2016 M&A Review

2016

M&A YEAR IN REVIEW A deal survey with a difference

This is a deal survey with a difference Our review looks beyond statistics to consider what really matters to bidders and targets in doing an M&A deal.

Corrs public M&A database at your service – happy to assist with any statistics you need With our new and punchier format we have not covered all the topics that have been addressed with the same detail as in previous years. However, our underlying analysis has remained as detailed as ever and we have a comprehensive database relating to all takeovers and schemes from 2011 to 2016. Any of the Corrs M&A team would be delighted to assist and respond to specific queries on deal statistics and market trends relating to public M&A activity, including deal structures and pre-bid stakes, rival bid strategies, target engagement, announcements, recommendation, pre-bid strategies, deal protection (such as lock up devices and break fees), bid conditions, truth in takeover statements, tiered bid structures, getting to compulsory acquisition, sector activity, consideration, bidders and foreign investment.

Please feel free to contact a member of the Corrs M&A team for any queries you may have.

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2016 Corrs M&A year in review – Our top 5 The Corrs M&A team is pleased to present our annual review of public M&A activity in Australia, which is now in its 6th year.

Sandy Mak, Editor 2016 was a year of highs and lows in M&A – the highest number of outbound Chinese M&A deals globally contrasted starkly with one of the quietest years in Australian public M&A since the inception of our review in 2011. Global uncertainties no doubt contributed to the lower number of transactions this year – the unanticipated outcomes of the Brexit vote and the US election kept transaction volumes down for the greater part of the year.

In a year of significant change, however, it is good to know that some things have stayed the same – pre-bid stake strategies remained consistent, competitive bids were an expected feature of a limited buyer’s market and deal timelines were generally unchanged. However, some findings surprised us – such as the likelihood of early disclosure of an approach by a target.

We hope you enjoy this year’s review and if you would like a more detailed analysis of any specific aspects of our review we would be delighted to assist.

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Our top 5 We have highlighted the 5 key issues in relation to public M&A activity, developments in market practice and strategies that make a difference to bidders and targets in getting a deal done.

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2016: The calm before the storm?

The rooster crows before sunrise breaks the dawn

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Pre-bid strategy

Competitive Bids and Deal Protection

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05 The End Game

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Key statistics

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38 Contacts

Methodology Page

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Christian Owen Ph +61 8 9460 1708 christian.owen@corrs.com.au

Russell Philip Ph +61 8 9460 1673 russell.philip@corrs.com.au

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2016: The calm before the storm?

2016: The calm before the storm?

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2016: The calm before the storm?

Christian Owen and Russell Philip

2016 was a year of significant uncertainty, with events like Brexit and the US election dominating sentiment in global capital markets. Against that backdrop, it is of no surprise that 2016 was one of the quietest years for public M&A activity since we started this review in 2011.

There was a continued slide in the volume of public M&A deals above $25 million – being some 7.5% lower than the volume of deals surveyed in 2015 and 39% lower than those surveyed in 2011 – as well as a significant fall in overall deal value. Unlike previous years, no one industry sector dominated public M&A activity during 2016, although there was a noticeable increase in activity in the engineering, software and consumer services sectors.

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Total deals above $25 million 2011 – 61 2012 – 56 2013 – 34 2014 – 55 2015 – 40 2016 – 37

Our review also showed: Whilst resource sector deals1 continued to represent the largest proportion (by volume) of our sample in 2016 at 21.6%, the resources sector no longer dominates the volume of Australian public M&A activity like it once did. The average value of resource sector deals in our deal sample was also significantly lower than other industry sectors.

Overall deal value was down by around 40% from 2015 levels,2 with a noticeable fall in the number of “mega deals” (deals over $1 billion) to 4, down from 11 in 2015.

The largest deals were in the transportation (Asciano ~$9b) and consumer services (Tatts Group ~$6.5b) sectors. Excluding those two deals from our sample would have seen overall deal value decrease by some 79% from 2015 levels.

The trend of increased levels of domestic public M&A activity continued with Australian bidders representing almost 65% of bidders in our deal sample, although the

average premium paid by foreign bidders in our deal sample (being 68.6%) was significantly higher than that offered by Australian bidders (being 27.7%). Chinese bidders were noticeably down on previous years, with only one bid being made by a PRC bidder in 2016 which was (unlike previous years) outside of the resources sector.

Cash continued to be the most common form of consideration offered during 2016, with 59.5% of deals in our sample offering “cash only” consideration, compared to only 18.9% offering “scrip only” consideration. Debt funding was involved in 40% of the deals surveyed that offered some form of cash consideration. Dividends continue to be used as a way to bridge value gaps, with 8 of the deals in our sample involving the payment of a dividend to target shareholders (although none of them involved the introduction of a dividend after announcement to sweeten the deal to win a target board recommendation).

1 “Resource sector” includes the mining and metals and energy sectors.

2 We removed the Asciano transaction from our 2015 results, as the transaction only completed in 2016.

The value of deals for 2016 would have been lower still if the Asciano transaction was only recognised in 2015, being the year in which the transaction was announced.

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The resource industry – Down but not out Whilst still the most active industry sector for public M&A activity, there was a continued slide in the proportion of resource sector deals comprising our sample, significantly down from 2015 levels where resource sector deals made up almost half of our deal sample. Deals in metals and mining represented 18.9% of our deal sample in 2016 (down from 25% in 2015) and deals in the energy sector comprised only 2.7% of the sample (down from 12% in 2015). Average deal value in the resource sectors was $73.8 million compared to the average outside these sectors of $812.4 million, reflecting that public M&A activity in the sector was confined to the junior end of the market.

