Private equity (PE) purchasers made up a relatively small proportion of bidders in public deals in 2015. 12.5% of deals from our sample in 2015 (5 out of the 40 deals) involved PE bidders (largely consistent with 2014) and the average deal size was a relatively modest $126 million. However, this was not entirely reflective of private equity interest in public M&A targets as these figures did not take into account approaches made by PE houses which did not ultimately culminate in an announced transaction – including for example, U.S. private equity firm Providence Equity Partners' indicative proposal for iSelect.com.au and CHAMP Private Equity's consortium approach (with Sigdo Koppers) for Bradken Limited.
Anecdotally, PE bidders have struggled to compete against trade buyers in auction processes, largely because they are generally unable to take into account business synergies in their pricing. (One notable exception last year was Anchorage Capital Partners' successful takeover of Affinity Education Limited, which it won after a hard fought battle against rival bidder G8 Education Limited (see case study following). Even where there is no rival offer for the target, private equity proposals for listed targets often do not result in a binding proposal (for example the rumoured private equity proposals for Treasury Wine Estates and Pacific Equity Partners' tilt at SAI Global), often because of the investment discipline exercised by PE houses and possibly also due to a level of scepticism by target boards on value offered by PE bidders.
This is not to say that private equity players were not active in Australia in 2015 – strong credit and equity markets saw plenty of PE activity in private acquisitions and exits. Examples of significant transactions in 2015 included the completion of Apollo's acquisition of 50% of CIMIC's construction services business, the acquisition of GE Finance's Australian consumer finance business by a consortium which included KKR & Co and Varde Partners, the continued activity in the real estate sector by Blackstone, and the placement by Santos of shares to Hony Capital in an effort to thwart a takeover bid from Sceptre Partners.
With global equity markets experiencing a shaky start to 2016 and the prospect of softer share prices, we expect to see more private equity interest in the public M&A sector this year. Whether or not this activity translates into concrete deals will very much depend on whether target boards view these approaches as opportunistic and not representative of true value, or as opportunities to deliver returns to shareholders in difficult market and economic circumstances.
Affinity Education Limited:4 how private equity trumped a trade buyer
It is not often that a private equity bidder outbids a trade buyer in a contested takeover, so the takeover bid for Affinity Education Limited is an interesting case study.
G8 Education Limited, a childcare education provider, made an unsolicited scrip takeover bid for competitor Affinity Education in July 2015, at an implied valuation of $0.70 per share. In August, unprompted, G8 increased its scrip offer and announced a parallel on-market cash takeover offer at $0.80 per share, and declared both the scrip offer and cash offer final. G8 also held 19.9% of Affinity at the time, which appeared to give G8 an unassailable position.
Affinity sought a "white knight", which appeared in the form of Australian private equity house Anchorage Capital Partners. Affinity and Anchorage announced a novel alternative proposal to the market, under which Anchorage would acquire all of Affinity's assets, and the consideration it paid (equivalent to $0.90 per Affinity share) would be returned to Affinity shareholders through an equal access buyback. The buy-back would have required an ordinary shareholders resolution, (that is, a 50% approval as opposed to the 75% approval which would have been required under a scheme of arrangement) – this was important for the success of the structure, given that G8 had a shareholding of 20%, which was likely to have been able to block a scheme.*
Concurrently, Affinity commenced takeover panel proceedings against G8, arguing that G8 was associated with a number of Affinity shareholders that had recently acquired shares, some of whom accepted within hours of the G8 offer opening, and had an understanding with such shareholders that they would accept G8's takeover offer. The Panel agreed, and ordered G8 to dispose of any shares it had acquired from those associates above the 20% takeovers threshold and to provide withdrawal rights for other shareholders who had accepted G8's offer.
The combination of the Panel proceedings and G8's strategy to declare its offer final eventually left G8 boxed in. G8's "best and final" statement, unlike some that we have seen in the past, did not include an exception for a superior offer emerging. G8 agreed to support the Anchorage proposal, which enabled Anchorage and Affinity to flip to a scheme of arrangement structure at an increased price of $0.92 per share.
1Corrs acted for Affinity Education Limited on this transaction.
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