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Soaring control premiums exacerbated by COVID-19

By Michael Karpathios
 — 1 minute read

Average control premiums have almost doubled throughout the COVID-19 pandemic, rising from 32 per cent in 2019 to 61 per cent in 2020, a new study has shown.

A control premium consists of the amount a buyer is willing to pay above the current traded share price to gain a controlling interest in a publicly traded company. 

RSM’s 2021 Control Premium Study, conducted in partnership with Curtin University, analysed 601 successful control transactions for companies traded on the ASX and 131 transactions on NZSX from 1 July 2005 through to 31 December last year, revealing a strong lift in premiums exacerbated by the COVID pandemic. 

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According to the results, the rise in control premiums between 2019 and 2020 significantly diverges from the long-term Australian average of 34.7 per cent recorded over a 15.5-year period.

“Control premiums have risen sharply, especially in April and May 2020, when economic uncertainty was [at] its peak and acquirers took advantage of the distressed capital markets,” said Nadine Park, partner at RSM.

“With interest rates remaining low and companies holding significant cash reserves following a capital raising spree during COVID-19, merger and acquisitions (M&A) activity is expected to be high in Australia and New Zealand through FY2022 and beyond.

“It is critical for directors and investors to carefully consider the control premium component when assessing equity values for potential transactions.”

The 15.5-year period studied includes an Australian boom, the global financial crisis (GFC), and the post-mining boom “hangover” followed by a gradual expansion until the COVID-19 pandemic.

This included a time where the average control premiums traded below the long-term average of 34.7 between the financial years 2013-17, attributed to generally reduced transaction activity.

Over the period studied, RSM found that it is evident that control premiums are influenced by numerous factors including industry sector, consideration and transaction type, timing within the economic cycle, toehold (the extent of the buyer’s existing investment in the target), and size and market capitalisation of the company.

Notably, cyclical or volatile sectors (metals and mining, energy and technology) were found to represent 48.4 per cent of overall transactions – it was thought this may have contributed to the variability seen in the Australian market over time.

“The economic cycle creates the fear or optimism that fuels risk appetite and helps drive share prices. RSM believes the control premium is influenced by these factors to varying degrees, at different times, within the economic cycle,” said Ms Marke.

“This can be seen in the period since COVID-19 was declared a global pandemic, which led to significant falls in global equity markets and a rise in observed control premiums driven by opportunistic or strategic acquisitions.”

In New Zealand, control premiums were significantly lower, with an average of 18.6 per cent over the 15.5-year period. It was theorised that this could be attributed to the uncontested nature of many takeovers in NZ.

 

Soaring control premiums exacerbated by COVID-19
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