Australian M&A and equity markets in a COVID-19 year: 10 things you might have missed

As we wave goodbye (or perhaps say “good riddance”) to 2020, we thought we’d take a step back and look at how the Australian M&A and equity capital markets landscape has performed over what has been a crazy 12 months, with some surprising results.

1. Extraordinary ASIC and ASX relaxation results in a stampede of capital raisings: Both ASIC and the ASX granted temporary capital raising relief to facilitate emergency raisings. This allowed listed companies to increase their 15 per cent placement capacity to 25 per cent, seek back-to-back (four-day) trading halts and undertake a non-renounceable entitlement offer with an offer ratio of more than 1:1. ASX also allowed listed companies who had been suspended for up to 10 days in the previous 12-months (instead of 5) to raise capital without a prospectus. These measures appear to have had the desired effect – by August this year over $30 billion of equity capital had been raised by ASX-listed companies, double the amount over the same period in 2019. Other markets, including the US, also experienced record breaking years for capital raisings.
2. Another (unsurprisingly) slow year for IPOs: Despite the insatiable investor appetite for secondary raisings, as the date of this article there have only been 55 successful IPOs in 2020 (compared to 70 IPOs in 2019 and 104 in 2018). COVID-19 can in part be blamed for making it more difficult for investors to assess companies and their assets, as well as hampering roadshow efforts. Notwithstanding the lower numbers, there have still been a few significant IPOs this year: including technology company, Nuix (~$975 million) and infrastructure play, Dalrymple Bay ($656 million). Investors have remained prepared to back quality listings at a fair price.
3. We saw some on-market bids for the first time in two years: Compared to 2019 (66) and 2018 (70), there have only been 53 public transactions announced in 2020, 12 of which were unsuccessful or withdrawn. Schemes of arrangement continue to be the preferred structure, comprising 59 per cent of deals. There were 2 on-market takeover bids: Golden Investments' successful bid for Stanmore Coal, and the ongoing competitive bid by Nordgold and Shandong to acquire Cardinal Resources. This represents more on-market bids in 2020 than in the two prior years combined. Considering the economic uncertainty and the reduced FIRB thresholds, the softer public M&A activity is not surprising. The increase in on-market deals was unexpected, but may point to investors desiring quick and certain cash returns during an uncertain time.
4. It has become a busy year for the Takeovers Panel: While mid-year it looked like the Panel members might be twiddling their thumbs, as the year draws to a close it has become a very busy time for the Panel, particularly given the numerous matters relating to the competitive bids for Cardinal Resources. As at the date of this article, December 15, 2020, there have been 25 Panel decisions. Other than 2019 (27 decisions) the Panel has not made more decisions in a year since 2008. The Panel declined to conduct proceedings in 44 per cent of matters this year. Over half of the applications related to alleged disclosure deficiencies. 7 of the 25 involved allegations of association, which continue to be difficult applications to pursue – the Panel did not make any findings of an association.
5. Careful with your “best and final” language: The Panel received multiple applications seeking to allow one of the bidders for Cardinal Resources, Shandong Gold, to increase its price after stating that its offer was “best and final in the absence of a higher competing offer” when another bidder, Nordgold, matched its $1 offer price. Orders were sought that Shandong Gold should be permitted to increase its price on the basis the “impasse” gave rise to unacceptable circumstances and that Nordgold was effectively “snookering Shandong” by matching the offer instead of offering, say, $1.01 per share. The Panel did not accept these arguments noting that it was open to Shandong to frame its statement differently, that the statement was definitive and given to the market voluntarily, and that last and final statements being adhered to is a fundamental principle of an efficient, competitive and informed market. Postscript: a third bidder emerged from Ghana offering $1.05, which allowed Shandong to then increase its offer.