Not surprisingly, given the uncertainty created by events like Brexit, our results show that gold was the most active of all resource sector deals in 2016 with transactions involving gold miners making up 37.5% of this year’s resource deals. However, the largest public markets transaction in the sector was in lithium, being the merger between General Mining Corporation and Galaxy Resources.

With the increased focus on battery

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technology, we expect to see more activity in lithium and other “battery” focussed commodities (such as graphite and cobalt) in 2017.

Whilst public M&A activity in the resources sector remained subdued, there were a significant number of project level transactions announced during 2016 involving the divestment of non-core assets. Notable examples include Evolution Mining’s $880 million purchase of gold and copper production assets from Glencore’s Ernest Henry operation, as well as Anglo American’s sales process in respect of its Queensland metallurgical coal assets. We expect this trend to continue during 2017 as larger companies continue to look to improve their balance sheets. Already we have seen energy companies like Origin and Santos announce plans to hive off components of their businesses, which are expected to be major capital markets transactions during 2017.

The broadening out of the Australian public M&A landscape Outside of the resources sector, public M&A activity during 2016 was well spread across a range of industries, including the transportation, engineering services, software and consumer services sectors.

The transportation industry claimed the largest deal value for 2016 of $8.9 billion, with Brookfield/Qubeled Australian Logistics Acquisition Investments Ltd finally acquiring rail and port operator, Asciano.

With the continued low interest rate environment, we anticipate that transport and infrastructure assets will remain of interest to prospective foreign investors, although identifying attractive targets will become increasingly difficult and the acquisition process itself more competitive.

Foreign buyers have continued to target Australian engineering firms whilst they trade at the bottom of the cycle. Spanish-led construction group CIMIC (formerly Leighton Holdings) took out the title as the most active and aggressive public M&A bidder in 2016, with two unsolicited (and successful) bids for UGL and Sedgman.

CIMIC is off to a fast start in 2017 announcing another unsolicited bid for Macmahon Holdings in January 2017. Other noticeable transactions in the engineering services sector included Japan’s Hitachi Construction Machinery acquiring Bradken for $556 million.

The real estate sector was noticeably quieter than in previous years, with only two real estate sector deals in our sample, with an average deal value of only $319 million. We expect this reflects the strong growth in the Sydney and Melbourne property markets, making it harder for potential investors to find good value in the sector.

Whilst not reflected in our deal sample due to the majority of available targets being privately owned, the agriculture industry continues to attract significant investor interest. Notable transactions during the year included Australian Grains Champion’s multi-billion dollar attempt to corporatise Western Australian grains handler Cooperative Bulk Handling, and the $386.5 million acquisition of S Kidman & Co by Gina Rinehart’s Hancock Prospecting and Chinese real-estate conglomerate Shanghai CRED (in which Corrs acted for the successful bidder).

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Andrew Lumsden Ph +61 2 9210 6385 andrew.lumsden@corrs.com.au

Stephanie Daveson Ph +61 7 3228 9493 stephanie.daveson@corrs.com.au

Lizzie Knight Ph +61 2 9210 6437 lizzie.knight@corrs.com.au

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The rooster crows before sunrise breaks the dawn

The rooster crows before sunrise breaks the dawn

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The rooster crows before sunrise breaks the dawn Andrew Lumsden, Stephanie Daveson and Lizzie Knight In 2016, China’s total outbound M&A volume increased for the seventh consecutive year by US$219 billion, accounting for more than half of Asia Pacific’s outbound volume and, in a first, exceeding US outbound M&A investment.

In this, the year of the Fire Rooster – a year of intelligence, fast pace and anxiety – as the Chinese authorities strengthen their scrutiny of outbound M&A activity and tighten checks on capital outflows – Chinese acquirers are likely to continue to focus on strategic acquisitions in healthcare and tourism in 2017. To realise the full benefits of M&A in these two sectors, bolt-on acquisitions by Chinese investors in vocational training services, for example, aged care and hospitality, is likely to grow in 2017.

In response to heightened concern about regulatory risk, we suspect the formation of consortia (with an underwrite by non-PRC investors) and the potential for the reintroduction of break fees will be more likely.

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Capital outflow controls As predicted in our 2015 M&A Review, the weakening yuan, the slowdown in the Chinese domestic market, and the relaxation of controls on outbound capital saw a drive to seek returns offshore. Indeed, China’s foreign exchange reserves fell by US$320 billion to US$3.011 trillion in 2016 (on top of a record drop of US$513 billion in 2015) and in February this year fell below the all-important US$3 trillion level.

To support China’s reserves, in 2016 Beijing required the State Administration of Foreign Exchange (SAFE) to strictly enforce the US$50,000 limit on outbound transfers coupled with a personal pledge that the money is not being used to buy overseas property, securities or insurance.

In addition, at the end of 2016, new rules were placed on outbound investments by centrally-controlled state firms, including a “negative list” of investment projects in which centrally-controlled state firms would not be allowed to invest.

At this stage the impact of the new rules is one of timing. Anecdotally, provided an acquisition has the requisite Government support, while transfers are delayed (in some cases over a month), the money does flow.

With SAFE in a defacto “approval” role (despite the relaxation on outbound approvals previously undertaken by the NDRC and MOFCOM), heightened concern about regulatory risk may result in the reimposition of break fees to ensure Chinese bidders are confident about their ability to close transactions.

