The return of the takeover bid in larger deals

There has been an increase of the use of takeover bids in recent times for larger target companies. Coupled with some interesting structures being successfully employed, this may encourage other bidders to think more about the takeover route in preference to trying a scheme of arrangement.

In brief

• Takeover bids for larger target companies have been on the increase in recent times.
• They can provide bidders with greater freedom than agreeing a scheme of arrangement with the target board will typically allow.
• This has resulted in some interesting structures being used successfully.

Modern takeover bid structures

In recent years, public company acquisitions have typically involved an approach to the target (via a non-binding indicative offer or NBIO) with a view to agreeing a recommended scheme of arrangement.

A scheme provides certainty for the bidder (largely because of the 75% voting threshold compared to the 90% compulsory acquisition threshold under a takeover bid) and because the scheme puts greater pressure on shareholders to make their minds up whether or not to accept the proposal. Sitting on the fence is not a realistic option.

This has led to schemes being the predominant form of transaction in our market, especially where the target value is over $1 billion.

However, my sense is that there have been an increasing number of takeover bids in recent years (particularly bids for larger target companies) and these have featured some interesting strategies by bidders.

I want to mention a few of these.

Deals supported by shareholders, even if not supported by boards or the independent expert opinion

As a takeover bid can be launched without the target company’s support or cooperation,¹ the price to be paid is ultimately determined by shareholders, not the board.

Therefore, it is no surprise that we have seen a number of bids which have not been recommended by the Board or judged by the independent expert to be ‘not fair’, but which have still been supported by shareholders.

These include:

• Seven Group’s 2024 bid for Boral - Board recommended reject based on IER value range. No subsequent bid increase as the bid was ‘best and final’, but conditions to a higher tier price were waived and bid succeeded;
   
• Charter Hall’s bid for Hotel Property Investments - Board recommended reject based on their view of value. The bidder later announced a modest price increase and declared the bid ‘best and final’. Control passed and the bidder achieved over 90%;
   
• Genesis Capital’s bid for Pacific Smiles - A very long story, but relevantly Board recommended shareholders reject the bid as opposition from key shareholders meant a 90% condition could not be met and bid price was less than previous offers for the company. There was a modest price increase from $1.90 to $1.985 per share. Around 40% of shareholders accepted and the board changed its recommendation to accept in view of expected change of control;
   
• Bennamon’s bid for PACT - Board recommended reject based on IER range, but later recommended acceptance of an improved bid price that was still below the IER range, ie ‘not fair but reasonable’; and
   
• Brett Blundy’s BBRC bid for Best & Less - The bid was at a nil premium, but the two largest shareholders (together around 40%) indicated their support. The IER concluded the bid was ‘not fair but reasonable’. As the bidder had 16%, control passed. The board later recommended acceptance (influenced also by a profit downgrade during the bid).

Typically, these bids have been launched at a nil or low premium to the market price of the target’s shares and, after the target company has issued its formal response (often with an IER price range), the bid has been increased marginally and declared ‘best and final’. The bidders have generally held an existing stake to drive momentum. Once some shareholders start to accept, we have seen a snowballing effect as others decide to sell out, rather than remain as minority holders in a company with a new controller and low liquidity.

These examples emphasise that shareholders are often motivated by selling for a price that may represent good short-term value, even if the price may not fully reflect the long-term value of the company. It shows that target company directors need to be very persuasive when they are defending a company against a bid at any kind of premium to market prices.

Speed

A scheme of arrangement follows a standard procedure which includes the need to produce a scheme booklet (including an independent expert’s report), a 14 day review period with ASIC, a court application, then printing and dispatch of the booklet, followed by 28 days’ notice of the scheme meeting, then, if the scheme vote is successful, back to court for final approval, then another 2 weeks for implementation. All up, it is typically a 3 to 4 month process (and longer if regulatory approvals are required).

On the other hand, a takeover can be launched on a much shorter timetable. The bidder must produce a bidder’s statement and lodge it with the target and ASX, but it does not need to commission an expert’s report (other than in certain limited circumstances) nor wait for a court. It can dispatch the offer document 15 days after the bid is announced.

This can enable control to pass quickly, as evidenced by FMG’s bid for Red Hawk Mining. The bid was announced on 28 January 2025.² The bidder’s statement and target’s statement were ready to go. As the bid was recommended from the outset, the bidder was able to send the offer on the same day that the bid was announced. The target dispatched its target’s statement that day too (with an IER). FMG had over 50% within the week, held 75% a few days later and reached over 90% within 4 weeks of the launch.

This ended up being a fast takeover bid. FMG benefitted from the board recommendation and pre-bid support from key shareholders who held over 80% of issued shares (that support was in the form of call options entered into by the key shareholders over an aggregate of 19.9% of shares exercisable if a competing bid was made).

Conditional price increase statements

In the last 6 months, there have been two takeover bids which had conditions that were designed to encourage key shareholders to accept the bid promptly.

1. LDC’s bid for Namoi Cotton
   
   This was a complicated and lengthy story, but, essentially, when this part of the story took place, Namoi was subject to competing takeover offers – an unconditional bid from Louis Dreyfus Company (or LDC) at $0.68 per share and a conditional bid from Olam at $0.75 per share.³ LDC held 22% of shares and Olam held around 8%.
   
   To break the deadlock, on the day in question, LDC announced at 5.04pm that it would increase its offer price to $0.77 per share if the major shareholder (STAM) accepted the bid for its 25% stake by 7pm that day.
   
   STAM duly accepted the bid within the timeframe and LDC’s interest increased from 22% to 47%, effectively delivering control to LDC.⁴ Olam withdrew its bid.
    
2. FMG’s bid for Red Hawk Mining
   
   This is the bid mentioned above. It had another feature designed to encourage key shareholders to accept promptly.
   
   The original bid price was $1.05 per share, but this would increase to $1.20 per share if FMG received acceptances taking its interest to 75% within 7 days of the offer period opening. If the two key shareholders accepted, this would be satisfied.

In neither takeover were there objections to the conditional price increase structure from the target company or from target shareholders.

There is an unresolved question as to what may ordinarily be expected under the Eggleston principle that shareholders should have a reasonable time to assess the merits of a takeover bid. For example, is a time period of 2 hours to consider a conditional increase statement (as was the case in the Naomi bid) sufficient time? Does it make a difference if the conditional increase statement is expressed in such a way that enlivens the “truth in takeovers” policy?⁵ Does it make a difference if the target has been through a thorough sale process?

That Eggleston principle was the basis for the Takeovers Panel rejecting a structure used by Bruandwo (an entity jointly owned by Woolworths and Bruce Mathieson) in the 2004 bid for ALH when it gave shareholders 4 hours to accept its offer in order to trigger a price increase, failing which Bruandwo said it would allow the bid to lapse (a statement which enlivened the “truth in takeovers” policy).⁶

In any event, although there may be some uncertainty about what is expected under that Eggleston principle (and noting that the specific facts and circumstances of each case will be relevant), many bidders would balance that uncertainty with the upside if a conditional increase statement with a short timeframe produces a change of control in their favour.

Conclusion

Who doesn’t love a takeover bid? So much action in a short period of time. So much value for shareholders. Sure, the prevalence of takeovers has diminished since the 1980s and 1990s, but they still remain a potent weapon for bidders who are prepared to chance their arm. The success of the takeover bids mentioned here may encourage more acquirers to use takeover bids in preference to the scheme of arrangement route.