Is no target too big? – consortium break-up bids in a post-Asciano world
June 2017 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2017 Issue
The $9bn consortium bid by ASX-listed logistics group Qube and global alternative asset manager Brookfield for logistics giant Asciano (following a year-long bidding war between them) has major companies reassessing whether there is still such a thing as being too big to take over.
Hot on the heels of the Asciano deal, Australian lotteries and wagering company, Tatts Group – which last year agreed to an $11bn merger with one of its main competitors, Tabcorp – received an unsolicited, $7bn proposal from a consortium led by Macquarie Capital and KKR. There is speculation that the financial investors wanted to keep Tatts lotteries business for themselves and spin off its wagering division to a specialist wagering operator. Tatts has since rejected the consortium’s proposal and continues to recommend the Tabcorp merger.
The Asciano transaction has shown us that, ironically, with the right target, it might be easier to take over in a consortium break-up play than under a conventional bid. A consortium break-up bid involves a consortium acquiring a target, and breaking up and sharing the target’s assets upon implementation of the deal.
As well as reducing the equity cheque and level of debt required by a bidder, consortium break-up plays can assist in overcoming antitrust issues, foreign investment restrictions and other regulatory hurdles by allocating assets to consortium members which are acceptable to the relevant authority. State-based duties on asset purchases and other tax obstacles, as well as contractual change of control triggers, are key diligence issues and may rule out particular break-up plays.
The Asciano consortium break-up bid
After almost 12 months of bidding against each other to take over Asciano, the Australian market was bowled over when two groups announced that they had come together to acquire Asciano and share the spoils.
The Brookfield/Qube consortium’s acquisition of Asciano by scheme of arrangement involved a special purpose vehicle (BidCo) acquiring all the shares in Asciano. This structure reflects a typical ‘consortium break-up bid’, under which two or more companies or groups form a consortium to acquire a target with a view to splitting up the target after completion.
The deal provided for the effectively contemporaneous break-up of Asciano into three separate companies, reflecting Asciano’s business units. Under the scheme, shares in Asciano were acquired by BidCo on the basis that BidCo would be owned by a Rail consortium (led by Global Infrastructure Partners and the Canadian pension fund CPPIB) which would retain Asciano’s Pacific National rail business. The deal was conditional upon two ‘connected transactions’ – the sale of Asciano’s ports and Bulk and Automotive Port Services (BAPS) businesses each to a smaller consortium within the larger consortium, with PortsCo to be co-owned by Qube and Brookfield (and Brookfield’s consortium partners) and BAPSCo to be owned by Brookfield (and its consortium partners).
As a result of this structure, Qube and Brookfield gained exposure to different aspects of the Asciano business. In this way, a consortium break-up bid provided for the acquisition of a large target, but also allowed consortium members to each break off a smaller entity which the relevant consortium member then controlled.
Why a consortium bid?
It is not uncommon for a potential target to have some assets which the bidder does not want and would rather not pay for. For example, in Metcash’s 2004 takeover bid for Foodland, Metcash only wanted Foodland’s Australian business, not its New Zealand assets. To structure this as a sole bidder required an elaborate bid structure, with an embedded, pre-blessed in-specie capital reduction under which – post-bid – Metcash would spin Foodland’s New Zealand business back out to the former Foodland shareholders through a capital reduction.
Ultimately, Woolworths (Australia) emerged as a willing bidder for Foodland’s New Zealand business. Under pressure from its shareholders to maximise value where different bidders wanted different assets, Foodland demerged itself into Foodland Australia – which was acquired by Metcash under a scheme of arrangement, and Foodland New Zealand – which was acquired by Woolworths. Theoretically, a consortium bid by Metcash and Woolworths could have been an alternative way of structuring that even on a hostile basis – with a simpler structure than the Metcash takeover bid.
Another reason for a consortium bid is to overcome regulatory issues – if one bidder has anti-trust issues with a particular asset held by the target, having a consortium partner who can take that asset may be a neat solution.
In Asciano, Australia’s antitrust regulator had raised issues with Brookfield acquiring Asciano’s rail business and also with Qube (or a Qube funded vehicle) acquiring Asciano’s BAPS business – the final ‘break-up’ structure solved both those problems, and also (because funding requirements were spread over a larger group of investors) permitted an all cash bid to be offered to Asciano shareholders (compared to cash and scrip under each of the previous rival bids).