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Regulatory push back Unsurprisingly and consistent with the rise of global populism and increased M&A activity by Chinese bidders, 2016 was also characterised by concern about Chinese ownership of strategic assets and the possible security implications relating to the acquisition of technology and data. Chinese bids to the value of US$35 billion failed in 2016 as a result of this regulatory push back – with the largest number of knockbacks being proposed Chinese acquisitions in the United States.

The Committee on Foreign Investment US (CFIUS) increased scrutiny of Chinese deals for reasons which were not always immediately clear. Anbang Insurance Group’s acquisition of Hotel del Coronado, which is located near a US naval base, fell through after US national security officials opposed the deal. In an unusual move, CFIUS approached Fosun International about a month after it closed on a deal to buy an 80% stake in property and casualty insurer Ironshore for $1.84 billion with concerns about how Fosun would handle professional liability coverage to the US. In the four week period between 22 January and 23 February 2016, three deals were rejected by CFIUS – all in the technology space and all faced undisclosed security concerns, including GO Scale Capital’s proposal to acquire an 80.1% stake in Philips’ Lumileds division, China Resources Microelectronics’ and

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Hua Capital Management’s bid for Fairchild Semiconductor and Tsinghua Unisplendour’s proposal to acquire a 15% stake in Western Digital.

The concerns about Chinese investment in the US, culminated in the recommendation from the USChina Economic and Security Review Commission that CFIUS’s mandate be extended to authorise CFIUS to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of US companies.

Concerns extended to the United Kingdom and Europe in countries without specific foreign investment regimes. For example, listed Shenzhen company Midea Group’s efforts to buy out German industrial robot maker Kuka provoked a political furor in Germany, resulting in Midea offering numerous guarantees on preserving local sites and jobs.

Similarly, Chinese investment in the Hinkley nuclear project in England resulted in intervention by the new British Prime Minister.

Consistent with these concerns in February of this year, Germany, France and Italy requested the EU grant them a right of veto over Chinese high-tech takeovers and a right to intervene in direct investments by state-controlled entities.

The Australian Government broadcast its focus on security matters with the appointment of David Peever (former

Chair of the Minister of Defence’s First Principles Review of Defence) and David Irvine (former director general of ASIO and the Australian Secret Intelligence Service) in 2015, stating:

In the years ahead it will be increasingly important for FIRB to not only have commercial expertise and background to deal with complex commercial transactions but to also have an even greater understanding of the broader strategic issues including national security.

This focus was most prominently seen last year when the FIRB Board unanimously agreed that the sale of Ausgrid to State Grid Corporation and Cheung Kong International posed an unacceptable security risk after consultation with Department of Defence, ASIO and DFAT.

information pertaining to domestic or international investigations, rulings, ineligibilities, or conditions imposed as part of previous foreign investment approvals, or exclusions relating to the purchaser.

For Chinese bidders the lessons from 2016 make it evident that national security is a sensitive area and bidders (as has always been the case for politically sensitive acquisitions) should engage early with FIRB and proactively address key concerns. The Treasurer’s approval for the acquisition of Kidmans by the Hancock/Shanghai CRED consortium is an exemplar of effectively addressing sensitivities.

Recognising the concerns of foreign investors about predictability and transparency of a foreign investment, Treasurer Scott Morrison announced in January the establishment of a Critical Infrastructure Centre and foreshadowed a package of foreign investment policy reforms intended to provide guidance about the national interest test.

The events of 2016 make clear there is increased international interagency sharing of security information and concerns, highlighted by the FIRB checklist that asks applicants to provide details of any relevant

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Closing the deal In a fragile M&A environment concerned with deal completion risk, PRC bidders (whether state-owned, private or otherwise) wishing to invest in Australia need to actively address market concerns.

As we predicted in our 2015 M&A Review, Chinese investors continue to demonstrate flexibility and a willingness to test the waters, being increasingly receptive to a variety of transaction structures including consortium arrangements (for example, on GenesisCare), the acquisition of strategic minority stakes (for example, HNA’s 13% stake in Virgin Airlines) and an appreciation of the political context by offering mitigation measures to preserve jobs and operational independence.

In 2017, we anticipate Chinese bidders will also need to contend with a general wariness of boards and concern about Chinese bidders’ ability to close the deal. Continuing to adopt a flexible approach through the use of break fees paid as upfront deposits, as was the case in Tianqi’s bid for Talison (see Corrs’ thinking piece Reverse break fees payable upfront – The new name of the PRC M&A game), and the

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use of bidding consortia involving non– Chinese entities who in effect provide funding support, will assist to provide comfort that a bidder is committed to closing the deal.

Outbound interest We anticipate that Chinese buyers in 2017 will focus on consumer and leisure opportunities associated with a rising middle class.

Healthcare – going out, bringing in As predicted in our 2015 M&A Review, Chinese acquirers continued to focus on the Australian healthcare market and the healthcare sector globally: GenesisCare – China Resources and Macquarie acquiring a 66.6% stake in cancer and cardiac services business GenesisCare. GenesisCare is Australia’s largest provider of cancer and cardiac care, and the biggest private provider of cancer care in the UK and Spain.

Bio Products Laboratory Limited – China’s Creat Group Corp acquired Bio Products Laboratory Limited – a maker of human blood plasma products in the UK – for US$1.2 billion in one of the largest international pharma acquisitions by a Chinese company.

Gland Pharma and Ambrx – Fosun Pharma made a non-binding offer to buy 96% of India’s Gland Pharma Ltd (focused on injectable drugs) and with a consortium of Chinese companies jointly acquired Ambrx Inc. Epic Pharma – China’s Humanwell Healthcare group also recently bought New York-based Epic Pharma LLC for US$550 million.

