Opinion piece by Stephen Mayne, shareholder activist, via Firstlinks
2 August 2023
(Editor’s note: we too have observed the hollowing out of our listed investment markets over recent years along with the gradual rise in private equity ownership of medium and large companies, both in Australia and overseas. In response, many of our recommended portfolios contain allocations to private equity strategies and we continue to look at new opportunities in this space)
After 38 years as a public company, vitamins group Blackmores recently fell into Japanese hands when more than 96.85% of voting stock supported Kirin’s attractive $95 a share $1.8 billion takeover bid.
Sadly, this isn’t a new phenomenon. The past four years has delivered an unprecedented splurge of takeovers of ASX listed companies which has coincided with an unprecedented drought of big floats, leading to a hollowing out of the ASX lists.
The 29 substantial public takeovers completed over this period have included the following ASX listed companies:
Afterpay, ALE Property Group, Ausnet Services, Automotive Holdings, Aveo, Blackmores, Bellamy’s, Bingo, Coca Cola Amatil, Crown Resorts, Dulux, Galaxy Resources, Healthscope, Infigen Energy, CIMIC, Milton, MYOB, Nearmap, Oil Search, OZ Minerals, Pendal, Slater & Gordon, Spark Infrastructure, Sydney Airport, Tassal, Uniti Group, Village Roadshow, Vocus Communications and Western Areas.
List-less
The total equity value of these companies exceeded $100 billion, as can be seen from this comprehensive but quite shocking list of 163 companies which were once capitalised at more than $1 billion on the ASX but are no longer listed today, whether it be from takeover or collapse.
The ASX admits we’ve got a problem re-stocking the public company shelves. A spokesman said:
IPOs are cyclical and we are at the bottom of the cycle right now. It’s the slowest it’s been in a decade. However, this is not unique to ASX. It’s a global phenomenon as a result of uncertain investor sentiment due to geopolitical issues, but more importantly inflation and the impact on monetary policy – where will rates go and what will be the impact on economies? Compared with our global peers, we do a lot of IPOs, and while numbers are significantly down this year, historically we have listed around 130 new companies annually.
Takeover targets
In addition to the Blackmores exit, the pipeline of upcoming takeovers is also looking ominous with the following major deals announced but not yet approved by shareholders:
Costa Group: floated by the Costa family and its US private equity partner Paine in 2015 and then Paine has returned with an indicative $1.6 billion offer announced earlier this month.
Invocare: the death industry giant has agreed to an indicative offer by US private equity firm TPG at $13 a share or $2.2 billion in total and we’re just awaiting the completion of due diligence.
Newcrest Mining: the biggest remaining ASX-listed gold miner has signed a binding agreement to be taken over by Denver-based US giant Newmont in an all-scrip offer valued at $29 billion which will go to a vote once the usual 300-page scheme book is finalised.
Origin Energy: signed a 142 page binding agreement way back on March 27 to sell itself for $18.7 billion to Canadian giant Brookfield and its US partner MidOcean Energy for $8.91 a share with a shareholder vote due later this year. This is a bit embarrassing given that the board knocked back BG Group’s $15.50 a share offer way back in August 2008. If you’re going to sell off the farm, at least maximise the price.
United Malt: was only spun out of Graincorp in 2020 but is being snapped up by Soufflet Group, a private French company controlled by the Soufflet family which has offered $5 a share or $1.5 billion in total.
So, what’s left to buy and sell?
Once you’ve digested this surprisingly long list of 163 departed $1 billion-plus companies have a look at this list tracking what’s left in the form of the current “top 150 companies” which were listed in The Australian’s weekend edition on Saturday.
At face value, it should be re-assuring that the 150th company, 4WD outfit ARB, has a healthy market capitalisation of $2.49 billion.
However, The Australian’s list is not what it seems.
For starters, it includes ten New Zealand companies, such as Infratil, Auckland Airport, Fisher & Paykel and Meridian Energy. Well, at least their assets aren’t too far away, unlike others on the list such as Zimplats Holdings, which has a big platinum operation in Zimbabwe, or Champion Iron which only operates mines in Quebec.
For some reason, The Australian doesn’t list News Corp, even though it has a secondary listing on the ASX and substantial assets here.
However, The Australian has included six ETFs listed in their top 150, such as the Vanguard Australian Shares Index which comes in at number 40 with a market capitalisation of $12.39 billion. Are ETFs even “companies”? When all they do is invest in other companies or asset classes?
Why is this happening?
There are a number of factors behind this hollowing out of the ASX. The first is our general inability to develop successful Australian head-quartered multi-national companies like Computershare, CSL, Macquarie, QBE and Wisetech.
Then there is our open-door policy for takeovers, which is arguably more liberal than other country, with the possible exception of the UK. As this list of more than 320 foreign companies turning over $200 million-plus in the Australian market shows, an increasingly large chunk of the Australian economy is foreign-owned.
Big Super on the rise
The next issue is the growing tendency for our big industry super funds to take public companies private. Vocus Communications, Sydney Airport and ALE Property Group were all snapped up by industry funds over the past three years.
Standby for more of this with toll road company Atlas Arteria expecting a bid soon from Industry Funds Management (IFM) which has already amassed a 23% stake on market.
Foreign trade buyers have also been active over the past four years with Nippon Paint buying Dulux, Canadian fish giant Cooke Inc buying Tassal and the French purchase of United Malt.
And then there is private equity
However, it is private equity which is the biggest driver, having taken out dozens of companies over the years, with many more in prospect.
And imagine if all of their prospective bids had proceeded. Surviving ASX100 companies like Ramsay Healthcare, Treasury Wine Estates and Santos have all rebuffed private equity bids in recent years.\
Too much power
The final problem is weak competition laws in Australia which have seen far too many takeovers approved, creating excessive domestic market power for the predators.
For instance, Howard Smith traded as a public company for 143 years until Wesfarmers was allowed to buy it for $2.7 billion in 2001. This eliminated its main Bunnings competitor, the BBC hardware chain, and made life hard for the remaining independents. Even Woolworths couldn’t compete with its failed Masters venture.
If you read through the ‘disappeared companies list’ you’ll see countless other examples. For instance, buried inside the privatised Commonwealth Bank is three former state banks – BankWest, State Bank of Victoria and State Bank of NSW – along with former mutual Colonial. No wonder CBA is a super profitable behemoth, making it takeover proof forever and a day.
A watchdog regrets
In his farewell February 2022 speech as Australian Competition and Consumer Commission boss, Rod Sims told the National Press Club that he regrets the power imbalance between big and small businesses in Australia, including the plight of farmers battling to get reasonable terms out of supermarket giants.
It’s a problem which is being exacerbated by the current startling run of ASX takeovers and the lack of viable scaled new competitors emerging to compete.
