Best M&A deal
Foxtel Management’s US$2.73 billion acquisition of Austar United Communications
Advisers to acquirer: Aquasia, Credit Suisse, UBS
Advisers to seller: Goldman Sachs
2012 was a tough year in Australian M&A; the year looked a lot like the grim days of 2008 and 2009 at the height of the global financial crisis.
Volumes were down materially on 2011, with just 15 deals valued more than US$1 billion, against 33 and 37 for 2011 and 2010 respectively. There was no deal greater than US$5 billion for the first time since 2003. That mean the year was dominated by smaller deals and lower risk transactions.
One industry-transforming deal that stood out in the quiet year was the pay-TV provider Foxtel’s acquisition of regional pay-TV company Austar, which created one of Australia’s largest media businesses. It was a transaction that had been attempted twice over the past decade.
“It’s clearly the M&A transaction which had the most compelling industry logic,” one M&A adviser says.
The complexity of the deal was due in part to the ownership structure. ASX-listed Austar was 54% owned by US-based Liberty Global. Foxtel is 50% owned by phone giant Telstra, with Rupert Murdoch’s News Corp and Consolidated Media Holdings both holding 25% stakes. Foxtel’s ownership structure has been the subject of much bitter wrangling between the powerful players in years past.
The other complication was regulatory hurdles, particularly from competition regulator, the Australian Competition and Consumer Commission (ACCC). The ACCC was negative on the deal from the outset and said the proposed acquisition was likely to substantially lessen competition. But after 11 months of intense negotiations, Foxtel and its advisers gained approval; they helped allay concerns, partly through voluntary undertakings and third-party access to certain channels.
The deal was also successfully completed despite market volatility: the ASX200 slumped up to 17% while the deal was being worked on.
The M&A generated significant synergies, which will allow Foxtel to innovate and bolster its position against the commercial free-to-air broadcasters. As one M&A adviser says, “that’s what M&A is about: delivering value for stakeholders. And, in a quiet year, and despite significant challenges, that’s what the Foxtel/Austar deal did.”
Fonterra Shareholders’ Fund NZD525 million (US$443.43 million) initial public offering
Bookrunners: ASB, ANZ
It was another skinny year for IPOs in Australia. The largest deal was the listing of Fonterra Shareholders’ Fund on the Australian Securities Exchange (ASX) and the New Zealand Stock Exchange.
In terms of size, raising NZD525 million was certainly not out of this world; but it was still the largest IPO in the New Zealand since 2005 and in the Australian market since the listing of QR National in 2010.
The lack of size was compensated by the complexity of the deal. The challenge was sizeable: how do you take a co-operative where only producing farmers can own voting shares, but that allows third parties to access the co-op’s economic upside? It has been a challenge faced by co-ops around the world, often unsuccessfully.
Fonterra is a co-operative 100% owned by its 10,500 farmer shareholders, who all supply milk to Fonterra; the supply represents some 89% of New Zealand’s total milk supply. Fonterra itself is the world’s largest processor and exporter of dairy products and New Zealand’s largest company, boasting NZD20 billion in annual revenue.
Under the previous structure, farmer shareholders held shares in Fonterra based on the amount of milk they supplied to the co-op each year. When a farmer supplied more milk, Fonterra issued shares, and when supply stopped or fell, Fonterra redeemed the shares for cash. The obligation to issue and redeem exposed Fonterra to a fluctuating capital structure and unstable balance sheet.
The solution was ‘Trading Among Farmers’ (TAF), which has two key mechanisms. Firstly, farmers can trade shares between themselves on a Farmer Shareholders’ Market, which cuts equity redemption risk. Secondly, farmer shareholders can transfer economic rights (dividend and capital value) of a portion of their shares via a farmer-owned custodian, the Fonterra Shareholders’ Fund, to outside investors. FSF rights don’t include the right to hold legal title to the share, or to exercise voting rights, except in limited circumstances.
There was early resistance. In pre-marketing the bookrunners frequently heard the complaint “it’s too hard, too hard, too hard” from potential investors. But strong education and marketing efforts helped overcome early opposition to the TAF structure.
Fonterra management met over 180 investors prior to the IPO. The well-planned and extensive marketing allowed the deal team to focus on selling the strong fundamentals of the Fonterra business.
The results flowed through to strong demand: the IPO priced at NZD5.50 per unit (AUD4.32 on the ASX), the top end of the indicative range of NZD4.60-NZD5.50. Performance post-listing was also strong, with the units trading up 25% on the first day to NZD6.85.
