Public M&A Trends for 2020 www.corrs.com.au Deal predictions based on real data We look beyond statistics to consider what strategies and drivers really matter to bidders, targets and shareholders undertaking a public M&A deal in 2020. This report is based on the most recent data taken from our proprietary database and in-depth research for the 12-month period ended 30 September 2019. Contents 1 2 3 Introduction Key trends and What happened? predictions for 2020 A snapshot of public What we expect we will M&A activity, including see next year deal structure, bidders and targets 4 5 6 How did they pay? How did it get done? What did the Consideration Execution of deals, regulators say? structures, control including pre-bid Key FIRB, ACCC, ASX, premia and funding strategy, conditionality, Takeovers Panel and competition and deal ASIC developments protection 7 8 Corrs Deal Review Contacts Database PAGE 1 Whenever there is change, and whenever there is uncertainty, there is opportunity. Mark Cuban, American businessman and investor PAGE 2 1 Introduction In the current global market, very few things While low interest rates and the hunt for yield mean that are certain, other than that volatility and equity markets will continue to move upwards, making change are ever-present. What then does this some deals harder to do in the short term, we believe that bidders will ultimately end up getting deals done at mean for the short to medium-term outlook a higher price, both because of the level of competition for public M&A? for good opportunities and because the low interest rate environment will become the 'new normal'. In this year’s M&A Outlook, we set out our views on what 2020 is likely to bring in the world of public M&A, Second, regulators will continue to based on our experience acting on transactions over the be more active and interventionist last 12 months, our analysis of the latest available data and our discussions with leading industry players. than before. The last year has been a relatively strong one for public We saw changes in policy and a step-change in M&A. Deal numbers and average deal values were enforcement from all relevant regulators, including the broadly consistent with prior years (other than in 2018, Foreign Investment Review Board (FIRB), Australian where there was an unusually sharp spike in activity). Securities Exchange (ASX), Australian Securities More significantly, we observed much more competition and Investment Commission (ASIC) and Australian and complexity in the deals that were announced. Competition and Consumer Commission (ACCC). These regulators have adopted a more interventionist Two fundamental trends emerged in the past 12 approach to transactions in a 'post-banking royal months, which we expect will continue into 2020. commission world'. Their key areas of focus are regulating access to data, with both FIRB and the ACCC First, there are strong drivers identifying this as a priority, and ensuring that there for increasing competition and is a level playing field for transactions by promoting competition and limiting the scope for unequal complexity in deals. treatment and improper influence. In a world of low underlying economic growth, While we expect more competition, complexity and businesses are becoming increasingly ambitious and creativity in the way deals are executed, at the same creative in the ways they look to M&A to drive inorganic time and somewhat counter to this, we also anticipate growth. that regulators will scrutinise the way in which those At the same time, there is more private capital— deals get done more closely than ever. Investor particularly in private equity funds—to deploy than expectations in relation to environmental and social ever before. Private equity was much more active in governance matters, including climate change, modern public markets this year, driven by the need to find large slavery and human rights, will also influence the M&A targets to deploy the amount of capital that has been landscape. raised. What this means for target and bidder boards and However, it is not just private equity that is looking investment committees is that they (and their advisers) to deploy capital. We observed superannuation and will need to take a holistic approach to M&A deals. pension funds, and other financial investors join This will be necessary in order to carefully navigate together with private equity and strategic bidders to the fine line between getting a deal done which is deploy capital directly themselves. commercial and competitive, while also satisfying all of their internal stakeholders, the interests of their We see private capital as a key driver of deal trends counterparties and the evolving policies of regulators. next year and expect that this will drive competition and complexity in deals. Corrs M&A Team PAGE 3 2 Key trends and predictions for 2020 What we expect we will see next year MORE COMPLEX, CREATIVE, MUCH MORE DIFFICULT DEALS REGULATORY SCRUTINY Bidders have more capital to deploy, Regulators want to be seen business wants to grow by acquisition, to be more active in a but targets have higher price post-Banking Royal Commission expectations environment PAGE 4 Who will be targets? 1. We will continue 2. Increased 3. More to see less competition for demergers resources activity assets As valuations make deals While still accounting for Given the fundamental difficult to do, we expect to the largest proportion of drivers for M&A are strong, see more demergers as an deals in the last 12 months, we are seeing healthy alternative to create value, we are seeing a decrease competition for attractive particularly following the in activity in the energy and assets (four targets were the success of Coles, Domain resources sector. We expect subject of competing bids and the proposed Graincorp this trend to continue, with in the last 12 months). As malt demergers. This will a relatively higher level economic growth remains create more competitive of activity in healthcare, generally low, greater tension for deals and software, property and interest will be focused potentially generate further telecommunications, fuelled on those few businesses activity as the demerged by changes in technology and that present attractive entities will be more interest from private equity opportunities. Targets are attractive targets. in these particular sectors. also getting much better at running competitive processes for public assets. Who will be bidding? 1. There will be 2. Foreign interest 3. Major more activity from (ex China) will shareholders will private equity and remain high be critical super funds This continues a trend we Bidders have to be focused Private equity bidders saw over the last 12 months on how to structure deals accounted for more bids by with foreign bids accounting around major shareholders. number and percentage in for 48.94% of bids and Shareholders played a the last two years than in 64.4% by value (so more significant strategic role in a any year since we started bigger deals) but far less number of transactions and reviewing data in 2011. from China (only 1 out of 23 we saw more than 48.9% AustralianSuper used its compared with more than had pre-bid interest over shareholding on two deals 30% in previous years). the last 12 months. Bidders this year to roll-over and need to carefully consider support a private equity how to approach major consortium rather than sell. shareholders. Bidders are This approach will continue also more likely to acquire to drive activity. a direct stake than ever before. PAGE 5 M&A 2020 Outlook Public M&A Trends for 2020 How will they pay? 1. Lower premia 2. Cash will remain 3. Roll over except for foreign king but scrip set consideration bidders to increase structures We expect premia to Cash is still most popular Given the importance of remain slightly down when (with 61.70% of transactions major shareholders and compared to previous offering cash only), which management to executing years (33.41% in the last 12 is not surprising given low transactions, we expect months). This is consistent interest rates and also the bidders to continue to with a general increase in high percentage of foreign look for ways to give those equity markets as yields bidders. However, we did parties equity as part of the remain low. However, see a significant increase structure. We expect to see foreign bidders are still in scrip-only consideration different structures used as paying much more at (23.4% of transactions) and regulators continue to focus 44.21% compared to 24.31% think this will continue as on ‘stub equity’ structures for domestic bidders. equity markets stay strong next year. This is assisted by their and more listed bidders exchange rate advantage, take the opportunity to use and also potentially reflects their highly valued scrip as the desire by targets for consideration. higher premia when more regulatory risk is involved. How will it get done? 1. Bridging the 2. Greater use of 3. Greater use value gap using process deeds of warranty creativity and We saw more deals with and indemnity timeliness 'process deeds' agreed insurance before due diligence than Even though there are in any year since 2011. This W&I insurance is now strong drivers for activity is only going to continue as becoming increasingly in public M&A, low interest more bidders understand common in public M&A, rates mean that equity the benefits they can offer, even on large and significant markets will continue to including the certainty of deals such as BGH’s bid move higher, making some a recommendation and for Navitas.