The recent takeover contest for control of Australian Leisure & Hospitality Limited (ALH) between Bruandwo (the Woolworths/Mathieson vehicle) and CMM Hotel & Retail Investments (the Coles Myer/Macquarie Bank vehicle) generated extensive media coverage in Australia as the two bidders competed for control of the company pushing the price well beyond the range assessed by the independent expert.
In this brief article, we examine some of the tactical lessons that emerge from that contest.
Scheme v Bid
Prior to the bid, it was generally thought that a scheme of arrangement was too cumbersome to be effective to compete against a takeover bid, particularly an unconditional bid which could offer immediate payment (as was the Bruandwo bid). The ALH takeover suggests that this will not always be the case.
The CMM scheme proposal was 'unconditional' in the sense that it only required shareholder approval (50 per cent of the shareholders voting and 75 per cent of shares voted at a meeting) and court approval. CMM was taking all other risks, such as material adverse changes and any regulatory and third party approvals.
The key hurdle was whether CMM could gain the 75 per cent of votes needed.
Voting at scheme meetings in Australia depends to a large degree on the level of interest (or apathy) amongst shareholders. Generally, approximately 50 per cent to 70 per cent of shares on issue are voted at scheme meetings. On that basis, Bruandwo's 16 per cent stake might have been seen as potentially a blocking stake which would mean that successfully proposing a scheme or arrangement would be extremely difficult.
However, in this case, the concentration of shares in the hands of a relatively small number of institutions and arbitrageurs meant that CMM proposal (and the earlier Newbridge acquisition proposal) had a good prospect of achieving the necessary votes. To counter the Bruandwo stake, votes in favour of the scheme would have been required from 48 per cent of issued shares (that is, three times 16 per cent to ensure the votes of 75 per cent of the shares voted were obtained). Given the state of ALH's register, this target was achievable. In fact, within less than two days after Bruandwo's bid was successful, Bruandwo received acceptances which took its holding to over 73 per cent of issued shares, which emphasised the concentration of shares in ALH.
What about immediate payment? It was claimed that Bruandwo's offer was worth five cents per share more than the CMM proposal purely on the time value of early payment. However, this overstates the importance of the factor, as delayed payment means the bidder enjoys the time value of the consideration, enabling it to compete on price.
Therefore, the ALH contest provides an illustration of a scheme proposal being a realistic alternative to an unconditional takeover bid.
A Starting Stake Of 16 Per Cent Is Good, But 19 Per Cent Is Better
Bruandwo's pre-bid stake of approximately 16 per cent would have prevented a rival bidder achieving the 90 per cent threshold to effect compulsory acquisition following a takeover bid. However, given the concentration of shareholdings on the ALH register, it was not enough to deter a scheme of arrangement.
A larger stake would have put Bruandwo in a stronger position, particularly if its stake had been more than 19 per cent. In that case, Bruandwo would have also been able to use the three per cent in six months creeping rule and could have crept to up to 22.9 per cent by the time of any scheme meeting proposed by CMM. That would have meant the chances of a scheme being successful would have greatly diminished.
Conditional Variations Are Acceptable If Clearly Explained
At several points in the contest, Bruandwo announced that, if it achieved an acceptance level of 20 per cent or 50 per cent, it would increase its offer from $3.15 per share to either $3.40 or $3.50 per share. The legitimacy of this tactic was challenged by CMM in the Takeovers Panel on the basis that, given the bid was unconditional, promoting Bruandwo's bid as a $3.50 bid was potentially confusing to shareholders who may not have appreciated that they would only receive the original price of $3.15 if the threshold was not met.
In considering this technique for the first time, the Panel decided that, provided the effect and risk of such informal variations are clearly articulated, there is nothing unacceptable per se with such a variation. However, the Panel is considering these techniques further and may issue further guidance to the market.
Undue Time Pressure Is Unacceptable
Bruandwo announced, at one point, that if it received acceptances of more than 20 by 6.00 pm that day, it would increase its bid and, if it did not, it would close its bid and then seek to frustrate the proposed CMM scheme of arrangement. As this announcement was made at 2.15 pm, shareholders and the market had less than four hours (at most) to react.
During the four hour period, CMM complained to the Takeovers Panel, which met and decided that this time pressure was unacceptable. A key objective of the legislation is to give shareholders a reasonable time to consider proposals. The Panel forced Bruandwo to extend its bid for seven days.
In light of this example, it will be risky for bidders to try to impose time limits of less than seven days, unless there are exceptional circumstances that would make such a time limit reasonable.
Part of the Takeovers Panel proceedings concerned the need to disclose any acceptance facility that Bruandwo or its agents or advisers had in place. An acceptance facility is an arrangement whereby shareholders may authorise an intermediary to effect an acceptance on their behalf once a particular condition is satisfied (generally the bidder reaching a particular shareholding threshold).
In this case, the Panel considered these facilities for the first time and decided that the use of them was acceptable, provided there was a high level of detail disclosed about the facility's operation and the number of shares accepted under the facility. This was consistent with the daily obligations on a bidder to disclose 1% movements in holdings during a bid period.
Disclosure Of Rival Bids
One point taken by Bruandwo in the Panel proceedings was that CMM should be required to respond to the latest Bruandwo bid at least three business days before the close of the Bruandwo bid. It was argued this was consistent with the objective of ensuring a reasonable time for shareholders to consider a bid, particularly as CMM had announced it would respond before Bruandwo's bid closed and urged ALH shareholders not to accept the bid in the meantime.
The Panel rejected this argument on the basis that there was sufficient commercial pressure on CMM to respond in sufficient time or risk ALH shareholders accepting Bruandwo's rival bid and that this was not a part of Australian takeover practice. Therefore, the Panel did not see fit in this case to invoke any regime governing the finalising of rival bids at the end of a long takeover period (as is the position in the UK).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.