INTRODUCTION

In November of 1994 Australias retail grocery giant Woolworths, in a joint venture with
pub chain owner Bruce Mathieson, completed the full acquisition of the pub and gaming
company Australian Leisure and Hospitality (ALH). This $1.32 billion1 deal capped off four
months of bidding between Bruandwo, the clumsily named Woolworths-Bruce Mathieson
venture, and two other serious bidders. The auction process was unique in that it combined
common takeover bids with bids done through schemes of arrangement, as laid out under
Australias Corporations Act.2 This new combination changed the structure of the typical asset
auction, and thus presented opportunities for players to use different strategies to tilt the game in
their favor. This paper will analyze the key moves and mistakes of certain players within this
auction, noting strategies that would have been more advantageous given the unique structure.

SCHEMES OF ARRANGEMENT
A scheme of arrangement is a less common means of achieving a takeover. The acquirer
makes a proposal which must be agreed to by the target company. The target company must then
put the proposal to shareholders for approval and then, if successful there, to the court for final
approval. The shareholder approval is binding when a majority of the shareholders at a meeting
vote for the proposal, and this majority holds at least 75% of the shares voted. If the scheme of
arrangement is approved by both the shareholders and the court, then the acquirer obtains the full
100% of the target company. A scheme of arrangement gives the target company more control of
the acquisition process. For an acquirer, however, it is often less desirable than a takeover bid
because it offers less flexibility it is more difficult to adjust the bid or extend the offer period.

1
2

All price terms listed in this paper refer to Australian dollar amounts.
Corporations Act, 2001, c. 6, pt. 5.1 (Austl.).

In addition, a scheme of arrangement requires a significant amount of time in order to set a

meeting for shareholder approval and then get final court approval.3

THE PLAYERS
For simplicity, the target company and three bidders are listed here. Note that two of the
bidders, Bruandwo and CMM are joint ventures. The retail competitors, Woolworths and Coles
Myer were the driving forces behind this bidding war.

DEAL OVERVIEW
In November of 2003, ALH was spun off from Fosters through an initial public offering
that received an overwhelmingly poor market response with most shares selling for around
$2.30. In June of 2004, Bruandwo began buying up shares of ALH on the open market and by
July the partnership owned over 16% of ALH shares. Bruandwo then made a hostile takeover
3

See Dyer, Bruce et al., Australia, Mergers & Acquisitions, INTL FIN. L. REV. (2005) at
http://www.legalmediagroup.com/iflr/default.asp?Page=1&SID=5985&F=F

offer to shareholders for $2.75 cash per share, contingent upon achieving 50.1% of the shares.
That offer sat for over two months until Newbridge Capital made a bid for $3.05 through a
scheme of arrangement that would be subject to shareholder approval in January 2005.
Bruandwo responded two days later by raising its bid to $3.15 a share. Two weeks later, on
October 13, CMM entered the auction bidding $3.35 a share through a similar scheme of
arrangement to the one used by Newbridge. Bruandwo then responded by making its offer 3
tiered: $3.15 now, raised to $3.40 if it received 20% of the shares, and $3.50 if it crossed the 50%
threshold. CMM responded with a raise to $3.75 a share. On October 26, Bruandwo cast the
final bid for $3.76. Given the time value of money, the immediate benefit to shareholders of the
$3.76 offer was significantly better than the $3.75 offer of CMM which would have to be voted
upon in January. CMM conceded defeat and Bruandwo began paying off shareholders. By early
November, Bruandwo had complete ownership of ALH.

INDUSTRY OVERVIEW: WHY DID IT HAPPEN?

