Mergers and Acquisitions in the time of Corona

In the News…

The completion date on Bauer Media’s $40 million acquisition of Seven West Media’s magazine business, Pacific Magazines, has been pushed back.  This acquisition was announced in October 2019, prior to the significant drop in Pacific Magazine’s advertising revenue, attributed to the Corona virus pandemic, leading to Seven West lodging proceedings in the NSW Supreme Court to complete the deal, before the parties agreed to the revised completion date.

As shown above, the Covid-19 pandemic has wrought significant changes to the legal, regulatory and business environment.  This is the first in a series of short papers examining the effects of Covid-19 on M&A, and considering steps that companies can take to protect their businesses and to maximize their opportunities in this changed environment.

Trends in M&A

• Reduced volume of deals
• Longer timeframe to completion
• In Australia, increased regulatory activism

Even before the Coronavirus pandemic, M&A deal volumes were down, affected by issues including Brexit, the global trade wars, the looming US election, and general market volatility.  Commentators have noted that the volume of deals in the first quarter of 2020 is reduced by 35% globally compared to the final quarter in 2019.  In addition, many deals are taking longer to complete.

Large deals (>$10 billion) have been particularly affected, as typically such transactions involve face-to-face negotiations over a long period of time.

In Australia, these trends are occurring in the setting of increased regulatory scrutiny and activism by the ACCC and other regulatory bodies.[1]

Some changes to Australian Laws and other developments in response to the pandemic

Some of the recent legal and regulatory changes and other developments that are relevant to M&A include:

• the well known health orders, including mandatory social distancing and avoidance of all non-essential activities;
• significant changes and softening of the insolvent trading laws;
• significant changes to awards, relating to working hours, employees’ duties, entitlements, flexibility arrangements, including for the Hospitality Award 2010, the Restaurant Award 2010 and the Clerks-Private Sector Award 2010;
• a commercial leasing Code of Conduct that will apply to those small and medium enterprises (SME) that are under “financial stress or hardship” as a result of the Covid-19 pandemic;
• changes to the foreign investment rules so that all relevant acquisitions by foreign persons have a nil threshold, i.e. are automatically notifiable regardless of value;
• changes to the rules regarding tenant evictions by landlords;
• disruption to supply chains due to travel restrictions;
• temporary ACCC relief to allow competitors to co-ordinate supply chain logistics;
• shifting of commerce on-line and associated issues with electronic transactions and signatures;
• a surge in contractual issues including renewed interest in Material Adverse Change (MAC) and force majeure clauses;
• relief recently announced by ASIC for “low-doc” placements, share purchase plans and rights issues for listed entities;
• ASX emergency capital fundraising relief; and
• updated ASX guidance on continuous disclosure for coronavirus.

Predicted trends

Some commentators predict that the major impact of corona virus will be more fully felt in the last 2 quarters of 2020, and the bulk of M&A work will be in rescue deals and restructuring, with opportunities for investors in those sectors most severely affected.

Conclusion

Over the next few weeks we will examine these issues in more detail in the context of M&A and fundraising activities.

Next week we will review the most common form of M&A, share sale and purchase transactions.

[1] As illustrated by the 5 month investigation by ACCC prior to its approval of Bunning’s acquisition of Adelaide Tools, and the recent unsuccessful attempt by ACCC to prevent the TPG-Vodafone merger.