August 04, 2020

Local Spotlight: Deal Drivers in Australia & New Zealand - Expert Insights

By Simon Segal, Editorial Consultant, Dealreporter

Part 2 of a two-part blog series featuring insights from the Deal Drivers: Australia & New Zealand – M&A in H1 2020 and beyond webinar hosted by Datasite and Mergermarket.

 

M&A in Australia and New Zealand saw some signs of a recovery starting in May after deals globally witnessed significant declines due to COVID-19 since the start of the year, according to industry experts speaking at a webinar hosted by Datasite and Mergermarket last month.

In line with the global plunge in M&A activity, M&A deal value in Australia and New Zealand declined 53% year on year in Q1 to US$5.4bn, according to Mergermarket data.

  • Deal volume fell 26% to 114 deals. April’s M&A activity plummeted 89% in value (US$588m) and 70% in deal count (12 deals) compared with April 2019.
  • In May deal value fell 55% (to US$2bn) and deal count dropped 47% (to 24 deals) compared with May 2019.
  • June saw a 29% drop in deals (34 deals) and year-on-year rise in value from US$2.5bn to US$5.4bn.

Peter Turner, national leader of corporate finance and M&A at KPMG, highlighted the pickup in M&A activity along a distressed track and growth track. The former is on the back of government’s fiscal support but still relatively subdued. More substantial has been growth around building balance sheets with clearer views of where the market is heading, he noted.

Kam Jamshidi, partner at Herbert Smith Freehills, identified balance sheet restoration as one of three phases since the onset of COVID-19, book-ended by shoring up trading positions and seeking new opportunities. Private equity has moved through this cycle faster than corporates and globally is proportionally involved in more M&A since 2007, he said. “Private equity has been willing providers of capital, indicating they are willing to look through the pandemic,” he added.

Comparing what we are now seeing against the global financial crisis (GFC), Simon Feiglin, managing partner at The Riverside Company, noted private equity was and is now relatively cashed up. However, coming out of the GFC, private equity was under pressure to hold capital as investors were nervous about investing. With COVID-19, lessons have been learned about unique investment opportunities when markets are down, he continued.

Focusing on cross-border M&A activity, Manoj Jampala, executive director of M&A at J.P. Morgan, did not find this worse affected than the 40% decline in global M&A volume. He was confident that Australia would remain an attractive destination for foreign buyers due to Australia’s strong rule of law, relatively strong economy, and attractive exchange rate.

Nick Brown, co-head of M&A at UBS, cited five factors why the M&A market had paused in the first half of 2020 – corporates’ internal operational focus, difficulty in forecasting earnings of targets, bridging valuations in uncertain times between different buyer and seller expectations, funding availability, and conducting diligence in a socially distanced environment. “Processes are involving more regular trading updates and scenario planning and testing that links into the valuation process. Structures are re-emerging to bridge bid/ask spreads such as contingent consideration payable in certain circumstances.” Brown said he has noticed positive signs in the easing of leverage availability that is also conducive for M&A.

Desmond Chua, head of region, APAC at Datasite, pointed to clients in the private equity space initially looking within their own portfolio companies to provide capital where this has now shifted to revisiting valuations. He agreed that M&A is picking up, but suggested beyond M&A, companies need to adapt and look into new technologies, business models and strategies to support the business. He finds a 50% rise in the time it takes for a project to launch to bidders being invited, as it takes longer for buyers to come on board. In the meantime, dealmakers are preparing to get deal artifacts M&A-ready with the aid of intelligent tools. Delays in due diligence are also extending deal completion times, he added.

Sectors weathering the COVID-19 storm

Jampala highlighted TMT and mining as sectors likely to attract M&A activity. “TMT is the biggest M&A driver by volume and notably one of the few sectors that don’t need a physical presence to conduct due diligence, as this can largely be done online,” he said. From an M&A perspective, he argued it is an excellent time to be an Australian gold miner with the dollar gold price so high. “The top five gold miners in Australia have completed M&A in the past 18 months and profit margins continue to remain attractive,” he noted.