6. You don’t have to trigger a bid condition to frustrate a bid: While we’re on the topic of the Panel and market bids, the Panel ordered Alto Metals to terminate the entitlement offer it launched after receiving an unconditional takeover bid from Habrok. As Habrok’s offer was unconditional, the entitlement offer did not trigger a bid condition and was therefore not a “frustrating action” per se. However, the Panel noted the actions were still unacceptable given the timing and pricing of the entitlement offer with the announcement recommending the rejection of Habrok’s offer were in part a defensive tactic in response to the bid and, as a defensive act, adversely affected the prospects of the bid succeeding. A not dissimilar action was taken by Stanmore this year, with the (then) board announcing a 1 for 33 bonus issue on the opening date of Golden Investments' offer. The matter was not taken to the Panel but the authors wonder if it wouldn’t have resulted in a similar finding by the Panel, given the timing and pricing (free) of the bonus issue. One also has to wonder how a bidder could be sure it could finance an unconditional bid if the number of shares on issue cannot be determined.
7. Gold, gold, gold (and a bit of iron ore): The biggest M&A transaction announced this year was the merger by way of scheme of arrangement between Northern Star and Saracen. The transaction will result in a $16 billion gold miner, if approved by shareholders in January, and create a global top-10 gold miner by market value. Other gold transactions have included Newcrest’s secondary listing on the TSX, the sale of Ravenswood, the competitive bids for Cardinal Resources and the acquisition of Spectrum Metals by Ramelius Resources. Global economic uncertainty and an ongoing global money printing race will see gold remain an attractive market, especially with the price of gold at its current record levels. Australian iron ore miners are also enjoying a strong finish to the year, with the iron ore price buoyed by Chinese port stocks depleting and high demand as Chinese steelmakers continue to ramp up production.
8. Busiest year on record for FIRB: On March 29, 2020, the Treasurer announced temporary changes to Australia’s foreign investment framework in response to concerns relating to Australia’s economic security due to COVID-19. The changes included a lowering of the monetary thresholds for all foreign investments requiring FIRB approval to $0, as well as extending the timeframe for a review of applications from 30 days to six months. In our experience, FIRB has done a fantastic job of managing its case load and didn’t need to rely on the timing extension to the full extent available – the majority of the applications handled by NRF for our clients in 2020 were dealt with in two months or less. The Treasurer has recently confirmed that these temporary measures will be lifted on January 1, 2021.
9. Australian Government announces extensive reforms to foreign investment regime: Many countries took decisive action in 2020 to protect national assets considered to be inherently valuable but weakened by the pandemic. The Australian Treasurer announced this year a comprehensive set of reforms to Australia’s foreign investment framework, motivated, in part, to address perceived limitations in the rights and remedies available under the existing regime to manage national security concerns. Further information regarding the FIRB changes is available in our previous publication here. 
10. First year that long-term suspended companies were de-listed under ASX’s new automatic de-listing policy: Over 100 companies were de-listed from the ASX in the first application of ASX’s stricter de-listing policy which includes the automatic de-listing of companies suspended for over two years. Companies are also finding it more and more difficult to get out of suspension through reverse takeovers (which had become popular transactions in recent years) due to the re-compliance requirements, which make them essentially an IPO. We expect ASX’s de-listing policy to further reduce the “value” that used to be applied to listed shells.

So, that’s it. We’d love to hear your views on 2020 and any themes that you considered to be particularly interesting.

As far as predictions for 2021; we’re not terribly big on crystal ball gazing. What we will say is that we are interested to see the effect of the end of the Government’s COVID-19 initiatives (including JobKeeper and JobSeeker payments, and the extension of the application of the safe harbour protections) on the Australian economy. We expect these measures, as well as record low interest rates, may have postponed the real impact of COVID-19 on large Australian businesses. This may result in more distressed M&A transactions and reconstructions in 2021. The impact of the current trade tensions with China, as well as the election of a new US President, also cannot be ignored.

At least we can enjoy cheaper lobster this Christmas!

This article was co-authored with Mauricio Da Rocha.