Hochtief uses Leighton as shield against ACS

German infrastructure group Hochtief has played its hand to try and prevent a takeover offer from its majority shareholder, Spanish construction company ACS, by asking the Australian regulator to force ACS to also bid for Leighton Holdings, an Australian construction unit of Hochtief.
 
If Hochtief’s bid is successful, then ACS’ takeover offer for the German company would become substantially more expensive, as it would have to factor in Leighton’s €7 billion market capitalisation.
 
However, this depends on Hochtief being able to convince the Australian Securities and Investment Commission that ACS’ takeover of Hochtief is really just a proxy to acquire a substantial interest in Leighton, in which Hochtief owns 54.4 percent.  ACS “has so far declared that it does not want to make an offer for the outstanding shares in Leighton,” Hochtief said.
 
Under Australian law, takeover bids of foreign companies that have substantial interests in downstream companies listed in Australia are exempt from making a follow-on bid for the downstream companies as long as the takeover offer complies with the rules of a stock exchange that is approved by the Australian regulator (which is the case with the German exchanges Hochtief is listed on). Downstream companies are firms in which the takeover target has significant holdings.
 
But while this exception is enshrined in law, the Australian regulator, ASIC, may still override it if it finds that the interests of Leighton’s shareholders are not being adequately protected. Bryn Davis, a lawyer at Sydney’s Minter Elison, tells Dow Jones:
 
“In the context of ACS’ takeover bid for Hochtief, ASIC will be primarily concerned with whether that bid is merely a proxy to acquire a substantial interest in Hochtief’s subsidiary, Leighton. This will depend on the precise circumstances in play,” he explained.
 
Hochtief’s bet, considering that Leighton comprises over 50 percent of Hochtief’s net assets and its market capitalisation represents about 90 percent of Hochtief’s valuation, is that ASIC will rule that ACS’ main objective in taking over Hochtief is to gain a significant holding in Leighton. In this case, the lawyer added, ASIC “would be likely to intervene to ensure that shareholders in Leighton are appropriately protected”.
 
This intervention would likely be bad news for ACS, as it could either force the company to sell its controlling stake in Leighton following a takeover of Hochtief, or it could obligate the Spanish firm to make a knock-on bid for the remaining shares in Leighton, which would significantly increase the cost of its takeover of Hochtief.
 
ACS dismissed Hochtief’s petition to the Australian regulator as “groundless” and was confident “ACS falls under the downstream exemption,” the company said in a statement. Many observers seem to agree with ACS, with one senior legal expert commenting to the Australian press:
 
“'I don't think they [Hochtief] have a leg to stand on – the law's really clear. There's no question if you're listed on one of those prescribed exchanges and someone makes a takeover in accordance with the laws of that place, then they don't have to make a follow up bid.''
 
In September, ACS said it planned to offer eight ACS shares in exchange for five Hochtief shares in a bid to increase its shareholding in Hochtief to just above 50 percent, allowing for full financial consolidation of the German company. Based on Hochtief’s closing price on September 15, ACS’ offer values the 70 percent of Hochtief that it doesn’t already own at €2.75 billion.
 
But Hochtief has dismissed the takeover – which ACS has repeatedly insisted is “friendly” – as “unsolicited”, of “no value for Hochtief shareholders”, and “not in line with the perceived relationship” between the two companies.