Year in M&A: Friends, foes and allies

It has been steady as she goes on the M&A front this year as Australian businesses came out of the shadows of the global financial crisis with their balance sheets reinforced through capital raisings. However, while activity was firm there were few bidding wars thrashed out on the markets. But there were a number of heavyweight companies involved and a lot cash thrown around the place. According to Freehills Public Mergers & Acquisition Report, M&A activity in fiscal 2010 was all together a friendly affair with suitors happy to stump more cash to ensure deal certainty and regulators making their presence felt more than ever. So with the scene set here's a look at some of the deals that kept us enthralled this year.

AXA Asia Pacific Holdings, AMP, NAB

The mining and energy sectors may have again dominated domestic M&A activity but it was the financial sector and the battle between National Australia Bank (NAB) and wealth manager AMP for AXA Asia Pacific Holdings (AXA APH) which kept the market on the edge of its seat. AMP, with the backing of AXA APH's French parent AXA SA, lobbed its initial $5.34 per share bid ($11 billion) for AXA APH's Australian and New Zealand operations in November 2009 which was promptly rejected by AXA APH. AMP returned to the fray with a sweetened $6.22 per share ($12.9 billion) but found itself upstaged by NAB and its $6.43 per share offer ($13.3 billion). The immediate feeling after NAB's swift move was that its compatriot ANZ Banking Group would also be keen to have a go at AXA APH but as it turns out it was the Australian Competition and Consumer Commission (ACCC) that played the pivotal role in guiding the end result. The competition watchdog launched its informal review in January and what followed was an extended nine month regulatory process which saw the ACCC impose several onerous conditions for NAB while giving AMP's bid the tick of approval. NAB promised numerous undertakings to appease the ACCC, including the potential sale of AXA APH's North Wealth.net platform to IOOF Holdings but it wasn't enough for the watchdog and a tired NAB had no option but to call it quits in September. That left the door open for AMP which returned with a $13.3 billion deal which was accepted by the majority of AXA APH's board. However, there was intrigue till the end as one of the target's independent director decided to play spoilsport and asked for more information before making the final decision. At the end the final director, whose identity was never revealed, fell in line and AMP which ran away with the prize.

BHP Billiton, Potash Corporation

BHP Billiton started the year sitting on a mountain of cash and that's pretty much where it finds itself at the end of 2010. However, for a while this year it looked like the mining giant was close to sealing the biggest deal in the resources sector with its $40 billion bid for Potash Corporation of Saskatchewan (Potash Corp). BHP's $US130 per share offer for Potash Corp was immediately rejected as being too low and the target quickly announced plans for a shareholders rights plan to further display its distaste for the deal. But BHP boss Marius Kloppers wasn't in mood to back down and thus began the hostile dance between a determined suitor and an obdurate target which grabbed headlines across the globe. BHP's interest in PotashCorp was underpinned by its belief in the potash sector's strong longterm industry fundamentals and the target was quick to point out that if BHP was willing to spend big then so were others. In fact that was the principal argument in PotashCorp's defence arsenal and the stoush was characterised by the constant speculation that rival bidders – Chinese, Russian, US and Canadian – were preparing to enter the fray at some point or the other. But none put their hand up and as a desperate PotashCorp sought to delay BHP with a legal niggle, the attention turned to what the regulators had to say about the deal. It was a good start for BHP after an independent report commissioned by the government of Saskatchewan on the impact of the takeover on the province endorsed the bid. However, things turned sour thereafter as Saskatchewan's premier Brad Wall launched a vociferous campaign against BHP. Wall didn't have the power to block the deal but as it turns out he had enough clout to sway the mind of the minority government in Ottawa which was afraid of the political fallout of giving BHP the green light. In the end Canada's industry minister Tony Clement shut the door on BHP as political pragmatism took precedence over market considerations. It was only the second time Ottawa had rejected a deal since 1985. So BHP fought hard but had nothing to show for it and with its Pilbara iron ore joint venture also falling foul of global regulators the miner will hope that 2011 proves to be a more fruitful year for M&A.

Telstra Corporation, NBN Co

Very few deals this year garnered as much attention as the $11 billion deal struck between the federal government and Telstra Corporation to facilitate the creation of the National Broadband Network (NBN). The telecoms giant and the National Broadband Network Co (NBN Co) agreed to a deal in June under which Telstra agreed to sell access to its existing broadband-related infrastructure such as trenches and backhaul fibre to NBN Co. The upshot for the federal government here was that the NBN Co wouldn't have to waste time and money duplicating a network and hopefully reduce the final cost to taxpayers. It was also a good outcome for Telstra given the fact that the NBN Co had originally flagged a figure of around $7 billion and after nine months of negotiations the telco's management had managed to fend off the government's threats to cut off Telstra's access to wireless spectrum, forced functional separation and the divestiture of Telstra's Foxtel interest, and extracted solid value for its assets. However, there is still more work ahead before its all set in stone with the deal yet to pass a three-month independent expert review and gain approval from the Australian Competition and Consumer Commission (ACCC). Once these are out of the way Telstra will then put it up for shareholder vote by the middle of next year.

