Behind the scheme: A sneak peak into one of the biggest deals of 2014

A senior lawyer that advised on the most talked about public company takeover of 2014 gives Australasian Lawyer insight into what really went on behind the scenes

Corporate law firm Gilbert + Tobin advised South African retailer Woolworths on their scheme of arrangement acquisition of David Jones and the parallel takeover bid for Country Road.

G+T senior lawyer Nirangjan Nagarajah gives Australasian Lawyer his exclusive behind-the-scenes take on what will likely shape up as the most talked about public company takeover of 2014.

There’s no other deal like…
From our first discussions with Woolworths about this transaction, we knew it would be one of the more interesting deals in the Australian market for 2014. DJs is a household name in Australia and had already seen its fair share of headlines recently, like the 2012 mystery UK private equity bid and, most relevantly, very public discussions with Myer on the ‘merger of equals’ proposed by DJs’ number one competitor.
Any high profile and transformational transaction of this size will present complexity and challenges. This deal did not disappoint.

Bypassing the auction
Competitive bidding is a target’s dream, but generally features high on a bidder’s list of undesirable environments for all but the most appealing targets. At the time, Myer was seeking to pressure the DJs board into a deal, so the only way for Woolworths to avoid an auction was to present a clearly superior and deliverable alternative.

The all-cash consideration at a significant premium offered by Woolworths was an obvious distinguishing factor. It was also clear that the Myer proposal had a long road ahead before ACCC approval would be granted, so the absence of an ACCC approval condition to the Woolworths proposal was also significant. It was also important to negotiate a suitable ‘exclusivity’ package which the DJs board would agree to, but which did not sacrifice any of the important protections for Woolworths as bidder. Finding the balance on all of these factors within a truncated timeframe can vary from transaction to transaction and in this case it was an exercise of weighing competitive tension against a practical set of important protections for Woolworths. 

Enter Solomon
Woolworths and Solomon “Solly” Lew have a long history. Lew held his c.11% stake in Country Road and denied Woolworths from reaching the 90% compulsory acquisition threshold for over 17 years, a stalemate which saw Country Road remaining listed and Woolworths restrained from dealing with Country Road as it would its other wholly owned  subsidiaries. Lew’s entry onto the David Jones register late in the piece and the suggestion that he may vote against the DJs deal if not given an exit from Country Road presented an opportunity to break the stalemate. However, there were some key issues which needed to be addressed between here and the finish line…

Working with the regulator
ASIC fiercely defends its ‘collateral benefits’ policy which seeks to address unfairness where one shareholder derives a ‘benefit’ not available to other shareholders of a target company (in this case DJs). The prospect of Lew finally securing an exit from Country Road via Woolworths’ parallel takeover bid raised the question as to whether the regulator should intervene.

This issue has many layers on which many takeovers commentators in Australia have expressed a view. The point is Australian takeovers regulation is ‘principles based’, meaning soft policies and hard legislative prohibitions blend into various shades of grey. We needed to asses and guide the client through a fine judgement call weighing up a number of factors, including the overriding commercial imperative, conflicting ASIC and Takeovers Panel policies on the topic, adequate disclosure to DJs shareholders, likely judicial reactions and, importantly, the applied science of reading the mood and policy concerns of the regulator from our late night meetings and teleconferences.

Ultimately ASIC did not object to the DJs acquisition, however this outcome could not be known until the end of the process and after Woolworths had made the decision to proceed. We engaged with ASIC early in this process, to both understand their concerns and ensure any alternative views were also discussed. In takeovers where shades of grey matter, the unique circumstances of this transaction were such that the judgement call on legal matters weighed heavily in the final decision made by Woolworths.

Hurry! Sale ends soon!
The court-approved scheme of arrangement process used for the DJs acquisition lends itself to a set timetable. Lew’s entry onto the DJs register relatively late in this process required us to manage timelines very closely in order to deliver a full takeover offer for Country Road before DJs shareholders (including Lew) voted on the scheme. It is always possible to vary the scheme timetable and the court did postpone the DJs shareholder meeting once. However the old adage that “time kills all deals” certainly rang true in this case. 

In addition to managing the broader legal risks above, the dual timetable presented its own challenges. It was a rewarding experience to work hand-in-hand with Woolworths management and financial advisers Rothschild to tie together the various workstreams required to prepare for the DJs scheme meeting and court hearings, manage discussions with regulators, deliver a bidder’s statement and engage with the independent Country Road board and their advisers, to name a few. 

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