JWS Consulting is a division of Johnson Winter & Slattery providing commercial consulting services.
We are engaged by major Australian and international corporations as legal counsel on their business activities, disputes and most challenging matters.
Established in 1993 by Tony Johnson, Nigel Winter and Peter Slattery as a boutique corporate firm, JWS grew rapidly to become a leading independent Australian firm.
The quality of our legal advice and service to clients is recognised through independent industry recognition and direct client feedback.
Learn more about breaking news at Johnson Winter & Slattery, including major transaction announcements, practitioner appointments and team expansions.
JWS supports a number of community initiatives and not for profit organisations across Australia through pro bono legal work, charitable donations and sponsorships.
In 2018, we celebrated 25 years of long-lasting relationships with our valued clients.
This article was first published in The American Lawyer, October 2014 - Global 100 issue.
PE deals only made up 6% of all Australian deals last financial year.1 The percentage is low relative to the US and UK markets where around 25% of deals involve PE. The difference suggests there is more scope for PE in Australia, although the Australian percentage is always likely to be lower - given deal flow is weighted towards infrastructure, real estate and resources sectors; three areas where PE has been less active.
While deal statistics suggest that the level of M&A activity in Australia has remained at similar levels to last year, there has been a recent uptick in activity. The uptick has been facilitated by:
• an increased level of interest from international corporates and
• PE funds; and improved debt availability, both domestically and internationally.
Key sectors of interest have been materials, finance health and education.
The IPO market opened with burst of activity in the last quarter of 2013 and there were a number of sponsor exits (e.g. Dick Smith by Anchorage; Nine Entertainment by Oaktree and Apollo; Veda by Pacific Equity Partners). The market has now softened but is still open for better quality assets. Interest has been supported by a strengthening in the equities market (away from the short term money market) and weakening of the Australian dollar.
Underwriters continue to pressure sponsors to retain a significant stake. However, unlike the US market, some sponsors have been able to exit their entire stake.
Buy-side warranty & indemnity insurance continues to be a common feature in sponsor and corporate trade sales but the overall package offered by insurers has become less attractive.
The cost of the product in Australia has generally been around 1-1.4% of the covered amount. There has been an increase in claims which has resulted in upward pressure on the policy cost and scope of exclusions, particularly in relation to unresolved tax issues.
In the past, insurers have generally covered a new breach of warranty that occurs after signing of the sale agreement and before completion, even if a buyer became aware of that breach prior to completion. However, we are now seeing insurers refusing to cover such a breach except in circumstances where an additional premium of 15-20% is paid, the period between signing and completion is short and material events are excluded. The additional cover is not that attractive and, accordingly, buyers are seeking a termination right for a material breach of warranty or price adjustment mechanism. This issue is significant in Australia given a customary sale agreement would generally allow a buyer to complete a transaction and then make a claim for a pre-completion breach of warranty, even if it has knowledge of the relevant facts or circumstances.
Insurers are also becoming more reluctant to accept customary positions on warranties. In particular, information and compliance warranties are being scaled back and qualified by materiality and knowledge.
In auction processes, sellers are often commencing the insurance process (e.g. providing the insurer with
vendor due diligence reports, data room access, draft sale agreements and even negotiating policy terms)
on behalf of bidders. The preferred bidder takes over the process once appointed. This structure shortens
the time to procure a policy once a preferred bidder is appointed.
Last year’s decision in Norcast v Bradken (Bradken) highlights that “bid rigging” (cartel conduct) can apply to M&A processes involving PE firms Bradken brought to the attention of Castle Harlan that NWS (a competitor of Bradken) was proposing to sell its business. Bradken had been excluded from the sale process but it advised Castle Harlan about the potential sale.
Bradken and Castle Harlan then formulated an arrangement under which Bradken would acquire NWS from Castle Harlan promptly after Castle Harlan acquired NWS. Castle Harlan did not disclose Bradken’s involvement.
The Court held that Bradken and Castle Harlan were potential competitors to the sale and had engaged in bid rigging and misleading conduct. The Court assessed the seller’s loss to be the difference between what Bradken and Castle Harlan respectively paid for NWS (A$22m).
The decision is significant because it demonstrates that:
Last financial lyear saw sustained refinancing and recapitalisation transactions due to continued low interest rates and increasingly favourable credit conditions. Sponsors generally used refinancing gas a means to recapitalise their investments and extract value through dividends to shareholders. It is anticipated that the low cost of funding will continue and encourage sponsors to make investments and obtain debt funding. The predominant source of debt funding remains secured term loan facilities, rather than bonds and securitisation structures, due to the continued liquidity and relative strength of the Australian bank market. In keeping with recent years, we have seen typical tenures of 3 to 5 years for leveraged finance facilities, with senior debt for new transactions generally not exceeding 50% to 65% of enterprise value but with capacity for uncommitted “accordion facilities”, allowing for the top-up of senior debt for permitted acquisitions and growth capital expenditure.
Whilst sponsors have tended to broker their own debt syndicates since the credit crisis as a means of lowering underwriting costs which had become quite expensive, there has been an increased appetite by banks and sponsors for underwritten debt facilities for senior debt commitments from A$100m.
In respect of senior leverage terms, for mid-market transactions of around A$250m, senior debt is typically 3x to 4.5x EBITDA, with larger transactions having higher leverage multiples of up to 5.5x EBITDA. Margins on senior debt have also continued to decrease to between 375bp and 425bp. Margins remain conventionally linked to leverage levels over the term of the facilities.
A number of domestic and international investment banks have been very active in the Australian debt market. In particular, the US term-B loan market has become increasingly attractive to sponsors due to long tenures, convenant-lite structures, and higher leverage multiples than Australian bank loans (e.g. TPG Capital’s Alinta Energy’s US$1.2 billion and PEP’s Spotless Holding’s US$1.05 billion term-B loan facilities).
The fundraising environment has continued to be challenging for PE funds with Australian superannuation funds continuing to wind back allocations and pushing for co-investment opportunities. This has forced sponsors to look offshore for funding. A number of established funds have successfully raised new funds but others have struggled.
With a pick-up in deal activity and the return of substantial funds through exits and recapitalisations, a number of funds are optimistic that fundraising conditions will improve.
Australian law firm Johnson Winter & Slattery has one of the leading private equity teams in the Australian market, acting for a range of domestic and international funds. Jeremy Davis and James Rozsa head the PE M&A team and David Beckett heads the Leveraged Finance team.
Recent deals include assisting Archer Capital in its secondary acquisitions of Aero-Care and SkyCare from Next Capital, and the LCR Mining Group from CHAMP Private Equity; Insight Venture Partners in its majority investment in Campaign Monitor; L Capital Asia in the acquisition of RM Williams and a 40% stake in 2XU; Macquarie on the sale Macquarie Private Markets to ROC Equity Partners; The Raine Group in its acquisition of 60% of Nitro Circus Live, and acquisition of global intellectual property rights from Godfrey Entertainment; and Wolseley Private Equity in its sale of the Guardian Early Learning Group to Navis
Market Observations, Australian Private Equity & Venture Capital Associations Ltd, August 2014.
JWS advised Institutional Venture Management XVI (IVP) and OpenView as lead investors on their Series B investment in Deputy by way of an acquisition of ordinary shares from existing shareholders...
A judgment handed down in the Supreme Court of New South Wales this week involving the Bank of Queensland (Bank of Queensland Ltd v AIG Australia Ltd  NSWSC 1689) highlights just how critical...
A recent decision has excited debate about the application of Australia’s income tax law to limited partnerships, particularly private equity and venture capital funds.