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Private equity bids for Australian companies face growing opposition from institutional shareholders worried about reinvesting funds into overheated markets, threatening to topple some large buyouts.
Leveraged buyouts have led a wave of merger and acquisition activity in Australia over the past year, propelling stocks to record highs and meeting little opposition from investors.
However, there have been growing signs in recent weeks that institutional shareholders may put up a fight.
Shares in travel retailer Flight Centre fell as much as 15 per cent yesterday after key shareholders rejected a planned A$1.6 billion ($1.8 billion) management buyout. It closed down A$1.89, or 11.19 per cent, at A$15.
Private equity offers for Qantas Airways, Australian retailer Rebel Sport and media group APN News & Media also face resistance from some institutions, with votes on those deals still to go through.
A huge boom in buyouts means funds will be flooded with extra cash to reinvest, a difficult move when the Australian market is trading at record highs and companies are going private.
"Some industries, if we are not careful, will run out of stocks. The more they tumble, the more reluctance there will be to let others go, just so we have some sort of viable market," said Argo Investments managing director Rob Patterson.
"It's a question of reinvesting the cash into suitable alternatives when you are considering these bids and whether you are not better staying with the assets you have got."
Private equity sources say the move is also driven by plain old-fashioned greed.
With due diligence on some big deals taking up to six months, the institutions know private equity will be reluctant to walk away and can hold out for a higher offer.
Buyout firms looking for exposure to Asia have flocked to Australia, where companies are bigger and more mature, the market is more receptive to private equity money, and compulsory pension schemes mean there is a huge pool of funds to invest.
While some deals have been scuttled by company boards, such as an A$18 billion bid for Coles Group last year, there has generally been little resistance from institutional shareholders until recent weeks.
"[There have been] some deals where insiders - I mean that in the proper sense of the word - supported by private equity could be possibly perceived as bullying shareholders to engage or accept an offer which we might consider to be inferior," John Sevior, head of Australian equities at fund Perpetual, told a Sydney conference this week.
"Australia is a very small market and increasingly getting smaller," he added.
Perpetual has criticised as too low a A$2.8 billion offer for APN News and Media by a private equity consortium led by Sir Anthony O'Reilly's Independent News and Media. Perpetual owns 14.8 per cent of the company.
Private equity firms buy and sell companies, usually borrowing about two-thirds of the money to finance a deal, and restructure them with the aim of a longer-term sale back to shareholders.
"There is a lot of risk associated with that - the execution and funding costs," Ausbil Dexia chief executive Paul Xiradis said.
"For private equity to do that there has to be a reasonable margin to reward them for that risk.
"On the flipside, shareholders don't necessarily want to give up that potential upside without being amply compensated."
Xiradis said he believed opposition was not a new trend, but had gained more prominence because of the number of deals around.
As the Flight Centre deal fell apart this week, local newspapers said the Macquarie Bank-led bid for Qantas faced opposition from some big shareholders. However, sources close to the deal remain confident it will go ahead.
- REUTERS
