Pacific Equity Partners’s Zenith Energy strategy a sign of times

Zenith provides contracted power to miners operating in remote locations Picture: Julian Smith

Pacific Equity Partners’ plan to buy Zenith Energy demonstrates a growing trend in mergers and acquisition deals where suitors are embarking on call options and other agreements to lock up shares held by a company’s major investor.

Zenith, which provides contracted power to miners operating in remote locations, announced to the market on Monday that PEP was offering to buy the business for about $150m, excluding debt, and that founder and chairman David Walker had entered into an agreement with PEP to vote in favour of the deal on an unconditional basis with his interest of about 17 per cent.

The move comes after PEP earlier entered into a call option over a 19 per cent interest in Village Roadshow from major shareholder the Kirby family-backed Village Roadshow Corporation before it made a $760m takeover offer for the company in December and as Partners’ Group secured a call option over a 15.88 per cent interest in Healius before making a $2.1bn takeover offer for the business by way of a scheme of arrangement.

Other similar situations include ones last year involving the PEP Australian private equity rival BGH Capital, which made a $4bn-plus play for Healthscope in conjunction with the company’s 20 per cent shareholder AustralianSuper, which had agreed to commit to its deal.

It used the same strategy for education provider Navitas, bidding with AustralianSuper and founder Rod Jones, who collectively owned 17.8 per cent.

M&A experts say that while the trend is not a new one, it is being used increasingly, as competition for attractive targets by infrastructure funds and private equity intensifies.

More funds are cashed up in a low-interest rate environment and are under pressure to put money to work, while attractive targets in a weakening economy remain slim.

BGH alone has raised a massive $2.6bn for its first fund.

It is a trend specific to the Australian market, according to one leading M&A expert, who argues that achieving deal certainty here is much harder than in the US and Britain.

In the US, break fees on deals where a party withdraws from a M&A agreement are about 3 per cent rather than about 1 per cent in this market, which some say is not enough to deter a target from reneging on its agreement.

Another factor involves the threshold of how many shares a party can amass in a target before they are required to make an acquisition proposal to a company. In Britain, you can buy up to 30 per cent of the stock before making a bid, while in the US a threshold does not exist.

They argue that The Takeovers Panel in Australia throws up challenges for takeovers, with derivative share trades now needed to be disclosed in the lead-up to deals.

“Every year, there is a new guideline or regulation or takeovers panel decision that makes it a little bit harder to get deal protection,” says David Friedlander, head of Australian public M&As at law firm KWM.

The downside, however, to entering into call options and other deals with major shareholders is that while it may deter another rival suitor, it could make it easier for a green mailer to take a major blocking stake in an effort to secure more money out of the suitor.

This is given that a scheme of arrangement, which is typically the structure used for major takeover proposals, requires 75 per cent of the shareholder vote on a deal for the transaction to be passed.

Numerous ASX-listed companies speculated to be takeover targets have a founder or major shareholder that dominates the register. This includes groups such as Adelaide Brighton, Pact Group, Worley, Crown Resorts, Ingham’s Chicken and many more, and it will be interesting to see if further deals emerge later in the year where a special arrangement has been struck beforehand with a major holder of the stock.

Zenith was advised by PwC and law firm Allens, while PEP is being advised by Highbury Partnership and law firm Minter Ellison.