2. 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)
3. Global Proxy Solicitation 3
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. 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.
5. Global Proxy Solicitation 5
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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