From pharmaceuticals to medical products to consumer health, China’s healthcare sector continues to develop at breakneck speed with health spending predicted to rise to US$1 trillion in 2020.

Government support – the PRC Government is actively committed to developing and providing strategic support for the biomedical industry, including pharmaceuticals and vaccines, medical devices and diagnostics.

Australia is an excellent destination for astute Chinese buyers to “go out and bring in” technology and expertise in healthcare. The acquisition of an Australian healthcare company with know-how, trained staff and stringent compliance with Australian regulatory standards will answer the PRC Government’s push to upgrade the “Made in China” brand.

Growth in demand for care is likely to remain strong for a number of reasons: chronic conditions – diabetes and hypertension are proliferating rapidly as the population ages, many more people move to cities, and lifestyles change; affluent middle class – increasing incomes and more extensive insurance coverage improve patients’ ability to pay; demand for treatment – cancer, depression, and respiratory illness remain largely underdiagnosed and undertreated in China. Better and earlier diagnosis, as well as demand for treatment from the middle class will significantly expand the number of patients;

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There’s nothing like Australia – 2017 Australia-China Year of Tourism Chinese tourists spent a record US$164.8 billion overseas last year and as we foreshadowed (see Corrs’ thinking piece Year of the Monkey Riding the Third Wave), in 2016 Chinese investors have set their sights on the fast growing tourism industry, including: China’s HNA (which owns China’s fourth-largest airline, Hainan Airlines) acquired Carlson Hotels (the US owner of the Radisson brand), acquired a 13% stake in Virgin Australia and established a joint venture in China with Spain’s NH Hotels; and Jin Jiang acquired the Louvre Hotels portfolio of brands.

For the year ending 30 November 2016, 1.193 million Chinese tourists visited Australia representing a 19% increase from 2015. Tourism Australia surveyed Chinese consumers about their key considerations when choosing a destination and 45% cited food and wine. Although packaged tours are common, the category known as “free and independent travel” is becoming increasingly popular, especially with younger tourists – an indication that Chinese travellers are interested in different “experiences”.3

Chinese investors accounted for 38% of investment in Australian tourism in 2016 with Chinese investors having already snapped up hundreds of millions of dollars in Queensland tourism assets, including iconic resorts Daydream Island and Lindeman Island, the Sheraton Mirage Port Douglas and Gold Coast hotels such as Palazzo Versace, the Hilton Surfers Paradise, the Sofitel and the Crowne Plaza.

Riding the tourism wave is likely to continue in 2017. At the end of January this year, Dalian Wanda pledged to invest $1 billion for development in the Sydney CBD with Wanda having already acquired a controlling stake in a $900 million-plus Gold Coast property in August that it hopes to turn into a luxury hotel and serviced apartment complex.

As the tourist cycle comes full circle, the announced sale of the Japanese real estate group Cosmos Initia Co Ltd’s Fraser Island Kingfisher Bay Resort, Eurong Beach Resort and accompanying tour and marine businesses means Chinese buyers will have an opportunity to ensure that legions of Chinese tourists in Australia shop, dine and play at a property owned by them.

3 See http://www.tourism.australia.com/markets/market-regions-greater-china.aspx 20

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For the year ending 30 November 2016, 1.193 million Chinese tourists visited Australia representing a 19% increase from 2015.

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Sandy Mak Ph +61 2 9210 6171 sandy.mak@corrs.com.au

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Pre-bid strategy Pre-bid strategy

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Pre-bid strategy Sandy Mak and Marina Pappas

Pre-bid stakes don’t always fit neatly into a statistical analysis. This year (as with last year), our analysis indicates that a pre-bid stake in the target does not correlate statistically with a higher prospect of success. However, our instincts as lawyers and dealmakers tell us otherwise – and when we “drilled down” into the factors underpinning the success or failure of specific transactions, those instincts proved right.

Our survey also considered the vexed issue of “early disclosers” – those target companies that announce an approach before a binding transaction is agreed for tactical or other reasons. The findings surprised us…

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Pre-bid stakes – no “one size fits all” solution 2016 saw a higher percentage of deals with pre-bid stakes in the target (59% compared to 47% in 2015). Perversely, however, bidders were less likely to succeed4 with a pre-bid stake than without one. Deals with a pre-bid stake had a success rate of 84%, while deals without a pre-bid stake had a success rate of 89%.

These statistics are at odds with the advice we generally give our clients – namely, that a pre-bid stake increases (although does not guarantee) the likelihood of success, particularly in takeover bids. Pre-bid stakes deter or disrupt a competing bid and shift the dynamics of target engagement, particularly when it comes to obtaining due diligence access or a target recommendation.

Clearly, this year’s findings required us to delve deeper into the deals beneath the statistics or otherwise be forced to retreat from our long-held views with our tail between our legs. Of 19 deals in our deal survey that began with a pre-bid stake with results known at the time of writing, three failed – two bids and one scheme. When we analysed these transactions more closely, this is what we found: Stakes can bring compromise: In last year’s review, we followed the battle for Asciano between Brookfield and Qube’s consortium and the emergence of their matching

blocking stakes. In October last year, Qube announced it had acquired 19.9% of Asciano, while Brookfield in November acquired a 14.9% stake together with an economic interest in a further 4.3%. Here, the strength of the competitors’ matching blocking stakes engendered a stalemate and effectively were a factor in bringing the parties to the negotiating table (there were also other regulatory issues at play). Their discussions resulted in a successful scheme with a consortium constituted by both Brookfield and Qube under which Asciano’s assets were divided. This deal is illustrative of how pre-bid stakes can alter the dynamics of a transaction and compel the parties to enter into negotiations and reach a compromise.

