Is the market approaching an M&A cycle crossroads? April 2015

2 Is the market approaching an M&A cycle crossroads?

Global Proxy Solicitation

Is the market approaching an M&A cycle crossroads?April 2015

Three high-profile bids, a new M&A cycle does not make. But there’s hope yet that animal spirits will emerge in Australia as global M&A and activist action pick up and nimble locals move on competitors and peers.

The Japan Post-Toll Holdings deal excited the

market, which recognizes the financial firepower

that exists in offshore investors and corporates

looking for fresh opportunities. The Novion/

Federation Centers tie-up and David Teoh’s

TPG bid for iiNet demonstrated Aussie initiative

in industries undergoing rationalization.

But where to from here?Well for a start, there’s been a recent flurry of

activism targeting several boards and a couple

of interesting bids have also emerged.

Luminis Partners’ Simon Mordant said recently that

Australian companies were becoming targets

through a combination of low interest rates,

falling dollar, higher multiples and cashed-up

balance sheets. He also observed that they were

likely to sit on the M&A sidelines for the next two

years as competition concerns lead to offshore

investors swooping in on Australian companies.

Mordant cited regulatory concern over the

concentrated nature of Australian industry as

an impediment to home-grown M&A activity.

“Australia does have a concentrated market. The capacity of in-market deals is limited, because in many cases the No. 1 and No. 2 can’t get together” he told the Financial Review.

No doubt the lower AUD has removed one

significant element of risk from cross-border

transactions and whispers abound of London

and New York strategists doing the sums.

Arguably Japan Post fired the starter’s gun on ASX200

opportunities, while at the other end, Toronto based

gold miner SEMAFO has already made the leap in

an almost clean-sweep bid for Orion Resources.

For a little bid innovation, it’s hard to go past GRAM’s

$1.71 cash unsolicited and unconditional bid for

PanAust that was announced on 30 March. It was

lobbed after PanAust’s board last May, rejected

as inadequate, GRAM’s $2.20 indicative offer.

GRAM, which already held 22.5% of PanAust, came

in on the back of PanAust’s $1.28 share price.

On the activist side of the street, matters

have begun to froth a little too.

• Northern Gulf Petroleum and its owner Chatchai Yenbamroong have used their 19.9% holdings to call a s249 spill of Tap Oil’s board.

• Australian and Hong Kong investors have combined to put Emeco Group on notice over a recent acquisition they disapprove of; and

• Ardent Leisure’s board is under attack by several of its institutional shareholders who are threatening

a board spill to reinstate the former CEO

Plus an eclectic assortment of

micro-cap s249 requisitions

Question is though, will our market attract

the big-hitting activists and investors like

Starboard Value, Third Point or even Carl

Icahn? The answer is; probably not yet.

Last year – before its share price ran away – AMP

was presented to several US activist funds by a

group of Australian investors as a classic proxy

fight target. Pick up 5%, call for a change in

board strategy (unload/realise surplus assets)

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and if that fails, launch a s249 proxy fight to

spill the board and do the job themselves.

They liked the concept and the numbers but

eventually, jurisdiction and geography got

in the way – and the AUD was +$0.90.

That was simply because US activists have so

many Wall Street targets to choose from and

the risk/reward of taking on a campaign in

Australia was considered too high when there

were easier pickings at home on familiar turf.

Activism has been growing annually in the US

for over six years but it’s really only been in the

last 2 years or so that big ticket US activism has

moved offshore – to the UK, mostly – where

many of the activist funds have set up shop in

London’s Mayfair, to scope out opportunities.

On a smaller – but growing scale – it’s been happening here for a while, drawing striking similarities to the US experience; in which activist investors started by targeting small caps and eventually graduated to tilting at iconic corporates.

Data presented in February 2015 at the launch of

an academic paper in London on activist hedge

funds by the Alternative Investment Management

Association (AIMA) and reported by Activist Insight

Editor Josh Black, clearly explains the growth.

The paper reported a 50% compounded return to

activist investors between 2012 and 2014, a six-

fold increase in assets under management over

ten years, and an average 25% appreciation in

activist-targeted stocks after the activist exited.

These kinds of metrics have not been lost on

certain Australian funds either. A coterie of

Australian activists including Sandon Capital,

Wilson Asset Management and Thorney

Opportunities have emerged and others

like Ariadne and Mercantile Investments re-

emerged, over the last couple of years.

4 Is the market approaching an M&A cycle crossroads?

Global Proxy Solicitation

Adding some grist to the mill, cross-border

activists like Lone Star Value Partners,

Pegasus, Black Crane and Quantum have

also tested the Australian market recently.

At another level, US opportunist/activist funds

have in fact been investing for some time in

Australian M&A situations. Notable among them

is P Schoenfeld Asset Management (PSAM) who

took positions in high profile transactions like

MIM, Qantas and GrainCorp and who keeps a

constant lookout for Australian opportunities.

PSAM – with a 1% holding – is currently mounting

a proxy fight to force the board of French

media conglomerate Vivendi to return up to

€9 billion in spare cash to its shareholders.

Increasingly, 1% is the new 5% because of the increasing willingness of big global investors like BlackRock, Dimensional Fund Advisors, TIAA-CREF and dozens of others to get actively involved.

Last year BlackRock supported 10 activist proxy

contests, TIAA-CREF supported nine and DFA

supported eight, according to Activist Insight. Each

of these funds is actively invested in the Australian

market, sitting on the registers of the ASX200

Last year GPS conducted a survey of mainstream

Australian institutions to gauge their propensity

for supporting an activist action against a board.

It found that nearly 50% of those surveyed would

publicly back an activist investor. “We wouldn’t

rule out any options” was the general view.

In a recent paper on ASIC’s proposed new

shareholder guidelines, Corrs partners Andrew

Lumsden, Corinna Lee and Hannah Cooper

observe that the rise of the activist interjector

means institutional investors are being forced

to engage in more intense debates about

strategy with companies and activists.

“Since institutional support is vital for any activist campaign, the boundaries of how the actors should interact are extremely important for all involved and the market.” They said.

Animal Spirits threatening to haunt the market or

not, the ground under boards is shifting, as we’ve

pointed out before. While M&A activity has got off to

a reasonable start in 2015, there’s no certainty of a

trend. Meanwhile, Australian boards contemplating

new strategies or sitting on old ones might need

to adopt the pedestrian crossing rule if they don’t

want to be caught flatfooted: Before stepping

off look right, look left then look right again.

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We are happy to discuss our experience and insights

Maria Leftakis (0411 275 275)

Andrew Thain (0411 432 221)

Murray Williams (0411 11 90 90)

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