Expert Spotlight: Australia & New Zealand Deal Momentum

Analysis by Mergermarket, an Acuris company owned by ION Group

M&A deal flow in Australia and New Zealand is expected to continue the rebound post COVID-19, driven by vaccine roll-out, capital availability, multinationals’ carve-outs, as well as the SPACs boom in overseas markets, according to industry experts speaking at a webinar hosted by Datasite and Mergermarket in late April.

This time last year when Australia readied itself to deal with the COVID-19 health crisis, there was considerable uncertainty about the economy leading to a slowdown in dealmaking, while managements turned their focus to survival, said Michael Sonego, Partner at Pitcher Partners.

“Twelve months on, and it's fair to say that Australia is a standout amongst the OECD economies” due to its response to the pandemic, Sonego said.

While Australia also experienced financial market volatility and investment uncertainty  that has inflicted other parts of the world, the country’s economic and M&A activity has recovered strongly, he added, pointing to Mergermarket’s data:

• M&A deal values in Australia and New Zealand rebounded strongly in Q4 2020, with nearly AU$24bn from 169 deals. This is more than double the figures recorded in Q2 and Q3 of last year.
• Q1 2021 data shows the value tripled when compared to Q1 last year, with over AU$11bn of deals in value announced.

The mood for the second half of 2021 is very “upbeat” as the region has logged a sharp rebound, an increase of consumer confidence, as well as a positive GDP outlook, said Iwen Chen, Head of Australia & New Zealand at Datasite. The prospect of mass vaccinations signals a hopeful end to the pandemic as well as a return to normality sooner rather than later, Chen said, adding that over the last few months, Datasite has seen a significant increase in M&A activity on its platform.

Australia has proven to be a stable market with good growth prospects, strong regulatory and sovereign risk profile, as well as a mature dealmaking industry, which will attract great interest in Australian assets, noted John Farnik, Division Director at Macquarie Group. Businesses with characteristics around renewable energy, innovation, and the resources industry, which still leads the world in many ways, are of particular interest, he explained.

Rebecca Maslen-Stannage, M&A Partner at Herbert Smith Freehills stated that, thanks to Australia’s performance on COVID-19 management, many of the law firm’s offshore clients view the region as a positive investment environment compared to the rest of the world. The Foreign Investment Review Board (FIRB) is not stopping many deals either, although more planning is required to leave enough lead time and to answer questions, especially around security and data, she added.

Brad Lynch, Partner at Advent Partners agreed, by adding that limited partners in the private equity (PE) world also see Australia and New Zealand as a strong destination for investment.

Driving forces

Massive dry powder among PE firms will be the main driver for M&A activity in 2021, according to 38% of respondents that were asked during the event. Some 30% of attendees believe that corporate carve outs, low interest rates (18%), high valuations and multiples (13%), as well as regulatory changes (3%), will also play a role.

With some AU$13bn dry powder in the Australian market for private equity and venture capital deals, these financial investors have the firepower to actively participate in M&A moving forward, Lynch said. The robust IPO market also provides a great opportunity for local PEs to exit their business, he added, pointing to the listing of Advent Partners-backed skincare and laser clinics business SILK Laser last year.

Macquarie’s Farnik also pointed to the uniting of private equity and other “private capital” investors, which refer to the “lower rate return style” investors with longer investment horizons, in the M&A landscape. “We’re starting to see that combination become more and more active in very large transactions… and I think that is likely to continue,” he said. Those long term private capital investors have traditionally played in the infrastructure markets, but now they are more comfortable with operating complexity and taking more risk, he explained.

Maslen-Stannage noted that her law firm is expecting SPACs that are being listed overseas could contribute to the M&A activity in Australia as they look to acquire local assets.

Corporates are reassessing their portfolios and considering whether or not a certain division will still fit the company’s strategic direction, Fiona Chalmers, Chief Corporate Development Officer at share registries and computer bureaus company Computershare said. Given the positive market sentiment, opportunities are arising for large corporates to exit some of their divisions, she said, pointing to Wells Fargo & Co’s sale of its corporate trust business as an example. Computershare announced the acquisition of the assets of Wells Fargo Corporate Trust Service (CTS) for US$750m in March 2021.

Valuations and sectors

Last year there were some “obvious mismatches” between buyers and sellers, but now there is a renewed focus on what a post-COVID environment looks like, Farnik noted.

One important reference point to the valuation landscape is that listed companies are having high multiples, which is pointing to very high valuation multiples for potential deals, he said. “The question obviously is: are there deals that can be done at those levels? The answer so far is yes,” he added.

For dealmakers, it is important to get a fundamental long-term view, as some potential “Black Swan events”, like the pandemic, can come up at any time, Chalmers said. Maslen-Stannage also noted that with long term fundamentals in mind companies will be less put off by short-term factors such as volatility and even impacts of the global pandemic.

It is unlikely to see radical changes to deal structures, such as a rapid increase in contingent consideration or the re-emergence of very complex earnout structures, both Farnik and Lynch said. Instead, intense discussions on how to price assets will continue for a while, Farnik added.

In terms of active sectors, Farnik said Macquarie Group has a strong view on the importance of energy transition and related technologies that flow into energy transition across the board. Since Australia has both the resources and emerging technologies to convert those resources into products that will facilitate renewable energy and energy transition, there will be interest in acquiring, developing, and pursuing those opportunities, as well as a great deal of inbound interest from overseas, he explained.

Some industry verticals, especially in healthcare and technology, have more certainty around future cashflows due to their business models or tailwinds in the sector, Lynch said.

Industrials, transportation, and TMT sectors had a “great last year” and remain strong, Chen said. On the other hand, it is hard to make predictions on sectors such as commercial real estate, given that businesses are starting to be more flexible with working from home, and retail, as the impact of COVID-19 starts to play out, he said.

Some Australian homegrown companies may become of interest to SPACs in the US, especially those carbon transition companies, companies with battery technology, or other technologies in the electric vehicles space, which are seeking “quick market listings”, Farnik added.

ESG Focus and digitalization

Environmental, Social, and Governance (ESG) is now far more integrated with the core of the investment narrative or the transaction rationale, as it is seen as part of the value creation story, speakers agreed.

ESG matters are more explicitly considered now, as good stakeholder management around the ESG framework makes a good business and drives the value of the business, Lynch said.

Investors now are more concerned about ESG issues, Maslen-Stannage and Chalmers agreed. These concerns may be another driver for corporate carve outs, Maslen-Stannage said, pointing to companies looking to exit coal as an example.

Looking forward, 56% of webinar attendees believe that due diligence will be the main area enhanced by technology or digitalization, followed by post-merger integration and deal preparation. Continued investment in technology, especially in artificial intelligence, machine learning, and big data analytics, will make the decision-making process easier, Chen added.

Although the global pandemic has normalized the use of video conferencing, it is still different for M&A dealmakers to forge new relationships, Lynch and Chalmers agreed. Especially at the smaller end of the town, closer relationships really come into play in the M&A process as founders of those businesses want to understand where their” baby” is going, Chalmers said.

Cross-border M&A could suffer or take significantly longer to execute if business traveling does not resume, but “where there is a will, there will be a way”, Chalmers noted.

This webinar coverage article was originally published by Mergermarket on May 4, 2021; it has been republished with permission.