Companies looking to ‘buy growth’, opportunistic bids and private equity activity renaissance were the key drivers for M&A activity in Australia in 2017, according to the MinterEllison Directions in Public M&A Report 2017. The report revealed that there were 39 deals announced, worth a total of A$2.4bn. The figures also showed a strong middle market focus – 28 deals in the A$50-A$400m range with the average deal value A$635.8 million. Most of the deals (85 per cent) were friendly but hostile takeovers are back in vogue, the report found. It also highlighted that cash remains king: 72 per cent of announced deals offered 'all cash.' The report also noted countervailing themes, including an increasingly complex Australian regulatory environment in terms of foreign investment, competition and tax laws, and the increasing potential for activist shareholders to disrupt announced deals.
'Overall, FY2017 was a dynamic year shaped by heightened volatility on the global stage and an increasingly complex regulatory landscape domestically,' said MinterEllison partner and public M&A specialist Alberto Colla. 'Pleasingly, this didn't deter strategically driven acquirers, who were prepared to look past external market shocks and execute transformational deals. There was strong appetite to offer healthy premiums to acquire targets that can deliver immediate access to new geographic regions, complementary products or know-how.Heightened market volatility and uncertainty also emboldened many acquirers to accelerate their growth plans by making opportunistically timed 'hostile' offers that by-passed the target board and were made directly to target shareholders at an attractive premium.' The MinterEllison Report also shows reduced M&A activity from Chinese bidders but an overall increase in foreign bidder activity, with greater in-bound investment from jurisdictions such as America and Japan.
Rise of the hostile bid
The Minter Ellison Report notes a number of instances where bidders by-passed the board and put an offer directly to target shareholders at an attractive premium to the market price. CIMIC made hostile bids for UGL (which succeeded) and McMahon Holdings (which failed), for example. Downer EDI made a hostile bid for Spotless (although still to be finalised, it can be counted as a success, with 65+% control already achieved and the Spotless board recently changing its "reject" recommendation to "accept".)
MinterEllison M&A partner Ron Forster believes that, apart from opportunism, there was a second important consideration driving the rise in hostile bids. 'Some bidders conclude that trying to engage with the target board to strike a friendly, recommended deal can be too protracted and potentially futile because the board might insist on a disproportionately high premium,' Mr Forster said. 'In that case, putting an offer directly to target shareholders, at an attractive premium and with limited conditions, can be a powerful alternative, especially if a bidder knows the target's business well and has been on their register for some time.'
Mr Forster also highlighted FY2017 as being characterized by a marked increase in pre-bid stake building, particularly as a prelude to hostile bids. 'Pre-bid stakes were often assembled by a combination of outright purchases of target shares and an increasingly sophisticated use of swaps and other derivatives to deliver a larger relevant stake for the bidder,' he said. 'Why is that route becoming more popular? It provides a base to quickly achieve a 50% controlling interest threshold and it can deter rival bidders. We are also seeing an increasingly sophisticated use of swaps and other derivatives to obtain a greater interest in targets.'
Changing mix of foreign bidders in M&A
The MinterEllison Report shows that there were also more foreign bidders active in the FY2017 public M&A marketplace – although not necessarily from China. 'The new Chinese State Administration of Foreign Exchange (SAFE) regulations issued in December 2016 introduced tighter capital controls, making it harder for Chinese bidders to pursue large scale outbound M&A investment. While there were still Chinese bidders, the level of activity was reduced,' Ron Forster said. 'Nevertheless, the drop-off in Chinese activity has been replaced by new inbound investment from other jurisdictions, such as America and Japan. We believe Japanese bidders will continue their strong run in Australian public M&A deals in FY2018. Japanese deal flow will likely focus on transactions in the mid-market and in sectors where Japanese companies can add value through their traditional strengths, such as robotics and IT.'