Private equity firms have been fans of schemes of arrangement to buy listed companies in recent years.
What's not to like? They get access to the target company's books, lock the board into pitching the deal to shareholders for them and have a lower threshold for success.
While there are usually some shareholder grumblings about getting railroaded into accepting schemes, investors can always say no and buyers tend to dangle a juicy enough offer to win them over.
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Metlifecare is a case in point. The listed retirement village operator found itself trading well below the book value of its assets when its peers were all trading at healthy premiums.
That situation made it a takeover target and, lo and behold, the suitors came calling late last year.
Like any good board, Metlifecare's directors pooh-poohed Swedish buyout firm EQT's initial $6.50 per share offer – or $1.4 billion – which would've been a bargain, given that its net tangible assets were valued at $6.93 a share at the time.
EQT came to the party, lifting its offer to $1.5b, or $7 a share, and signing up to a pretty rigid scheme agreement. The deal specifically carved out hits to earnings and net tangible asset values from changes in general economic conditions or the publicly traded securities.
As the Covid-19 pandemic took hold and equity markets were savaged by great unknowns, Metlifecare continued to insist the deal was on track. It first said it planned to hold a shareholders meeting in April, then pushed it out to May as EQT started to waver on its commitment.
Legal arguments now under way are all about whether the exclusion of epidemics in the scheme's "material adverse change" clause means the deal has to go ahead. Metlifecare thinks so. EQT thinks not.
When its Nordic partner finally called time, Metlifecare tried to keep the process moving, petitioning the High Court for initial orders to go ahead with a shareholder vote.
Justice Graham Lang didn't bite, saying there is too much uncertainty to go ahead with a shareholder vote on whether to approve the scheme, when investors will actually be focused on whether to support the proposed litigation.
On top of that, the judge said it would be "very unusual" to grant the initial order for a meeting to be held and then wait the better part of a year before making the final order approving the deal.
The Takeovers Panel – which makes sure buyers and sellers adhere to the rules of engagement – didn't oppose the scheme being put to shareholders before the dispute is resolved, but indicated a final order application will be more problematic, given the potential delays.
Metlifecare has called for a meeting on July 10 and wants shareholders to back litigation and another year or so of legal fees. It already has the blessing of the New Zealand Superannuation Fund, ACC's investment team, Maso Capital, Omni Partners and Westchester Capital, who collectively own about a third of the company.
Given the shares are trading near $4.40, forcing the $7 deal is far more appealing than pursuing the $14.9 million break fee, which adds up to about 7 cents a share.
But the issue goes much wider than a $1 billion-dollar-plus deal.
If EQT is allowed to walk away, scheme agreements will lose their lustre. If you're a director tasked with acting in the best interests of your shareholders, it's hard to meet that obligation if you can't be sure a potential buyer will hold up their end of a deal.
And it's not just the Metlifecare scheme that's creating headaches in merger and acquisition land, which is already reeling from a lack of appetite for new deals and a handful of transactions now terminated.
As the Australian Financial Review's Street Talk column pointed out recently, four Australasian schemes - including Metlifecare and Abano Healthcare – have fallen over this year.
That is making investors nervous, given schemes often attract arbitrage funds looking for a few cents on a deal that are all but a sure thing and will vote accordingly.
In Metlifecare's case, global investors JP Morgan, Mitsubishi UFJ and Morgan Stanley all dropped below the 5 per cent substantial shareholder level in the days leading up to EQT quitting the deal.
If those investors can't rely on a scheme being a done deal, both buyers and sellers will need to rethink the value of getting into bed and putting a joint proposition to shareholders.
That's not necessarily a bad thing if there's a return to more suitors returning to formal takeovers, where the drama unfolds in public rather than in the boardroom.
But if deep-pocketed private equity firms decide it's too hard to buy publicly listed companies, that would be a kick in the guts for shareholders who rely on major transactions to accelerate value creation and then put that money back to work.