Chapter 3 of Gilbert + Tobin’s Takeovers + Schemes Review 2023 (below) explores transaction structures used in public mergers and acquisitions in 2022.


Schemes continue as the preferred transaction structure

Schemes of arrangement were again the preferred transaction structure for deals over $50 million, with 68% of transactions using this structure, consistent with the trend we have seen for more than five years (excluding 2020). The results in 2022 reflect the long held view in the Australian market that schemes of arrangement are typically the preferred transaction structure, unless there is a particular reason why a takeover might be preferred or needed.

In 2022, there were no friendly deals which proceeded by way of takeover unless there was some structural reason why a takeover was necessary. This included HRL Holdings / Australian Laboratory Services where the physical pre-bid stake held by the bidder (~19.9%) would prevent the bidder from voting on a scheme and increase the capacity of small shareholders to vote down the scheme in its entirety.

That said, 2022 did see an increase in the use of takeovers over schemes of arrangement compared to 2021, although nothing like the 50:50 divide we saw in 2020.

Interestingly, the numbers for 2022 were skewed towards takeovers due to a number of competitive situations (being the battles for control of Virtus Health, Warrego Energy and Nitro Software). It is not unusual to see takeovers usurp a friendly scheme of arrangement in a competitive scenario, as the traditional view has been that schemes of arrangement are too inflexible to provide a truly competitive platform once a second bidder makes a takeover bid. However, we saw the use of concurrent scheme and takeover bid structures in two hotly contested takeover battles occurring in 2022, being:

  • the battle for control of Virtus Health between BGH Capital and CapVest Partners; and
  • the battle for control of Nitro Software between Alludo and Potentia Capital.

In each of those deals, while a scheme of arrangement was the preferred transaction structure, the contest for control in circumstances where the other bidder had a pre-bid stake of approximately 20% meant that a takeover was ultimately needed in both cases to allow a change of control to occur if the scheme was voted down. Concurrent takeover / scheme transaction structures are becoming a more regular feature of the Australian M&A market, and the two examples in 2022 demonstrated that they are an effective way to create a true competition for control when the bidder kicking off the process has a significant pre-bid stake.

In both Virtus Health and Nitro Software, the availability of this structure facilitated a second bidder entering the auction when it might otherwise have been deterred by the existence of a likely blocking stake for a scheme held by the first bidder. As a result, the premium achieved for shareholders was significantly higher than that which might otherwise have been obtained by negotiation with the first bidder in the absence of any competition. With the Takeovers Panel recently considering and confirming that a concurrent takeover / scheme structure is not unacceptable (see the Takeovers Panel section of our Regulator influence, trends and developments in public M&A in 2022 chapter for more detail), these structures are likely to continue to be used as a useful tool to facilitate competition and allow target directors to maximise value for shareholders in the right circumstances. We expect to see them used, or at least proposed, more often.

For transactions valued over $1 billion, schemes of arrangement remained the dominant structure in 2022 (89%). Only one transaction in this category proceeded by way of a takeover, namely, the minority takeover bid by HOCHTIEF AG for CIMIC Group. This transaction was conducted by takeover - HOCHTIEF’s controlling pre-bid shareholding in the target of ~78.6%, the shareholder voting hurdles associated with a scheme and HOCHTIEF not being able to vote on the scheme resolution presumably were factors that influenced this structure, together with HOCHTIEF’s strategic decision to declare the offer price as final on announcement. This predominant use of schemes to implement large and recommended 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, the need for due diligence and greater complexity of third party financing which is inevitably required for transactions of that size.

Schemes v takeovers ($50m+)

Schemes v takeovers ($1b)”: The split between schemes and takeovers for all deals over $1 billion in 2022 shows schemes were used in 89% of high valued deals and takeovers were used in 11% of high valued deals]

Schemes v takeovers ($1b+)

Schemes v takeovers ($50m)”: The split between schemes and takeovers for all deals over $50m in 2022 shows schemes were used in 68% of deals and takeovers used in 32% of deals

Pre-bid stakes in takeovers and schemes

Pre-bid stakes were more common in 2022 as compared with 2021 (49% of deals included some form of pre-bid compared with 39% in 2021).

Pre-bid stakes were much more prevalent in takeovers (69%) than in schemes (39%). Where a pre-bid stake was present, the type used was broadly consistent with previous years:

  • pre-bid agreements with shareholders were entered into in 30% of deals in 2022 (slightly down from 33% in 2021);
  • an existing shareholding was present in 65% of 2022 transactions (down from 71% in 2021); and
  • equity derivatives featured in 10% of deals (up from 4% in 2021).

2022 saw a return to the trend of years prior to 2021, where the preferred form of pre-bid stake for takeovers was a physical pre-bid shareholding (78%) whereas for schemes it was a pre-bid agreement with shareholders (50%). This is what we would expect, given the shareholder approval thresholds for schemes and the inability of a bidder to vote its shares in the same class as other shareholders voting on scheme proposals.

Hostile bids in the minority

Hostile v Friendly

Only 17% of transactions were hostile in 2022, continuing previous trends (apart from the outlier year of 2020, caused by the dislocation in markets at the onset of the pandemic). Half of the hostile bids occurred in competitive situations – namely, the competitions for control of Virtus Health, Warrego Energy and Nitro Software.

In a move away from the usual trend, whether a transaction was hostile or friendly did not have as significant an impact on the chances of success for the transaction, with 86% of friendly transactions being successful and 67% of hostile transactions achieving success. In the past few years, we have seen hostile transactions have a much lower than 50% chance of success. This outcome likely results from the fact that most of the hostile bids were in competitive processes, so while they may not initially have been recommended, if they were the highest bid at the end of the process, they were subsequently recommended by the target board and so became successful. The originally hostile bids for Virtus Health and Warrego Energy are good examples of this. Nitro Software is another example, however, at the time of writing, Potentia Capital’s bid, although recently recommended by the target board, is not yet successful.

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