ALH turned out to be a much more valuable asset than industry analysts and traders had
predicted. Fosters Group Ltd, Australias biggest brewer, sold ALH in an initial public offering
for $2.30 a share just 11 months before the bidding war began.4 Although Woolworths and Coles
Myer were both interested in ALH at that time, Fosters chose to float the company to avoid
having to choose between two of its largest customers. In mid 2004 KPMG, an independent
expert hired by the ALH board, valued ALH shares at between $3.125 and $3.555.5 Industry
analysts generally agreed. When the price reached the upper level of this range, one analyst
quipped that raising the bid would be absolutely nonsensical.6 There was also speculation that
the ALH holdings in gaming and hotels would be losing value with the introduction of strict
smoking bans in the country. Woolworths final prevailing bid, however, was for $3.76 a share.
Woolworths and Coles Myer, it seems, had an interest in ALH that extended far beyond the
market valuations.
The prize for these two competitors was ALHs 5% stake in Australias $11 billion takehome liquor market, making it the third largest liquor retailer in Australias highly fragmented
market.7 At the time, Woolworths owned 19% and Coles owned 16% of that market. Although
Woolworths and Coles controlled the grocery market, they had been branching out into new
markets such as fuel, cosmetics, and liquor to increase sales.
In 2004, liquor sales were increasing at approximately four times the pace of groceries.
Furthermore, ALH had access to Queensland, Australias fastest growing but highly regulated
state. Supermarkets in Queensland cannot sell alcohol, but pubs can operate up to three satellite
4

Coles Myer and Macquarie Lift Bid Offer for Hotels, CHINA DAILY, October 25, 2004.
Josey Puliyenthuruthel, Newbridge Joins Pub Crawl, THE DEAL, September 29, 2004.
6
Anthony Marx, Wholl Be the First to Blink Round by Round, These Two Retailing Competitors Are Slugging It
Out for Australias Third Largest Liquor Chain, THE DAILY TELEGRAPH (Sydney), October 16, 2004, at 83.
7
Australian Leisure & Hospitality Group Limited, HOOVERS COMPANY RECORDS, March 15, 2005.
5

liquor shops within a ten kilometer radius.8 Thus, ALHs 54 pubs in Queensland were key to the
growth strategy for both Woolworths and Coles, because they would allow them substantial
access to the highly restricted packaged liquor market there. The best alternative to a negotiated
agreement (BATNA) for both companies was thus poor. There was not a similar asset available
that would provide such an immediate foothold in this restricted packaged liquor market. As one
observer put it, This is a once in a lifetime asset up for sale in Australias fastest growing state.
What is it worth to let your competitor get their hands on it?9 Woolworths proved that it was
worth at least $1.32 billion.

A LUCRATIVE AUCTION PROCESS

Australian Leisure and Hospitality, and the ALH shareholders certainly were the
beneficiaries of the auction process and subsequent bidding war that ensued. Although they were
aided by some missteps of other players in the auction, ALH did make some key decisions in
setting up and nurturing a productive auction process.
First of all, ALH recognized the existence of interested parties, and thus structured an
open auction process to their advantage. It was fairly easy to predict the emergence of
Woolworths, Coles Myer, and Newbridge since all three parties had expressed interest in ALH
when Fosters first decided to shed the company in 2003. Nevertheless, ALH could have
strongly pursued a friendly deal with another company, likely Bruandwo, early on. In July, word
leaked out that the Woolworths-Mathieson team had bought up 16% of ALH. At this point,
Woolworths chief executive Roger Corbett and Bruce Mathieson met with ALH chief executive

Woolworths Pops in for a Quick One, BUS. REP. (Johannesburg), October 18, 2004, available at
http://www.busrep.co.za/index.php?fSectionId=565&fArticleId=2265537.
9
Wendy Frew, Woolies to Fire the Next Shot, SYDNEY MORNING HERALD, October 14, 2004, available at
http://www.smh.com.au/articles/2004/10/13/1097607300480.html?from=storylhs

Geoff Rankin to discuss alternatives that may benefit both parties.10 Although there is no
public information about what transpired in the meeting, the end result was no agreement
between the two companies. ALH may have foreseen the opportunity for a bidding war to
unfold which would drive up the sale price. Thus it rejected an agreement proposal, intending to
hold an auction that would pit the bidders against one another.
Once ALH made this choice to use an auction, it needed to induce other players to
participate. The 16% stake held by Bruandwo was a significant barrier. Under Australian
corporate law, a takeover bidder must achieve 90% of the outstanding shares in order to trigger
compulsory acquisition of the remaining minority shareholders shares.11 Thus, any bidder
interested in acquiring 100% control of the company was essentially shut out by the 16% stake.
The scheme of arrangement, however, provides another means of taking control of a
company that was often overlooked in this context. It is generally not used in response to a
takeover bid because it is less flexible and requires a much longer time frame to complete.12 In
this instance, however, a scheme was essentially the only alternative. Despite Bruandwos 16%
holding, it was still possible for another bidder to get the requisite number of shareholder votes
(50% of the votes constituting 75% of the shares voted) in order to pass the scheme. A scheme
of arrangement, however, requires the agreement of the target company. This gave ALH some
leverage in working with other bidders, and essentially turned the auction into more of a
negotiauction.13 The two other bidders, Newbridge and CMM had to work closely with ALH
in designing their bids. They had to negotiate a merger implementation agreement (MIA) in
10

