TAKEOVERS + SCHEMES REVIEW 2021 | Chapter 3
Chapter 3 of Gilbert + Tobin’s 2021 Takeovers + Schemes Review explores transaction structures used in public mergers and acquisitions in 2020.
Split between takeovers and schemes of arrangement close to 50:50
In 2020, 45% of all transactions valued at over $50 million proceeded by way of takeover bid, with that transaction structure achieving near parity with schemes of arrangement. This is a significant increase from 2019 when only 17% of transactions were undertaken by way of takeover bid.
As the graph below reflects, the historical “50:50” nature of the takeover or scheme divide had seemed destined to be confined to the history books, with 83% of deals in 2019 and 65% in 2018 proceeding by way of scheme. The shift towards takeovers in 2020 was likely, at least in part, to be an output of falling asset prices making agreement on price harder - a widening of the bid-ask spread. This led to a substantial increase in the number of hostile transactions, which generally can only be undertaken by takeover bid, with 26% of all transactions in 2020 being hostile in nature as compared to only 5% in 2019.
On the other hand, there remained a strong preference for schemes of arrangement over takeover bids for transactions valued over $1 billion in 2020, with four of the five high-valued transactions being structured as schemes. The only high-value transaction which was structured as a takeover was ARA Asset Management’s $2.4 billion proportional takeover offer for Cromwell Property Group which was not supported by the target board. This predominant use of schemes to implement large transactions is consistent with market practice over many years and is referrable to a strong desire for transaction certainty in the context of “bet the farm” transactions and the need for due diligence and greater complexity of third party financing for transactions of that size.
Pre-bid stakes in takeovers and schemes of arrangement
The preferred form of pre-bid stake used in takeover bids and schemes of arrangement differed markedly in 2020.
While a physical pre-bid shareholding in the target featured in 83% of takeover bids involving a pre-bid stake, it appeared in only 38% of schemes. Instead, pre-bid agreements were the most popular form of pre-bid stake in schemes, featuring in 75% of schemes which involved a pre-bid stake.
This divergence reflects the greater degree of flexibility in M&A transaction structuring associated with schemes and also the fact that shares held by a bidder cannot be voted in the same class as other shareholders voting on scheme proposals. A pre-bid agreement structured as an option or a voting commitment ensures the existing shareholder, supportive of the deal, can vote in favour as part of the general class of shareholders. See our chapter on pre-bid stakes - Chapter 6 Success factors in public mergers and acquisitions in 2020.
The hostile takeover bid makes a comeback!
26% of all transactions in 2020 were commenced on a hostile or unsolicited basis, a marked increase from 5% of transactions in 2019 and 12% in 2018. The increase in hostile bids was accompanied by a significant fall in the success rate of takeovers in 2020, with only 53% of takeover bids achieving success during that year, down from the 86% success rate observed in 2019.
Some of the more notable hostile or unsolicited bids were:
- ARA Asset Management’s successful $2.4 billion proportional off-market takeover offer for Cromwell Property Group;
- UAC Energy’s $835 million unsuccessful takeover bid for Infigen Energy; and
- Starwood Capital’s $485 million withdrawn bid for Australian Unity Office Fund.
The modest levels of success associated with proceeding on a hostile basis (44% versus 81% for friendly transactions in 2020) is to be expected. Obviously, acquirers will continue to have a preference for agreed or recommended transactions provided the bidder considers it possible to agree the price with the target board. That said, continuing uncertainties and the potential for re-emergence of market dislocation may mean we continue to see an elevated number of hostile takeover bids in 2021 as opportunistic bidders seek to capitalise on targets at attractive pricing in real time.
On-market takeover bids remain rare
Of the 42 M&A transactions valued at over $50 million in the Australian market in 2020, only two were on-market takeover bids (being Golden Investment’s bid for Stanmore Coal and Nord Gold’s bid for Cardinal Resources). This is in-line with 2018 but an increase from 2019 where there were no on-market bids.