Chapter 5 of Gilbert + Tobin’s 2022 Takeovers and Schemes Review (below) explores the types of consideration offered in public mergers and acquisitions in 2021.

Raining paper

Strong equity markets encouraged bidders to propose, and targets to accept, scrip consideration in a trend which went well beyond the impact of the COVID-19 pandemic. Scrip-only deals accounted for 31% of transactions, a significant leap from previous years (21% in 2020 and 17% in 2019).

A highlight for Australian mergers and acquisitions, and indeed scrip-only consideration structures, was Block, Inc’s acquisition of Afterpay. At $39 billion, it is the highest value scrip-only deal, and the largest public company acquisition, in Australian history (for further information, see the Deal Spotlight on Afterpay)  Santos’ merger with Oil Search and Washington H Soul Pattinson and Company’s acquisition of Milton Corporation were also notable for their respective $8.1 billion and $4.6 billion scrip-only market values.

The relative prominence of scrip in 2021 reflects the rise in actual or perceived “mergers between equals” and increasing consolidation within industry sectors (including the $8.1 billion merger between Oil Search and Santos), continued high stock prices and potentially a desire amongst some investors to retain exposure to a target’s underlying assets and also participate in the synergy benefits.

Use of cash consideration in public mergers and acquisitions remained subdued

Only 63% of public mergers and acquisitions in 2021 gave target shareholders the option to receive all cash consideration. This is consistent with levels observed in 2020, where 62% of deals offered all cash, but is a significant reduction from levels observed between 2017 and 2019.

Interestingly, all cash consideration was significantly less likely for takeover bids when compared to schemes, with only 46% of all takeover bids offering all cash consideration versus 67% for schemes, a factor we also attribute to the increase in industry consolidation mergers and continued high stock prices.

Types of consideration by number of transactions 

Combination consideration out of favour in Australia

There were only four public M&A transactions in 2021 which offered target shareholders a fixed combination of both cash and scrip with no all cash alternative. This represented 6% of announced transactions in 2021, down from 17% in 2020 (which was a five year high). The largest of these transactions was HomeCo Daily’s $2.2 billion acquisition of Aventus Group.

Only a handful of transactions gave shareholders the option to elect their preferred consideration structure. This included Aussie Broadband’s proposed $344 million acquisition of Over the Wire by scheme of arrangement, where target shareholders could elect either:

• 80% cash consideration and 20% scrip consideration equating to $4.60 cash and 0.23 Aussie Broadband shares for each Over the Wire share;
• 100% cash consideration equating to $5.75 cash per Over the Wire share;
• 100% scrip consideration equating to 1.15 Aussie Broadband shares for each Over the Wire share; or
• at least 1% but less than 100% scrip consideration with the balance payable as cash consideration.

Link – finessing consideration structures

2021 proved to be an interesting year for Link Administration Holdings Limited (Link). It supported the ASX listing of PEXA Group Limited (PEXA) (which it owned together with Morgan Stanley Infrastructure Partners and CBA) and retained its 44.7% shareholding in PEXA on listing in July 2020. It then received offers from Carlyle Group and Dye & Durham (D&D) to acquire Link (being whole of company deals) and commenced a sale process for its Banking and Credit Management business (one of its smaller divisions).

The all-of company offers dealt with the listed (and therefore liquid) PEXA shareholding and the BCM sale process somewhat differently. The bidders structured their offer consideration to best suit the configuration of the business they ultimately sought to acquire. For example, in the case of the Carlyle Group and D&D offers for Link:

• The Carlyle Group was content to distribute Link’s shareholding in PEXA to Link shareholders as part of its offer consideration, thereby reducing the effective cheque size for the acquisition; and
• D&D was able to incorporate a contingent value component linked to the proceeds of any sale of the BCM business into the structure of their offer (while retaining Link’s shareholding in PEXA).

Sources of funding for public mergers and acquisitions

Where cash consideration was used, it came from a variety of sources.

2021 showed a resurgence of bidders funding their acquisitions using at least a portion of their existing capital, with 85% of bidders doing so, reflecting the surprisingly strong balance sheets holding up through 2021.

The number of transactions establishing new acquisition facilities (for the most part, secured debt facilities) increased from the 27% seen in 2020 to 39%, likely explained by the continued access to cheap debt for bidders. Several bidders used a combination of existing capital and new debt facilities.

Larger deals that used a mixture of funding sources in 2021 included:

• AusNet Services / Brookfield-led consortium – $10.2 billion funded from existing cash reserves and a syndicated facility agreement with various banks;
• Boral / Seven Group – $9 billion funded from existing cash reserves, undrawn facilities and a new unsecured syndicate term loan facility; and
• Spark Infrastructure / KKR-led consortium – $5.1 billion funded from existing cash reserves and secured debt facilities.

By the same token, it is not surprising that only one bidder, Aussie Broadband in its proposed acquisition of Over the Wire, undertook an equity capital raising to fund its acquisition – strong balance sheets, cheap debt and high equity prices pushed bidders toward more direct consideration alternatives.  

Source of funds