Chapter 4 of Gilbert + Tobin’s  2022 Takeovers and Schemes Review (below) explores the involvement of foreign bidders in public mergers and acquisitions in 2021.

Increased emphasis on national sovereignty in Australia and throughout the world

2021 saw a continuing trend of nations throughout the world placing an increased emphasis on national sovereignty and seeking to protect their country’s assets, people and general well-being from a range of threats including geo-political, military, food security, consumer privacy, cyber security, data security and security of energy supply and key infrastructure.

Australia is no different.

Indeed, with Asia-Pacific geo-political tensions on the rise and an increasing awareness of cyber-attacks and data security, the now seemingly annual deluge of new and additional foreign investment regulation intensified.

With the range of new regulation, the involvement of FIRB in reviewing deals and imposing conditions on approvals increased.

That said, foreign investment remains important to Australia.

Deals involving foreign bidders in 2021 accounted for $61.9 billion (a high in the 10 years we have been preparing this Review) or 47% of total transaction value of all public mergers and acquisitions. However, interestingly, on a relative basis, foreign bids declined in 2021 with only 32% of all deals involving a foreign bidder. More than anything, the relative reduction in foreign acquisitions is in part due to the increased involvement of Australian superannuation funds in public M&A for infrastructure assets.

We explore the main themes of foreign investment regulation and foreign bids in 2021 below.

Foreign investment regulation and FIRB

The Australian government’s increasingly expansive views on national security have been evident for some time through the foreign investment review process, but 2021 was the year that they expanded to a new high.

The initial step involved amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) (effective 1 January 2021) which created new regulated actions and new powers on the part of the Treasurer relating to national security risks. While the zero monetary threshold was mostly scrapped as of 1 January 2021 for many transactions, it continued for transactions where the target conducted any national security business.

From a national security perspective, the initial tranche of 2021 amendments gave the Treasurer the power to:

• block, divest or impose conditions in relation to “notifiable national security actions” if the Treasurer considers them to be contrary to national security – this broadly covers a foreign person starting a national security business, acquiring an interest of 10% or more (and in some cases less than 10%) of a national security business or acquiring an interest in national security land and can capture offshore entities even when there is no Australian subsidiary;
• “call in” for review a broad range of transactions (including ones that are not otherwise caught by FATA) for a period of 10 years after completion, in order to determine if they are contrary to national security; and
• re-review previously approved transactions, if the Treasurer becomes aware that the application was misleading or that changed circumstances may give rise to national security risks.

Identifying whether a business is publicly known to be, or could be known following reasonable enquiry to be, carrying on business in Australia in whole or in part in one of the identified national security categories has proven to be a headache.

For starters, there are no hard and fast rules as to when a non-Australian entity is carrying on business in Australia – although FIRB has now provided some non-exhaustive guidance on this front. Moreover, it is only necessary for the target (whether Australian or not) to be carrying on a small amount of business in one of the national security categories to be caught, meaning significant amounts of due diligence may have to be done before a determination can be made about whether a target business is caught by the zero dollar thresholds.

In addition, many of the terms used are vague (such as, “critical” goods, services or technology) which, even with the benefit of guidance on FIRB’s website, can be uncertain. Understanding whether a target stores classified information (defined to include information that has been classified as “protected” or higher within the Australian Government Protective Security Policy Framework (PSPF)), for example, will require a detailed understanding of the PDSF and the ability to make necessary inferences from other data that may become available in due diligence as to the likelihood or not that stored information is so classified. And finally, the government has set a very high bar for what constitutes “reasonable enquiries” – merely asking the target is insufficient.

All of this has been compounded by amendments made to the Security of Critical Infrastructure Act 2018 (Cth) (SOCI Act), which came into effect in December 2021. The definition of national security business in FATA is tied to the definition of “critical infrastructure asset” in the SOCI Act, so these amendments have the effect of broadening the national security business categories from owners and operators of specified assets in the electricity, gas, ports and water / sewerage sectors to include owners and operators of additional specified assets in aviation, banking, broadcasting, data processing, data storage, the defence industry, domain name systems, education, energy market operators, financial market infrastructure, food and grocery, freight infrastructure, freight services, hospitals, insurance, liquid fuel, public transport, superannuation and telecommunications sectors. While the specific assets covered are relatively narrow, the breadth of the sectors suggests that a lot more transactions will be caught by the zero dollar threshold in 2022.

In conjunction with these latest amendments, the government has released an updated guidance note relating to national security risks. The note provides detailed and candid sectoral guidance on national security risks across a number of sectors. It is not surprising that a number of sectors described in earlier versions of that note as sensitive are, as a result of the December 2021 amendments, now “notifiable national security actions” and subject to the zero dollar thresholds.

While the vast majority of transactions are still approved, the true scale of rejections cannot be determined because of the practice of quietly withdrawing applications after preliminary determinations have been made that the transaction is contrary to the national interest (or national security, where applicable). While FIRB does report on the number of withdrawals, there are also other reasons to withdraw applications, making these statistics difficult to interpret. Nevertheless, rejections appear to be increasing. In addition, the government’s tougher stance on national security has led to changes in business behaviour, with Chinese bidders more likely to opt out of processes that involve national security businesses, on the basis that approval is unlikely.

