05/11/2020

Welcome to the ninth edition of Expert Adviser, published quarterly by G+T’s Perth corporate advisory team and developed specifically for advisers active in the local market. 

Quarter In Review

A better than expected reporting season gave way to a flurry of ECM activity in Q1FY21, with a range of new floats coming to the market across all sectors on the ASX.

Our detailed analysis of the profit reporting season roller-coaster is featured in our Quarterly Publication Review below. By the end of the reporting season, only 17% of ASX200 companies had opted to reaffirm or not withdraw their guidance. The remaining 49% of ASX200 companies had determined pre-COVID to provide no earnings guidance, including mining companies who provided only production guidance but not earnings guidance. Profit increases by mining companies were largely due to commodity price fluctuations, with the price of gold increasing by more than 30% and the price of iron ore rising by more than 40% since the beginning of CY20. Secondary raisings started to slow towards the end of the quarter indicating boards are a more comfortable with balance sheet positioning. The IPO Market, on the other hand, remains very robust, particularly for resources listings in WA. For ECM, COVID-19 termination rights are now beginning to disappear from underwrites or at least be included with greater finesse.

Whilst M&A remained challenging in the early part of Q1FY21, data room activity indicates that the deal pauses or terminations of "early COVID-19" are behind us. The Northern Star and Saracen tie up reminded the market that well-planned M&A (and the rationalisation of mining JVs) can unlock synergies for shareholders, justifying nil-premium combinations.  Indeed most of the announced M&A deals during the quarter and more recently entailed highly logical combinations with clear synergy cases and lower due diligence risks (such as Northern Star / Saracen, Pilbara Minerals / Altura and Coca-Cola Amatil).  Aside from these situations, it remains a market for brave acquirers only given a combination of earnings uncertainty, lack of guidance and swirling liquidity.  Private equity and Australian superannuation funds have recognised the break in the investment cycle to pick off distressed assets ahead of public markets recapitalisation processes – as shown by RCF and AusSuper's support of Pilbara Minerals' bid for the Altura assets. 

Our deal mechanic below considers in more detail how the public M&A market has matured during Q1FY21 in its navigation of COVID-19 uncertainty. The private M&A equivalent of this was recently utilised in a carve-out acquisition of ASX listed Healius Primary Care’s medical and dental practices. In that deal the purchase price proceeds are deferred if the earnings of the business have not returned to pre-COVID-19 levels at the time of completion. Any trailing outstanding balance will be paid over the 18 months following completion and return to normal trading conditions. 

In-bound M&A enquiry during Q1FY21 shows a willingness to utilise these private equity derived mechanisms in the local WA resources market to (1) quell target board fears of reliance on blunt force MAC termination events to walk from a deal; and (2) bridge the volatile bid-ask spread between bidders and targets on valuation. As WA emerges from its hard border lockdown, we see opportunity in the local resources market to bake in adjustment events for COVID-19 impacts on mine production results or mining services revenues to allow public M&A transactions to straddle uncertain business impacts during long implementation periods. 

Recent Deals

Despite significant macroeconomic uncertainty, our Corporate Advisory team enjoyed a robust Q4 FY2020, acting on several high-profile M&A and ECM transactions.  Notable transactions for the team in this period included:
 
Mali Lithium acquisition and financing
We advised Mali Lithium Limited on its acquisition of 80% interest in Morila from Barrick and AngloGold for US$27 million and its $70 million capital raising via placement and SPP.
 
WA Kaolin Limited IPO
We advised WA Kaolin Limited on its proposed initial public offering to raise $21 million and listing on the ASX.

Sandfire Resources divestment of Sams Creek 
We are advising Sandfire Resources Limited on the $23 million sale of its interests in the Sams Creek Gold Project in New Zealand to Auris Minerals Limited.
 
BCI Minerals entitlement offer
We advised BCI Minerals Limited on its fully underwritten 1 for 2 entitlement offer to institutional and retail investors to raise approximately $48 million. 

JLMs on Salt Lake Potash 
We advised Euroz and Canaccord as the joint underwriters for Salt Lake Potash’s ANREO and placement to raise $98 million.
 
Amur Minerals on its strategic investment 
We advised Amur Minerals Corporation in connection with its strategic investment in Nathan River Resources, an Australian iron ore producer, by way of secured A$7 million convertible notes. 

Mincor royalty buy-back and gold divestment
We advised Mincor Resources NL on the buy-back of the Morgan Stanley Gold Royalty over its tenure in the Southern Goldfields region and on the divestment of its Jeffrey’s Find gold assets to Auric Mining Limited.
 
Sipa Resources on its placement
We advised Sipa Resources Limited on its oversubscribed private placement of shares to raise approximately $2.3 million.

Pelican Resources Limited 
We advised Pelican Resources Limited on its acquisition of XXXX Gold Pty Ltd and its associated underwritten capital raising and proposed re-admission to ASX. 

