AUCTION SALES GROW IN POPULARITY AS AN M&A TOOL
For mid-cap companies and above, auction sales have become a settled part of the international mergers & acquisitions (M&A) landscape.
When it comes to Africa, South Africa has shown brisk auction activity (although not yet at the levels seen in the US and Europe) and the trend in other countries is on the up.
On the sell-side, recent auctions have shown that it has become more difficult for South African companies to access international buyers through auctions, given the nervousness of overseas investors about the country as an investment destination. As a result, most current auction bidders in South Africa are locally-based.
On the buy-side, bidders are mainly interested in high-quality assets, of which there are comparatively few in South Africa, often fuelling significant competitive tension among bidders.
These are some of the insights gleaned at the 2017 Private Equity Academy jointly hosted by Bowmans and global law firm, Freshfields Bruckhaus Deringer LLP (Freshfields), in Johannesburg in September.
Auctions can get things moving
One of the most interesting points to emerge from this year’s academy is that the auction process can get things moving in a way that more conventional transactions can seldom do.
In fact, even the idea – some would say “threat” - of an auction can inject new life into bilateral M&A negotiations that have been dragging on or running out of steam. As Bowmans’ James Westgate noted during the academy, the mere possibility of an auction at the back-end of a bilateral can be enough to galvanise a buyer into action.
Dubai-based Rob Cant of Freshfields has seen a similar trend in Europe and the US. When sizeable assets are at stake, some sellers will run two parallel sets of preparations: one for an initial public offering (IPO) and one for an auction sale, choosing the option that offers better value late in the day.
Auctions have become commonplace overseas because in the right circumstances, they can be highly advantageous. For the seller, an auction can be an effective vehicle for making a good seller-buyer match at a good price, in a reasonably short space of time. For buyers, an auction can provide an opportunity to acquire an attractive asset that might not otherwise have been available to the buyer.
The proviso, of course, is that the parties should have a healthy understanding of the do’s and don’ts of how auctions work. Auctions can be expensive to run or participate in and a failed bid or an auction that flops can be costly in terms of time and money.
While many technical aspects of auctions were discussed during the academy, from warranty and indemnity insurance to the ins and outs of vendor due diligence, some important non-technical points were made as the panellists shared their hands-on experience.
Here are some sell-side and buy-side do’s and don’ts that emerged during the Academy.
Advice for sellers: be reasonable and realistic
The consensus among panel members was that sellers considering an auction need to be realistic about the value of their asset, reasonable about its pricing and have a keen understanding of the buyer universe before embarking on the auction process.
Potential buyers tend to be either private equity houses, which are usually nimble and so likely to stick to an auction timetable, or strategic or trade buyers.
The two types are different and have different priorities. Shawn der Kinderen, co-head of the Freshfields Africa Group, pointed out that trade buyers are usually more focused on integration, meaning they want the target business to be a good fit for their own business. Private equity buyers, on the other hand, will probably continue to run the business as a standalone entity.
Although all buyers must be treated equally in terms of the process, sellers should understand that different buyers may have different process needs and internal governance processes to manage. Buyers must be alive to these different needs and strategise and plan accordingly.
Panellists recommended that sellers do some pre-auction “hygiene” analysis and clean-up of the asset as a first step to preparing for an auction and ensuring that sellers are aware of the strengths and weaknesses of the business they are taking to market.
Issues to address include cleaning up the group structure. This is especially important in Africa, where it is helpful to be able to trade through a jurisdiction that is perceived as reputable and investor-friendly. Also important is ensuring key contracts are all signed and documented, and where applicable renewed, and ensuring that all regulatory approvals are in place and that the books and records of the company are complete and up-to-date.
A list of key consents required to implement the transaction should be prepared and where there are third-party shareholders who hold pre-emptive or similar rights, the proposed transaction should be shared with them to obtain the required waivers.
Warts and all
At the same time, sellers should never try to cover up any shortcomings. Duncan Randall, Managing Director of Tana Africa Capital advises: “Be honest and upfront. Don’t try to hide the warts. You might as well tell the bidders about them upfront.”
The value of having a clear understanding of the asset you are selling – both its strengths but particularly its weaknesses – cannot be overstated.
Simon Denny, Managing Director, Head of South Africa Investment Banking at Deutsche Bank South Africa, advised sellers to spend the time ahead of a sale process on making sure their financials are watertight with clear, accurate assumptions linked to their forward-looking strategy and upside.
Denny also raised an important point about the role of management in auctions. While management’s buy-in to the process is essential, he cautioned against letting them become the kingmaker, especially at a time when the preferred bidders are being identified. Ideally, sellers should be allowed to engage early on with the senior management team to build rapport and understand their desired short, medium and long-term outcomes. At the outset though it is important to agree and put in place clear protocols about the auction process and decision-making procedure.
Confidentiality is key, Denny added, especially when the auction process kicks off. Details of auction progress should be confined to a very small group and it is critical to keep the identities of participating bidders confidential until the very end. Denny commented: “While some speculation around the process and the bidders can be useful, it can also play against you.”
How to be a successful bidder
One of the most useful pieces of advice for bidders in an auction is to show the seller how serious they are by having the right level of people attending presentations and visiting the data room. More often than not, data room managers have the ability to monitor how much time visitors spend and what they do there, and a serious bidder would make a serious effort to familiarise themselves with the seller’s business.
Another solid tip is for bidders to fight only for the things that are really important to them. As Shawn der Kinderen put it: “Don’t let your lawyers run amok with the marking up of documents.” This just shows an inability to see the wood for the trees.
Likewise, make a point of asking the pertinent questions; the ones where the answers truly count. Bear in mind that the seller is fielding questions from all sides and management is still trying to run the business while the auction is under way. So it can be helpful for the bidder to filter the questions going through to the seller, ensuring that the frivolous or unnecessary ones stay behind.
It is almost always risky for a bidder not to comply with the auction rules, so bidders are well advised to do their level best to meet any deadlines or other key criteria set.
While the seller’s final decision will invariably be about price, never underestimate the value of thoughtfulness, common sense and creativity in an auction. If there is a close call to make, those qualities could be what pushes the winner over the finishing line.