FOCUS POINT: DEVIL IN THE DETAIL

Written on the 10 October 2012

FOCUS POINT: DEVIL IN THE DETAIL

INVESTORS who bought shares in Whitehaven Coal Limited or Sundance Resources Limited, on the expectation of a return from the takeover bids made for each entity, have been reminded that even a bid that has the support of the target may not come to fruition.

The bids (Tinkler Group for Whitehaven and Sichuan Hanlong Group for Sundance) were both highly conditional.

While the market now appears to have factored in this ‘conditionality’ in both instances, the initial market pricing of the Sundance deal in 2011 did not appear to fully reflect the conditionality of Hanlong’s offer.

And that was despite it being significantly more advanced than Tinkler’s tilt at Whitehaven.

Hanlong’s initial ‘indicative intention to make an offer’ for Sundance, announced to the market on July 18, 2011, proposed $0.50 per Sundance share (representing a 65.3 per cent premium to the one-month volume-weighted average price prior to the date of that bid).

A formal bid, together with the related scheme implementation agreement, was subsequently announced to the market on October 4, 2011 at an increased bid price of $0.57 per Sundance share.

Sundance’s board of directors supported that offer.

Hanlong’s offer was conditional upon, among other things, usual regulatory conditions, including approval from the Australian Foreign Investment Review Board (FIRB) and the Chinese National Development Reform Commission (NDRC).

On June 22 this year, Sundance announced that FIRB approval had been obtained.

However, on August 2, Sundance reported that while provisional approval had been obtained from the NDRC, final NDRC approval would be conditional upon, among other things, a “reasonable acquisition price” being agreed on between Hanlong and Sundance.

Speculation remains as to what is a “reasonable acquisition price”. However, Sundance shares currently remain suspended from official quotation on the ASX.

The closing price for Sundance’s shares on July 31, the last day of trading in the company’s shares before the August 2 announcement, was $0.335 – approximately 41 per cent below Hanlong’s offer price.

The requirement that regulatory approvals and consents are first obtained before an offer becomes binding, including approval and consent from the FIRB, ASIC or ASX, is a common feature of takeover bids.

The inclusion of such conditions adds a level of uncertainty to the takeover process, not to mention to the discretionary elements usually included (for example “that approval not being conditional or subject only to such conditions as the bidder considers to be acceptable”).

While it can be expected the key commercial terms of a deal will be left to the bidder and target to agree on, public commentary that the NDRC is somehow ‘not playing by the rules’ is misplaced when it is considered the FIRB often provides its approval subject to various conditions.

One example of this is the 2009 FIRB decision in relation to Felix Resources. In that case, it was a condition of FIRB approval that the bidder operate its Australian mines through an Australianheadquartered company with a predominantly Australian management and sales team.

In that instance, it didn’t appear to be relevant that, in the 2008-09 financial year, more than 50 per cent of coal mined in Australia was exported. That meant a large percentage of the company’s clients lived outside of Australia, which no doubt increased the costs of the deal to the bidder.

The Sundance scenario provides some helpful guidance as to the breadth of the possible conditions that the NDRC may seek to impose when providing its approval – which is helpful for those who may be dealing with a target (or a bidder) who requires such approval.

In the meantime, Sundance shareholders will be hoping they do not need to wait too long to learn what the NDRC considers to be “a reasonable acquisition price”.


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