While companies in the rest of the world have found bank lending to be increasingly tight and risk averse, and that they have had to hold on to their cash just to ensure their own working capital requirements are satisfied rather than throw money around in the hunt for new acquisitions, deal activity in Australia is thriving – so much so that analysts are encouraging companies to invest their cash in mergers and acquisitions just to remain competitive.
In August, global private equity firm Blackstone announced that it was seeking AUD 431m ($452m) financing to back its purchase of Australia property firm Valad Property Group, while Peroni brewer SAB Miller has rolled out a hostile £6.1bn offer for Foster’s, Australia’s brewing giant. Elsewhere, Insurance Australia Group is set to buy a 20 percent stake in a Chinese insurer for $107m in a foray into the world’s second largest economy, marking a key step in meeting its targets of earning 10 percent of gross written premium from Asia by 2016.
Interest in Australian companies is also coming from Asia. China’s Bright Food Group is on the lookout for more acquisitions there, particularly in the food, dairy and wine industry, after spending $400m for a 75 percent stake in Manassen Foods.
Vice-president Ge Junjie said: “Recently, quite a few small to medium-sized Australian businesses came to us on their own to talk about potential co-operation. Australia is the area where we are going to focus more. We are trying to understand Australia better. Manassen Foods would be our platform for our international strategy.”
Merger mania
The summer has seen one of the country’s largest M&A deals come to fruition. At the end of August, Australian miner Macarthur Coal backed a revised takeover offer from Peabody Energy and ArcelorMittal after the bidders raised their offer by three percent to AUD 16 per share, valuing the deal at AUD 4.8bn ($5.2bn).
Macarthur, the world’s largest producer of pulverised coal, has been a takeover target in the wake of growing demand for coal, and has fended off four takeover bids in the last years. Peabody and ArcelorMittal had made a formal offer for the Australian miner at the start of the month. But Macarthur tried to raise the sale price by saying that “a number of parties” had shown interest in the company and had taken a look at its business. However, despite the interest, none of those companies made a rival bid.
Analysts said in the absence of any rival bids, Macarthur did not have many options. “How long can you keep a potential bidder out there? At the end of the day Macarthur has decided to move on,” says Jonathan Barratt of Commodity Broking.
Australian Treasurer Wayne Swan had issued a statement of no objection under the Foreign Acquisitions and Takeovers Act to the proposed takeover of Macarthur Coal on August 12. The European Commission had already ruled that the Macarthur takeover bid did not require approval under the EU Merger Regulation. Again, analysts see the lack of regulatory obstacles as being a tacit acknowledgement that merger activity may be a boon to the world’s depressed economy.
The true value of the deal can be best assessed in the strength of the bidders. Peabody is the largest coal company in the US, while ArcelorMittal is the world’s largest steel maker. Analysts said the deal is likely to benefit both companies as the acquisition of Macarthur will help Peabody increase its presence in the coal market even further.
“When you look at the large mining companies, the trend is to expand and reduce the concentration of rivals. That gives them an edge.” Barratt says. “The attraction is for greater profits through greater concentration of prices.”
As for ArcelorMittal, analysts believe the deal will help it secure more supplies of pulverised coal, a key commodity for making steel, at competitive rates.
It certainly appears that merger mania is springing up, down under. A recent study shows that Australian mergers and acquisitions have reached a record AUD 130.3bn ($125.79bn) so far this year, despite the gloomy economic outlook and share market turmoil. This was a 78.1 percent increase from the same period in 2010 and was the busiest year-to-date in terms of the volume of transactions, the Thomson Reuters Australasia Investment Banking Snapshot has found.
Metals and mining
New Zealand inbound M&A this year reached $2.1bn, a 62.6 percent increase from the comparable period in 2010. Japan accounted for $1.4bn, or 66.7 percent, of the inbound transactions in dollar value compared to none in 2010 year-to-date for New Zealand. In August Japan’s Asahi Group Holdings announced it would buy New Zealand’s Independent Liquor, in a deal worth $1.3bn, to expand its overseas presence.
The research found that food and beverages reported the biggest upsurge, with transactions of $18.1bn from 33 deals, bolstered by recent acquisitions of beverage companies. This compared with $118.2m from 25 deals in the 2010 year-to-date. However, metals and mining remains the busiest sector with $27.8 billion of mergers and acquisition activity, up 31.5 percent from the same period last year.
And experts believe that growth in M&A activity in the sector is set to continue. At the beginning of August, Ernst & Young analyst Paul Murphy told delegates at the Diggers and Dealers forum – Australia’s largest mining conference – that mergers and acquisitions within the industry are set to almost double this year, to hit $2bn worldwide by the end of 2011.
Murphy said strong commodity prices are behind most of the movement by companies in the sector, adding that external expansion is one option for miners deciding how to invest their increased cash flow. “Do they bring on projects, organic projects faster, do they engage in M&A activity, do they do share buy-backs and bigger dividend payments?” he asked. “I think what we are seeing is that they are doing a combination of those, to manage all their interests.”
