Stephen Bartholomeusz
Time is money
It’s now nearly three weeks since first Transurban and then AXA Asia Pacific received and rejected their approaches from major shareholders proposing takeovers. After an initial flurry of publicity and posturing from prospective bidders and targets, everyone has become silent.
In neither bid does there appear to have been any meaningful subsequent engagement, nor any signs of imminent action. The targets are trying to get on with business-as-usual as if the approaches never occurred, while the would-be bidders appear to hope that time and the market will impose some pressure on the defending boards.
The tactical dilemma confronting the two Canadian pension funds stalking Transurban, and the AMP/AXA SA partnership eyeing AXA APH, is that their preferred offers, if made, would use schemes of arrangement. Without the endorsement and support of the target boards there can be no schemes.
That means the defenders can afford to stare their suitors down, particularly as at this point there is no clamour from their shareholders for them to initiate an engagement. In both instances the market’s pricing of the targets’ securities would suggest that investors expect a second round of bidding and understand the defences’ tactics.
The defenders would no doubt be hoping that, if their prospective bidders lose patience and come back at the higher prices required to convince them to engage, there could be some prospect of the higher prices being the starting point, rather than the end-point, for more serious discussions.
Transurban is trading at about $5.50 per security, or about 25 cents above the offer price indicated by Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan. AXA APH is trading more or less in line with the value of the cash and share offer envisaged by AMP, which would sell AXA APH’s Asian businesses to AXA SA of France if its offer succeeded.
The approaches have caused investors to reappraise both target companies by considering their strategic value to the aspiring bidders.
Transurban may be an infrastructure stock, and infrastructure stocks may be out of fashion post-financial-crisis, but the Canadians’ approach has forced recognition of the quality of its portfolio of tollroads and their unique value to long term investors.
The AXA APH approach has provoked an even more profound reappraisal because of the $8.24 billion price-tag its French parent put on its Asian operations and because AMP’s involvement has put a spotlight on the consolidation opportunity in the sector and AMP’s need for scale and a more complete and balanced distribution network in the wake of the crisis and in anticipation to changes to the regulation of financial services.
It has indicated both how valuable the Asian operations are and how significant the undertakings the French gave to the federal government as the price of approval for its original investment in what was then National Mutual. It agreed that any Asian opportunity it was considering would be first offered to the Australian entity.
The crisis has inflicted significant distress on European and North American banking and financial services groups and some large Asian businesses are now earmarked for sale. There is a unique opportunity for AXA SA to expand rapidly on attractive terms in the region.
However, unless it can in effect buy back its undertakings by acquiring the Asian operations and Australianising AXA APH through its acquisition by AMP the French group will have to offer those opportunities first to AXA APH, which would be able to cherry pick the best of them.
Given the time it takes to develop and execute a scheme of arrangement, and the complexity of the arrangement with AMP, an offer would be quite a protracted process. In the meantime the opportunities might go to less encumbered buyers. Time isn’t on AXA SA’s side.
Having helped set the process in motion, AMP would also be conscious of both the relatively modest risk that its involvement could precipitate strategic action on its own register but more particularly is that it has exposed some weaknesses and vulnerabilities in its own business.
AMP may say that it doesn’t have to acquire AXA APH’s Australasian operations, but it will continue to lose relevance and suffer from scale comparisons with the increasingly powerful four major banks and their wealth management businesses.
The Canadians, who own 28 per cent of Transurban between them, like AXA SA, don’t have to be concerned about a rival approach. However, that minority stake doesn’t allow them access to Transurban cash flows that are pre-destined to rise at CPI-plus rates over the next few decades, let alone acquire those cash flows while the post-crisis view of infrastructure still prevails.
For both aspiring sets of bidders, there would be sense that an opportunity missed this time round will mean a lengthy wait and a much higher price in any subsequent attempt.
While there is said to be some small-scale hedge fund activity on both target company registers, there doesn’t appear to have been enough volume to affect the thinking of the target company directors.
That would suggest that, if the aggressors want to create some pressure on the defenders to engage, they’ll have to be the ones who blink and make new approaches at higher prices to get the targets to take them seriously and to create the kind of market pressure that itself creates foregone conclusions.
There are two sets of clocks ticking, with AXA SA’s probably ticking somewhat louder and faster than the Canadians’ because of the prospect of lost strategic opportunities if it can’t get rid of the obstacle to its Asian ambitions within a relatively brief time.
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