M&A Deal Report May 2015 Contact: Nick Humphrey Partner and Head of Corporate Sparke Helmore Lawyers tel + 61 2 9260 2747 nick.humphrey@sparke.com.au 1
Global activity in 2014 Australian activity in 2014 Sparke Helmore Deal Trends Report
Global M&A highlights Close to pre-gfc levels Global quarterly trend Dramatic rebound in global M&A for calendar year 2014 (only 11.8% by value below 2007 peak levels) Global 2014 saw a 44.7% increase by value (US$3,230bn) on 2013 s total (US$2,232.5bn) US record levels with a 55.6% increase by value (US$1,409bn) on 2013 s total (US$900.1bn) and a 21.5% increase in deal count (4,782) Best year for Asia Pacific M&A on record (62% increase on 2013 levels) European M&A up 55% Sources: Mergermarket 2014 M&A Deal Trend Report, Thomson Reuters Mergers and Acquisitions Review Financial Advisors Full Year 2014 3
Australian M&A activity Large deals v mid-market Australian-announced M&A up 20% (US$119.8bn), the highest full year total since 2011 Increase in large-value transactions continued into Q1 2015 (e.g Federation Centres/Novion Property Group (US$8.2bn) and Japan Post / Toll Holdings (US$6.3bn)) However, mid-market transactions (US$10m to US$ 250m) still accounted for 68% of all Australian M&A in 2014 7% 7% 5% 4% 16% US$0m - US$9m US$10m - US$50m US$51m - US$150m US$151m - US$250m US$251m - US$500 18% US$501 - US$1,000m 43% >US$1,001m Source: Baker Tilly Pitcher Partners Dealmakers: Middle Market M&A in Australia 2015 4
Global private equity Record exits Global trend Global record in private equity exits by both value (to 21.4% above 2007's peak) and number of deals at 2,054 Strategic buyers bought 715 PE portfolio companies (13% more than in 2013) for US$303bn (a 91% jump) led by the sale of Alliance Boots by KKR to Walgreen Global buy-out backed IPO s numbered 210 (20% more than in 2013) with a value of US$86bn (up 48%) Asia Pacific IPO numbers buoyed by the reopening of China s capital markets (eg US$21.8bn listing of Alibaba) 60% of assets sold had been held for more than five years with fewer than 10% held for less than three years. Fund-raising and investments remained steady Source: Bain & Company Global Private Equity Report 2015 5
Australian private equity - Fundraising Snapshot Fundraising for FY2014 up 30% from FY2013, but >90% is attributable to Quadrant Private Equity s AU$850m for Fund No.4 No new mid-market funds between AU$200m to AU$800m were raised PE investment fell to AU$1.96bn in FY2014 (lowest in five years) with investment in 64 companies (lower than the 67 in FY2013) Inbound investment rose to almost AU$1.2bn for PE and VC combined, 45% more than in FY2013, through more activity by foreign firms Source: AVCAL 2014 Yearbook 6
Australian private equity - Exits FY14 exit proceeds were highest in five years, led by upturn in Australian equity capital markets: 29% of portfolio company exits and 63% of total divestment at cost Source: AVCAL 2014 Yearbook 7
Other key statistics IPO market was strong with 74 floats raising $26bn (56 in 2013 raising $11.9bn) Australia saw considerable interest from overseas investors including PE funds and Sovereign Wealth in financial services, education, agriculture Healthy tech sector with active angel groups and venture investors Strong IPO market means private M&A having to compete on price and terms (so high multiples, less warranty protection and less earn-outs) 8
Sparke Helmore Deal Trends Report 9
Sparke Helmore Deal Trends Report We reviewed 79 share purchase agreements (SPA) over last 3 years We focused on mid-market and excluded deals over $250m Broad spectrum of deal sizes with average around $30m We had mixture of roles (buyer, seller, management, insurer) There were dozens of different law firms (so reasonable test of market custom) 25% = total deals involving a PE fund, VC fund or sovereign wealth fund 23.6% include a cross-border element 10
Deal Trends Report - general Broad range of structures used When referring to what is customary, note: Some mechanisms interrelated (if you have protection of W&I insurance, parent guarantee or escrow may be less likely to push other protections) Depends on pricing, balance of power, regional differences In competitive deals (auction situation) more likely to be seller friendly Depends on house rules (big difference between trade deal, receiver sale and PE deal) 11
Warranties 12
