The articles in the blog are intended for informational purposes only, with the aim of encouraging thoughtful discussions. The articles should not be relied upon as financial advice. Please read the important disclaimer at the bottom of the page before proceeding.

What is a Material Adverse Change Clause and why does it matter?

As someone who loves reading the fine prints of every document, this article discusses the the implications of having a Material Adverse Change (MAC) clause in privatization and restructuring agreements. The inclusion of an MAC gives the offeror the right but not the obligation to walk away from the deal if certain conditions are breached before the completion date. Usually, this involves a certain deterioration of financial performance, such as decreased revenue, net profit, or valuation of assets.

The MAC serves to protect the offeror/buyer, as the financial condition of the target company could have worsened between the time the offer was made, and the completion date of the transaction. If the financial performance of the target company has worsened materially, then it may not be worth as much as compared to the initial deal terms. Hence, the MAC clause serves to protect the offeror, giving them the option to walk away from a deal if the target company has breached the terms of the MAC.

Here, we look at two case studies of how the MAC can be applied to transactions.

Case Study 1: Keppel Corp

On 21 October 2019, Temasek made a partial offer for Keppel shares at $7.35. At the point of the offer, Temasek owned 20.45% of Keppel, and made a partial offer to acquire another 30.55% of Keppel at $7.35 per share. Had the offer been successful, Temasek would have owned 51% of Keppel, with Keppel remaining listed on the SGX.

The offer had a long stop date of 21 October 2020, which meant that the pre-conditions of the offer had to be satisfied by then, or the offer would lapse. This was a 1 year timeframe from the time the offer was first announced.

The Material Adverse Change clause in the pre-conditional partial offer announcement stated that none of the following events should occur following the pre-conditional partial offer announcement date and the formal partial offer announcement date:

1. aggregate provisions for any claim, litigation, investigation or proceeding of the Group should not exceed the aggregate provisions in the Last Financials $500 million or more.

2. any subsequent financials showing a decrease in NAV of the Group by 10% or more from that stated in the Last Financials.

3. cumulative net profit after tax but before non controlling interests (the “PAT”) of the group for the last 12 months ended on the balance sheet date of the latest Subsequent Financials released prior to the formal partial offer announcement date showing a decrease of 20% or more from the cumulative PAT of the group for the 12 months ended 30 September 2019 of $696 million.

For the full announcement details, please head to the SGX website here: https://links.sgx.com/1.0.0/corporate-announcements/GUWX6WTHV0MRDDB3/09a179f691fbe3111a46f03bfc41a2b96c967916d5b72819a23ed396490286ea

Subsequently, Covid-19 hit Keppel hard and resulted in massive impairments. On 10 August 2020, Temasek announced that it would not be proceeding with the partial offer as the MAC clause had been breached. Section (3) of the MAC clause meant that Keppel’s cumulative PAT over four quarters from September 2019 cannot fall by more than 20% from $696 million. However, Keppel reported a loss of $165 million due to impairments of $919 million. Hence, Temasek was able to invoke the MAC clause to pull out of the deal.

Please read the news article here:


Case Study 2: CapitaLand

CapitaLand announced its restructuring on 22 March 2021, which would see its development arm privatised while its investment management arm would continue to be listed as CapitaLand Investment Management. The transaction is expected to be completed in Q4 2021, which is about 6 months from now.

In the case, the MAC relates to the valuations of a portfolio of properties known as the “Identified Properties”. The MAC states that “No Revaluation Notice having been issued in accordance with Clause 3.2A of the Implementation Agreement, or if a Revaluation Notice has been issued, there being no diminution in the Revalued Valuation by more than 10 per cent. as compared with the Agreed Valuation.”

The Identified Properties are as follows: Raffles City Chongqing (excluding components developed for sale), CapitaSpring, Suzhou Center Mall & Suzhou Center Office, Jewel Changi Airport (Retail), CapitaMall SKY+, Capital Square, Rochester Commons, Ascent, 9 Tai Seng Drive, China-Singapore Guangzhou Knowledge City, Ascott Heng Shan Shanghai, Innov Center Phase II, 5 Science Park Drive, Ascendas OneHub GKC and Ascendas-Xinsu Portfolio, details of which are set out in the Implementation Agreement.

The Agreed Valuation, which is the sum of the Individual Value of the properties, is S$6,652,000,000. This means that if there is a revaluation carried out, the combined revalued valuation of the identified properties cannot be more than 10% lower than S$6,652,000,000.

However, the offeror may waive the MAC clause even if it is breached, and still choose to proceed with the deal.  

For the full announcement details, please head to the SGX website here:

My view is that the possibility of the MAC being invoked for this deal is low, as it would require the combined value of the identified properties to be reduced by 10% or more. Capitaland had already taken significant revaluation losses in FY2020. Looking at the locations of the Identified Properties, those in China may be less impacted given that the Covid situation there has been relatively controlled. On the other hand, properties in Singapore, especially tourist dependent ones such as Jewel and Ion Orchard, may see further revaluation losses. Again, in order for the MAC to be invoked, the combined value of the Identified Properties has to fall by more than 10%.

With the Implied Consideration for CapitaLand’s restructuring being $4.102, the current share price of $3.50 may seem attractive. However, an investor would have to balance this against the certainty of the completion of the deal, which depends on a variety of factors, including shareholder approval or even the remote possibility of the MAC being invoked.

Disclaimer: This article is intended for informational and discussion purposes only, and do not constitute financial advice. When in doubt, please contact a licensed financial adviser.

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