Stakes can provide an upside, even in failure: South-African backed Growthpoint Properties Australia and Centuria Metropolitan REIT battled it out for GPT Metro Office Fund, with both bidders beginning with pre-bid stakes of 12.98% and 16.10% respectively. Under its off-market takeover bid, Centuria made a cash/scrip offer valuing the GPT Metro securities at $2.48 per security. Growthpoint’s offmarket bid similarly offered mixed consideration valuing the securities at $2.53 and also offered a cash alternative of $2.50. The target’s independent board committee announced its recommendation that

4 In the context of our review, a “successful” scheme is one which has become effective (ie, it has been approved by shareholders and the court). The general rule of a “successful” takeover bid is one where all conditions were either fulfilled or waived and the bid closes, even if the bidder acquires less than 100%.

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the Growthpoint offer was superior.

Centuria subsequently withdrew its bid, however not without participating in the upside of Growthpoint’s cash alternative facility for its entire 16.10% stake. Although Centuria was not ultimately successful in its bid for GPT Metro, it was able to tip into a successful rival’s bid and realise a premium on its stake.

Stakes in schemes are less valuable than stakes in bids in non-competitive situations: The consortium behind SR Residential Pty Ltd (Simonds Family Office Pty Ltd and Roche Holdings Pty Ltd) had a sizeable 39.04% stake in Simonds Group Ltd prior to announcement of their proposed scheme of arrangement.

However, according to a Simonds announcement, following the announcement of the scheme, more than half the shares eligible to vote on the scheme were sold by Simonds shareholders at a price close to or above SR Residential’s offer price, meaning that a number of Simonds shareholders were already afforded the opportunity to sell their shares at a significant premium to the trading prices prior to announcement of the scheme. SR Residential’s offer price of $0.40 per share was a 42% premium to the 30-day volume weighted average price of Simonds shares but a 77% discount to the offer price when Simonds Group Limited floated in November 2014.

It is therefore not surprising that, despite a recommendation from the independent board committee to accept and a finding that the offer was fair and reasonable, proxy votes 26

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received in advance of the scheme meeting indicated that holders of the majority of shares eligible to be voted did not support the proposal, moving the consortium to withdraw its scheme. While the failure of this scheme seems tied to price, it is an example of how a direct holding by the bidder in a scheme context is not as valuable as in a takeover bid as it excludes the bidder from voting (in this case, excluding 39.04% of shares in the target), affording other shareholders a higher proportion of the votes on the scheme and potentially reducing the prospects of success.

By contrast, the success rate for uncontested takeover bids which commenced with a pre-bid stake was 100%.

The key takeaway from our findings remains consistent with our anecdotal experience: pre-bid stakes offer considerable advantages – but only if the deal dynamics are right.

Premature disclosers – majority or minority?

Anyone that has acted for a bidder on a public M&A transaction will know that one of the most frequently debated issues at the outset of a transaction is whether the target company is likely to announce an approach by the bidder. Our advice to clients is to always assume that a target company will release any approach letter to the market – typically for tactical reasons rather than as a result of any legal disclosure requirement.

In the last year, our personal experience as advisers has been that as many targets will be “early disclosers” as not. So we were interested to discover that this year as many as 76% of deals were initially announced by way of a “transaction announcement”, as compared to an “approach announcement”. This represented a slight increase from 2015 where 72.5% of deals were initially announced by a transaction announcement.

The reasons behind a decision to make an “approach announcement” as compared to a “transaction announcement” vary and are not always easily discernible from public information. While the publication of ASX’s Guidance Note 8 on continuous disclosure a few years ago has provided some clarity around continuous disclosure requirements in relation to approaches, some directors continue to have a genuine concern that the board could be criticised for not disclosing an indicative offer. In most cases, however, the decision to announce an approach is driven purely by tactical or strategic considerations, often designed to start an auction for the target or as a prelude to price increase negotiations.

A transaction announcement is an announcement of a binding arrangement between the target and the bidder in relation to either a scheme or takeover. In a takeover context, this could be either an announcement of an intention to make a takeover offer attracting the obligations under section 631 of the Corporations Act or an announcement of a signed bid implementation agreement.

An approach announcement is generally an announcement of an indicative, non-binding proposal, and is usually made by the target.

ASX guidance on naming counterparties to material transactions In July 2016, the ASX released guidance stating that they now expect any announcement of a material transaction, including an announcement of a nonbinding indicative offer (ie, an approach announcement), to also contain the identity of the potential bidder or counterparty.

The ASX considers that if a transaction is sufficiently material to warrant disclosure in accordance with the Listing Rules, the identity of the other party or parties to the transaction will itself also be sufficiently material to warrant disclosure to allow investors and their advisers to understand and assess the impact of the transaction or proposal. It seems to us that there may be instances in which the identity of the party is not necessarily price sensitive and that this guidance was created in reaction to a specific transaction. Nevertheless, when acting for a target, this guidance will have implications when determining whether an indicative approach should be disclosed and what the content of that disclosure should be.

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Jeremy Horwood +61 7 3228 9790 jeremy.horwood@corrs.com.au

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Competitive bids and deal protection

Competitive bids and deal protection

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Competitive bids and deal protection Jeremy Horwood and Lisa Tolhurst

Although there was a decline in the number of competitive deals in this year’s deal survey, competition was fierce in a number of acquisitions of strategic assets. Complex competing transaction structures in 2016 presented a number of target boards with the difficult task of comparing “apples” with “pears”.

