Throughout my years in the market, particularly working on a range of capital market transactions, the lesson that I have perhaps learnt the hardest is that time kills deals – and when ignored, it often ends in disaster.
The mere thought of execution risk is enough to send a chill down the spine of even the hardest dealmaker. And the real concern and fear lies in the uncertainty of what happens after the deal is announced and it becomes subject to market forces … and time.
When trying to control things that are entirely out of one’s control, dealmakers will try to minimise uncertainty and the most critical factor to manage is TIME. Hence, the longer a deal remains “live”, the more potential there is for things to go south.
Markets can plunge, sentiment can turn, rival bidders can appear and … well, you get the picture.
Recently, the lithium sector has created one of the most extraordinary times in M&A (merger and acquisition) history and there is no shortage of billionaires circling the industry willing to hand out the odd lesson to some of the supposed expert investment banking teams advising the mega-miners. These investment banking teams are the guys with the all-star credentials, multi-billion-dollar market caps, bulging bank accounts and rock-star managers – and the billionaires are dishing out big slices of humble pie to them all.
The absolute must read, “Barbarians at the Gate” is like an investment banking 101 curriculum. It is basically a walk down memory lane of cashed-up US corporations using endless cash and debt to aggressively outbid each other to take control of a target company. The shareholders make squillions and the bankers stuff their pockets with enormous fees!
For those who remember the 80s in Perth, the larger-than-life characters running the largest corporations wrote the handbook on corporate raids – and the overpaying for assets.
Some of the bidders immersed in the current lithium M&A landscape are creating similar market frenzies, but curiously so. These bidders repeatedly broadcast their intention to the entire market before embarking on a long and convoluted process – THAT TAKES LOTS OF TIME – to potentially proceed with a deal that seeks to include the needs and wants of the target board.
What are these bidders thinking and when did investment bankers decide that the best way to acquire a company that is highly prospective in a sector that is experiencing sheer euphoria, is through a gentle process where everyone takes TIME and sits down to work out a “friendly deal” that ignores timing pressures and pricing tensions?
Enter the billionaires!
Thankfully, there are still some capitalists out there with a competitive streak who still know how to sniff out an opportunity without resorting to Queensbury rules.
I can only imagine how the in-house teams at Hancock Prospecting and Mineral Resources, led by Gina Gina Rinehart and Chris Ellison respectively, are feeling as they have each embraced the tardiness of their competitors. They have completely stamped their dominance on the emerging battery metals market and have largely snuck up on their targets.
There is a lesson being played out for those hungry to learn and the tutorial has only just begun! Of course, it helps to have money – and lots of it – but Bookbuilds and Banter has very much enjoyed the sideline seat in the ensuing battle of the billionaires.
Step one in the billionaire buyout manual appears to be, “kill your competitors”, which each of our billionaires appear to have done quite successfully. By securing a strategic shareholding and scuttling a “friendly deal”, these big players have locked away controlling and/or blocking stakes in Liontown Resources, Global Lithium, Azure Minerals, Delta Lithium, Essential Metals and Wildcat Resources, to name just a few.
They have also neatly prevented any other bidder from invoking the section in the Corporations Act that allows a bidder to compulsorily mop up the hold-out rats and mice shareholders in a takeover deal. In each example, competitors have been neutralised and each company and their boards have had to welcome a new major stakeholder – and the complexities that come with them.
Step two – build your defence.
This is where time slows down and can, somewhat surprisingly, even work to the benefit of those most patient. In this stage of the deal, we have seen companies having to resume normal operations and in some instances, raise new equity or project funding to continue the trajectory and momentum in operations.
Having to navigate this process under the scrutiny of a new major shareholder can be a daunting process!
Unfortunately for investors looking for a hostile bidding war, where competitors fight each other in the unique public spotlight and hundreds of millions are thrown around like loose change, disappointment prevails as the reality sets in. The competitive process is soon over, along with the financial hopes and dreams of many a small shareholder!
Step three – The generals will regroup and plan the next attack.
The good news is that in time, real assets will prevail and for shareholders able to ride out the journey, the strategic investors will have created optionality for themselves. This could take the form of an ongoing strategic interest, a buying opportunity at lower prices if the share price wanes over time and lastly, in the event of the re-emergence of M&A interest, the strategic investor has a guaranteed seat at the table, if not a commanding position to launch their own change of control event.
The bad news is that this can be a drawn-out process and there is little requirement or motivation to move quickly, or to work within any reasonable time frame whatsoever. As long as some bidders take the “safe” approach, opportunists will have a chance to take matters into their own hands and exercise their right to take control by stealth.
In terms of the players, the market is dominated by some enormous companies with similarly-enormous balance sheets and aspirations. Combine that with the drive that only the WA billionaire club can muster and we have the makings of a melting pot!
With the rise and rise of Gina and Chris, the absence of WA’s third mining gladiator Andrew Forrest is notable and curious. But beware the sleeping giant – Forrest has never been one to overlook an opportunity.
Investors should take solace, however, in the fact that the M&A cycle is alive and well and like all good cycles, the competition for assets will heat up along with valuations. No doubt time will continue to teach its valuable lesson and those with money who can strike fast and are happy to ignore those Queensbury rules and just get the deal done will be the ultimate winners.
And Bookbuilds and Banter reckons the view from the cheap seats is going to be good.
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Davide Bosio is the WA State Manager and Director of Corporate Finance at investment and wealth management firm Shaw and Partners. For 22 years he has been immersed in the WA finance industry offering corporate services and strategic advice to private and public organisations, specifically in relation to capital raisings and M&A advice. He has also been to the other side having been a director of multiple ASX-listed public companies. While he is the State Manager of Shaw and Partners (AFSL 236 048) this column is for information and entertainment purposes only and is not intended to constitute financial advice. The views and opinions contained within are those of the author and do not necessarily represent those of Bulls N’ Bears, this media outlet or Shaw and Partners.
