The rise of the 'Reverse Air Hug'
It has been cliché in M&A to say Australia is a bidder’s market. But recent deals – successful and otherwise - suggest this is changing – and could mean public markets should strap in for more contested deal-making.
The orthodoxy goes that targets’ only real cards to play in friendly negotiations are the granting of diligence, and the directors’ recommendation. However, in several recent deals – Newmont’s Newcrest takeover, the Invocare proposal from TPG and Bain’s move on Estia Health - we’ve observed an innovative target tactic in play.
In each, the target has wrapped the bidder in what we’re calling a ‘Reverse Air Hug’. (Groan away) It’s a play on the well-known ‘bear hug’, where a bidder announces a compelling proposal to the market ahead of, or after, approach - to strong-arm a target into responding. An ‘air hug’ is when the proposal is not compelling but still disruptive. A “Reverse Air Hug” is a target seeking to turn the tables.
It goes something like this:
A target receives an approach. If the approach does not leak, the target announces it to the market. Then, the target announces that it rejects the proposal, but that it will provide limited non-public information to enable the bidder to sweeten its offer.
To access this limited information bidders must usually agree to a standstill (preventing the bidder from acquiring securities or making a hostile bid for an agreed period) and confidentiality arrangements. These arrangements are a “bear trap”. The target gives only very limited diligence, and has no obligation to engage with the bidder’s proposal or exclusivity provisions to stop it from shopping itself to other bidders.
Worse for a bidder, it can’t acquire a blocking stake or announce any improved proposal, limiting its ability to pressure the target by seeking shareholder support.
We first saw the tactic used in the Crown/Blackstone transaction. It was also used (with some modifications) in the recently inked Origin/Brookfield deal. In both cases, the premium ultimately extracted was higher than the initial offers.
Likewise with Newcrest -, Newmont’s initial approach leaked to the market, Newcrest rejected it and offered limited due diligence. One month later, Newmont revised its offer, and after what the parties termed ‘robust’ due diligence, have just announced a signed Scheme Implementation Agreement.
In Invocare, after trying the same tactic, TPG withdrew its offer (an “Air slap” perhaps)? A revised offer from TPG followed and now the parties are in exclusive due diligence.
Estia Health has achieved the same result after using the tactic on Bain – which is currently in exclusive due diligence after entering into a process deed and making a revised (higher) proposal.
Whether the tactic leads to an ultimately successful transaction on any of these situations remains to be seen, but its prevalence shows it’s the new black in public M&A.
What does its rise mean?
In the right circumstances, it’s a great play – if you’re a target with assets uniquely valuable to the right bidder – Crown or Origin for example.
- Takeaways from the Deal Talk podcast
- Schemes just got easier - Federal Court changes to documentation requirements
- Offering less to get more - harnessing the power of a scheme structure
- The Global M&A mood – on the ground in New York for the International Bar Association’s M&A Conference
- Return to main page
Targets employing it take risks. There are continuous disclosure issues – a target is effectively telling the market it possesses material non-public information relevant to a bidder. Second, it can backfire - if there is no higher offer or the target rejects the offer of limited diligence, the directors expose themselves to significant shareholder criticism.
For bidders, this tactic obviously presents a conundrum – if used well it serves to neuter a bidder’s ability to build the public pressure so often the only way to move recalcitrant target boards who are not willing to deal.
What can they do about it? First, a bidder can sign up to confidentiality arrangements but negotiate protections. For example, an ability to announce improved offers irrespective of the target’s response. Alternatively, wait and let the market put pressure on the board.
Finally – and this is where we think things could get interesting - committed bidders can just go hostile - launch a takeover bid arguing compelling logic and let shareholders decide. Going hostile is always a bold move, but how much more Reverse Air Hugging will bidders bear?