Our 2016 deal survey demonstrates that target boards need to exercise caution when assessing the integrity of contrasting competing bids, including consideration and conditionality, and when negotiating deal protection arrangements to ensure they can exercise their fiduciary duties appropriately.

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In 2016 we saw continued strong competition for strategic assets with a number of examples of complex competing transaction structures.

The takeover contests for Asciano and more recently Tatts Group (see separate summaries for these transactions below) both provide excellent illustrations of the challenges listed target boards can face in properly assessing competing, but starkly different, proposals of this type. Both deals are also examples of the impact that deal protection mechanisms and lengthy regulatory approvals can have on the competitive deal process.

Key takeaways for targets: Ensuring the market has sufficient information for competing bidders to put credible alternative proposals forward is critical to promoting an auction.

Target boards can play an important role in pushing bidders to re-shape proposals to maximise the likelihood of success, including minimising regulatory risk.

-- having firm financing commitments in place; and -- keeping requirements for further due diligence as narrow and specific as possible (for example, limited to confirming stated assumptions).

Where transactions have high regulatory risk, a first mover’s advantage is significantly reduced if it cannot structure the transaction to remove or minimise that risk.

Apples and pears In order to ensure they can discharge their fiduciary duties, a target board’s recommendation will ordinarily be made subject to no superior proposal emerging.

However, assessing what constitutes a superior proposal can be far from easy and in 2016, we saw a number of examples of target boards having to assess competing proposals with very different structures and risk profiles.

A second bidder needs to ensure a competing proposal is as unconditional as possible. Steps which can help deliver this include:

Where one or both offers include scrip, the target board is required to evaluate the underlying value of the scrip and grapple with the inherent uncertainty of future performance, market conditions and different business structures. For example, target boards may need to assess the projected synergies which may be realised by the proposed merger or consider how the scrip being offered represents a different investment proposition from a shareholder’s perspective (for example, if the offeror is listed on a foreign exchange).

-- ensuring the accuracy of valuations and any underlying assumptions;

Aside from monetary value, we also saw a number of examples where execution

Key takeaways for bidders: Deal protection mechanisms can be of real value particularly where a second bidder requires material due diligence but ultimately price and execution risk will determine success.

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risk played a key role in a target board’s decision making. Key risks included due diligence, financing and regulatory approvals (primarily FIRB and ACCC).

Target boards need to subject competing bids to detailed scrutiny and will often need to seek specialist financial, tax and legal advice on the relative merits and integrity of competing offers.

Deal protection Deal protection mechanisms continue to be very widely used in Australian takeovers and schemes. Of the 26 deals we surveyed with implementation agreements, 85% included some or a number of contractual “deal protections” such as break fees, no talk and no shop provisions, and notification and matching rights. This is consistent with our previous surveys, as is the general form of those protections.

Target boards still need to exercise caution when negotiating these arrangements, to fully understand their ramifications and to ensure that they do not unduly inhibit the board’s ability to create competitive tension or restrict its ability to meaningfully engage with a second bidder, should one emerge.

For example, in the Tatts process, although the Pacific Consortium had completed some preliminary due diligence in mid-2016, Tatts was unable to grant the Consortium access to further due diligence or otherwise engage in discussions regarding their proposal because the Consortium had not, in the opinion of the Tatts board, presented a superior proposal or one reasonably capable of resulting in a superior proposal.

32

CORRS CHAMBERS WESTGARTH

Regulatory approvals and their impact on competing proposals We continued to see a number of high profile transactions in the public and private M&A space significantly affected by lengthy and uncertain regulatory approvals, primarily FIRB and ACCC approvals. Examples included Kidman & Co (FIRB), Ausgrid (FIRB), Asciano (ACCC) and Tatts (ACCC and State gaming regulators). This significantly diminished the first mover advantage and left initial bidders exposed for lengthy periods of time.

For example, Qube acquired a 19.9% share in Asciano just 15 days after the ACCC released its statement of issues on Brookfield’s proposed acquisition of Asciano, announcing its competing proposal shortly after this. The eventual joint bid by Qube and Brookfield for Asciano entailed a complex deal structure designed to address the ACCC’s concerns, seeing Asciano’s business being split up between the combined consortium members.

In the ongoing Tatts bid, the ACCC approval process arguably gives the second mover, Pacific Consortium, the opportunity to observe how the ACCC’s deliberations unfold before deciding whether or not to make a revised proposal.

Bidders are more often looking to minimise the risk of lengthy and uncertain regulatory approvals by engaging with regulators in advance to formulate structures that are more likely to be acceptable without the need for extensive negotiation.

Tatts Group The Tabcorp bid for Tatts Group, announced in October 2016 and, at the time of writing, unanimously recommended by the Tatts board, would see Tatts shareholders receiving primarily Tabcorp shares and a small component of cash for each Tatts share.

By contrast, the Pacific Consortium’s bid, announced in November 2016, would involve the demerger and listing of Tatts’ wagering & gaming businesses (Wagering & Gaming Co) and the acquisition by the Consortium of Tatts’ lottery businesses for cash – in effect a substantial cash payment and a relatively smaller amount of scrip in the demerged Wagering & Gaming Co. However, notwithstanding the larger cash component and what the Pacific Consortium represented as a higher overall value for its indicative proposal, the Tatts board concluded that it did not represent a superior proposal or one reasonably capable of resulting in a superior proposal. This was because it was predicated on a number of key assumptions that Tatts said were either incorrect, inconsistent with Tatts’ current expectations or unknown, the result of which was that in Tatts’ view the value proposed was inferior to the Tabcorp proposal. In addition, the Pacific Consortium’s indicative proposal was conditional on due diligence and its need for significant as yet uncommitted debt financing involved higher risk.

