Private mergers and acquisitions will be driven by the unlikeliest of sources in 2012: public governments.
That’s the prediction from Torys LLP, as noted in the law firm’s latest annual report on M&A trends.
Judging by last year, it’s worth taking note of the firm’s forecasts: In January, 2011, Torys predicted that politics would continue to matter in foreign takeovers of Canadian companies, and that takeover defence tactics would ramp up. Both hunches proved to be true: A proposed takeover of TMX Group Inc. became highly politicized and Mosaid Technologies Inc. fought hard against a hostile takeover.
This year, Torys’ expected trends include asset sales of Crown jewels as governments tighten their belts; reverse break fees that keep acquirers from backing out of M&A deals; and a flurry of public-private partnerships.
It’s difficult to predict anything with the markets so shaky. Last year, for instance, what started as a glorious commodity boom crash-landed in a European crisis. Yet Torys feels confident enough to make predictions in some areas at least.
Government asset sales, for instance, is one of the easiest trends to spot because so many countries, provinces, states and municipalities are overburdened with debt while having limited opportunities to increase revenues. At the same time, governments need to invest in infrastructure. Their best solution is to turn to the private market.
Luckily, private investors such as Canadian pension funds are lining up to get their hands on high-quality, creditworthy assets that churn out stable revenues, such as toll roads and liquor and gaming businesses. These buyers are also open to working with governments because, even though the sellers may be perceived as slow and inefficient, there is “a lot of sophistication within government,” especially in North America, said Torys’ Mark Bain.
“In Canada, the federal government and, say, four of the larger provinces, have done a fair bit of internal spade work on [potential sales or public-private partnerships] and have [floated] trial balloons for years,” he said.
Mr. Bain acknowledged that many government deals are only in the preliminary stages, but “there will be enough of a fiscal push in the next year to push some transactions over the line from internal thinking to external action.”
In terms of structuring M&A deals, Torys expects reverse break fees to become a lot more common. Typically, break fees are paid by target companies that agreed to be acquired, but then struck a deal with another firm at a higher price. These fees are still common, but now the acquirers are agreeing to reverse-break fees, which force them to pay the target company a penalty if they try to back out of a deal.
For instance, Company A may want to buy Company B at $50 a share, but if the market plummets and B’s share price falls to $40 before the deal closes, A may want out. In that case, the reverse fee forces A to pay for the privilege.
In another trend, private equity players and pension funds – some of the biggest buyers these days – will team up to co-invest in 2012, Torys predicts. Canada Pension Plan Investment Board and Public Sector Pension Investment Board, for instance, teamed with Apax Partners to buy Kinetic Concepts for $6.3-billion (U.S.) last year. While this so-called “club” structure is “by no means a new phenomenon, we think that the market climate of 2012 will continue to be conducive to these types of deals,” Torys noted. That’s because the amount of equity any one fund can utilize to sponsor a deal has shrunk in a tepid fundraising environment, and many players, particularly Canadian pension funds, have expanded their teams to add geographic and industry diversity.
With so much expertise flying around, different firms view each other as “value-added partners that can bring more than just money to an investment opportunity,” Torys noted.