Pre-bid Stakes in Australian Public M&A

In the battle for control for Village Roadshow, the Kirby family held 40% of the target and wanted to remain invested given the family’s legacy with the company. In December 2019, Pacific Equity Partners entered into a call option over 19% of the Kirby’s shares, exercisable at $3.90 a share on a rival bid being announced. If the call option was exercised, the Kirbys had the right to acquire the shares back if Pacific Equity Partners did not secure control of Village within a period of time, giving the Kirbys certainty that they would retain their stake. A similar “call-back” structure was used by Kirin and Marcus Blackmore in the Blackmore acquisition. In the Village transaction, Pacific Equity Partners’ pre-bid arrangement was overcome by a successful rival bidder, BGH Capital, after the COVID-19 pandemic in February 2020 resulted in Village Roadshow’s share price trading well below the option exercise price, rendering the option uneconomic and ineffective.

In Potentia’s bid for Tyro in 2022, major shareholder Grok (who held 12.5% of the target) entered into a novel voting and acceptance agreement with the bidder. Grok agreed to accept a takeover bid, or vote in favour of a scheme, if proposed by Potentia at $1.27 per share or higher. Presumably, a tension emerged, Grok did not want the pre-bid to prevent a rival bid, while Potentia wanted to prevent a rival bidder from accessing the Grok stake. The solution they agreed was that Grok was not permitted to support a competing proposal unless the rival offer was worth $0.25 or more per share than Potentia’s most recent proposal and was unmatched by Potentia. Grok also agreed to reimburse Potentia’s costs if a rival bidder was successful, presumably as a means of encouraging Potentia to make the first move and put Tyro into play, with downside protection if it was outbid.

The use of a dual structure scheme and takeover bid to apply pressure to a blocking shareholder to vote in favour of the scheme or risk having a minority position under the takeover bid was used effectively in the battle for control of Healthscope in 2019. However, this has not always worked to overcome a rival bidder. In August 2022, Potentia Capital acquired a combined relevant and economic interest of 17% (12% physical and ~5% in cash settled total return swaps) in Nitro at the same time it launched an NBIO at $1.58 a share. Potentia’s offer was rejected by Nitro, upon which Potentia physically settled the swap and increased its physical stake to 19.9%. Nitro received multiple offers from third parties, spurring Potentia to launch an unrecommended takeover bid at $1.80 per share. Nitro entered into an agreed deal with a rival bidder Alludo, for a scheme at $2.00 and takeover at the same price, designed to force Potentia to accept the offer to avoid being stuck in a minority shareholder position. Potentia matched this price under its unrecommended takeover, at which time Alludo went to $2.15. Alludo’s scheme was voted down (including using Potentia’s stake) and only amassed 13% of acceptances under its bid. With Alludo having declared its offer best and final, Potentia increased its bid to $2.17 and ultimately reached compulsory acquisition. While the concurrent scheme and takeover put pressure on Potentia, which contributed to Potentia bidding up its price, the example shows the power of a pre-bid as a blocking stake to a rival bid and ability to control the outcome, notwithstanding this tactic.

In the recent Selfwealth control situation, first bidder Bell Financial had an agreed deal, after which time M&A arbitrage fund, Harvest Lane, amassed a 13% stake. Harvest Lane sold its stake to a second bidder, Syfe, who acquired a total blocking stake of just under 19% and submitted a higher rival bid that was ultimately successful. The example shows the power of a blocking stake. A similar situation is emerging in respect of PointsBet, where following an agreed deal with MIXI, a rival bidder, betr, acquired 19.9% from an institutional investor before submitting a higher proposal. This demonstrates that where an initial bidder declines to acquire a pre-bid stake, the initial bidder can be vulnerable to a second bidder emerging with such a stake (and potentially losing the deal), notwithstanding the exclusivity granted to the initial bidder by the target.

In the long running battle for control of Pacific Smiles, first bidder Genesis Capital amassed a cash settled long swap position for 19.9% of the target in December 2023. In May 2024, Genesis announced it had acquired 19.9% of the shares in Pacific Smiles by requiring physical settlement of its swap. Genesis had failed to inform the market that in December 2023 it had altered its swap arrangements to allow physical settlement of the swap, which the Takeovers Panel found to be unacceptable (though it did not make any orders). In April 2024, National Dental Care (owned by Crescent Capital) entered into an agreed deal with Pacific Smiles at $1.90 a share. In July 2024, Genesis informed the target it intended to vote against the NDC proposal ahead of the scheme meeting, at which time NDC increased its offer price to a best and final $1.91 a share, absent a superior proposal, which Genesis said it would also vote against. Genesis submitted a proposal at $1.90 a share that the Board considered superior (notwithstanding it was below the latest NDC offer price) because it would be reasonably likely to be more favourable to shareholders. NDC increased its offer to $2.05 ahead of the scheme meeting, but was voted down by Genesis and other shareholders (only 63% voted in favour) and the deal with NDC was terminated in August 2024. Genesis made a subsequent takeover bid at $1.90 a share, which the target Board recommended shareholders reject. Genesis increased its price to $1.98 per share and got to 45% voting power under the takeover bid, at which time the Board recommended remaining shareholders accept the bid. Genesis currently holds 89% of the shares, and will presumably reach compulsory acquisition imminently.