Make Mine an ALH, SYDNEY MORNING HERALD, October 23, 2004, available at
http://www.smh.com.au/articles/2004/10/22/1098316861261.html?from=storylhs
11
Corporations Act, 2001, c. 6, pt. 6A.2 (Austl.).
12
See Ashcroft, Lisa & Craig Henderson, Trumping a Takeover Bid by Scheme of Arrangement: a New Trend or a
Flash in the Pan?, IN THE DEAL, December 2004, at 3, available at
http://www.aar.com.au/pubs/itd/dec04/art02.htm.
13
See Subramanian, Guhan & Richard Zeckhauser, Negotiauctions: Taking a Hybrid Approach to the Sale of
High-Value Assets, NEGOTIATION, October 2004, at 4.

order to have a legal scheme of arrangement that the court could approve. Offering this company
endorsement of the bidder was one way that ALH was able to induce other bidders to join the
auction. ALH was then able to use its leverage to get better terms. For example, when CMM
made its first bid through a scheme of arrangement, ALH was able to negotiate an almost
unconditional agreement. The prior Newbridge scheme was subject to several conditions that
would allow Newbridge to walk away from its bid, such as material adverse change clauses.
Given the increased competition, ALH was able to negotiate an agreement with CMM that was
conditioned only upon the required shareholder and court approval.14 This significantly lowered
ALHs risk in the sale. At the same time, ALH saved one condition for itself the agreement
was subject to the absence of a superior offer in order to keep the auction alive.
ALH was able to further induce additional bidders to the auction by providing a breakup
fee for the agreements. Newbridge Capital walked away with an $11 million termination fee,
while CMM secured a $7 million payment for the failure of its scheme.15 Both of these breakup
fees represent less than 1% of the total deal value. By American standards that would be very
low, but in Australia these amounts were more typical and the Newbridge payment was actually
controversial given that it was at the high end of such fees.16 Furthermore, Australias Takeovers
Panel, which closely regulates breakup fees, has issued guidelines indicating that in general 1%
is the ceiling for a reasonable breakup fee.17 It seems likely that these fees had some impact on
attracting new bidders, especially in the case of Newbridge Capital. As a private equity firm,
Newbridge, unlike Coles Myer and Woolworths, did not have operational synergies to gain from
the acquisition of ALH. Thus, its chances of winning the company if a bidding war broke out
14

Ashcroft, supra note Error: Reference source not found at 3-4.

Giles Parkinson, Coles Myer Ups Ante in ALH Fight, THE DEAL, October 25, 2004.
16
See Peta Luma, Will the Duopolists Carve Up ALH?, Crikey Website, October 13, 2004 at
http://www.crikey.com.au/articles/2004/10/13-0004.html.
17
Final Guidance on Lock-Up Devices, Takeovers Panel (Austl.), December 7, 2001, available at
http://www.takeovers.gov.au/display.asp?ContentID=271.
15

seemed fairly low. The breakup fee may have served as a sufficient inducement for them to still
enter the game. Furthermore, it was strategic for ALH to secure the bid by Newbridge because it
signaled to the market that this asset was highly valued. A fund manager remarked, If
Newbridge think[s] it is worth $3.05 a share without any synergies, imagine what such a valuable
and strategic asset would be worth to Woolworths or any other interested party.18
These key moves by ALH fostered a bidding war, ultimately between CMM and
Bruandwo. Through this auction, ALH was able to appropriate to shareholders the bulk of the
savings that would be created by the synergies with Woolworths. As suggested above, however,
part of this result must be attributed to the missteps made by Roger Corbett and the Bruandwo
team. They failed to recognize the dynamics that would come into play, and thus did not
properly adjust their strategy. Furthermore, Roger Corbetts ego and stubborn refusal to give in
contributed to the escalating bids.

