The takeover timeline

Speaking at the RIU Resurgence Conference in Perth today, Corporate Finance Partner at BDO Adam Myers reinforced a sentiment that the Australian mining sector is ripe for a period of takeovers.

He said that BDO had done a lot of analysis of quarterly cash flows over the years, but over the last couple, there had been a shift in what was being observed long-term.

Takeover timeline

Myers ran through the shareholding levels of significance, starting with that first five per cent milestone and requirements of a substantial shareholder notice.

“The world becomes aware that you’re on the register and at that point you start to get some speculation and you might see others start to make a move once they’re aware of who’s hit the register,” he said.

“Every time you increase by more than one per cent, you’ve got to lodge another notice you’ve changed, and you’ve got two business days.”

When you get to ten per cent you are then subject to restrictions around party transactions – and you can block a compulsory transaction.

“That becomes a very key strategic state for people to accumulate once you get the 20 per cent. That’s sort of where our bread and butter at BDO is if you go over, you are then required to make a takeover offer unless you satisfy some exceptions or get shareholder approval,” he explained.

“That’s why you’ll see a lot of people go to 19.99 to avoid that. So they’ve still got the optionality. Obviously 50% control passes 75 significant from the point of view that a majority shareholder can pass special resolution, so therefore it becomes a little bit more difficult for the minorities.”

Myers said as a takeover progresses, you can see the momentum build up to 75 and on to 90 per cent, when an interest becomes a compulsory acquisition.

“Follow the timeframe is very important. We see some people panic a little bit about having to do things quickly and I guess there’s some contrasting elements there.

“The timeframe really comes down to an announcement of bid. An intention to bid is made that can be up to two months before the bidder statement is then issued to the ASX, ASIC, and the target.”

The bid is in

That’s what starts the clock running, and the bidder statement sits with the ASX and ASIC for 14 days, after when it can go to shareholders.

If there is a common director or greater than a 30 per cent preview state, an expert’s report is required, or the bidder can choose as a board to get one for their own benefit.

Once the bid is open, it has to stay that way for a month, and then it can quickly turn from fast-paced to relaxed.

“You’ll see the holding statement made by a target, take no action, wait until we get our target statement out. You’ve certainly got some wiggle room there,” Myers noted.

“The bid can go for a maximum of 12 months, and we know that does certainly frustrate some shareholders when it bogs down and drags out.

“The only key difference is where you’ve got an on-market bid, as soon as you’ve lodge that bid statement, you can commence acquisitions on market. So, a lot of people think that someone can buy on market during an off-market bid.”

But he explained that is not necessarily the case, and there is no need to panic, but if you are staying on market, you can move quite quickly.

“Contrasting an off-market bid, you make an offer to each shareholder who then responds in writing, accepting that offer can be cash or shares, so you get some flexibility around consideration,” Myers said.

“You can also put conditions in around minimum acceptance, regulatory approvals and other factors that may impact the bidder’s ability to complete on that.

“If you had a minimum acceptance condition of 50%, if that fails to get met, then the shares remain with those accepting shareholders that can’t get fulfilled is that condition and you can make a proportional.”

Another element, one which Myers said gets misreported sometimes, is talk someone is voting against a takeover.

“It’s not voting against a takeover, it’s against the scheme. A scheme’s a slightly different process and it really is a process where the bid and target are actually working together to produce the document,” he explained.

It is more friendly in terms of it’s being negotiated. It’s not necessarily hostile like an off-market bid. It may have conditions that need to be met, price coming into effect.

“And the process runs through a court hearing process. The first court hearing is around approving the documentation, making sure the shareholders have got all the information they need to make a decision.

“You’ve got to get 50% by number of shareholders and 75% by quantum of votes in each class. So quite higher and then binding on all shareholders.”

He said it was an all or nothing bid, but one that provides a fantastic level of flexibility, and you can have a structure where you could carve out another entity with certain assets.

“If you’ve got a diversified group, you may group all the gold assets for the takeover and then spin out lithium assets to another vehicle and continue to trade on,” Myers noted.

Shareholder stakes

Myers said a shareholder really needs to think about “What’s in this for me, what’s in it for them, and what does that mean for me?”

He said the industry had recently seen a real focus on cost of production and consolidation in regions for more effectively feed an operating mill.

“That certainly makes a lot of sense to bring sub capacity assets into a more efficient structure. You’ve got other entities that are looking at extending the life of their operations. They’ve got a project that’s nearing the end of the life, so they’re looking for extension large,” he said.

Myers added that in general, the large explorers have moved away from exploration and using the M&A as a way of adding advanced exploration and pre-development assets to their portfolios.

“There’s opportunity there where you can realise some value. Some companies have cash and financing through the markets or debt may be expensive compared to going to an industry player that does have a cash balance,” he said.

There will naturally be opportunistic grabs on assets perceived as undervalued or a company with a share price bogged down for all sorts of reasons – and that’s when they swoop.

“What you need to think about as an investor is what’s the motivation and how do you respond.”

Takeover time

Myers then went over some recent takeovers, and the features he had noticed.

“When Essential Metals and IGO announced a scheme to acquire at 50 cents a share just before the scheme meeting, Mineral Resources acquired a 19.99 per cent stake,” he recalled.

“There was a lot of speculation about would another bid be coming. And you would imagine that that actually affected the vote because people waiting to see what’s next re didn’t raise a bid and they voted against the scheme, which led to them saying that they wouldn’t proceed with a restructured deal.”

He said there is a truth in takeovers law: if you make a statement about a takeover, you’ve got to stick with it.

“IGO couldn’t move alone given it was their JV partner, therefore it left the asset available, Develop came in and acquired a central buyer, a scheme for script consideration.”

“We think that was a key difference as well, that shareholders were exposed to the assets rather than the cash bid, which took them out of their exposure to the lithium play.”

Myers noted another interesting example, one he saw being structured to avoid the last-minute hiccup.

“SQM announced a bid for Azure, who picked up at a reasonable premium an exploration asset. Very early stage, so a great result,” he said.

“What then happened was the scheme was priced at $3.52 or if the scheme was voted down an off-market bid would be launched as soon as that happened. We saw that as a potential effort to protect against bid disruption.

“What we then saw was Hancock and Mineral Resources both emerge with significant stakes following that, and then you’ve had a negotiation process to actually announce a joint bid.

“They’re working through the process of getting regulatory approvals to make that occur. Quite interesting to see the change in structure, but not necessarily the desired outcome from the structuring.”

On-market speed

Myers said we saw a new century on February 21st, when Sibanye-Stillwater launched an off market takeover offer for New Century, with a key element of an on-market facility for a certain number of shares that was immediately filled.

On the 22nd, Sibanye announced it had reached 40.58 per cent and more on market purchases, and by the 23rd, it was over 50 per cent.

“In a very short timeframe, it made very difficult for the board to respond in a way that meant that they had time to communicate to shareholders,” he said.

“You can see that speed of transacting, which if you’re a shareholder who’s been looking to get out of a stock, fantastic, you get normal settlement and your money a lot quicker than some of the other structures, but it certainly moves a lot faster.”