Visitors from the US and Europe who engage a group of Australians in the game of “football” soon discover that the Aussies have their own rules.
The situation is no different in Australia's growing leveraged buyout market. A number of large international private equity firms have attempted to apply tried-and-trusted take-private strategies to the Australian stock market recently, only to end up seeing a dismaying percentage of these deals “kark it”, as the locals might say.
But privatisations are a challenge for local buyout firms, as well, who explain that the country's rising stock market and peculiar director-shareholder dynamics mean buyout firms need a lucky confluence of necessary conditions in order to clinch a deal.
“You could think about it as a series of gating factors,” says Tim Sims, managing director and co-founder of Sydney-based Pacific Equity Partners, of the conditions that can bring an Australian take-private to completion. “Was the process right? Has there been a change in the business or its aspirations that warrants privatisation at an attractive premium? Does the transaction offend institutional or public sensitivity? You need to have all three checked off” or face defeat at the hands of the board or shareholders.
Not that deals aren't getting done in Australia. The past two years have seen something of a sea-change in the country's burgeoning private equity market. According to UBS estimates, the number of private equity-backed deals of greater than A$50 million in value have risen steadily since 2003, hitting 30 in 2005 and nearing 40 last year. Average deal size doubled last year to roughly $700 million.
The recent value totals represent dozens of deals of varying sizes and styles, although several big-ticket buyouts have in recent months captured Australian headlines and helped shape public and government perceptions as to what private equity is and how it operates. These large deals have also shaped perceptions among large private equity firms about the Australian public-to-private opportunity, most of which conclude that “these things are bloody hard”, as one local buyout GP puts it.
As is evident from the recent history of private equity-backed public-to-private bidding in Australia (see table p. 88), many of the largest deals have failed.
Australia has many features that are attractive to private equity firms, local and foreign alike. The country is home to many mature, globally positioned companies. Its legal and financial systems are navigable by anyone familiar with Anglo-Saxon economies. For these reasons, many pan-Asian private equity funds end up doing the bulk of their buyouts in Australia.
Somewhat tantalisingly, the penetration of private equity into the overall Australian M&A market is relatively low. The Australian Private Equity and Venture Capital Association estimates that Australian private equity activity relative to the overall market is roughly half the levels seen in the US and the UK.
Foreign buyout firms active in Australia quickly learn that the market's unfamiliarity with public-to-privates has real consequences with regard to deal execution. Peter Gold, a partner at Sydney-based private equity firm Archer Capital, says that going-private deals in Australia create “unique dynamics between the GP, the board, shareholders and management that can get quite complicated”.
The complexities of such deals in the country are both structural and cultural, say market insiders. Among the legal issues is a rule that a takeover must be approved by 90 percent of shareholders, although the threshold can be lowered to 75 percent of total votes under a “scheme of arrangement”, for which a target company's board must first receive court approval.
Culturally, the Australian business community is beginning to recognise private equity as something other than a bottom feeder. But many corporate board members remain worried that agreeing to a public-to-private will somehow tarnish their reputations, say Australian market participants.
At the beginning of 2007, some Australians were chagrined to learn that the chairman of energy infrastructure company Alinta had proposed a management buyout of the company after first being sold on the idea by advisor Goldman Sachs. He was removed by the board, and later described by a local newspaper as having “monstrous audacity” for taking this course of action. Board members everywhere took note.
And while Australian boardroom culture is on balance open and internationalist, there remain pockets of what amounts to mild corporate nationalism, according to market sources. Some board members do not want to be seen as selling the company to foreigners when a local buyer will do.
Perhaps the most powerful force complicating the Australian take-private opportunity is the country's seemingly unstoppable stock market. Since 2001, the SPX 200 index has more than doubled. This has been supported in part by the steady flow of Australian superannuation (pension) fund capital into domestic stocks – the so-called “wall of money” that must to be put to work, primarily in local assets. With the outlook for share prices so rosy, what director of a nicely performing company would agree to be taken private?
This is compounded by the fact that, in Australia, the market is small enough that the likelihood of a single influential institution blocking a deal, or holding out for a much higher valuation, is higher. These public equity funds are currently extremely resistant to any of their holdings going private, given the expected performance of stocks generally.
Add to all these challenges the recent credit crunch, and the near future of mega-deals in Australia is thrown into question.
A FOR EFFORTOf the largest Australian public-to-private transactions announced in recent months, only one has been completed – the acquisition of Investa, a real estate investment trust, by Morgan Stanley Real Estate. Market observers blame a buoyant stock market as well as Australian shareholder dynamics and culture.
|Nufarm (agricultural||Blackstone;||Nov 2007||A$2.0bn||Pending||Nufarm board behind the|
|chemicals)||ChemChina||deal; company will pay|
|dividend prior to delisting.|
|Investa Properties (REIT)||Morgan Stanley||May 2007||A$6.6bn||Completed||Shareholders approved|
|deal by a comfortable|
|Symbion Health||Healthscope;||May 2007||A$3.6bn||Pending||Symbion has|
|(diagnostic services)||Archer Capital;||received a rival bid from a|
|Ironbridge Capital strategic buyer;|
|Healthscope and PE firms|
|would split the company's|
|Coates Hire||Carlyle;||April 2007||A$2.0bn||Pending||Board rejected two initial|
|(equipment rental)||National Hire||offers, but now have|
|recommended the deal to|
|Orica (explosives)||Bain; PEP;||April 2007||A$11.9bn||Failed||Orica's board said the offer|
|Blackstone,||undervalued the company.|
|APN News (media)||INM; Carlyle;||Jan 2007||A$4.6bn||Failed||Four bids by Irish media|
|Providence Equity||tycoon Tony O'Reilly and|
|PE firms were rejected.|
|Qantas (airline)||Macquarie; TPG;||Nov 2006||A$16.5bn||Failed||Qantas requires 50%|
|Allco; Onex||Australian ownership.|
|Flight Centre (travel agency)||Pacific Equity||Oct 2006||A$1.6bn||Failed||Deal had backing of CEO|
|Partners||Scroo Turner; shareholder|
|Lazard balked, citing|
|Coles Group (retailer)||Wesfarmers;||Sept 2006||A$19.7bn||Failed||Prior bidding groups|
|Permira; PEP;||included CVC; KKR; Bain|
|Macquarie||and TPG; Carlyle;|