Chapter 5 of Gilbert + Tobin’s Takeovers + Schemes Review 2023 (below) explores the types of consideration offered in public mergers and acquisitions in 2022.
Chapters:
Key Highlights - An analysis of Australian public mergers & acquisitions in 2022
Chapter 1 - Market activity: M&A activity stabilises in 2022 after all time high of 2021
Chapter 2 - Sector analysis: exploring the sectors of interest in 2022
Chapter 3 - Public M&A: schemes, takeovers and pre-bid stakes - trends in 2022
Chapter 4 - Involvement of foreign bidders in public M&A in 2022 & FIRB considerations
Chapter 5 - Public M&A: consideration types and sources of funding in 2022
Chapter 8 - Implementation agreements and bid conditions in public M&A transactions in 2022
Chapter 9 - Regulator influence, trends and developments in public M&A in 2022
Scrip-only consideration remained prominent in M&A transactions
32% of announced public M&A transactions in 2022 involved the bidder offering scrip-only consideration to target shareholders. This continued the trend observed in recent years (17% in 2019, 21% in 2020 and 31% in 2021).
The continued higher percentage of bidders offering scrip-only consideration in 2022 reflects:
debt funding for acquisitions becoming increasingly more expensive after the end of the very low interest rate environment that persisted in 2020 and 2021;
bidders being naturally conservative as the macroeconomic environment became less certain as the year progressed;
a greater number of actual (or, at least, perceived) “mergers of equals” and increasing consolidation within industry sectors, including:
Deep Yellow’s $350 million acquisition of Vimy Resources (both uranium miners);
the proposed $542 million scrip acquisition of Genesis Minerals by St Barbara (which, if implemented, will result in the creation of a major Australian gold miner, Hoover House);
Genesis Minerals’ $127 million takeover of Dacian Gold; and
Qantas’ proposed $764 million acquisition of Alliance Aviation Services; and
the preference of some target shareholders to retain exposure to the target’s underlying assets and, in the case of industry consolidation, participate in the synergy benefits expected to arise from the combination of the bidder and the target, even in the periods of significant volatility in equity markets that subsisted for much of 2022.
Cash-only consideration was consistent with prior years
63% of public M&A transactions announced in 2022 offered, or gave target shareholders the option to receive, all-cash consideration. This proportion was consistent with 2021 (63%) and 2020 (62%), but was a significant reduction compared to 2019 (83%).
Interestingly, all-cash consideration was slightly less likely for takeover bids (58%) than for schemes of arrangement (66%). This may be attributable to the increase in proposed industry consolidation mergers discussed previously, a significant number of which took the form of all-scrip takeover bids. This was especially the case in the energy & resources sectors, including Mineral Resources’ $485 million acquisition of Norwest Energy, Gold Road Resources’ successful $259 million takeover of DGO Gold, Genesis Minerals’ successful $127 million takeover of Dacian Gold and Strike Energy’s $416 million hostile, competing bid for Warrego Energy (which was ultimately unsuccessful). Many of these all-scrip takeover bids relied on the expected synergies and other longer-term benefits of consolidating two industry participants as the value proposition to target shareholders (rather than the immediate value and certainty of all-cash consideration at an offer price representing a substantial premium to the recent trading prices).
Types of consideration by number of transactions
Combination consideration was rare
There were only two public M&A transactions announced in 2022 which offered target shareholders a fixed combination of both cash and scrip consideration (and with no all-cash or all-scrip alternative). This represented just 5% of public M&A transactions announced in 2022, which was consistent with the 2021 level (6%) but significantly less than 2020 (17%, which remains the highest proportion since 2015).
The largest of these transactions was Perpetual’s high-profile, $2.2 billion acquisition of Pendal, in which:
when the transaction was first agreed and announced, it was proposed that Pendal’s shareholders would receive default consideration of 1 Perpetual share for every 7.5 Pendal shares and $1.976 in cash for each Pendal share, but could elect to receive all-cash or all-scrip consideration, subject to caps and a pro rata scaleback process; but
subsequently, the consideration structure was amended so that Pendal’s shareholders would receive 1 Perpetual share for every 7 Pendal shares and $1.65 in cash for each Pendal share. The implied total consideration (based on Pendal’s undisturbed share price) remained unchanged, and the “mix and match” option described above was removed from the proposed scheme.
The changes to the consideration structure were stated by Perpetual and Pendal to have been made to strengthen the combined group’s balance sheet on implementation of the proposed scheme, but:
these amendments were made shortly after a non-binding, indicative proposal for Perpetual was made by a consortium comprising BPEA EQT and Regal Partners (with speculation as to whether or not Perpetual could walk away from its deal with Pendal);
these amendments increased Pendal shareholders’ ownership of the combined group from 47% to 49%; and
Pendal stated that the removal of the “mix and match” option was intended to simplify the structure of the proposed scheme.
The media speculated that the changes were made to make the terms of the proposed merger more attractive to both Pendal shareholders (who would shortly vote on the proposed scheme at the scheme meeting) and Perpetual shareholders (given the emergence of BPEA EQT and Regal Partners’ proposal for Perpetual) and to increase the prospects of success of the proposed merger.
The scheme was ultimately approved by Pendal shareholders and implemented in January 2023. For further information about this transaction, including the Supreme Court of New South Wales’ decision relating to Perpetual’s right to walk away from the proposed merger with Pendal after paying the reverse break fee under the scheme implementation deed, please see our Implementation agreements and bid conditions in public M&A transactions in 2022 chapter.