Public mergers and acquisitions in 2021: a tale of two stories

With closed borders, the challenges of COVID-19, increased focus on security and with that foreign investment regulation in 2021, it should come as no surprise that the headline percentage of foreign bidder acquisitions in Australian public M&A in 2020 was at a low point over the last 10 years.

Indeed, foreign bidders accounted for only 32% of all announced deals over $50 million in 2021. The relative decline of foreign bidder activity continued the downward trend of recent years. Indeed, one could say the decline has become steeper.

Foreign bidders by number of transactions

However, these percentage statistics do not tell the full story.

There were 20 foreign acquirer deals in 2021, which was slightly ahead of 2020 at 19 deals.

But when considering transaction value, deals involving foreign bidders accounted for $61.9 billion, a high in the 10 plus years we have been preparing this Review, or 47% of total transaction value of all public mergers and acquisitions. Indeed, notwithstanding the tougher foreign investment regulatory settings in 2021 and the decline in the percentage of foreign bidders amongst all bids, the aggregate transaction value of all foreign bids more than tripled last year.

Foreign bidders by value

That all said, if we exclude the $39 billion Afterpay / Block, Inc deal from the analysis, then the overall picture in 2021 was somewhat similar to 2020 in terms of foreign bidder deal numbers and aggregate transaction values.

Still, it’s not uncommon to have one deal skew the data. For example, in 2020, almost half of the overall foreign deal value came from Coca-Cola European Partners’ $9.8 billion acquisition of Coca-Cola Amatil.

Whatever the case, foreign bidders remained significant players in the highest value public M&A transactions in 2021. Indeed, the three largest deals were either foreign or had a significant foreign component:

• US based Block, Inc’s $39 billion acquisition of Afterpay;
• US headquartered GIP teaming up with IFM and others to acquire Sydney Airport for $23.6 billion. While we have classified this deal as an Australian transaction due to the consortium being majority Australian owned, GIP’s involvement meant there was significant foreign investment in this transaction; and
• Canada’s Brookfield, together with other Canadian pension funds, and Sunsuper’s acquisition of AusNet Services for $10.2 billion.

Where did the bidders come from?

As illustrated in the world map below, in 2021 foreign bidders came from a range of continents and countries including North America (US, Canada and Bermuda), Europe (including the Netherlands, Norway, France and Germany), Asia (Korea, Singapore and Indonesia), South America (Brazil) and New Zealand.

However, when you break it down some more, there are some interesting themes in this:

• North American bidders were involved in nine deals (which increases to 11 deals, if GIP’s involvement in the bidding consortium for Sydney Airport and Ontario Teachers’ Pension Plan’s involvement in the acquisition of 1300 Smiles were included in the analysis);
• Europe had six bidders, all from Western Europe;
• Asian bidders came from Western allies in Singapore and Korea plus Indonesia. Notably, there were no bids from Chinese companies; and
• New Zealand had one bidder (which increases to two deals if Mercury NZ’s involvement in the acquisition of Tilt Renewables was included).

In this respect, one can see the foreign investment regulatory settings and security concerns has resulted in a material shift in the home country of bidders such that the vast majority of foreign bids came from Western countries.

Where did the bidders come from?

Proportion of foreign transactions by region over time 

The largest number of foreign bidders from individual countries were:

• Canada – 4 deals
• United States – 3 deals
• Netherlands, Bermuda, France – 2 deals

Interestingly, Asian bidders were down overall. There were only three Asian bidders and two of those deals (iCar Asia / Carsome Group and Nusantara Resources / Indika Energy) were effectively intra-Asia deals as the target business was in Asia and not Australia.

The geo-political tensions with China and the continued (Australian government and media) sensitivity towards Chinese foreign investment, resulted in zero Chinese acquisitions. Only the POSCO acquisition of Senex was a true Asian bid for an Australian business.

Proposed acquisitions by Chinese acquirers including Hong Kong (2014-2021)
2021	0
2020	1
2019	2
2018	3
2017	6
2016	3
2015	4
2014	8

 

For sectors which were of interest to foreign bidders see Chapter 2 – Sector analysis for public mergers and acquisitions in 2021.

Foreign bidders’ strong success rates

Foreign bidder success rates in public mergers and acquisitions significantly improved in 2021 at 82% compared to 47% in 2020. This reflected a return to the success rates reported over most of the last 10 years.

We put this increase in 2021 back to usual levels as reflective of the greater number of opportunistic bids in 2020 following the initial impact of COVID-19 on asset prices which resulted in more unsuccessful deals. 2021 proved to be a much more normal year in this respect. Bidders seemed prepared to pay up for agreed deals leading to a greater success rate. As with 2020, in 2021 no listed company M+A deal failed for want of getting FIRB approval (at least not any transactions that were announced).

For completeness, it should be noted that this Review does not record confidential non-binding indicative offers which may not become public if rejected. If one takes this into account, the true success rates may have been lower.

Foreign bidder success rates 

^{The success rate for 2022 does not include 12 transactions which were current as at 16 February 2022. The success rates for 2017 to 2021 have been updated to reflect the ultimate outcome of all transactions which were analysed in those past Reviews.}