Best equity offering
QR National AUD500 million (US$517.69 million) follow-on offering
The sell-down of part of the Queensland government’s AUD1.5 billion stake in rail operator QR National (QRN), which had been privatised and listed in 2010, was one of the most broadly telegraphed transactions in years. The regional government had come off escrow, and the recently elected government of premier Campbell Newman was expected to monetise part, or all, of its stake.
That created big challenges. Many market observers assumed a sale would be done via a block trade at a discount, which led hedge funds to short the stock.
In a slow market, competition for the deal was obviously fierce and more than a dozen investment banks lobbied the government for the work. “The best of the market put together their most innovative and competitive proposals,” says one banker. “It was a highly, highly, competitive transaction.”
UBS won the mandate as sole financial adviser to QRN and sole placement agent to the Queensland government in its AUD1.5 billion sale. It had come up with a solution where the government could sell a majority of shares at a premium to the prevailing price. “Every other bank in the market was talking about discounts,” the banker says.
UBS understood clearly the government wanted good headlines, and it delivered. The bank’s solution was neat: QRN would buy AUD1 billion worth of shares from the Queensland government, which gave QRN the opportunity to accelerate its share buy-back. Additionally, it would place AUD500 million of shares with select institutions.
Taking a select rather than a shot-gun approach meant that the government wouldn’t have to respond to the lowest common denominator when it came to pricing.
The deal was priced at AUD3.47, a premium to the market price of AUD3.42. It also triggered a short squeeze and re-rating of the stock, which jumped 5% to AUD3.65, creating an additional AUD400 million of value for the Queensland government.
As The Australian newspaper said at the time: “The genius in yesterday’s QRN deal was allowing the government to walk away with a AUD400 million profit, but leaving remaining shareholders to share a AUD436 million increase in market value.”
The government also got the headlines and a good financial outcome. Queensland treasurer Tim Nicholls said at the time: “We have been able to secure the best deal for Queenslanders in terms of the total sale figure.”
Best equity-linked offering
Commonwealth Bank of Australia (CBA) AUD2 billion perpetual exchangeable notes
Bookrunners: CBA, Morgan Stanley
In 2012 one of the major Australian banks needed to step up and be the first to issue a security structured to qualify as Additional Tier I under the local regulator’s implementation of Basel III in Australia, which came into effect on January 1. The security needed to include ‘non-viability’ triggers, which in turn means they are less investor friendly and therefore significantly more challenging.
CBA was the first major bank to stand up with its PERLS VI transaction, which was upsized from AUD750 million to AUD2 billion. It was the largest ASX-listed hybrid transaction since 2009, raising AUD320 million more than the next largest transaction.
Through 2012 other major bank competitors, including Westpac and ANZ, issued ‘transitional’ securities, which didn’t include the future Basel III requirements. Without non-viability triggers they were easier to sell into the market, but the downside was they lost face value in subsequent years.
CBA backed its clout with regulator, Apra (Australian Prudential Regulation Authority) and began negotiating hard. It faced a complex balancing act between what Apra would stomach, and what investors would stomach (the securities would be more equity-like and therefore more risky).
CBA included a non-viability mechanism that enables it to provide investors with ordinary shares in the bank with a value equal to the face value of PERLS VI prior to any write down of the PERLS VI, which gives investors an opportunity to recover all or part of their original investment.
The board of CBA were also concerned that they were putting something quite different into the market and that investors needed to be made aware of the risks they faced. A warning statement was put on the front of the prospectus, which was not a legal requirement.
Despite the non-viability language, and the fact that some AUD10 billion of other issuance had been poured into the market during the year, strong demand allowed CBA to price PERLS VI at the bottom end of the indicative margin range of 380 basis points (bp) to 400bp.
The issue provided an excellent outcome for CBA: it gave the bank a cost-effective alternative to issuing equity to satisfy its regulatory capital requirements.
But CBA’s PERLS VI deal also led the market and set a precedent. Other Australian bank issuers including Suncorp, Bendigo and Adelaide Bank and Bank of Queensland have gone on to raise fully compliant Additional Tier I hybrid securities.
As one competitor notes, it was “a cracking deal; a really big deal”.
Best international bond
Commonwealth Bank of Australia (CBA) €1.5 billion (US$2.02 billion) 2.625% covered bonds due 2017
Bookrunners: BNP Paribas, CBA, HSBC, RBS
CBA stood head and shoulders above rivals during 2012 when it came to bond issuance.
Like its three ‘big bank’ peers, the lender relies on raising money through bonds to help fund its operations, which has made it a common participant in the international debt markets. But its efforts during last year were particularly impressive.
And it began the year with a bang; launching a €1.5 billion covered bond issue, the first such deal from the country to be denominated in the currency.
