In this edition:
M&A 2009 – An Opportunity for SMEs?
The economic outlook for 2009 looks challenging to say the least. But the economic downturn also provides significant opportunities for investment. In this article DibbsBarker examines the current climate and discovers that a number of factors are contributing to the creation of opportunities in the SME space.
The general 2009 economic outlook is one of the most challenging for M&A and private equity for many years. The Australian Government and the RBA continue to work to ensure Australia is kept above recessionary waters, however the global economic climate and many domestic indicators are not promising for overall confidence. The National Australia Bank’s monthly business survey showed that business confidence fell to a record low of negative 32 points in January.
So far in 2009 the big M&A deals of recent times are struggling to take off. According to research house Dealogic, so far this year 99 deals totalling $US24.3 billion have collapsed globally including Lion Nathan’s bid for Coca-Cola. This follows a similarly difficult year in 2008, when 1380 deals worth a combined $US909 billion were withdrawn, rejected or simply lapsed including the BHP-Rio Tinto deal and Qantas’ merger with British Airways.
SME opportunities
History shows that from major economic downturns come significant opportunities for investors. As the dust begins to settle from 2008’s financial crisis, entities in the SME space have more reasons for cautious optimism in 2009 than their larger counterparts. We are seeing investment and acquisition opportunities continuing early in 2009 for SMEs and mid market private equity ($20 to $250 million) where there is a willingness to take on risk and brave market turbulence.
Why are there opportunities?
A few key reasons:
-
Declining asset values – The Australian stock market has lost nearly half of its value since November 2007 and asset values continue to decline across most industry sectors. But as the market comes closer to bottoming-out, investment targets will become increasingly attractive to cashed up investors and those having access to alternative debt sources.
-
Debt stress – Debt laden corporates suffering reduced product demand and lower cash flow are having greater difficulty in managing their strained balance sheets. One solution - in this market - is the sale of assets albeit at bargain prices or discounted capital raisings.
-
Vendor expectations – Over the last few years, acquisitive corporates have found opportunities at reasonable valuations hard to find. Over the second half of 2008 vendor expectations have dropped and are likely to continue to stay lower during 2009.
-
Survival of the fittest – Corporates with stronger balance sheets will increasingly look to cement their market position not only through increased market share but growth through acquisition.
-
$AUD – If the weaker Australian dollar continues, investment in Australia will continue to be attractive for foreign investors.
-
Alternative investments needed – With interest rates at 1960s levels and superannuation suffering significant losses in 2008, investors are searching for alternative forms of investment offering higher rates of return.
SMEs are better placed
SMEs are often in a better position to take advantage of current opportunities. The SME business model and general deal sizes give these entities and funds the capability to respond now under current conditions and not at the end of 2009/2010. Whilst larger deals (with the exception of scrip offers) and top-end private equity cannot generally attract debt at acceptable rates of return for investors, SMEs generally rely on less debt and more cash.
Primarily we perceive distressed or troubled asset funds, mid market private equity, cash rich corporates (or those corporates prepared to consider scrip deals) and foreign investors (including sovereign funds) are those best placed to take action in the short term.
A number of distressed asset funds are actively marketing and raising funds that are attracting renewed investor interest. For example, Helmsman Capital recently raised funds to invest in restructuring, turn around and under-managed assets. These funds are now increasingly active across a number of industries.
We are also seeing increasing activity in mid market private equity with new funds such as Pinnacle Private Equity (Sydney) and Banksia Capital (Perth) going to market. Participants believe 2009 will be an excellent vintage for this sector of private equity as valuations become more attractive and businesses need to convert value into cash for personal reasons such as retirement. Unlike the bigger global private equity funds, high levels of debt are not necessary to achieve strong returns for investors.
But only time will tell how successfully SMEs are able to navigate the choppy waters of 2009 – but for those ready to venture into the market the opportunities, and rewards, are likely to be significant.
This article is the full version of an article that was published in the March 2009 edition of the Australasian Legal Business Magazine.
ASIC Review of Share Purchase Plan Monetary Threshold for Disclosure Relief
ASIC released Consultation Paper 103: Review of Share Purchase Plan Threshold on 18 December 2008 and is in the process of reviewing comments and feedback from stakeholders regarding the proposed changes.