Warranties escrow Australia Escrow or retention amount for potential warranty breaches Of those deals that used an escrow amount, what number also used W & I insurance? 12% 22% US US deals included an escrow or holdback Size of escrow Escrow period 97% Avg 11.8% Avg 18 months Source: SRS Acquiom M&A Deal Terms Study 13
Warranties - management accounts In 49% of deals a warranty was provided in relation to the accuracy of management accounts In 11% the warranty was qualified by the seller s knowledge 16 Standard adopted for Management Accounts (as a % of total SPAs that had a management account warranty) 14 15 12 13 10 8 10 9 6 4 4 4 4 2 0 Reasonable accuracy/gives a reasonable view 22% Prepared with due care and attention/reasonable care 25% Prepared on a consistent basis with past practice 6% No material inaccuracies/ misstatements or not misleading 16% Fairly presents/prsents a fair measure 6% True and fair view/true and accurate view 15% 1 Prepared in good faith 2% Prepared in accordance with the Corporations Act/ Accounting standards 8% 14
Warranties - general statistics Australia US Specific seller indemnities 44% Disclosure letter/schedule 60% High Seller was permitted to disclose data room generally against warranties 63% Low Warranty provided for quality of data in data room 65% No undisclosed liability warranty 32% 94% Of those deals, the warranty was qualified by the seller s knowledge 21% 5% Right for the buyer to terminate prior to closing for breach of warranties 29% Of those, the termination right could only be triggered if the breach had a material adverse affect 50% Source: Private Target Mergers & Acquisitions Deal Points Study (2013) (slide 47) 15
Warranties time limits (other than tax and title) Australian deals US deals Less than 12 months 3% Less than 12 months 0% 12 months 16% 12 months 26% >12 months <18 months 8% >12 months <18 months 9% 18 months 36% 18 months 52% >18 months <24 months 4% >18 months <24 months 0% 24 months 27% 24 months 13% 24 months + 6% 24 months + 0% Source: 2014 SRS Acquiom M&A Deal Terms Study 16
Warranties Tax/Title Warranties In 76% of our deals there was a cap on claims for breaches of title/tax warranties Australian deals (% of purchase price) 0% - 25% 26% - 49% 50% 51% - 75% 76% - 99% 100% 3% 5% 5% 3% 16% 68% Australian deals (Time Limit in Tax Warranty claims) 100% more than 7 years 90% 7 years 80% 70% 60% 50% 40% 30% 20% 10% 0% 5 years Less than 5 years 17
Warranties - aggregate claim thresholds Aggregate threshold for warranty claims: 68% of our deals 97% US deals Australian deals 0.0% - 1.0% (56%) 1.1% - 2.0% (25%) 2.1% - 3% (8%) 3.1% + (11%) US deals 0.0% - 1.0% (89%) 1.1% - 2.0% (8%) 2.1% - 3.0% (2%) 3.1% + (1%) 2% 1% 11% 8% 8% 25% 56% 89% Source: SRS Acquiom M & A Deal Terms Study 2014 (slide 59) 18
Warranties - de minimus thresholds Minimum claim threshold: 71% of our deals 20% US deals Minimum claim thresholds- Australian Deals (as % of purchase price) 11% 6% 0.0 - less than 0.1 (44%) 0.1 - less than 0.5 (27%) 10% 45% 0.5 - less than 1.0 (11%) 1.0 - less than 1.5 (11%) 28% 1.5+ (7%) Source: US data from SRS Acquiom M & A Deal Terms Study 2014 (slide 63) 19
Warranties - caps on claims (other than title and tax) In 78% of our deals there was a cap on claims for breaches of seller warranties. Australian deals (as % of purchase price) 0% - 25% 26% - 49% 50% 51% - 75% 76% - 99% >=100% US deals (as % of purchase price) Mean = 12.9% Median = 10.00% 17% 12% Minimum = 2.00% 8% 12% Maximum = 53.2% 17% 34% Source: SRS Acquiom M & A Deal Terms Study 2014 (slide 66) 20
Purchase price adjustments (other than earnouts) 21
Purchase price adjustments Australian deals US deals No Adjustment Provision (48%) No Adjustment Provision (15%) Includes Adjustment Provision (52%) Includes Adjustment Provision (85%) Source: Private Target Mergers & Acquisitions Deal Points Study (2013) (slide 13) 22
Purchase price adjustments adjustment methodology Australian deals US deals Other (14%) Net Working Capital (68%) Other (35%) Net Working Capital (91%) Net Assets (27%) Capital Expenditure (7%) Net Assets (3%) Capital Expenditure Net Debt (10%) Net Debt (10%) Purchase price adjustment paid only if exceeds threshold: 4% of our deals 9% US deals Source: Private Target Mergers & Acquisitions Deal Points Study (2013) (slides 13; 19) 23
