Navigating Takeovers in the Australian Equity Market

Merger and acquisition (M&A) activity remains robust in the Australian listed equity market during 2024. If you’re an investor, what should you keep in mind when a takeover offer is made for your shares?

Market dynamics

M&A activity tends to ebb and flow, influenced by global events like the COVID pandemic and share market sentiment. If you’ve noticed an uptick in takeovers over the past few years, you’re right!

Key factors for a successful bid

Confidence: A successful deal hinges on overall market sentiment. Investors need to feel positive about the share market.

Funding: The acquiring company (bidder) must have a solid balance sheet and access to funding. This ensures they can make a compelling offer and seamlessly integrate the acquired entity.

Board considerations

The board of directors of the target company under offer has a crucial role. They must carefully evaluate offers to determine if they align with the company’s best interests. They have obligations to shareholders, but it is the shareholder who determines if the price is right.

Regulations and guidelines

Takeovers are governed by laws and regulations, including ASX listing rules.

For those unfamiliar with takeover processes, comprehensive texts and references are available. Consider consulting resources like The Allens Handbook on Takeovers in Australia.

Takeover principles in a nutshell

Efficient Market: Takeovers occur in a competitive and well-informed market.

Shareholder Rights: Target shareholders receive adequate time and information to assess proposed acquisitions.

Equal Opportunity: Shareholders participate equally in the benefits of a change of control (referred to as a control transaction).

Patience is required

Deals take time—from the initial idea to presenting an offer to shareholders. This process can span several months or even a year. While it may frustrate some shareholders seeking a quick decision, thorough consideration is essential.

Scheme of arrangement or off-market bid

A scheme of arrangement is sometimes termed a friendly bid. It’s where both the company to be acquired and the acquirer agree an implementation deed which sets out the terms for a merger which is voted on by the shareholders. A scheme is approved when 50% of the shareholders and 75% of shares vote in favour of the scheme. It is often suggested the lower threshold than an off-market bid is easier to complete, but the Origin Energy/Brookfield/EIG scheme shows that’s not always the case.

Alternatively, we see off-market bids, where an offer is made for shares at a price and shareholders receive forms to complete and return if they want to accept the bid. The price will include shares and/ or cash. A bidder might want to buy the entire company, in which case the bid will be conditional on reaching 90%, the level at which the company can compulsorily acquire the remaining 10% – providing there has been no skulduggery. At other times, the bidder is happy to reach a majority ownership and will continue to operate the target company with non-accepting shareholders remaining on the register.

Seven’s bid for the Boral shares it doesn’t own

The recent Seven Group (ASX: SVW) offer for shares in Boral (ASX: BLD) that it doesn’t currently own, shows the flurry of ASX announcements that are released by bidders and targets. We comment on this bid as a recent example of an off-market takeover.

The offer is to pay a minimum consideration of 0.1116 SVW shares and $1.50 cash for every BLD shares a shareholder owns. The combined value of the cash and shares was said to be $6.05 per BLD share as at the announcement date of 19 February 2024.

This bid also includes an increase of $0.10 in cash per Boral Share if SVW reaches an aggregate interest of 80% or more of all BLD shares, or the BLD Board unanimously recommending that BLD Shareholders accept the offer. And there is a further $0.10 increase in cash per BLD share if SVW reaches the 90.6% compulsory acquisition threshold. SVW held 71.6% of BLD shares when it announced its offer.

Shareholder should be aware that compulsory acquisition of the shares of the non-accepting shareholders takes some months for the company to go through the process of compulsory acquisitions and for these shareholders to receive the proceeds.

The takeover laws require truth in takeovers – so the initial announcement also noted the offer was Best and Final and would not be increased – shareholders can build that into their expectations and decision making. SGH also confirmed that it will not acquire Boral Shares for more than $6.25 for at least 12 months following the close of the offer.

The BLD independent bidder committee has made a “No Action” ASX announcement. The target company directors advise shareholders there is time to consider the best decision for them individually – effectively a wait and watch notice. For BLD, it is the directors who are independent of the bidder made this announcement. The Target’s Statement which will cover the BLD response to the bid is expected to be issued by 19 March 2024.

One of the challenges in a takeover is to get to 90%, in order to get to 100%. And some offers will have that as a defeating condition – get to 89% and the deal falls through. That isn’t the case for the BLD bid.

To make it more likely to succeed, there is an acceptance facility where an institutional investor can indicate an intention to accept the bid if it proceeds.

At the time the offer was announced, it was only conditional upon the customary condition of no prescribed occurrences. Page 97 of the Second Supplementary Bidders Statement gives details which can be summarised as no significant changes to the share structure and assets or business. However, on 4 March 2024 the offer was declared unconditional and that accepting BLD shareholders will be sent payment within 7 Business Days from the date the offer is accepted.

The SVW offer for BLD is scheduled to close (unless extended or withdrawn) on 7.00pm (Sydney time) on 4 April 2024.

You can monitor how the bid is going by the substantial shareholders’ notices. Seven is required to issue a substantial shareholder notice, for each additional 1% of the shares acquired.

It is worth scanning the bidder and target statements that are provided to help you make your decision.

And a final word to shareholders, when there is a takeover offer, you should check the taxation implications (and note what information you might need to calculate new cost-bases) and whether your bank and other holding details are up to date.