Australia: Deal structures – Return of the on-market bid

M&A Year in Review

As in previous years, schemes were the structure of choice for mega-deals (over $1 billion), while the lower end of the market clearly preferred takeovers. Interestingly, 5 of the 23 takeovers in 2015 were on-market bids – a significant increase from previous years. Bidders generally prefer off-market takeovers if their purpose is to achieve total or majority control. However, on-market bids can be a useful structure for bidders to quickly increase their stake in the target, even without a target board recommendation.

Takeover bids were back in favour in 2015, with around 60% of deals in our sample proceeding by takeover and 40% by scheme. However, there was a clear preference for schemes in the mega-deals space, with 80% of deals over $1 billion proceeding by way of scheme (noting the interesting tactic of Brookfield in having both a takeover and scheme on foot in its quest for Asciano).

flexibility to increase price, among others). Matching deal structure to a particular transaction is what will influence success – that is, transactions better suited to bids will not necessarily succeed as schemes – and vice versa.

One aspect of deal structure that was notable in 2015 was the increased use of on-market takeover bids.

On-market bids require the bidder to appoint a broker to acquire shares on-market on an unconditional basis. This structure has traditionally not been favoured by bidders given concerns that such unconditional bid structures could result in the bidder not acquiring the 90% interest needed to proceed to compulsory acquisition or not even reaching 50% to ensure control. 2015 saw five on-market bids (up from two in 2014) and if achieving a 50% or 90% acceptance level is important, these bids demonstrate that such concerns are well founded.

In four of these on-market bids, the bidder did not succeed in acquiring even 50% of the target and in the case of G8's on-market bid (which it launched concurrently with a scrip off-market bid), G8 did not acquire even one share under this structure. The exception was Auctus Chillagoe's 100% acquisition of Atherton Resources. However, the Auctus Chillagoe takeover could be considered an anomaly as it was Auctus Chillagoe's third bid for the target, it was priced at a significant premium (45%) and had the support of two shareholders which were in liquidation and which held 63.12% of the target's shares. The board recommendation that came with this bid was also predicated on the two shareholders selling into the bid, indicating the influence that these shareholders had on the outcome.

On-market bids can be attractive from a timing perspective as they allow a bidder to acquire target shares on-market immediately following the announcement of the takeover. While none of the other on-market takeovers were recommended by the target board and no other bidders were able to obtain a controlling interest through this structure, all of these bids (other than G8 Education's on-market bid for Affinity*) resulted in the bidder increasing its interest in the target from between 17% and 20% to between 46% and 48% in six to seven weeks.

In such circumstances, a failure to obtain a target board recommendation may not be a major obstacle for a bidder for whom success means something less than a 100% or even a 50% shareholding. An interest of 46% or more in a widely-held listed company will usually deliver effective control to the bidder given the voting turnout rate at an ASX-listed company shareholder meetings is often under 60%. Obtaining a holding of approximately 46% also puts the bidder in a good position to use the 3% creep provisions to get to 50% in the next 6 to 12 months, or to use this position to launch a further control transaction in the future.

Accordingly, while an on-market bid will never be appropriate for bidders with regulatory conditions or a need to guarantee control and consolidation, it can be an effective structure where the bidder does not have a board recommendation and is looking to increase its shareholding above 20%.

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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