Murphy said smaller players in the industry are a potential target. “You’ve got those smaller players who haven’t got the access to funding as a means of warding off those corporate predators: we’ve already seen the start of some consolidation activity.”
Some industry players are also keen to stress their interest in merger activity. Troy Resources chief executive Paul Benson has said that the group is permanently on the look-out for potential acquisitions: “We’re always interested in M&A,” he told journalists on the sidelines of the Diggers and Dealers conference. “We’re kissing frogs the whole time. We’d like to have an asset in Australia.” Benson added that Troy, which has operations in Brazil and Argentina, would be attractive for other companies looking to do deals because of its history of mine development.
But some experts believe that Australian companies could be missing out on the country’s merger mania if they are too risk averse. According to law firm Gilbert + Tobin, companies will miss out on bargains if they continue a cautious approach to mergers and acquisitions as a result of the federal government’s “radical” policies and overseas debt. Writing in its mid-year M&A review, partner Neil Pathak said that “the catalyst, in our view, to greater M&A and capital markets activity is financial and political stability, which will breed confidence in the business and consumer sector and global markets generally.” He added: “Less radical and uncertain policy from our government and a sustained period of calm offshore and resolution of the foreign debt issues is required. The reality is that this may take some time.”
The law firm says that after a “patchy” first half, the M&A market has improved, with the $4.7bn bid for Macarthur Coal and deals for ConnectEast, Sundance Resources and Eastern Star Gas. Gilbert + Tobin, which is advising Foxtel shareholder Telstra on the pay-TV group’s bid for Austar, expects resources to continue to drive activity.
In contrast, equity capital markets remain in the doldrums, which is putting extra pressure on investment banks. Globally, major banks have shed jobs, while in Australia analysts expect Macquarie to cut staff at its investment banking unit. Merrill Lynch said Macquarie was “well off” its M&A numbers from last year and needed to address “company-specific” issues to arrest the slide in market share. However, Goldman Sachs was the top financial adviser for Australian-involved M&A this year – advising on 27 deals for a 42.4 percent market share, up 8.5 percentage points from the same period last year.
The time is now
Echoing remarks by bankers, Pathak wrote that deals are getting harder and taking longer. But he noted that there are positive signs: “Deals with solid fundamentals are getting done, but uncertainty remains… With foreign financial conditions arguably starting to improve, the time to move may be now.”
Pathak believes that the M&A market will begin to see a number of trends unfold as the year goes on – namely, that offshore suitors will continue to make the most of depressed valuations despite the strong Australian dollar, with inbound M&A up sharply on last year, and that outbound M&A will also grow as local companies use the strong dollar. Other trends to continue will be cash deals, joint bids from multiple suitors and target companies disclosing approaches early, he said.
While the Australian government may not be doing much to encourage M&A bids, it appears that even its attempts to halt a high profile and high-value merger may have backfired, potentially producing a detrimental effect. Competition experts believe that the court defeat towards the end of August of the Australian competition watchdog’s bid to block Metcash’s AUD 215m purchase of the Franklins grocery business and its 80 stores may make M&A easier to process.
The Australian Competition and Consumer Commission (ACCC) took court action because it believed Metcash’s purchase of Franklins would have the effect of substantially lessening competition in the market for wholesale supply of packaged groceries in New South Wales and the Australian Capital Territory.
In a rare move the dispute went to the courts, with Federal Court judge Arthur Emmett asked to rule on the case. However, Justice Emmett dismissed the ACCC’s case and its arguments that the purchase would lead to less competition, ruling that “it is quite likely that the acquisition of Franklins by Metcash will strengthen the capacity of independent retailers operating under the IGA banner to compete more vigorously with the major supermarket chains.”
One of the other key arguments by the ACCC was that an alternative buyer would come forward to buy the Franklins business, but the judge rejected this too. “It is a matter of speculation as to whether, assuming the acquisition did not proceed, a third party, as propounded by the commission, would ever be able to make an offer that would be accepted by Pick ‘n’ Pay,” Justice Emmett said.
ACCC chairman Rod Sims said the watchdog was “disappointed” by the Federal Court decision. “The role of the ACCC is to oppose mergers where we believe there will be a substantial lessening of competition in a market in Australia, and this will not change,” Sims said. “The ACCC’s role is important to avoid inappropriate market concentration and to protect the long-term interests of consumers.”
But lawyers have welcomed the decision, saying that it should smooth the way for further M&A activity in the country. Allens Arthur Robinson partner Fiona Crosbie said the decision made it clear the ACCC had to have strong evidence if it was going to oppose a merger and argue that there could be an alternative buyer for a company. Hall & Wilcox Lawyers partner Sally Scott said that if the decision was not appealed, she expected “a spate of mergers, as many have been holding off awaiting the outcome of this decision.”
