A surfeit of uncontested cash bids

Bell Gully's Takeover Markets Practice Report studied all the 69 takeover deals of NZX listed companies done since 2001. This is the first study done over the 16 year period.

A landmark study on takeovers on the New Zealand stock market has found almost all of them were uncontested and cash-only over the last 16 years, in contrast with overseas markets where more deals are contested and include both shares and cash.

The Bell Gully Takeovers Market Practice Report study of all 69 transactions involving NZX companies since the introduction of the Takeovers Code in 2001 found only 5 percent of the deals were contested and 89 percent of the amounts paid were in cash.

Bell Gully Partner James Cooney told Newsroom the relatively concentrated nature of New Zealand’s shareholder registers with many larger stakes and the use of ‘lockup’ deals was the main reason for the lack of contested deals.

Bidders in New Zealand often pre-arrange an agreement to buy from the owner of a large stake in the takeover target before launching the full bid. The agreement often makes the deal a fait accomplit and discourages competing offers.

The situation in Australia is different because there are more diffuse shareholder registers and lockup deals are limited to stakes of no more than 20 percent.

In New Zealand, the report found 52 percent of the deals involved some sort of lockup agreement, with the average stake being locked up at 45 percent. The agreements here typically don’t include a clause that would allow the stake’s owner to sell to a higher bidder, whereas such clauses are more common in Australia.

“We’re seeing three times more contested situations in Australia over recent years,” Cooney said.

There are two sides to the argument about whether more contested deals are better.

“When you stand back you typically think that more competition must be good and more contested offers must mean a better outcome for shareholders,” he said.

But the flip side was lockups increased certainty about the outcome of a bid for the buyer.

“The argument is that without the attraction of the lockup, maybe they wouldn’t have made the bid in the first place. We would see more competitive situations without the strong lockup position, but lockups do play a role in potentially bringing bidders to the table in the first place.”

Cooney said changing to an Australian-style rule of lockups being no more than 20 percent would be difficult in New Zealand because many stakes are of larger sizes, particularly with the average lockup agreement being for a 45 percent stake.

“There is the potential for a legitimate difference in New Zealand because of the nature of the holdings, and the fact that some of the shareholdings are quite large,” he said.

The other notable feature of the study was the relatively high proportion of cash in the deals, which is due partly to New Zealand share registers being heavy with retail investors, who preferred cash to shares. The report found 89 percent of the deals were cash only, with four percent being shares only and seven percent being a combination of cash and shares. In Australia, the proportion of deals paid for with cash is 70 percent.

Cooney said the New Zealand Takeovers Code requirement for an independent adviser’s report on the value of a bid introduced uncertainty for bidders because it required an assessment of the value of shares being offered.

“To avoid that potential uncertainty or risk, bidders move more towards a form of cash-only consideration,” he said.

One trend that has developed in recent years is the increasing use of schemes of arrangement after changes to the law in 2014 to make them easier. They allow target companies to agree at their own shareholder meeting to a takeover, which is then approved by a court. A takeover bid requires the bidder to get the approval from holders of 90 percent of the target company’s shares before compulsory acquisition of the remainder can happen. That can make schemes more successful than takeover bids.

Schemes of arrangement are much more common overseas, but were frowned upon here until the law change in 2014. The study found just 7 percent of deals since 2001 had been done through schemes of arrangement, but that percentage had increased to 23 percent since the law change. Up to 50 percent of takeovers in Australia are done through schemes of arrangement.

The game-changer for schemes of arrangement was the acquisition of Nuplex Industries by Allnex through a Nuplex-led scheme of arrangement in 2016. The $1 billion deal was the largest done on the New Zealand market in a decade. Bell Gully advised Nuplex on the deal.

“That will hopefully provide some confidence to market participants and future bidders that a scheme is a viable option for undertaking transactions,” Cooney said.

Other key facts from the study:

  • 95 percent of the successful takeovers since 2001 were recommended by the target board, while 85 percent of the unsuccessful bids were not recommended by the target board.
  • 84 percent of the bids within the independent advisor’s valuation range were successful.
  • There have been an average of four takeovers per year on the NZX Main board since 2001
  • 59 percent of bidders were from overseas and 85 percent of the buyers in the 20 biggest takeovers were from overseas.
  • The offer price was increased in 19 percent of deals and by an average of 12 percent. Seventy-seven percent of the deals where the bid was increased were successful.