The ASIC proposal
Share purchase plans (SPPs) are plans for the offer of new issues of shares to existing investors of an entity listed on the ASX. Usually a disclosure document, such as a prospectus or product disclosure statement, must be given to prospective shareholders. ASIC Class Order 02/831 currently offers relief from companies having to put together a disclosure document where there is an issue of $5,000 or less made to existing shareholders within a 12 month period.
ASIC proposes to triple the threshold for relief so that it will apply to issues of $15,000 or less made to existing shareholders within a 12 month period. ASIC proposes that companies will lodge a ‘cleansing notice’ instead of a traditional disclosure document.
One of the drivers for the proposed increase is to provide companies with quicker and lower-cost capital raising in lieu of debt financing which is increasingly difficult to obtain in the current economic climate.
Incentives to existing shareholders to further invest
This proposal would offer existing shareholders the opportunity to acquire shares up to the value of $15,000 each at a discount to the current market price. Moreover, shareholders will save on brokerage fees and stamp duty.
The cleansing notice requirement
The disclosure relief is currently restricted to securities listed on the ASX. Under the Corporations Act 2001 (Cth) listed entities must continuously disclose all price-sensitive information to the market, allowing shareholders to access current information about a company. So even without a disclosure document, potential investors may still have access to information which will help them decide whether or not to invest.
The cleansing notice steps in to bridge a gap that would exist if the only obligation on companies was to comply with the continuous disclosure regime. The cleansing notice ensures that companies disclose information that has not been released to the market via continuous disclosure but is nonetheless relevant to an investor’s decision. This includes information exempted from disclosure under ASX Listing Rule 3.1A, and information that investors and professional advisors would reasonably require for the purpose of making an informed decision on investment.
The benefits of a cleansing notice are that it provides an issuer with a low cost, and less time-consuming alternative to the traditional disclosure documents such as a prospectus or product disclosure statement.
What does this proposal mean?
If adopted the proposal will:
-
promote capital raising at a time in which debt financing is increasingly difficult to obtain;
-
lower the cost of capital raising (savings on broker commissions and disclosure documents not required); and
-
provide an incentive for existing shareholders to further invest.
Are there any limitations?
-
There is a $15,000 cap on offers;
-
there remains a ceiling on the number of shares that can be issued pursuant to SPPs claiming this relief. Total share issues must not exceed 30% of the total fully paid ordinary shares that have already been issued by the company;
-
the issue price of shares must be less than the market price, but at least 80% of the average market price for securities in that class; and
-
the written offer document must disclose certain details relating to the calculation of the issue price, the relationship between issue price and market price, and there must be a warning stating that the current market price is subject to change between the date of offer and the date of issue.
After reviewing submissions, ASIC may decide to proceed with the proposal and amend relevant class orders and Regulatory Guide 125: Small offers of shares to existing shareholders by listed companies – share purchase plans.
Clarification of the Foreign Investment Screening Regime under FATA
The Treasury recently announced that the Commonwealth Government will amend the Foreign Acquisitions and Takeovers Act 1975 (FATA) to clarify the operation of the foreign investment screening regime effective 12 February 2009.
Overview
The FATA provides the Treasurer with the power to examine proposed foreign investment into Australia to determine if such investment is ‘contrary to the national interest’. The Government determines what is ‘contrary to the national interest’ by having regard to widely held community concerns of Australians. The FATA and the Foreign Acquisitions and Takeovers Regulations 1989 provide criteria and monetary thresholds which, if satisfied or exceeded, trigger the relevant FATA provisions.
Some examples of foreign investments subject to Foreign Investment Review Board (FIRB) notification are:
-
acquisitions of substantial interests by a foreigner in an Australian business where the value of business gross assets exceed $100 million or the proposal values assets above $100 million, except for US investors;
-
direct investments by foreign governments and their agencies irrespective of size; and
-
proposals where any doubt exists as to whether the proposal is notifiable.
For the purposes of the first example, a substantial interest occurs when a single foreigner (and any associates) has 15% or more of the ownership or several foreigners (and any associates) have 40% or more in aggregate of the ownership of a corporation, business or trust - see section 9 of the FATA.