What is interesting is that in rejecting Pacific Consortium’s proposal, the Tatts board was able to provide some key information in its announcement that could assist the Pacific Consortium in formulating another proposal based on better information, given the extended timetable resulting from the need for ACCC approval.

Asciano Asciano’s board was also placed in the position of comparing second bidder Qube’s cash and scrip offer with first bidder Brookfield’s cash and scrip offer. It concluded that Qube’s offer represented a higher value and therefore represented a superior proposal, partly in light of the “red light” issues announcement made by the ACCC in relation to Brookfield’s proposal (although Qube’s proposal also involved significant competition risk). Asciano also noted that Qube scrip was likely to be more attractive than Brookfield scrip for reasons including Brookfield scrip being less liquid in Australia (it was not listed in Australia and a secondary listing was proposed, whereas Qube’s primary listing was on the ASX) and Brookfield having a significantly different risk profile, governance and management structure.

Asciano’s board encouraged Qube and Brookfield to work together to develop a joint improved, allcash proposal which reduced the ACCC uncertainty associated with both individual proposals. The ensuing discussions eventuated in a successful joint proposal emerging.

Interestingly, in the context of addressing deal protection mechanisms, first mover Brookfield (which itself received a break fee of $88 million when the Asciano board changed its recommendation to the Qube proposal) urged Asciano not to “award needlessly to [Qube] rights and other advantages that, in the present circumstances are clearly not in the best interests of Asciano’s shareholders”. The circumstances listed by Brookfield included the fact that Qube already held a significant investment in Asciano (19.9%). Brookfield said it was preparing an all-cash binding bid and break fees would erode the value of Asciano to the detriment of its current shareholders and necessitate a commensurate reduction in Brookfield’s proposed purchase price. Asciano’s board nevertheless agreed to certain break fees with Qube, although no payment was made due to Qube participating in the revised successful proposal by the Qube and Brookfield consortiums.

CORRS CHAMBERS WESTGARTH

33

James Morley Ph: +61 3 9672 3193 james.morley@corrs.com.au

Jonathan Farrer Ph: +61 3 9672 3383 jonathan.farrer@corrs.com.au

34

CORRS CHAMBERS WESTGARTH

The End Game

The End Game

CORRS CHAMBERS WESTGARTH

35

The End Game James Morley and Jonathan Farrer

The tactics bidders employ to close out an announced deal vary from the carrot – such as price increases – to the stick – such as truth in takeovers statements – used to coerce shareholders into accepting offers or risk the opportunity disappearing.

In past years we have seen bidders seek to use a variety of inventive tactics to assist in successfully completing a deal, including the use of institutional acceptance facilities and price ratchets. However, in 2016 these tactics were used sparingly, potentially as a result of the higher premiums offered and the lack of competitive offers.

36

CORRS CHAMBERS WESTGARTH

Price increases behind closed doors There was a price increase after the deal became public in only 14% of deals in 2016, compared with between 32% and 38% in each of the prior 4 years of our survey. While this could arguably be due to the lack of competitive transactions in 2016 (only two targets in our survey were the subject of multiple bids), there was not a decrease in the size of the premium offered by bidders across all deals. In fact, the premium offered was slightly higher in 2016 than in 2015 (49% and 42%, respectively), suggesting that negotiations on price increases were undertaken confidentially prior to announcement of the transaction.

This may be a sign that, consistent with ASX’s Guidance Note 8, target directors are more willing to keep approaches confidential while they negotiate an agreed transaction (see further comment on page 26 – Premature disclosers – majority or minority?).

Price ratchets not used Price ratchets (where the bidder agrees to a price increase under a takeover offer conditional on receiving an agreed number of acceptances) were not used at all in 2016 (compared with 17% of takeover offers in 2015), potentially due to the higher premium already being included in the offer price.

Institutional acceptance facilities remain uncommon Institutional acceptance facilities were used in only 2 takeover offers in 2016, as opposed to three in 2015 (both equating to 13% of takeover offers in our surveys). This continues the trend of these facilities being used more sparingly than in the past. We also have not seen the emergence of any “target” acceptance facilities which have only been implemented once (by Alesco in response to Dulux’s 2012 offer).

Continued use of truth in takeovers statements Truth in takeovers statements (such as statements that the offer is best and final or will not be extended) were again commonly used in 2016 (47% of takeover offers, the same percentage as 2015). Although our statistics do not indicate a material difference in the time taken to close a takeover offer with or without the use of these statements, these statements are typically used in protracted transactions and therefore a similar overall transaction length tends to indicate that these statements are helpful in closing out protracted deals.

No change in deal timelines Notwithstanding the above findings which generally relate to tactics used in takeover offers rather than schemes, the average time between a transaction announcement and close of the offer was the same in 2016 as 2015 for takeover offers (95 days).

