Australia: Public-To-Private Takeovers — Aligning The Planets

Last Updated: 28 January 2007
Article by Rodd Levy

The private equity phenomenon has received an enormous amount of attention in the past six months in Australia. It seems that hardly a day goes by when there is not media speculation of a privaty equity-driven transaction affecting a well-known Australian business. The public’s imagination has been captured by a handful of very significant public equity proposals including the KKR lead consortium proposal for Coles Myer and the recent announcement made by Qantas about a proposal by a Macquarie lead consortium.

However, when the actual transactions are considered, private equity takeovers remain a rarity in Australia. As this article attempts to demonstrate, in order for a public equity proposal to lead to a successful takeover transaction, various significant factors need to be aligned.

Recent Transactions

By 30 November 2006, on my calculations, Australia has experienced six successfully completed public-to-private transactions and there are four more which are pending or have been announced. For this purpose, I am excluding possible transactions which have been announced but did not, or have not yet, resulted in any formal agreements. In that last category are the Coles Myer and Qantas proposals.

The six transactions that have been successful are:

  • Just Jeans / Catalyst (2001)
  • Ausdoc / ABN Amro (2003)
  • Sabre Group / AMP Henderson (2003)
  • Freedom Furniture / Management (2003)
  • Tempo Services / Pacific Service Solutions (2004), and
  • Affinity/Colorado (2006).

The other transactions which have been announced but are still pending include DCA Group / CVC, Flight Centre / PEP, Rebel Sport / Archer and Global Television / Catalyst. All of these have been announced in recent months.

Common Factors

Of the transactions that have been successful it is clear that, with one exception, each transaction was supported by the target company. Usually, there was also a major shareholder in the company who was a keen seller. These factors existed in the Just Jeans, Ausdoc, Sabre Group and Tempo Services transactions. In those cases, the company conducted a sales process, supported by the major shareholder, which then led to the private equity firm making its proposal.

One exception is Affinity’s bid for Colorado earlier this year. However, even though that bid was initially not recommended (prior to the increase in the amount offered), Colorado had announced a ‘strategic review’ and Affinity had conducted some limited due diligence before it launched its bid.

In the other pending transactions there was also support from the company or the major shareholders and, in most cases, the company had conducted a process before the proposal was received. This was the case for the transactions involving DCA, Flight Centre, Rebel Sport and Global Television.

The willingness of the target company to participate can distinguish the largest private equity proposal in Australia, the Coles Myer proposal. In that case, the board had not solicited any approaches, nor did the company have any major shareholders on its register to agitate for a process to be commenced.

What of the Future?

Despite the rarity of public-to-private transactions in Australia—and at the risk of being proven wildly optimistic—I believe that we will see more public-to-private takeover bids conducted in Australia.

I think there are several reasons for this conclusion:

  • Selling to private equity is now a more acceptable form of transaction for target company directors. Previously, there was a perception that private equity bidders would only pay low prices for assets. However, recent transactions have shown that they are willing to pay at least as much, if not more, than trade buyers.
  • For that reason, selling to private equity no longer carries a stigma for the directors that they are handing over the keys of the company to someone else who brings no operational synergistic benefits.
  • The weight of money behind private equity is creating pressure on the relevant firms to invest their money in order to generate returns for their investors and for their management. The targeted internal rates for return for private equity firms are therefore presumably decreasing over time.
  • These factors appear to be causing private equity firms to be more willing to take on greater risk than previously. The Affinity bid for Colorado is a classic example where the private equity firm was willing to make a hostile bid and purchased a significant stake in the target company (19 per cent) prior to its bid being made. It was also prepared to declare its bid free from conditions before it reached the 90 per cent compulsory acquisition threshold (though, as history shows, it paid a price by leaving itself open to a spoiler purchasing a blocking stake).

Whether these factors actually cause the planets to align more frequently, only time will tell. However, overseas experience suggests that private equity takeovers will be more common.

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.

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