Pre-amendment classification of equity interests
The FATA provides the Treasurer with the power to make an order prohibiting a proposed acquisition by a foreign person in shares (including an interest in shares) and assets (including an interest in assets) where the investment is contrary to the national interest. However, the prevailing view was that the issue of convertible notes did not trigger FIRB notification until the actual conversion of the notes into equity.
The amendments
Essentially the amendments will:
-
ensure that the FATA applies equally to all foreign investments irrespective of investment structuring; and
-
mean that any investment including through instruments such as convertible notes will be treated as equity under the FATA.
These amendments will act to clarify the operation of the foreign investment screening regime at a time where there is increasing foreign investor interest in Australian assets, especially from state controlled enterprises and government backed investment funds seeking to invest in the Australian resource sector.
What now?
Foreign investors will need to recognise that their investments will be scrutinised by FIRB regardless of how they are structured. For example, the issue of convertible notes to investors as part of an acquisition will require upfront FIRB approval (if relevant conditions and thresholds are reached). Investors in convertible notes may need to factor in FIRB approval as a condition precedent to completion.
We will keep you updated on these legislative amendments and any other developments.
The Effect of Acquisitions and Disposals of Wholly-Owned Entities on Financial Reporting Relief
ASIC Class Order 98/1418 (Class Order) provides relief from certain financial reporting requirements under the Corporations Act 2001 (Cth) (Act) to eligible wholly-owned entities (Eligible Subsidiaries) within a corporate group (Group).
This article sets out some background information about the relief available under the Class Order and some things to consider when making changes to the Group, either through acquisition or disposal.
ASIC power to provide relief
Under section 341(1) of the Act, ASIC can make an order in relation to a specified class of companies relieving any of the companies from all or specified requirements of the Act in relation to keeping financial records, financial reporting and the requirement to appoint an auditor.
Relief under the Class Order
Relief under the Class Order has been available to wholly-owned entities for a number of years, however, ASIC amended the Class Order earlier last year to simplify the requirements for obtaining and maintaining relief under the Class Order. These changes have resulted in a significant increase in the number of companies seeking to rely on relief under the Class Order.
The Class Order provides Eligible Subsidiaries with relief from the following requirements of the Act:
-
the requirement to prepare a financial report and a directors’ report (sections 292(1)(b) and (c) of the Act);
-
the requirement to have the financial report audited (section 301(1) of the Act);
-
the requirements concerning distribution of the financial report, directors’ report, auditor’s report on the financial report and any concise financial report (sections 314(1), 315(1), 315(4) and 316 of the Act);
-
the requirement for a public company to lay reports before an annual general meeting (section 317 of the Act);
-
the requirement to lodge reports with ASIC (section 319(1) of the Act); and
-
the requirement for a public company to appoint an auditor (sections 327A, 327B and 327C of the Act).
What entities are eligible for relief under the Class Order?
Ordinarily an entity will be eligible for relief under the Class Order if that entity:
-
has a financial year which commences and ends on the same day as the financial year for the parent of the Group (Group Parent);
-
at the end of the relevant financial year (i.e. the financial year upon which relief will be relied upon) (Relevant Financial Year), is wholly-owned by the Group Parent or does not have any members which are persons other than the Group Parent, another one of its subsidiaries, a nominee for the Group Parent or a nominee for another of the Group Parent’s subsidiaries;
-
is either a public company, large proprietary company or a small proprietary company which is controlled by a foreign company;
-
is not a borrower in relation to debentures, a disclosing entity or a financial services licensee; and
-
is party to the deed of cross-guarantee in the form approved by ASIC with respect to the Group.
When to apply for relief?
In order to rely on relief under the Class Order for the first Relevant Financial Year, an entity must apply for relief under the Class Order before the end of the first Relevant Financial Year. For example, if an entity’s financial year commences on 1 July and ends on 30 June each year and it wanted to rely on relief under the Class Order for the fist time in relation to the financial year ending 30 June 2009, it would need to apply for relief under the Class Order on or before 30 June 2009. This includes, among other things, becoming party to the relevant deed of cross-guarantee for the Group and lodging that deed with ASIC prior to the end of the first Relevant Financial Year.
Considerations for acquisitions and disposals
The table below sets out some important things to consider in relation to the Class Order when making changes to the Group through acquisitions and disposals.
|
Acquisitions |
Disposals |
-
How will the structure of the Group change as a result of the acquisition?
-
Does the entity being acquired need or want to rely on the relief?