Jamshidi identified factors dictating which sectors attract M&A attention as those impacted by COVID-19 looking to right-size their cost base, private equity buyers looking to deploy capital, divestments as companies start focusing on core businesses, and sectors changing their business model (e.g. the retail sector where online retailers are performing well compared to traditional retail). “M&A may be a path to supplement traditional retail offerings and access the new operational models,” he said.

For Brown, it makes sense to divide industrials into defensive businesses such as transport and packaging that are performing strongly and more cyclical businesses that have had to look at their operations and then their balance sheets, leading to capital raises.

“Companies are actively looking at the cost of capital and which assets are core and optimizing their returns on capital, perhaps leading to divestments,” Brown noted. Examples of this include industrial companies divesting property assets, taking advantage of the current low interest rates, and exiting foreign markets. Brown also drew attention to supply chain optimization. With regard to capital raises, he expected this to continue in the tourism sector. Healthcare, at the other end of the spectrum, remains an active space for consolidation and acquisition by private equity. In a low interest rate environment, cheaper capital for infrastructure assets could facilitate M&A in the sector, Brown added.

 

Potential M&A opportunities in H2

With regard to private equity, Feiglin agreed these operational thematics are driving M&A decisions and opportunities. “But at the lower end of the mid-market, operations or strategy are overshadowed by family ownership issues still driving exits,” he said. Feiglin finds activity in technology, healthcare, and business services, where businesses generally are more resilient and growth-oriented, to be of interest to investors. He believed infrastructure investment, driven by government support for the economy, could create opportunities for smaller businesses.

In the mid-market, Turner highlighted e-commerce and technology as presenting M&A opportunities, especially segments where the technology component is interesting. “There are a lot of private companies and smaller businesses who see opportunities to press their competitive advantage by finding private equity partners,” Turner added.

Regulatory changes and their potential impact

The panel also discussed the impact of Australia’s new planned foreign investment regulations on M&A. The Federal Treasurer announced in June the most significant changes to Australia's FIRB regime in more than two decades. The proposals, laid out in a 31-page document and designed to address rising national security risks, are scheduled to be implemented from 1 January, 2021, when the recently imposed emergency zero-dollar COVID-19 threshold changes end.

Jamshidi noted initial concern that an element of protectionism was creeping into fair process. “We were advising clients to brace themselves for greater scrutiny in respect of foreign investors. We have been pleasantly surprised that FIRB is applying additional resource to process applications. They are also sensitive and responding quickly to companies in affected industries, particularly where the workforce is affected,” he said.

Turner agreed the anticipated negative effects have not materialized, but nevertheless believed “it's a competitive advantage not to require FIRB approval”.

Technologies enabling due diligence in the new normal

Talking about strategies and technologies used by dealmakers in the current turbulent environment, Chua noted that new technologies like artificial intelligence can reduce due diligence three-fold.

Feiglin argued practitioners have a choice to conduct a different kind of diligence, but “the eyeball contact cannot be replaced and will remain a hindrance to concluding deals.”

Jampala agreed Zoom and Microsoft Teams facilitate preparation, but site visits remain difficult. “Video presentations of sites are being done, even drone fly-throughs, but being on the ground is crucial for both due diligence and deal completion, where interaction maintains momentum,” he said. Brown, meanwhile, expected post-pandemic the acceleration of technology that could assist in global transactions.

 

This webinar coverage article was originally published by Mergermarket on August 3, 2020; it has been republished with permission.

Pulse of the Market

Dealmakers across Australia and New Zealand share their views about the market, the types of deals that will be prevalent in coming months, and the technologies that would help them the most to get deals done.

Read Part 1

Deal Drivers: ANZ Webinar Recording

Watch the live briefing Deal Drivers: Australia & New Zealand – Mergers and acquisitions in H1 2020 and beyond on-demand to learn more about how dealmakers across these markets are adapting to the COVID-19 crisis.

Watch On-demand

Ready to Get Started?