Locked Box Mechanisms Australian Deals UK Deals US Deals In 5% of our deals, the purchase price was determined via a locked box mechanism In 25% of deals with a locked box mechanism there was a private equity, venture capital or sovereign wealth fund involved In approximately 50% of UK deals, the purchase price is determined via a locked box mechanism - this figure is increasing Locked Box Mechanisms are very rare in US deals Source: The locked box mechanism - brings more certainty to M & A transactions, PriceWaterhouseCoopers 24
Earnouts 25
Earnouts Australian deals US deals % of deals with earn-out 23% 13% Earn-out was referrable to EBITDA/earnings 80% 20% Median earn-out duration 20 months 27 months Source: SRS Acquiom M&A Deal Terms Study (slide 18) 26
Earnouts period of earnout Australian deals US deals <12 months (28%) 12 months (16%) >12 to <24 months (5.5%) 24 months (22.5%) >24 to <36 months (5.5%) 36 months (17%) 48 months (5.5%) <12 months (6%) 12 months (32%) >12 to <24 months (0%) 24 months (18%) >24 to <36 months (3%) 36 months (9%) 48 months (12%) not determinable (21%) Source: Private Target Mergers & Acquisitions Deal Points Study (2013) (slide 21) 27
Earn-outs acceleration and covenants Of those deals with earn-outs: Australia US Covenant to run 17% 13% of US deals in 2013 had a covenant to run in accordance with seller s past practices 20% of US deals in 2013 had a covenant to run the business to maximise earn-out payment clause Acceleration clause 14% 13% of US deals had an acceleration clause that accelerated payment (fully or partially) on change in control of earn-out assets Lapsing clause 14% Source: SRS Acquiom M&A Deal Terms Study 2014 (slide 19) 28
Other key features Non-cash consideration (scrip) was utilised in 20% of our deals. In US deals, 21% of deals utilised scrip consideration. Material adverse change (MAC) condition precedent more commonly used than pre-gfc. 30% of our deals used a MAC condition precedent; 94% of US deals in 2012. In US in 2014: only 11% of MAC include prospects (trending down from 24% in 2010) - so more seller friendly; 95% of these conditions include force majeure carve-outs (ie. material change other than due to change in economic conditions, act of war or terrorism, change in law etc). Source: SRS Acquiom M&A Deal Terms Study 2014 (slide 10); ABA Private Target Mergers & Acquisitions Deal Points Study 2013 (slide 67) 29
Warranty & Indemnity (W&I) Insurance 30
W&I Insurance W & I insurance was used in 9% of deals In 85% of deals that had W&I insurance it was taken out by the buyer In 27% of deals where W&I insurance was used, the deal also involved a private equity fund, venture capital fund or sovereign wealth fund In 12% of deals that had W&I insurance, new breach cover was used in the policy 31
W&I Insurance 19% of deals that used W&I insurance had a foreign buyer 19% of deals that used W&I insurance had multiple sellers 7% of deals that used W&I insurance were a partial sell-down of shares 32
About Sparke Helmore Nick Humphrey Partner & Head of National Corporate Group Sparke Helmore Lawyers Tel: (02) 9260 2747 nick.humphrey@sparke.com.au www.sparke.com.au Sparke Helmore celebrated its 130 anniversary in 2012 and is an integrated, national full service law firm. Our Corporate Group is dedicated to providing a boutique offering servicing mid-market M&A, banking and private equity, delivering world class service and expertise. Our team combines senior partners and associates with experience gained on some of the most iconic and cutting edge deals while working in top tier Australian and global law firms. Sparke Helmore is a proud partner of the Australian Growth Company Awards, alongside Deloitte, Macquarie Capital, Intralinks, MYOB, AVCAL, 2020 Exchange, The Australian and Private Equity Media. Some of our key clients include Macquarie Bank, CHAMP Ventures, Anacacia Capital, Olympus Capital, Westpac and AMP. Nick Humphrey is the Head of Corporate and Head of Private Equity at Sparke Helmore. Nick chairs the annual Australian Growth Company Awards and wrote the Australian Private Equity Handbook (CCH), a plain English guide with step-by-step advice on implementing PE transactions. Nick has been recognised by a number of influential awards as one of Australia's leading private equity and M&A lawyers, including PLC, Chambers & Partners Asia, The Legal 500 Asia Pacific, IFLR, Euromoney s Guide, AFR s Best Lawyers and Global Private Equity Counsel. He was a finalist for Dealmaker of the Year and The Partner Award in the Lawyers Weekly Australian Law Awards 33