Independent Expert’s Report Review
Welcome to our first Independent Expert’s Report Review. A short round up of recent trends in Independent Experts’ Reports (IERs). For those that are not familiar with IERs and would like more background on what they are and when they are needed, click here for more information.
For the initial review we have summarised data for transactions requiring an IER since 1 January 2018.
Independent Expert’s Report (IER) trends by industry
While IERs take place across all sectors, the metals and mining industry has shown clear dominance by volume of transactions. However, these are generally smaller transactions, with the median value being only $12 million and the average a little higher at $57 million due to a handful of larger deals such as Wesfarmers $770 million acquisition of Lithium miner Kidman Resources in 2019 and Hancock Prospecting’s $390 million takeover of Atlas Iron in 2018. More recent trends reveal an increase in pharma, biotech and life sciences work including a number of transactions we are working on at present.
Source: All chart data sourced from Connect 4
Why are IERs being commissioned?
In the period analysed, related party transactions were the most common reason for commissioning an IER, closely followed by schemes of arrangement. Related party transactions cover a range of asset purchases and sales from related entities (often directors). IERs are often required for fairly small related party transactions as the materiality threshold is based on book value of equity which can be low for companies with a significant level of internally generated intangible assets not reflected on the balance sheet. An entity that is subject to a scheme of arrangement is required to commission an IER if the other party to the scheme holds at least 30% of the voting shares in that entity or if they have a common director. However, voluntary IERs are generally commissioned for other schemes of arrangement to assist the parties including the Court to evaluate the transaction.
In the current environment, we expect higher volumes of schemes and s611 transactions (acquisitions approved by members) due to capital raisings, restructuring and debt for equity swaps which will often require an IER as these transactions often involve investors increasing their shareholding above 20% (or between 20% to 90%) without making a formal takeover offer.
Based on discussions we have had with our clients, we expect the demand for voluntary IERs will also increase in the current environment due to volatility in share prices and the uncertain outlook for many businesses which may pose greater difficulty for boards in providing a recommendation on an offer without expert valuation advice.
There are a large number of small deals, with one third of transactions being under $10 million. Generally, deals in the range of $50-$500 million account for around 30% of all transactions. There were only two large transactions in this period, the Westfield demerger and the merger of TPG and Vodafone.
The form of an expert’s opinion depends on the nature of transaction, with schemes being a test of whether the transaction is in shareholders’ best interest whereas for most other transactions the test is whether the transaction is fair and reasonable. Unsurprisingly, for schemes the conclusion by independent experts have all been positive, or ‘in the best interests’ of shareholders. The primary reason for this is that if it were not the case, the scheme would be highly unlikely to proceed without being renegotiated. Schemes are also generally friendly and extensively negotiated before an independent expert is hired.
For takeovers, transactions were evaluated as ‘fair and reasonable’ 44% of the time, ‘not fair but reasonable’ 29% of the time (a large proportion of these were capital raising transactions which may include some distress), and ‘neither fair nor reasonable’ 4% of the time. Generally, those that were neither fair nor reasonable were hostile transactions.
Compulsory acquisitions are evaluated for fairness only and represent a small proportion of IERs commissioned.
Over the next few months, given the likely economic uncertainty due to COVID-19 and the expiry of the government stimulus packages, we anticipate an increase in capital raising and opportunistic takeover transactions. We also expect an increase in the ‘not fair but reasonable’ outcome due to the distressed nature of a number of these transactions.
If you’re interested in learning more please don’t hesitate to contact us for a confidential conversation.