Newcrest Mining, Lihir Gold

The other big mining deal of 2010 and one that actually did reach the finishing line was the $9.5 billion tie up between Newcrest Mining and Lihir Gold. The game started in March with Newcrest launching an initial $9.2 billion takeover offer. The deal valued Lihir at $3.87 a share and comprised of one Newcrest share for every nine Lihir shares, plus 22.5 cents cash, less any interim dividend declared for the half year to June 2010. Lihir didn't rise to the bait straight away and rejected the offer saying that the offer did not represent good value for shareholders, however, it did concede that the merger had strategic merits. Newcrest faced a nine month wait under a standstill agreement signed with Lihir but instead of going hostile as many had expected the suitor opted to take its case to the shareholders common to both companies – Black Rock, Colonial and Fidelity – who held more than 30 per cent of Lihir. In the interim, Lihir appointed the former head of BHP Billiton's uranium business, Graeme Hunt, as its new chief executive and started the hunt for alternative suitors. These did appear namely in the form of Barrick Gold and Newmont but neither turned out be a white knight. With gold prices pushing higher and Kevin Rudd's proposed 'resources super profits tax' starting to cause waves Newcrest raised its offer to $9.5 billion in May and that turned out to be more than enough for Lihir shareholders who gave the merger their tick in August. The tie-up between two of Australia's leading gold producers always made sense and while Lihir's board played their hand just right to get a sweeter offer from Newcrest, both miners knew what was at stake. The combined entity is now the fifth biggest largest gold miner in the world and almost takeover proof.

ASX, SGX

Talks of a tie-up between the local stock exchange operator ASX Limited (ASX) and a bevy of prospective suitors had been doing the rounds even before the global financial crisis reared its ugly head, and in October the long awaited deal was finally in the picture with the ASX announcing a US12.3 billion merger with the Singapore Exchange Limited (SGX). The lead up to the announcement was a curious affair after speculation of an imminent deal sent ASX's shares surging over 10 per cent forcing the company to answer a speeding ticket. The bourse operator said at the time that it was in talks with a number of parties but it didn't take long for the SGX to emerge as the interested candidate. While the ASX's ambitions for a strategic partner had been an open secret for some time there might have been a greater impetus to find a partner this time around. The company lost its market supervisory powers to the Australian Securities and Investments Commission (ASIC) in August and will face more competition on its home turf with Nomura owned Chi-X set to make its debut in 2011. Combine those pressures with the promise of transforming the ASX into an Asian financial hub and you had the recipe for a perfect deal. However, this was never going to be a simple deal given the approvals needed from the Reserve Bank of Australia (RBA), ASIC and the federal government – and, of course, the political firestorm it unleashed in Canberra. These political fires still need to be hosed down in 2011 before the deal can finally be sealed.

Intoll, Canada Pension Plan Investment Board

Australian toll roads became a hot target this year and after missing out on Transurban in November 2009 the Canada Pension Plan Investment Board (CPPIB) set its sights on another quarry. Its target was Intoll Group which had separated from Macquarie Infrastructure Group (MIG) in January and severed its management ties with Macquarie Group. Intoll, which managed interests in the Westlink M7 motorway in Sydney and the prized 407 ETR in Toronto, received a $3.39 billion takeover approach from CPPIB in July with Canada's second-biggest pension manager offering the target's shareholders $1.535 in cash per share via a scheme of arrangement. Under the offer, Intoll shareholders also had the option of rolling over their stake into a newly-formed unlisted entity, or a combination of that and the cash offer. Rumours of a possible play had been doing the rounds for some time and as it turned out the target and the suitor had been in informal discussions three weeks before a proposal was put on the table. Intoll granted CPPIB due diligence but it wasn't exclusive and for a while there was talk that Intoll's 9.9 per cent shareholder Abu Dhabi Investment Authority and other private equity players may have been ready to enter the fray again a bidding war. But by early August there was a distinct lack of any competition and Intoll extended the due diligence period by approximately one week as attention switched to whether the suitor would sweeten its bid. The cash component of CPPIB's offer was linked to currency exchange rates between the Australian and the Canadian currency and the value of CPPIB's initial offer had slipped from $1.535 to $1.495 in the interim. In the end Intoll agreed to the offer after CPPIB sweetened the cash component of its offer and the Canadian pension fund finally had its Australian toll road operator.

Wrapping up

Apart from the six aforementioned heavyweight deals there was enough action, especially in the second half of 2010, to keep M&A watchers in business. The year marked the return of private equity with TPG and Carlyle going head to head with Kohlberg Kravis Roberts & Co (KKR) for hospital group Healthscope. After a lengthy battle the TPG-Carlyle consortium pipped KKR at the post. Private equity players have also shown their interest in Foster's Group's wine assets and that situation may become a whole lot clearer in 2011. As mentioned earlier, the resources sector was the key driver of the resurgence in M&A activity with Banpu's $2.5 billion takeover of Centennial Coal and the extended takeover tussle between Macarthur Coal and Peabody Energy the real highlights. In the energy sector, Arrow Energy sold its Australian coal-seam gas assets to Royal Dutch Shell and PetroChina for $3.4 billion, giving resource-hungry China its first bite of Australia's burgeoning coal-seam gas industry and Shell returned to the headlines in November after selling a third of its stake in Woodside Petroleum for $3.3 billion, effectively putting Australia's largest oil and gas firm in play. Australia's agribusiness sector also came into prominence with Singapore-based agribusiness Wilmar International paying $1.75 billion for CSR's sugar and renewable energy business Sucrogen and Canadian fertiliser maker Agrium snapping up Australia's largest wheat exporter, AWB, for $1.2 billion.