CORRS CHAMBERS WESTGARTH

37

Key Statistics

22

Scheme

Total schemes and bids for 2016

15

Bid

0

5

10

15

20

25

100

80

60

93.75% 40

75%

20

0

38

Bid

Scheme

CORRS CHAMBERS WESTGARTH

Success rate of deals with results known at time of writing

Deal activity by industry sector – 2016

3

Capital Goods

0

Pharmaceuticals, Biotechnology & Life Sciences

2

Diversified Financials

2

Real Estate

1

Energy

4

Software & Services

1

Food, beverages and tobacco

2

Transportation

1

Media

1

Utilities

7

Metals & Mining

13

Other

Contested

16%

Uncontested

Deals subject to competitive bid processes 84%

100

80

60

100%

40

40%

20

0

Schemes

Deals with deal protection mechanisms in 2016

Bids

CORRS CHAMBERS WESTGARTH

39

Deals beginning with a pre-bid stake

11

Bid

11

Scheme

15

Deals without a pre-bid stake

19

Direct stake Option Agreement

2

Pre-bid Acceptance

2

Swap

2

Voting Agreement

0

Different forms of pre-bid stake 3

Other Agreement 0

5

10

15

20

Canada

1 United States

3

1 Cayman Islands

40

CORRS CHAMBERS WESTGARTH

100

Overall

80

Bids Schemes

60

40

Success rates of deals with pre-bid stakes

20

0

No pre-bid stake

0-10%

10-20%

20%+

Division of foreign bidders

Luxembourg

1

China/ Hong Kong

1

Japan

2

South East Asia

2 New Zealand Multiple Countries

1

1 CORRS CHAMBERS WESTGARTH

41

Methodology

The Corrs Chambers Westgarth 2016 M&A Year in Review comprises a deal sample of: 37 takeover bids and schemes of arrangement involving an Australian listed target; announced between 1 January 2016 and 31 December 2016; and with a deal value over $25 million.

A full list of all deals surveyed is set out below.

Information in relation to these deals is current to mid-January (unless otherwise specified in this survey). As at that date, six schemes and three takeovers from the deal sample were ongoing.

The information gathered for our survey was largely obtained from primary sources such as ASX announcements, bidder and target statements and scheme booklets.

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CORRS CHAMBERS WESTGARTH

Target

Bidder

1

Colorpak Ltd

Graphic Packaging International Inc 12/01/2016

Date announced Bid / Scheme S

Final % 100%

2

Sedgman Ltd

CIMIC Group Investments Pty Ltd

13/01/2016

B

100%

3

World Titanium Resources Ltd

African Minerals Exploration & Development Fund II SICAR SCA

18/01/2016

B

69.21%

4

Asciano Ltd

Qube Holdings Ltd

28/01/2016

D

Failed

5

American Patriot Oil & Gas Ltd

Running Foxes Petroleum Inc

23/02/2016

B

Failed

6

Ethane Pipeline Income Australian Pipeline Ltd Fund

7/03/2016

B

100%

7

Asciano Ltd

Australian Logistics Acquisition Investments Ltd

15/03/2016

S

100%

8

Flinders Mines Ltd

TIO (NZ) Ltd

17/03/2016

B

52.64%

9

Pacific Brands Ltd

HBI Australia Acquisition Co Pty Ltd 28/04/2016

S

100%

10

General Mining Corporation Ltd

Galaxy Resources Ltd

30/05/2016

B

100%

11

Patties Foods Ltd

Australian Foods BidCo Pty Ltd

2/06/2016

S

100%

12

Ausenco Ltd

Resource Capital Fund VI LP

14/06/2016

S

100%

13

Diversa Ltd

OneVue Holdings Ltd

14/06/2016

S

100%

14

Gryphon Minerals Ltd

Teranga Gold Corporation

20/06/2016

S

100%

15

GPT Metro Office Fund

Growthpoint Properties Australia

1/07/2016

B

100%

16

Payce Consolidated Ltd Bellawest Pty Ltd

1/07/2016

S

100%

17

Onthehouse Holdings Ltd

Consortium BidCo for OTH

6/07/2016

S

100%

18

Renaissance Minerals Ltd

Emerald Resources NL

19/07/2016

B

100%

19

Intecq Ltd

Tabcorp Gaming Holdings Pty Ltd

1/08/2016

S

100%

20 Vitaco Holdings Ltd

Consortium Bid Co for VIT

4/08/2016

S

100%

21

SR Residential Pty Ltd

30/08/2016

S

Failed

22 BigAir Group Ltd

Superloop Ltd

13/09/2016

S

100%

23 SAI Global Ltd

Casmar Holdings Pte Ltd

26/09/2016

S

100%

24 Metaliko Resources Ltd Echo Resources Ltd

29/09/2016

B

100%

25 ASG Group Ltd

Nomura Research Institute Ltd

30/09/2016

S

100%

26

Hitachi Construction Machinery Co Ltd

3/10/2016

B

Ongoing

27 UGL Ltd

CIMIC Group Investments No 2 Pty Ltd

10/10/2016

B

100%

28 Fantastic Holdings Ltd

Steinhoff Asia Pacific Holdings Pty Ltd

14/10/2016

S

100%

29 Tatts Group Ltd

TABCORP Holdings Ltd

Simonds Group Ltd

Bradken Ltd

19/10/2016

S

Ongoing

30 Blackgold International Vibrant Group Ltd Holdings Ltd

31/10/2016

S

Ongoing

31

Healthe Care Australia Pty Ltd

30/11/2016

S

Ongoing

32 Cover-More Group Ltd

Pulse Health Ltd

Zurich Insurance Group Ltd

12/12/2016

S

Ongoing

33 GPT Metro Office Fund

Centuria Property Funds Ltd

24/05/2016

B

Failed

34 Hastings High Yield Fund

Aurora Global Income Trust

29/9/2016

B

Ongoing

35 oOH!media Ltd

APN Outdoor Group Ltd

14/12/2016

S

Ongoing

36 Hunter Hall International Ltd

WSHP Hunter Hall Pty Ltd

30/12/2016

B

Ongoing

37

Spicers Ltd

11/10/2016

S

Ongoing

PaperlinX SPS Trust

CORRS CHAMBERS WESTGARTH

43

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