Australia’s covered bond market was only established following legislation allowing such deals in September 2011. The first deals were five-year US dollar-denominated bonds conducted by ANZ and Westpac within 48 hours of each other in November. But the two transactions made for an unappealing debut of a new type of product. They were too aggressively priced, leading to a lack of support that led both sets of bonds to widen sharply in the secondary market.
CBA had been intending to conduct its own US dollar-denominated bond issue in late 2011, but the impact of ANZ and Westpac’s deal debacles caused it to pause and take stock. Instead, the bank decided to change to a euro-denominated deal that was primarily focused at European investors.
It was a sensible move. Europe’s investor base is highly familiar with covered bonds, having bought deals from various regional banks for years. A deal from an Australian bank offered them diversification and a strong credit story, given the robust ratings of the country’s top borrowers.
But it was key that CBA got its pricing right. In that it proved to be highly successful. The bank brought the bonds at 100bp over mid swaps, in line with its mooted pricing. The size of €1.5 billion surprised observers, particularly given that both ANZ and Westpac only issued US$1 billion apiece. But CBA’s deal gained €1.7 billion of orders from 100 investors, and the bonds traded in slightly on the break.
Most importantly the deal was deemed a success, and helped to get covered bond issuance from Australian banks back on track. National Australia Bank followed with its own €1 billion covered bond the next day, also pricing it in line with speculation. And all four of Australia’s big banks conducted euro- and US dollar-denominated covered bond deals during the rest of the year.
One of these deals, CBA’s own US$4 billion dual tranche covered and unsecured bond issue, was another contender for this transaction. But while a huge, impressive and successful deal in its own right, we feel that the bank’s ability to kick start the covered bond market in 2012 after a lacklustre beginning in late 2011 was even more noteworthy.
Best local currency bond
BHP Billiton AUD1 billion 3.75% bonds due 2017
Bookrunners: ANZ, CBA
Australia’s domestic currency bond market has long gained a good array of borrowers, but one persisting complaint among investors is that it’s heavily dominated by financial borrowers and not enough local corporates use it. Added to this, investors moan that when companies do raise debt locally their transactions are seldom deals of truly benchmark size.
In October, BHP Billiton helped address both criticisms.
The Anglo-Australian resources company returned to the Australian bond market for the first time in over 10 years, and it did so in style, issuing AUD1 billion in five-year bonds. The transaction stands as Australia’s largest single-tranche deal by a non-financial borrower, offering a potential benchmark for other companies.
The scale of this rare domestic market deal excited local investors, who were quick to offer up orders for the transaction. Ultimately joint-bookrunners ANZ and CBA drummed up AUD1.8 billion in investor orders. Australian investors tend to be more conservative when it comes to placing orders than their international counterparts, so this level of demand was more than sufficient to ensure that the Melbourne-headquartered BHP could price its deal at extremely competitive levels.
In fact the deal ended up enjoying a highly competitive spread level. The bonds were priced at 90bp over swaps, while Westpac’s 2017 bonds were trading at 104bp over at the same time. Coming tighter than equivalent bank debt is remarkable, especially considering that BHP Billiton is rated A1/A+ by Moodys’ and Standard & Poor’s, a notch lower than the ‘AA-’ ratings enjoyed by Australia’s big four banks.
The reason BHP could gain such competitive pricing was due to the combination of the company’s central role in Australia’s resource-fuelled economic growth over the past decade, its blue-chip nature, and the dearth of corporate supply in the local bond market. Fund managers extolled BHP Billiton for helping to fill a yawning gap in corporate bond supply among Australia’s buyside community.
The company’s decision to remain prudent with its investments also helped; BHP chose to delay several plans to invest in new projects amid concerns of softening global demand for resources. However the company still intends to spend US$6.2 billion to develop coal mines and port facilities in Australia, according to its exploration and development report, so it still has a sizeable funding need in the country. This transaction will help greatly towards that.
BHP Billiton’s deal looks set to stand as a benchmark for corporate bond issuance in Australia for some time to come. The greatest hope among the country’s investors is that both the resources company and other corporates opt to follow with similarly large transactions.
Medallion Trust Series 2012-1 AUD1 billion mortgage-backed securities offering
Lead manager: CBA
No securitisation in Australia’s relatively sophisticated market really broke the mould during 2012, so Asiamoney opted to look at size and market impact. From that basis CBA’s latest mortgage-backed securities (MBS) deal from its Medallions Trust series was an interesting transaction.
The issue marked the first time CBA had conducted a securitisation from its Medallion series since April 2011, when it conducted a AUD3 billion deal. It was less ambitious this time but still managed to raise AUD1 billion from investors, making it the largest securitisation of the year. While smaller than its last market foray the size was still notable, given that the standard size of securitisations tends to be AUD500 million or less.
