targets attracting competing bids in FY15. In each of the cases where a competing bid announced in FY16 has completed, the overbidder has been successful. Encouraging a competing bidder has been an effective strategy for target boards confronted by an unsatisfactory bid.
Merger and acquisition activity in the industrials and utilities sectors featured strongly in FY16, representing $23.3b (70%) of overall deal value. In contrast, challenging business conditions in the energy and resources sectors, which were characterised by low commodity prices in oil, iron ore and coal, slow growth and uncertainty, affected the level of deal activity, with these sectors contributing only $1.1b to total deal value.
Private equity participation remained steady in FY16, with 18% of deals involving private equity bidders (FY15, 18%), although target values were larger. Consistently with broader trends in the market, private equity acquirers bid across a range of industry sectors.
Origin of bidders
Foreign bidders accounted for 44% of all deals in FY16, by value. This represents a slight increase in funds committed by foreign bidders in FY16 relative to FY15. Unlike previous years, foreign bidder activity was not concentrated in energy and resources, with foreign bidders being active in the industrials and utilities sectors.
North American bidders were more prominent in FY16 than in previous years, with 27% of all bidders coming from North America (FY15, 15% ), representing 40% of all deals by value. North American bidders were particularly active in larger transactions, with 3 of the 6 deals exceeding $1bn involving North American bidders.
The preference for schemes of arrangement remained steady in FY16, with 44% of all deals involving schemes, compared with 45% in FY15. The use of schemes continued to dominate transactions exceeding $1 billion, with 86% of deals in this category implemented by scheme.
Cash consideration continued to feature prominently in FY16, and was the sole form of consideration in 62% of transactions (up from 58% in FY15). There was a strong preference for cash consideration in unsolicited deals, with 80% of all unsolicited bids being cash-only or having an all-cash alternative.
Bids with cash-only consideration were more successful in FY16 than in the FY13-15 period, with cash-only bids (including both friendly and hostile bids) having an 80% success rate overall.
FY16 saw a further increase in deals involving an initial premium in the 20-40% range (46%), as well as an increase in bids offering an initial premium exceeding 40%.
Success rates in FY16 continued FY15’s trend, showing a positive correlation between size of premium and bid success, with bids involving an initial premium in the 20-40% range having a 70% success rate, and those with an initial premium exceeding 40% having a 92% success rate.
Consistently with previous practice, material adverse change conditions continued to be included in the majority of bids and conditional deals. However the continued increase in the use of carve outs from the material adverse change conditions for external factors such as changes in law or accounting policy, general economic conditions, industry conditions and stock markets reflect that bidders are more willing to accept commercial risk when making a bid.
Deal protection mechanisms continued to feature in negotiated transactions, with an increase in toe-holds during FY16, compensating for a decrease in other forms of lock-up from target shareholders. ‘Truth in takeovers’ statements (being public statements of intent to accept or otherwise support a bid by target shareholders) remained the preferred form of lock-up, with 75% of lock-ups taking the form of truth in takeovers statements only, despite Takeovers Panel guidance raising concerns that such statements have been misused as lock-up structures.
Notification and matching rights continued to their popularity with notification and matching rights being found in 100% and 93% respectively of negotiated deals. Use of break fees and reverse break fees also increased, with 86% of negotiated deals having a break fee and 32% of deals also having a reverse break fee.