STRATEGIC ERRORS
The Bruandwo team failed to recognize the potential for a bidding war to break out over
ALH. There was a sense of overconfidence on their part that led them to assume that they could
walk away with ALH at a bargain price without anyone giving them a fight. They seemed to rely
on their 16% stake in ALH as an unstoppable trump card. Although responding to a takeover bid
with a scheme of arrangement was never really done until this deal, Bruandwo or its advisors at
UBS should have been able to anticipate the possibility. They knew that Newbridge and CMM
had been interested in ALH before. Furthermore, one of the key reasons for obtaining ALH was
to give Woolworths access to the retail liquor market in Queensland. To think that Coles Myer
wouldnt have a very similar incentive was just plain lack of foresight. Had they examined the
18

James Chessell, Newbridge Takes Second Go at ALH, THE AGE (Melbourne), September 29, 2004.

alternatives from the perspective of their competitors, they should have recognized the
possibility of the scheme bids.
One way that ALH could have acted more strategically was to attempt to put together a
friendly deal with ALH from the beginning. ALH was relying on an expert valuation of the
company that put the shares at somewhere between $3.125 and $3.555, while Bruandwo ended
up paying $3.76 a share in the end. Thus there was a very large zone of possible agreement
(ZOPA) for them to work within any price between $3.125 and $3.75. Furthermore, the ALH
board endorsed a bid of $3.05 by Newbridge suggesting that they may even have been flexible
with the range given by KPMG. Although Roger Corbett did contact the ALH board before
making a bid, he said that it was a courtesy call more than anything.19 Had Bruandwo been
able to secure a deal with the blessing of ALH up front for a price in their range, they could have
saved themselves hundreds of millions of dollars. Of course, this would have depended upon
willingness of ALH to agree to such a deal. But as one industry watcher noted, it is very easy to
imagine that if Woolworths had walked in the front door of ALH with its arms open, instead of
trying to climb in the back window with a club, it would now own ALH for $3.10 a share.20
A second strategic misstep by Bruandwo was its reliance on the 16% stake in ALH to
deter other bidders. It certainly foreclosed the possibility of another player gaining full control
through a takeover bid, but it was not enough to block a scheme of arrangement. In order to
succeed, a scheme needs the approval of more than 50% of the targets shareholders that vote at a
meeting, and those shareholders must hold at least 75% of the shares of shareholders voting at
the meeting. Thus, Bruandwo would theoretically need over 25% of ALH to block a scheme of
arrangement. But in practice, a 20% block would have been nearly impossible for a rival bidder
19

Make Mine an ALH, supra note Error: Reference source not found.
Michael Pascoe, Michael Pascoes Finance Editorial, Sunday Sunrise, Seven Network, October 17, 2004 at
http://seven.com.au/sundaysunrise/finance_041017_pascoe.
20

to overcome.21 Australia corporation law limits stock acquisitions to 20% of a company, before a
formal bid is made. 22 So if Bruandwo really planned to use its stake to block out the
competition, then they should have gotten as close as possible to that 20% limit. Then,
Bruandwo could have taken advantage of Australias 3% in six months creeping rule. This
would have allowed Bruandwo to increase its post bid stake by an additional 3% before the time
of any scheme meeting proposed by another bidder.23 This strategy would have rendered a
scheme of arrangement essentially infeasible. The 16% stake, however, left just enough of a
window to make a scheme of arrangement a reasonable option.
Given its overconfidence in their 16% stake in ALH, Bruandwo poorly chose to make a
low ball offer through a hostile takeover bid and couple it with a lot of hollow rhetoric to make it
seem attractive. Perhaps it was an effort to anchor the price at a number that was most favorable
to them. If so, they overlooked the key danger of such a strategy which was the loss of
credibility. The $2.75 per share offer, which was discounted to $2.685 because they were
withholding the share dividend, was deemed grossly inadequate by the ALH board.24 A Smith
Barney analyst indicated that ALH is worth a lot more than $2.75 to Woolworths.25 Bruandwo
responded that it was a very full offer and then proceeded to raise doubts about the legitimacy
of the KPMG valuation. Bruandwo later tried to justify its low bid by publishing statements
indicating that it had serious concerns about the profitability or prospects of ALH given the
new smoking bans in Queensland.26 As if this backhanded strategy didnt damage Bruandwos
credibility enough, Corbett added the final kicker that Bruandwo would not be lifting this offer
21