CBA itself had started out with an intention to raise AUD750 million for the deal, but it registered strong demand from local investors and was able to increase the size by another AUD250 million.
The bank ended up pricing the three-tranche transaction highly competitively, given the strength of demand. Its AUD920 million class ‘A’ tranche was priced to offer 140bp over the bank bill swap rate, the bottom level of the 140bp-145bp guidance it had offered investors a week before the deal was priced. The weighted average life of this tranche was 3.4 years.
The strength of investor demand also ensured that it was able to price the deal tighter than comparable transactions. Westpac for example had a AUD1.15 billion deal whose ‘A’ tranche, which also possesses an average life of 3.4 years, paid 155bp over the bank bill swap rate.
Best syndicated loan
Leighton Holdings AUD1.4 billion syndicated loan
Bookrunners: ANZ, HSBC, Mizuho, RBS
As Australia’s largest construction and contracting group, Leighton Holdings has greatly benefited from the country’s resources boom, helping to build the facilities required, as well as participate in a variety of civil engineering, non-residential construction and telecommunications projects within Australia and beyond.
The company’s success also meant that its need for capital was growing, and in particular it needed to increase its bonding capacity. On the less positive side it also had debt maturing in the near future which was raising concerns. This included an outstanding AUD700 million performance loan facility that was proving insufficient for Leighton’s debt needs, so it began looking around for a larger alternative.
The four bookrunners to this deal supplied it, initially arranging a AUD1 billion syndicated performance bonding facility to improve Leighton’s balance sheet flexibility. The facility provides a form of surety for Leighton’s clients for contractual obligations that it has undertaken.
However once the facility was syndicated into the market demand among banks to participate proved to be very strong, allowing the bookrunners to add another 40% to the over facility’s size, bringing it to AUD1.4 billion. In the end 19 banks participated in the new facility.
The strength in demand was particularly evident from Asian banks, many of which enjoy strong capital ratios and liquidity. Overall 71% of the loan facility was allocated to Asia-based banks, with the rest going to Australian lenders. The debt of the three-year facility can be drawn down in Australian dollars, Singaporean dollars, Hong Kong dollars or US dollars.
Ultimately the interest in participating in the facility was so strong that the four bookrunners had to scale back the involvement of hopeful participants due to Leighton’s limited need for cash. Even so, it ended being the largest syndicated loan in Australia during 2012.
Leighton also conducted a US$500 million 5.95% 144A bond issue at the same time, which was priced at 430bp over US Treasuries.
Best project financing
Australia-Pacific LNG Processing US$2.88 billion project financing
Lead arrangers: ANZ, BBVA, Bank of China, CBA, DBS, DNB Bank, Export Development Canada, Export-Import Bank of China, Export-Import Bank of the US, HSBC, Lloyds Banking Group, Mitsubishi UFJ Financial Group, Mizuho, National Australia Bank, SG Corporate & Investment Banking, Sumitomo Mitsui Financial Group, Westpac
One of Australia’s largest project financings in recent times revolves around a major new liquid natural gas (LNG) facility in Queensland, Australia. The plan for the project is to build two gas liquefaction trains that would convert coal seam gas (CSG) into LNG.
It marked the first CSG-LNG project financing in the world, and was hardly modest in its expense; construction of the entire facility is estimated to cost around US$8.5 billion. It was also the first LNG project financing to be conducted in Australia in over 10 years.
The bulk of the project’s cost was mostly promised by the Export-Import Bank of China, with additional support by the Export-Import Bank of the US. All in all the two are offering US$5.63 billion to support the project. However the remaining US$2.88 billion had to be raised via project financing.
This was a challenge, as virtually no banks had any experience valuing the risks of a CSG-LNG project. So lenders willing to participate had to first get up to speed on the requirements of such funding. Yet the appeal of the project quickly outweighed such challenges, and the project finance facility ended up being supported by 17 banks.
This was a strong level of participation, particularly given that the banks had to commit to a 16-year commitment period, during which it will be a big challenge to keep the construction costs of the project from spiralling. Both were challenging factors for Australian banks in particular, but they still proved willing to be counted in the funding.
The participation of such a broad array of banks was encouraging, as was the Chinese banks’ willingness to participate and Chexim’s direct offer of funding for the project too. Traditionally Korean and Japanese banks had been the most willing to offer project financing help for LNG projects, so this marks a new step for Chinese lenders too.
More such steps are likely as mainland China banks seek to do their part in securing various energy sources to support the expansion of the world’s second-largest economy.
Asiamoney did not choose a Best Leveraged Financing award this year due to a lack of compelling nominations.