Australian Update: Deal Landscape, Origin of Bidders and Deal Structures
- The Australian public M&A market has seen an overall decline in deal activity in the 12 months to 30 June 2015 (FY15).
- Success rates have increased from FY14, with 70% of deals announced in FY15 being fully completed transactions.
- FY15 has seen an increase in the number of bids implemented via schemes of arrangement, especially in deals exceeding $1 billion.
- Foreign bidders accounted for 47% of deals in Australia, with Asian based bidders comprising 25% of deals overall.
- The number of competitive bid scenarios declined in FY15, with only 2 targets the subject of multiple bidders, down from 8 targets attracting competitive bids in FY14.
There was a decline in Australian public M&A activity in FY15, with 55 deals announced and $28 billion committed by bidders, down from 77 deals and $44 billion in the previous 12 months. Despite the overall decline in activity, success rates increased to 70%, from 60% in FY14.
The number of competitive bid scenarios declined in FY15, with only 2 targets the subject of multiple bidders, down from 8 targets attracting competitive bids in FY14. The main reason for failed bids in FY15 was a failure of conditions or the acquisition being successfully defended, rather than a bidder being overbid by a competitor.
While the proportion of deals exceeding $1 billion experienced an overall decline, with only 7 deals announced in this category in FY15, the value of these deals was high, accounting for 80% of the deals by value in FY15.
The preference for schemes of arrangements surged in FY15 with 45% of all deals involving schemes, up from 36% in FY14. The use of schemes dominated transactions exceeding $1 billion, with 86% of deals in this category implemented this way. This is in contrast to deals exceeding $1 billion in FY14, of which the majority consisted of hostile takeover bids. The move towards schemes indicates bidders’ preference for certainty.
Energy and resources transactions continued to account for the majority of the number of deals (33 of the 55 deals). The value of these deals, however, only contributed $4.9 billion of the total $28 billion deal value (18%). In contrast, the 5 real estate transactions in FY15 contributed a value of $8.4 billion.
The proportion of M&A activity initiated by private equity has also increased in FY15, with 18% of all deals involving private equity bidders, up from 13% in FY14. Consistently with recent years, the majority of private equity M&A activity involved deals in the energy and resources sector.
Origin of bidders
Foreign bidders accounted for 47% of the value of deals in FY15, up from 39% in FY14, but the majority of deals were dominated by Australian and New Zealand bidders. Australian bidders also dominated transactions exceeding $1 billion, with 4 out of 7 bidders being Australian (the remaining 2 from Asia and 1 from the US), down from 69% of foreign bid offers made in the same category in FY14.
Asian-based bidders comprised the majority of foreign bidders in Australia, contributing to 25% of launched deals and 34% of deals by value.
Consistently with FY14, the majority of deals involving foreign bidders were in the energy and resources sector, with 18% of bidders from China or Hong Kong and 12% from North America.
Cash (or cash and scrip) consideration was offered in 73% of all transactions in FY15 which marks an increase from cash based consideration in FY13, when M&A activity was at a similar level (58%). Cash only consideration was more successful this year than in the FY12-14 period, with cash only bids successful 3 out of 4 times.
Despite this, deals exceeding $1 billion saw an increase in the use of scrip consideration, with 29% of deals in this category comprised of scrip only consideration. This is in contrast to the 5% average seen in the FY12-14 period. This trend may reflect a decline in bids by offshore acquirers, who usually offer cash, in this category of deals.
The use of external debt funding was also more prominent in FY15 with 34% of cash consideration being primarily funded by private debt, down from 26% in FY14. This suggests that the availability of credit has increased.
FY15 saw an increase in deals involving initial premium offers in the 20-40% range (38%). This did not correlate with a greater success rate, however, with only 71% of deals successful in the 20-40% range, compared with a 90% success rate in the FY12-14 period. Deals involving premium greater than 40% had a success rate of 91%, up from a 55% rate in FY14.
Minimum acceptance conditions and material adverse change conditions continued to be included in the majority of bids and conditional deals. However, increasing use of carve outs for external factors such as changes in law or accounting policy, reflect that these conditions have become unreliable for bidders.
Deal protection mechanisms continued to feature in negotiated transactions, with an increase in lock-ups during FY15. ‘Truth in takeovers’ statements were the preferred form of lock-up, with 70% of lock-ups taking the form of truth in takeovers statements only. A recent Takeovers Panel guidance note on shareholder intention statements demonstrates the Panel’s concern that such statements have been misused as lock-up structures. Increased regulation of such statements could result in reluctance for individual shareholders to allow their intentions to be used in this way, possibly increasing the use of generic descriptions when describing aggregate shareholder responses.