In every other era, selling Probuild could have been a simple deal.
A Chinese bidder seeking to expand its exposure in Australia is offering $ 300 million to an Australian construction company and all parties assumed it would continue, given that Probuilds’s parent is listed in South Africa and the target is already in foreign hands.
The deal would not be different from selling John Holland a few years ago to the China Construction Company for three times the price and securing the approval of the Foreign Investment Review Board (FIRB), despite John Hollands important defense contracts in that time.
But the federal government DECISION to block the sale of Probuild at the China State Civil Engineering Corporation has illustrated how complex national security has become and warns of problems for companies looking to sell offshore.
The offer to buy Probuild was withdrawn as soon as it became clear that the FIRB would declare the transaction a risk to national security and contrary to Australia’s interest.
But since the federal government is not in practice to explain exactly why a particular sale is refused, it is left to the business community to draw its own conclusions.
An objective look at the Probuilds contract book does not immediately raise the risk of national security.
Unlike John Holland, who sold out keeping contacts, including providing defense bases, airfields, medical equipment and armaments, the Probuilds defense exposure is relatively small.
But reports suggest its construction of Victorian Police headquarters, as well as CSL homes in Melbourne, both considered sensitive buildings and were part of the decision-making.
If this is correct, it underscores the challenges for vendors ahead.
It makes sense that a company currently holding a protection contract, or with plans to build a government data structure, would face an additional scrutiny under Australia of tougher foreign investment laws, which began on January 1st. .
But it is still not clear how far the shadow of these laws will extend.
According to the changes, the Treasury there are a host of powers, including being able to block, impose conditions or force a company to waive an agreement deemed not in Australia ‘s national interest, for companies that are considered to be national security businesses.
This definition of national security includes those related to critical infrastructure (such as ports and utilities), but special legislation can expand the proposed range of assets this includes public transport, university, health and food or food assets.
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For many Australian companies, it is possible that assets and contracts that were not considered particularly sensitive in the past will now be held to the highest security standards.
So what are the prospects for companies looking to sell offshore or receive significant foreign investment under the new framework?
Well, it is impossible to know how the government will jump and you can not just do a self-assessment to see if an agreement can be made clear.
The only thing you can do is draw conclusions from what has happened in the past and make some assumptions as to whether it was the buyer, the target, the assets or the client book that caused the failure of a particular deal.
For a company looking to sell, it now becomes a test to think what the government thinks, to find out if you have exposure to something that will exclude you from foreign investment.
If you have a working pipeline in the hundreds of millions and a small portion is about building a prison or working on land owned by the defense, for example, you need to assess whether the value of this contract is worth risking that a deal falls through.
If you have an asset that could potentially be considered tangible, you need to decide if it is easier to depreciate.
The second thing sellers need to factor in will be the increased risk of deal breakdowns, with the risk of reputation and the cost of opportunities coming with that outcome, then evaluating potential buyers accordingly.
If you are looking at an international investor as part of your buyer group, consider the red flags are they government related? Do they have a story that can rule them out? Do they have tangible assets elsewhere? What is the policy that can influence this decision?
The level of proper care you need to do for prospective buyers not only the opposite now becomes much more important when they are international and from a sensitive market.
The third issue will be price. If you want to accept an international offer and there is an estimated risk, the offer will have to be much more convincing for companies in sensitive sectors to agree.
In the case of Probuilds, the failed bargain price is now on the market and it is hard to see that it is matched by a local second chance buyer. This is the risk of canceling an international offer. In many cases, light, local sales will seem preferable.
Where will these changes lead Australian M&A in 2021? It is not clear though that many buyers and sellers will be chilled by Probuild’s decision. Uncertainty destroys trust and this is not beneficial to all parties to an agreement.
International demand for Australian targets is high and growing, but we expected some vendors to now sit down to figure out which deals are likely to be settled within and before they operate.
While the Treasury continues to emphasize, foreign investment brings significant benefits to Australia, but will face a difficult time until the achievement of the new rules becomes clear.
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