-
Will the entity being acquired need to accede to the existing deed of cross-guarantee?
-
Will ASIC need to be notified that the entity being acquired is a member of the Group and wants to rely on the relief?
-
Was the entity being acquired already party to a deed of cross-guarantee in relation to the Class Order for another corporate group?
-
Does the financial year for the entity being acquired end on the same day as the Group Parent?
-
Is the entity being acquired a borrower in relation to debentures, a disclosing entity or a financial services licensee?
-
What are the financial reporting obligations in respect of the entity being acquired?
-
Will the acquisition affect any other Group member’s ability to rely on the relief? |
-
Will the structure of the Group change as a result of the disposal?
-
Will the entity being disposed of need to revoke the existing deed of cross-guarantee?
-
Will ASIC need to be notified that the entity being disposed of is no longer a member of the Group?
-
Will the entity being disposed of become party to another deed of cross-guarantee in relation to the Class Order for another corporate group?
-
Will the disposal affect any other Group member’s ability to rely on the relief?
-
What are the financial reporting obligations in respect of the entity being disposed of?
-
Will the disposal require the addition or substitution of a trustee or alternative trustee under the deed of cross-guarantee? |
2008 Merger Guidelines - Officially in Force
On 21 November 2008, after months of public consultation, the ACCC released its final revised Merger Guidelines. They are completely different from the 1999 Merger Guidelines so we won’t go into a mind-numbing analysis but here are some of the main things to note:
-
The guidelines now provide an unequivocal outline of the broad analytical framework to be applied by the ACCC when assessing whether a merger or proposed merger is likely to substantially lessen competition under section 50 of the Trade Practices Act 1974 (Cth) (TPA).
-
The ACCC will no longer utilise the market share “safe harbour” notification threshold.
-
The ACCC has confirmed that it will review internal corporate documents such as board papers to assess the likely effect on competition of a merger.
Notification thresholds
While there are no compulsory pre-notification requirements for mergers in Australia, the Merger Guidelines provide that merger parties should notify the ACCC well in advance of completing a merger where both the following apply:
The Herfindahl-Hirschman Index (HHI)
In assessing whether a merger is likely to substantially lessen competition under section 50 of the TPA, the ACCC will look closely at market concentration and market conditions will be measured by reference to market shares, concentration ratios and the HHI.
The ACCC considers markets to be ‘concentrated’ when a small number of firms account for a large proportion of sales, output or capacity, giving a HHI of greater than 2000. What is an HHI greater than 2000? The HHI is calculated by adding the sum of the squares of the post-merger market share of the merged firm and each rival firm in the relevant market. The HHI indicates the level of market concentration while the change in the HHI (or delta) reflects the change in market concentration as a result of the merger. For example: in a market consisting of 4 firms with a market share of 30%, 30%, 20% and 20% each, the HHI is 2600 ( 30² + 30² + 20² + 20² = 2600).
The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. In assessing market concentration, the ACCC will take into account the pre-merger and post-merger market shares of the merged firm and its rivals and the actual level of increase in concentration, as well as the level of symmetry between rival firms’ market shares.
A merger that falls below the HHI threshold may still raise competition concerns if any of the following are relevant:
-
a substantial number of customers consider the products of the merger parties to be particularly close substitutes such that the merger parties represent their first and second choices; or
-
the target firm has shown a recent rapid increase in market share, has driven innovation or has tended to charge lower prices than its competitors in one or more markets in which the merged firm would operate.
Internal corporate documents
The ACCC has in the past few years increasingly accessed internal corporate documents to assess the likely anti-competitive impact of a proposed merger. The Merger Guidelines confirm that the ACCC will examine board papers, internal plans, financial accounts or other relevant documents to determine whether merger parties are likely to be effective competitors in the future and to support a finding that a target is a “failing firm”, ie it is likely to exit the market in the foreseeable future.
Our concluding thoughts
If you are a business contemplating a merger or acquisition with possible anti-competitive effects, take note of the Merger Guidelines. While the Merger Guidelines do not have any legal force in determining whether a proposed merger is likely to contravene the TPA (that is up to the Courts), they do provide guidance as to the level of scrutiny the ACCC will apply to a proposed merger and provide some guidance on how merger parties can best avoid anti-competitive conduct.
The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
