Non-binding indicative offers in public M&A

The data is surprisingly steady year-on-year. Disclosure that was voluntary, caused by media speculation or because of an existing proposal were all roughly consistent through the review period, indicating the data is quite reliable. While each case will be fact specific and requires a tailor-made strategy, the consistency of the data helps support our conclusions on practices. 

It is well established that the ASX does not expect companies to disclose an NBIO, provided the approach remains confidential and incomplete (i.e. before definitive transaction documents are agreed). The ASX clarified this position in its 2013 updates to Guidance Note 8 on continuous disclosure. Prior to this, there had been mixed practice with a bias to disclosing approaches. The ASX provided clarification after the infamous example in 2012 of David Jones Ltd disclosing an approach from a self-proclaimed private equity fund for which there was no public information available. That approach turned out to be a hoax, but not before a great deal of share price volatility that caused losses for shareholders.

The ASX guidance gives target Boards a great deal of flexibility on whether or not to disclose an approach, so long as confidentiality is maintained and the bidder does not take action that forces disclosure (such as obtaining a pre-bid stake greater than 5%).¹

There may be good reasons for the Board to voluntarily disclose an approach even if not required to do so. This is most commonly to “test the market” for other potential bidders, test shareholder views on what is a fair offer or control the narrative with shareholders (e.g. avoid later criticism and signal the Board’s directional views on fundamental value). In BHP’s bid for OZ Minerals in 2023, OZ Minerals decided to voluntarily disclose the rejection of BHP’s first approach to encourage any rival bidders (none emerged), be able to receive shareholder feedback on the right price to engage on and apply pressure on BHP to increase its offer.        

From the charts, we can see about 50% of all approaches were first announced at the time transaction agreements were signed. This seems high relative to the high number of newspaper headlines we read about indicative approaches having been made. An example of this is the recently announced A$2.4 billion combination of Ramelius Resources and Spartan Resources.

This highlights that bidders and targets generally prefer deal confidentiality, and are still successfully able to deal behind closed doors, in most cases. For bidders, confidentiality is prized because it reduces the risk of a rival bid by not advertising that the target may be “in play”. For targets, confidentiality avoids unnecessary share price volatility and criticism if a deal does not eventuate.

However, this strategy does not preclude the target from procuring a price rise, even absent a rival bid. When we acted for Newcrest, the target secured a unilateral price rise from Newmont by confidentially rebuffing the first approach at a lower price, before a media leak and a further price rise was secured to agree a deal.

The data shows that about 30% of approaches disclosed result in an agreed deal. That is quite a low success rate. Disclosure of an approach can set a target’s share price on a volatile ride, which when combined with the low success rate, makes the decision to disclose a delicate one for target Boards.

In March 2023, Liontown voluntarily disclosed it had received an offer from Albemarle at $2.50 a share that sent the share price immediately up ~75%. Over the coming months, a further proposal was made by Albemarle at $3.00 a share. In October 2023, when Albemarle announced it would not proceed with the transaction (because of a blocking stake), the share price declined 40% over a week or so. Ultimately, the emergence of a blocking stake is outside of the target Board’s control, but the example shows the potential volatility which can cause significant loss and emotional damage for shareholders. 

About 34% of cases on average over the three years involved a rejection soon after the initial approach, which is consistent with conventional wisdom that the first price is rarely a bidder’s final price. In about 30% of cases, a rival bid emerged following announcement of an approach (before an agreed deal). In a further 27% of cases on average, the bidder unilaterally increased the price. We conclude that, on the whole, target Boards are doing a good job in handling disclosures in a way that increases value for shareholders.

The Australian market gets criticised from time-to-time for being a leaky market. But only 12% of approaches had to be disclosed because of media speculation (notwithstanding the best efforts of hard-working journalists to sniff out a deal). This is much lower than we expected. It shows that the large number of people often involved in a deal can generally be trusted to protect confidentiality.

Bain’s approach to Insignia leaked in December 2024, following which two separate rival bids from private equity firms emerged that saw the offer price increase from $4.00 a share to $5.00 a share. Arguably the newspaper reporting was helpful in creating a bidding war, though in theory the competition could have been generated while Insignia engaged with bidders confidentially. 

Approximately 20% of approaches were voluntarily disclosed by target boards. Was this an effective strategy? Drilling into the data, we see that, over the three years, an average of 26% of these voluntarily disclosures resulted in a rival bid and 26% resulted in a unilateral price increase. This indicates that, in a majority of cases, the decision to voluntarily disclose was helpful in creating value for shareholders. We temper this conclusion by noting that a rival bid or unilateral price increase could be secured even if the approach had been dealt with confidentially, provided the target advisers effectively canvass the full universe of possible bidders or push bidders on terms.

Bidders requesting exclusivity on a first approach has become relatively routine. However, the decision to seek exclusivity has become more delicate for bidders, following the Takeovers Panel’s revisions to Guidance Note 7 in August 2023. The revised guidance states that failure to disclose the material terms of exclusivity may be unacceptable in certain circumstances, including where there is a notification obligation that would disclose to the first bidder the second bidder’s identity or the material terms of its proposal.

This updated guidance resulted in disclosure of a number of approaches in 2024, including Alcoa’s approach to Alumina, Integral Diagnostics’ approach to Capitol Health, Bell Financial Group’s approach to SelfWealth and Proprium Capital’s approach to AVJennings. In the last two circumstances, rival bids emerged for the target. While these competing bids may have emerged after a deal was agreed, the earlier disclosure caused by the exclusivity features does give rival bidders more time to formulate their competing proposal. Bidders should carefully consider whether what is gained in the terms of exclusivity is worth their approach being disclosed.

Exclusivity was granted in ~35% of the disclosed approaches (before an agreed deal) on average across the three years (after a price was acceptable). The average initial period of exclusivity granted was 35 days, while the total average period of exclusivity was 39 days. This is consistent with our expectation of exclusivity being required for about 5-6 weeks to complete due diligence and agree transaction documents. On average, an extension to the initial exclusivity period was granted in 37% of cases, with the average extension in those cases being for 19 days. We conclude that in, the majority of cases, bidders will accurately estimate the period of exclusivity required and, where it is not, an extra ~2 weeks is often required.