Top 10 Australian Public M&A Predictions for 2015

Source: DLA Piper, by David Ryan, Lydon Masters and Mark Burger

Top 10 Predictions for 2015:

1. RETURN OF THE MEGA DEAL
The mega deal is back. The shift in strategic direction by companies worldwide from one of organic growth with core business focus to higher risk strategies of diversification will likely create further opportunities for significant transformative deals as high-performing Australian assets continue to attract interest. Look out for big deals in the IT/technology, agribusiness and media spaces in particular, as well as consolidation in the oil and gas/ resources sector as a result of the falling commodity prices.

2. COMPETITIVE BIDS
In 2014, around 25% of announced deals attracted multiple bidders. We expect this percentage to increase in 2015 as bidders compete for a decreasing pool of strong performing assets. Interested bidders will need to have a well-conceived deal strategy to enable them to efficiently respond to unwanted approaches by other bidders and unfavourable conduct by activist shareholders. A good example was Allan Gray’s attempt to block the Roc Oil/Horizon merger.

3. CASH IS STILL KING
Cash is still king. Of the competitive bid scenarios we saw in 2014, initial suitors offering scrip were in most cases trumped with an all cash offer, such as the Roc Oil deal. We predict that bidders will look to take advantage of stronger balance sheets by offering cash consideration to improve their chances of coming out of the competitive auction process triumphant. The continuing volatility of the international capital markets will continue to weigh against the attractiveness of scrip consideration.

4. JOINT BIDS
There were a number of high-profile joint bids in 2014 such as Wilmar International and First Pacific’s bid for Goodman Fielder and Kohlberg Kravis Roberts and Pacific Equity Partners proposal for SAI Global. We expect to see an increase in joint bids in 2015 from bidders whose interests align. Notwithstanding high asset valuations, bidders will likely adopt creative and “out of the box” measures to obtain and share upside in acquiring joint control of strategic assets.

5. STAKE-BUILDING DEVICES
As first mover advantage declines, bidders will look to increase deal certainty through securing shareholder support early on in the bid process. We expect to see a range of creative deal-protection devices structured to take into consideration the competitive environment.

6. SCRUTINY OF DEAL PROTECTION DEVICES
Deal protection devices will necessarily remain standard practice in the competitive public M&A environment. These devices, which will be increasingly creatively structured to protect against bidder risk and in many cases unseen and untested, will naturally attract greater regulatory scrutiny.

7. CHINESE M&A PIPELINE
The Chinese Government has relaxed its approach towards approving outward investment. The Australian Government will also later this year afford Chinese investors the same concessions afforded to Korean and Japanese investors. These changes to the regulatory environment will encourage Chinese inbound investment in Australia and in particular, we expect Chinese investors to drive foreign inbound mid-market deal activity.

8. INCREASED FOREIGN INBOUND INVESTMENT
The Australian M&A market will reap the benefits of an improved US economy and weaker Australian dollar in the form of renewed US investor interest in Australian assets. The reported widespread US investor interest in Network Ten is indicative of this. The Australian Government has also significantly increased the monetary thresholds for which Japanese and Korean investors are required to get approval to invest in Australian assets (to bring them in line with those concessions currently afforded to US and NZ investors). We expect this will lead to a rebound in foreign inbound investment from Japan and for Korean investors to redirect their significant M&A appetite towards Australian assets.

9. TRUTH IN TAKEOVERS STATEMENTS
The truth in “takeover statements” will feature prominently as stakeholders try to generate and maintain momentum for their bid. However, there is a limit to what can be done to procure such statements. Overstepping these boundaries may result in Takeovers Panel intervention, as was the case in Ambassador Oil and Gas Limited.

10. REVERSE BEAR HUGS & TACTICAL DISCLOSURE
Although not required, target boards have traditionally disclosed initial highly conditional non-binding indicative proposals, which previously opened it up to “bear hugs”. This has changed in recent times in light of ASX guidance indicating that such disclosure is not required. Despite this, we expect target boards will revert back to disclosing proposals for strategic reasons, including to avoid getting shareholders off-side and to force the bidder’s and other interested bidder’s hands.

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