With the competition regulator increasingly requiring ‘fix it first’ divestment solutions rather than allowing a bidder to acquire, ring-fence and divest post-acquisition (which of course brings its own risks), the ability to have another consortium member which will take that asset at the point of completion could make the difference between being able to bid or not, including on a hostile basis. Of course, if the consortium includes competitors, care is needed not to breach the competition laws in the bid itself. Through careful structuring and protocols, this should usually be doable.
It is not hard to envisage circumstances where difficulties in obtaining foreign investment approval could be overcome through a similar structure, with the contentious asset allocated to an Australian consortium member, and the foreign consortium member being able to obtain approval to acquire the balance of the target on that basis.
Launching a consortium bid can be an effective way to mitigate commercial or deal risk for a bidder which has plans to sell off part of the target’s business – whether by regulatory imperative or for commercial reasons. It can give the bidder execution and price certainty on that disposal from the outset rather than having to carry market and execution risk – and in a way which is more appealing to target shareholders than some form of break-up bid which leaves them with part of the asset. At the same time, there may be a defensive benefit – including the logical buyer of that asset in the consortium can forestall a rival bid by that party. It is better for both parties to make a consortium bid and share the assets between them.
When won’t the consortium break-up play work?
Sometimes shareholder activists propose that companies break themselves up with a view to delivering value to shareholders, but analysis shows that the damage done by the break-up outweighs the positives. This could be for commercial reasons (e.g., dissynergies, or contractual change of control triggers which could lead to loss of important contracts or joint ventures or trigger repayment of corporate group debt) or because of state-based duties or other taxation consequences – which can be considerable and, in some cases, prohibitive. It very much depends on the structure and history of the assets.
These factors make due diligence even more critical, and if the bid is hostile, the bidder needs to consider appropriate conditions to protect it if issues emerge during the bid process which make the break-up more costly, or otherwise less appealing, than initially anticipated.
Other examples of consortium break-up bids
While Asciano has certainly been one of the largest high profile Australian deals utilising a consortium break-up bid, there have been a number of others, across a range of industries, including the following.
Babcock & Brown (and various managed funds) and Singapore Power together agreed to acquire Alinta by scheme of arrangement (following a bidding process against a Macquarie led consortium). The consortium agreed to divide Alinta’s assets among its members (including various Babcock managed funds which also contributed scrip consideration), based on the acquiring entities’ different business focuses.
In the pharma space, Healthscope offered to acquire Symbion, by scheme of arrangement, for cash and Healthscope shares. While Healthscope sought to acquire Symbion alone, the plan was for Symbion’s Pharmacy Services and Consumer businesses to be sold to a consortium comprising two private equity funds following Healthscope’s acquisition.
In media, Macquarie Media and Fairfax Media formed a consortium to acquire Southern Cross Broadcasting by scheme of arrangement. Following the scheme, Fairfax would acquire Southern Cross’ radio businesses, while Macquarie Media would hold Southern Cross’ regional television operations.
In the general industrials sector, after having made a number of unsuccessful bids for Email Limited, Smorgon Steel entered into a successful joint bid arrangement with a competitor, OneSteel. The consortium’s bid was conditional on Email selling off its Major Appliances business, and was followed by the spin-off of all of Email’s non-core businesses, leaving the consortium with the metals businesses that it intended to acquire.
The ultimate success of the consortium break-up bid for Asciano may embolden bidders to look at larger targets with distinct assets or businesses that lend themselves to being broken down. Bidders they might see going straight to a consortium bid as more appealing than running the gauntlet of regulatory hurdles such as potential antitrust and foreign investment objections, or as an overall commercial risk mitigant.
Major companies which have thought of themselves as too big to take over may wish to assess whether this dynamic puts them more at risk of an unsolicited bid than might have been the case in the past, or alternatively whether this type of approach opens up further strategic opportunities to create value for shareholders.
Rebecca Maslen-Stannage and Philippa Stone are partners and Courtney Dixon is a senior associate at Herbert Smith Freehills. Ms Maslen-Stannage can be contacted on +61 (2) 9225 5500 or by email: firstname.lastname@example.org. Ms Stone can be contacted on +61 (2) 9225 5303 or by email: email@example.com. Mr Dixon can be contacted on +61 3 9288 1824 or by email: firstname.lastname@example.org.
© Financier Worldwide
Rebecca Maslen-Stannage, Philippa Stone and Courtney Dixon
Herbert Smith Freehills