Option for target shareholders to elect preferred consideration
Only one public M&A transaction announced in 2022 gave all target shareholders the option to elect their preferred consideration. This was the hostile takeover bid for Nitro Software by Potentia Capital, where Nitro’s shareholders were offered:
100% cash consideration of $2.00 cash per Nitro share;
100% scrip consideration, being 70% of an ordinary share and 30% of a redeemable preference share in the holding company of Potentia Capital’s bid vehicle per Nitro share; or
50% scrip consideration and 50% cash consideration for each Nitro share.
Potentia Capital’s takeover bid initially offered $1.80 per Nitro share in cash (only) to Nitro shareholders, but the takeover was varied to increase the cash consideration and included the option for Nitro shareholders to elect their preferred form of consideration. This variation occurred after Nitro had entered into a transaction implementation agreement with Alludo, under which Alludo would offer $2.00 per share in cash by way of a simultaneous takeover bid and scheme of arrangement. Potentia Capital was undoubtedly trying to make its bid more attractive to Nitro shareholders than Alludo’s all-cash offer by giving Nitro shareholders the option to retain some exposure to Nitro and participate in any future upside under Potentia Capital’s ownership. In response to this, Alludo increased its all-cash offer to $2.15 per share and made a “truth in takeovers” statement that this was Alludo’s “best and final” offer. Potentia Capital subsequently advised Nitro that, if it was granted due diligence access (and was satisfied with the results of that due diligence), it may increase its offer to between $2.20 to $2.30 per share. Nitro granted the requested due diligence access and, after Potentia Capital completed its due diligence investigations, it increased its offer by $0.17 per share to $2.17 per share and varied the scrip consideration component such that Nitro shareholders could elect to receive scrip consideration for 25%, 50%, 75% or 100% of their Nitro shares (which gave Nitro shareholders more flexibility). Potentia Capital also made a “virtual variation” to its takeover bid that automatically increased the offer price to:
$2.20 per share if Potentia Capital obtained a relevant interest in at least 75% of Nitro shares; and
$2.25 per share if the condition for the $2.20 increase was satisfied and the scrip consideration elections represented at least 25% of the total number of Nitro shares accepted into the takeover bid (this condition effectively gave Potentia Capital certainty that, if the offer price was increased to this amount, the amount of the aggregate offer consideration that Potentia Capital would need to fund in cash was capped).
Potentia Capital made a “truth in takeovers” statement that this was Potentia Capital’s “best and final” offer (in the absence of a superior proposal being made by a competing bidder). The Nitro board determined that Potentia Capital’s revised offer was superior to Alludo’s “best and final” $2.15 all-cash offer and recommended that Nitro shareholders accept it.
Target management “rollover” consideration structures
Two schemes announced in 2022 adopted a consideration structure which allowed the target’s management to “roll over” their shareholding in the target into the bidder’s bid vehicle under the scheme without giving the same option to the remaining target shareholders:
the $3.4 billion acquisition of Uniti Group by the Brookfield led consortium involving Morrison & Co and Commonwealth Superannuation Corporation; and
the $483 million acquisition of ELMO Software by K1 Investment Management.
These transactions followed a line of precedents involving private equity bidders using a similar structure, including Quadrant Private Equity’s acquisition of QMS Media in 2020 and Pacific Equity Partners’ acquisition of Zenith Energy in 2020.
Sources of funding for M&A transactions
As the chart below shows, where cash consideration was used in public M&A transactions announced in 2022, it came from a variety of sources.
Sources of cash funding by number of transactions
86% of public M&A transactions offering cash consideration to target shareholders were funded (whether wholly or partly) by bidders using their existing cash reserves and / or existing corporate debt facilities. This proportion was consistent with 2021 (85%) but represents a significant increase to 2020 (67%) - this is possibly explained by:
surprisingly strong balance sheets holding up through 2021 and the beginning of 2022; and
new debt funding for acquisitions becoming increasingly expensive in 2022 after the end of the very low interest rate environment that subsisted in 2020 and 2021.
The proportion of announced public M&A transactions involving cash consideration that bidders funded (whether wholly or partly) using new acquisition debt facilities increased slightly in 2022 (43%, up from 39% in 2021). This is somewhat surprising given that the macroeconomic environment became less certain, and debt funding became increasingly expensive as interest rates rose throughout the calendar year.
Larger public M&A transactions announced in 2022 for which bidders used both existing cash reserves and new debt facilities to fund cash consideration included the following schemes:
BHP’s proposed $9.5 billion acquisition of OZ Minerals;
Blackstone Inc’s $8.9 billion acquisition of Crown Resorts;
Brookfield led consortium’s $3.4 billion acquisition of Uniti Group; and
Thoma Bravo’s $1.1 billion acquisition of Nearmap.
No bidders undertook an equity capital raising to fund the cash consideration for public M&A transactions in 2022. Interestingly, one agreed transaction involved an equity capital raising by the target - it was a condition precedent to St Barbara’s proposed scrip acquisition of Genesis Minerals that the target conduct a $275 million capital raising to fund ongoing working capital. As mentioned in our Market activity: M&A activity stabilises in 2022 after all time high of 2021 chapter, AustralianSuper contributed $164 million towards the $275 million capital raising by Genesis, and will receive scrip in the merged entity as a result.