Deal Mechanic

MAC walkaway rights replaced with price rachet to bring deal certainty

The M&A market has matured during Q1FY21 in its ability to accommodate COVID-19 exposed industries with private equity leading the way to balance uncertainty created by potential lockdowns. In a sign of the times for public M&A, NZX listed Abano Healthcare’s deal was recut following reliance on a material adverse change termination right by the bidder after target earnings were impacted when its dental shops were shuttered. The Abano board subsequently unanimously recommended its shareholders accept a revised private equity bid with fixed price ratchet on the scheme consideration for specified COVID-19 adjustment events (subject to an overall cash reduction cap). Subject to ASIC and the Courts being comfortable with a scheme price adjustment up to the morning of the implementation date (which is not yet certain), we see opportunities in the local market for similar flexibility on downside protection or even upside participation for targets. 

Loan to own with s444GA relief

During Q1FY21, ASIC formalised its policy on when it will give Chapter 6 relief for share transfers under s444GA of the Corporations Act to allow shares of a company in administration to be transferred by an administrator as part of a deed of company arrangement (DOCA). Since 2014, ASIC has received over 15 applications for Chapter 6 relief in matters involving s444GA share transfers via DOCA.  As these transfers involve expropriation of shares from shareholders, often for no consideration, many of these have resulted in shareholders exerting their rights to object in Court.  ASIC’s policy brings welcome certainty to this area of practice in a market supportive of recapitalisations.  Note that Pilbara Minerals' conditional agreement to acquire Altura’s Lithium operations for approximately US$175 million out of receivership will not (given the specific deal structure) require this relief.

Board minutes must evidence deliberation of takeover offers and recommendations

The Takeovers Panel made a declaration of unacceptable circumstances in Alto Metals Limited [2020] ATP 17 on the basis that the recommendation by Alto Metals that its shareholders reject Habrok (Alto) Pty Ltd’s (Habrok) takeover bid was misleading or had the potential to mislead shareholders. Having regard to Alto Metals’ Board minutes, the Panel noted that the lack of deliberation by the Board in relation to the Habrok takeover offer was ‘curious’, given the significance of the decision to shareholders. This decision reiterates the importance of properly recording Board deliberations regarding a bid in the minutes, and suggests there should be a “settling period” after a bid rejection by target before it launches a capital raising.

Cross border developments

In June 2020, Treasurer Josh Frydenberg announced comprehensive changes to Australia’s foreign investment regime which come into effect on 1 January 2021 and replace the temporary measures introduced in March 2020. The changes represent a sharpened focus on national security, with key changes including:

•    investments in a new category of business called “sensitive national security businesses” (such as telecommunications, electricity, gas, infrastructure, defence and potentially those that handle sensitive data) which are otherwise below the normal (pre-29 March 2020) monetary thresholds will now be screened by FIRB under a new national security screening regime;
•    the government will have new “call in” (the ability to compel an investor to submit an application) and “last resort review” (the ability to reassess previously approved foreign investments) screening powers to assess national security risks;
•    the government will have new powers to enforce compliance with foreign investment laws in a more targeted way; and
•    there will be an exemption from the definition of ‘foreign government investor’ for certain investors that have foreign-government ownership but are privately controlled.  This is welcome news for private equity funds and institutional investors that are otherwise captured in the current definition of ‘foreign government investor’ and screened by FIRB.

Quarterly Publication Review

What you need to know about impact investing

What is impact investing?

Just as Australians are increasingly considering ethical and sustainable factors relating to what they buy, they too are increasingly concerned about what they invest their money in and whether such investments are purposeful and sustainable.

While conventional investing is typically undertaken with the intent of simply receiving a financial return, impact investing is undertaken for a dual purpose – to both receive a financial return and generate positive, measurable social and/or environmental impacts. Click here to read more.
 
The 2020 Profit Reporting Season Rollercoaster

COVID-19 has had a historic impact on Australia’s economy. The imposition of restrictions by Federal and State governments, coupled with depressed market conditions, has had significant financial ramifications for many of Australia’s largest listed companies.

As published by us in March 2020, the outbreak of COVID-19 in Australia precipitated an initial rush of earnings guidance withdrawals. Companies also responded by taking action to fortify their financial position, including through equity raisings, debt restructures and asset impairments. However, particular industries were well placed to thrive in the market conditions created by the pandemic or were insulated from its effects.

In order to better understand the financial impact of COVID-19 on large ASX listed entities, we have reviewed the financial results announced by ASX200 entities during July and August 2020 and have analysed how particular sectors have fared. 

Our review has uncovered a number of interesting themes. We trust you will find these insights useful. Click here to read more. 

G+T in the community

Steptember

This September G+T stepped up to raise money for the lives of children and adults living with cerebral palsy. The whole firm got active for the cause, finding innovative ways to add more steps into their day. Together, G+T walked more than 28 million steps, amounting to over 21 thousand kilometres of walking. The team effort raised over $11,000 for charity.

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