Top 10 Developments In M&A In 2006

Throughout 2006, the size and pace of private equity deals has steadily increased. Solid investment inflows and relatively benign credit conditions have prompted funds to become more audacious in their targets, with the media sector recently becoming flavour of the month (see below). With deals to date being favourably received by the market, takeovers law and policy in the public-to-private realm has yet to be tested, but watch for interesting developments in 2007.

After a period of relative unpopularity, schemes of arrangement have returned to the fore. A number of transactions in 2006—including Schneider Electric’s successful acquisition of Citect Corporation, and Peabody Energy’s successful acquisition of Excel Coal—have shown that, appropriately structured, schemes can be sufficiently flexible and responsive to be effective against takeover bids and other threats in competitive scenarios.

The seldom-used ‘Pacman’ defence makes a return to the Australian corporate landscape following AGL’s counter-punch to the hostile bid by Alinta. The Takeovers Panel (Panel) intervenes, imposing non-waivable conditions to the bids which effectively set up a ‘race to 50%’. Some commentators suggest that utilisation of the defence bought the target valuable time and changed the momentum of the deal. It remains to be seen whether ‘Pacman’ returns (again) in 2007.

Following a series of Federal and High Court actions in the Re Austral Coal matter, in which the constitutional validity of the Panel was called into question, the Commonwealth Government tables the Corporations Amendment (Takeovers) Bill (Cth) 2006, tackling a number of technical shortcomings in the law. In doing so, the government affirms its ongoing commitment to the Panel, an implicit endorsement of the latter’s achievements since being ‘revitalised’ in 2001.

The Panel proves that it is willing to dig beneath the surface to give full effect to the associate provisions of the Corporations Act. In Re Orion Telecommunications, the Panel was prepared to find, on the evidence, that there was an undisclosed association giving the associates voting power in excess of 20 per cent, and ordered the vesting of the excess shares in the Australian Securities and Investment Commission for sale. This and other similar decisions demonstrate how the Panel is achieving its policy objectives in areas which have been notoriously difficult to litigate.

6. Deal protection increases in sophistication

Bidders in negotiated transactions continue to employ a range of deal protection measures, including break fees, blocking options, exclusivity and no-shop provisions. However, the Panel clamps down on a ‘no shop/no talk’ provision with no fiduciary out in the Re Axiom Properties matter, demonstrating that there are still limits to be observed. Some bidders are prepared to offer ‘reverse break fees’ to secure opportunities. Deal protection devices are also successfully employed in schemes of arrangement, providing a measure of economic protection to acquirers without affecting voting majorities.

There was a spate of activity in the media sector in the second half of 2006 ahead of legislative changes scheduled for 1 July 2007. Deals included joint ventures, stake acquisitions and other significant transactions involving channels Seven and Nine, Fairfax, Rural Press, West Australian News, Macquarie Media and Southern Cross Broadcasting. In the Seven and Nine transactions, private equity played a major role, demonstrating that it may become a viable source of finance in other ‘non-traditional’ sectors in 2007.

Despite parliament’s clear intention that the Panel should have more or less exclusive jurisdiction over disputes between parties in takeovers, 2006 showed that courts may still play an active role. The litigation in Re Austral Coal aside, this year witnessed the active use of judicial proceedings in the Toll/Patrick takeover, as well as concurrent proceedings in the court and in the Panel in the Tower Software matter. Going on this trend, the delicate balance between courts and the Panel in bids, schemes, and other corporate control contests, is likely to be further tested in 2007.

While the procession of outward-bound investment by Australian companies in recent years has received much attention, 2006 has also seen foreign acquirers return to the Australian market with vigour. Peabody Energy, Tullow Oil, Hospira, Danaher Corporation, CEMEX and SvitzerWijsmuller Marine, as well as numerous foreign private equity houses, have all announced or completed deals with significant Australian targets, and most recently, Qantas. Changes to the capital gains tax rules affecting foreign interests in Australian companies are likely to trigger further M&A opportunities, prompting some commentators to wonder whether even the most iconic Australian companies will escape the attention of overseas acquirers in 2007.

Within the space of 12 months, the competition landscape changed significantly. Earlier in 2006, the Australian Competition and Consumer Commission (ACCC) was promoting the use of undertakings to get mergers over the line. More recently, the ACCC has suggested changes to bolster the undertakings and divestitures regime: the immediate appointment of an independent administrator to manage the operation of divestiture assets until they are sold, enabling the ACCC to unilaterally modify undertakings given by companies where there has been an extreme failure to comply, or possible imposing an obligation of ‘good faith’. As M&A activity leads to increased concentration in a number of industries, so too will there be an increase in the role played by the ACCC in 2007.

For more information please contact any one of our partners in our Mergers & Acquisitions team.

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