Bryan Frith, Woolies Took a Low First Stake and Paid the Price, THE AUSTRALIAN, October 27, 2004.
See Dyer, supra note Error: Reference source not found.
23
Rodd Levy, Australia: Lessons from the ALH Takeover Contest, Mondaq, December 16, 2004 at
http://www.mondaq.com/article.asp?articleid=30071&searchresults=1.
24
Trevor Chappell, Bruandwo Secures 20 Per Cent of ALH, CMM Quits Takeover Battle, AUSTRALIAN ASSOCIATED
PRESS, October 26, 2004.
25
ALH Shares Fall After Woolworths Takeover Bid, SYDNEY MORNING HERALD, July 8, 2004.
26
Announcement by CMM Hotel & Retail Investments Pty Ltd, October 15, 2004 available at
http://imagesignal.comsec.com.au/asxdata/20041015/pdf/00468706.pdf.
22

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and was prepared to walk away from the bid.27 The effect of this statement was that months
later, when Bruandwo was in the midst of the bidding war, its credibility was negligible and thus
the other players disregarded any further commitments they made to their bidding strategy.
In fact, when Bruandwo later made its three tiered offer, institutional shareholders just
didnt believe that Bruandwo had reached its bidding limit. Bruandwo attempted a coercive
move by giving shareholders only 4 hours to respond to the offer before it would expire. Perhaps
a credible threat would have been successful, but given the earlier statements by Corbett few
shareholders actually tendered their shares.28 In the end, the Takeovers Panel stepped in and
imposed a longer, one week decision period for the offer. In that time period, CMM raised its
offer allowing Bruandwo to avoid possibly having to go back on its word a second time.
Finally, Roger Corbett was nearing the end of his career and the ALH acquisition
provided him a final opportunity to make his mark at Woolworths. It was his first time to
attempt a takeover of a listed company, and thus this was a chance to prove himself in a new
arena. Most importantly, though, this was his opportunity to outmaneuver his rival chief at Coles
Myer, John Fletcher. With growth in the grocery division fairly stagnant, both companies had
been expanding into new directions. They had had a similar head to head battle in an attempt to
expand into the petrol market. Analysts generally agree that the Coles Myer deal with Shell was
much more valuable than the Woolworths-Caltex deal.29 So ALH presented a one shot
opportunity for Corbett to redeem himself. Corbett remarked early on that, I never think about
the ego of the other guy at the auction.30 Perhaps, but it seems evident that he was thinking

27

Chappell, supra note Error: Reference source not found.

See Australian Leisure & Hospitality Group Limited 03: Panel to Conclude Proceedings, Takeovers Panel, October
22, 2204 at http://www.takeovers.gov.au/display.asp?ContentID=859.
29
Marx, supra note Error: Reference source not found.
30
Make Mine an ALH, supra note Error: Reference source not found.
28

11

about his own ego. And with all of the missteps in his bidding strategy, he simply could not end
up losing this deal.

CONCLUSION
In the end, Roger Corbett and the Bruandwo team got what they wanted. And they paid
handsomely for it. The $1.32 billion acquisition of ALH was $350 million more than their initial
bid. ALH helped to structure an auction process that fueled this increase to their advantage. And
Bruandwo made some mistakes that forced it to spend more than initially planned. But the
hindsight view from the perspective of May 2005 is that this was still a good deal for Bruandwo
and particularly Woolworths. It is too early to speculate too much on the effect of the ALH
acquisition, but Woolworths is certainly financially healthy. Woolworths now claims 37% of the
grocery and takeaway liquor market, while Coles Myer holds 32%. Woolworths shares have
been relatively flat thus far in 2005, trading at about 19 times forecast 2005 earnings, while
Coles Myer stock has fallen 5%, trading at 17.4 times forecast earnings.31 And Roger Corbett is
enjoying the success of Woolworths along with his now cemented reputation as Crusher
Corbett.32 So much so, in fact, that he has accepted the boards offer to extend his tenure.

31

Wendy Pugh, UPDATE 2-Australia Woolworths Profit Up on Sales, Cost Cuts, REUTERS FINANCE NEWS,
AUSTRALIA, February 28, 2005, at http://au.biz.yahoo.com/050228/19/3ish.html.
32
Bill Eclairs, Corbetts AFR Profile and Bumper Profit, Crikey Website, February 28, 2005 at
http://www.crikey.com.au/articles/2005/02/28-0005.html.

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