To disclose or not disclose indicative approaches? Lessons from recent market practice

There has been a recent upsurge of examples of target companies disclosing non-binding, preliminary approaches from bidders.  We look at a number of these examples and the lessons for target boards.

Summary

• There has been an upsurge of examples of target companies disclosing non-binding indicative offers from bidders.
• This may suggest a change in practice, but it seems that most of the disclosures may be attributable to strategic factors or as required by loss of confidentiality or media speculation.

There has been a recent spate of target companies announcing the receipt of non-binding indicative offers from bidders concerning takeover bids or schemes of arrangement.

In October alone, we have seen at least 6 such examples: Santos, ALE Property Group, iSelect, HUB24, UXC, and Australian Industrial REIT.

Does the recent trend suggest that companies are taking a conservative view of their ASX continuous disclosure obligations? Or are there other strategic factors at play which have influenced the decision to disclose?

Looking at recent market practice

Disclosure where no leak/media speculation

A number of announcements have been made where there has been no apparent loss of confidentiality. These include:

The a2 Milk Company/Freedom Foods & Dean Foods (June 2015): a2 Milk announced on 22 June 2015 that it had received an expression of interest from “two associated trade parties”. While not specifying when it was received, a2 Milk mentioned the bidders’ condition relating to no change to the number of shares on issue. This was relevant as a2 Milk was planning a capital raising. On 20 July 2015, a2 Milk announced that it did not consider the expression of interest to be compelling and, on 8 October 2015, announced a capital raising.

UXC/CSC (October 2015): on 6 October 2015, UXC announced that it had received an indicative proposal from CSC and had entered into a process agreement with CSC providing for exclusive due diligence and certain exclusivity provisions. There had been no earlier announcement of an approach.

HUB24/IOOF (October 2015): HUB24 announced on 8 October 2015 that it had received an indicative proposal from “an unrelated party”, which it was evaluating. The company did not indicate when the proposal was received or why it was being disclosed. Subsequently, IOOF’s identity was disclosed in response to media speculation.

iSelect/Providence (October 2015): on 13 October 2015, iSelect announced that it had received an indicative scheme proposal from “a well credentialed international private equity firm” (and at the same time announced that its CEO had resigned). The company also told shareholders that its capital management initiatives would be pushed back until completion of due diligence and negotiations with the bidder.

ALE Property Group (October 2015): Caledonia, a 26% securityholder, made an indicative approach to ALE on 14 October 2015. On the same day, ALE disclosed the approach and said that it would not progress the proposal on the basis that it significantly undervalued the company.

Santos (October 2015): on 22 October 2015, Santos announced that it had received an indicative proposal from Scepter Partners on 20 October 2015, which it had rejected on the basis that it was opportunistic, undervalued the company and some of the conditions in the proposal would be adverse to Santos’ strategic review process.

Disclosure following leak/media speculation

Diversa/Equity Trustees (April 2015): on 14 April 2015, Diversa received an indicative scheme proposal from Equity Trustees. Following an apparent leak on 21 April 2015, Diversa announced that it had received the proposal, but that no agreement to proceed had been reached.

Asciano/Brookfield (June/July 2015): Brookfield submitted an indicative scheme proposal to Asciano on 26 June 2015. On 1 July 2015, following media speculation, Asciano confirmed receipt of the proposal and that it was engaging further with Brookfield on an exclusive basis to progress the proposal.

Oil Search/Woodside (September 2015): Woodside made a preliminary approach to Oil Search in relation to a proposed merger. On 8 September 2015, following media speculation in relation to the proposal, both parties announced the proposal, with Oil Search stating that it intended to review it.

Commentary – lessons for target boards

The recent market practice is, we consider, consistent with target boards having a degree of flexibility about disclosing non-binding indicative offers, at least so long as they remain confidential. The two largest completed transactions in the Australian market in 2015 were kept confidential until a final binding implementation agreement was agreed - Toll/Japan Post and Novion/Federation Centres.

When is disclosure appropriate before a final transaction is agreed?

• Immediate disclosure is clearly required when confidentiality is lost or there is considerable media speculation, as demonstrated by the examples of Diversa, Asciano, and Oil Search.
• Another reason for disclosure may be that the market was expecting a strategic initiative, but that will be delayed due to the approach. This appears to be a factor behind the disclosures made by a2 Milk and iSelect.
• If there is some formality between the target and the bidder, such as a process agreement (particularly if it contains exclusivity provisions), that may prompt the target to disclose details, as happened in the UXC/CSC example.
• Another basis of disclosure, as demonstrated by the Santos and ALE Property examples, is where the target has rejected the approach. In that instance, it is often considered that disclosure is appropriate as investors should be aware of the position and disclosure will also put the board in a better light in case the approach and its rejection subsequently become public. Generally, a board will want to be seen to be doing the right thing.
• The last category is simply where the target board decides that shareholders’ interests are best promoted by immediate disclosure. We would put HUB24 in that category given the apparent lack of any other reason for early disclosure.

Keeping a lid on the bidder’s identity

In each of the indicative proposals disclosed by a2 Milk, HUB24 and iSelect, the target did not initially disclose the identity of the bidder. This is the typical approach where a target wishes to disclose the confidential approach and the bidder is seeking to prevent its name being up in lights at such an early stage. In each of these examples, following media speculation, the target was required to disclose the bidder’s identity shortly after the initial announcement. Such an outcome is not surprising given the limited universe of potential bidders for a particular company.

End notes

1. Herbert Smith Freehills has roles acting for either the bidder or the target in UXC/CSC, iSelect/Providence, Asciano/Brookfield and Oil Search/Woodside.