Their predictions, which suggest that Australian dealmakers will have another very busy year ahead, include:
1. DEALS, DEALS AND MORE DEALS
2021 was a massive year for M&A, both globally and locally. In Australia, it was a combination of a lot of deals, but also a lot of large and very important deals (e.g. Sydney Airport, Santos/Oil Search and BHP/Woodside). As we approach the end of 2021, we see the strength in M&A continuing and expect another very busy year in 2022. Plenty of tailwinds to drive another big year, which we think outweigh the negatives from a range of uncertainties.
2. SUPER STRIDES OUT
“The increasing importance of super funds in M&A” is a safe bet for an M&A prediction list these days. The role of super funds in public M&A continues to grow. Notably in 2021, we saw super funds play a key role in a range of large deals (e.g. Sydney Airport, Vocus and Vitalharvest). With lots of capital to deploy, and an increased comfort playing in the public M&A space, 2022 will be another big and important year for super funds.
3. ESG DRIVING DEAL FLOW
ESG issues have been important across a range of areas of business. In last year’s predictions, we called out the increasing role of ESG issues in due diligence exercises. In 2021, we also saw ESG issues actually driving deal flow: note the significant deals in the oil and gas sector. This trend will continue. We expect 2022 to see more of the same and for M&A to be a solution for ESG matters.
4. STUB EQUITY AND EARN-OUTS
We expect to see a number of public M&A deals continue to utilise deal structures such as stub equity and earn-outs so as to make the offer more attractive to target shareholders. In the MIRA acquisition of BINGO, there was a stub equity feature that included an earn-out, thus providing BINGO shareholders with the option of staying in and also of receiving a consideration that varies with the performance of the business. We have also seen deal proponents become increasingly comfortable with stub deals aimed at particular large shareholders as opposed to all shareholders, despite this taking the relevant large shareholders out of the voting pool. There has been a strong level of interest in these deal structures and we expect to see more of them in 2022.
5. INTERESTING TIMES AT THE ACCC
While there are few Nostradamus bonus points for predicting that the term of the current ACCC Chairman, Rod Sims, will end in 2022, we expect that the new Chair, lawyer Gina Cass-Gottlieb, will quickly seek to establish the narrative for the ACCC under her leadership, including in relation to mergers (as well as other issues such as perspectives on enforcement).
6. THE SECTORS TO WATCH
We continue to include resources in our list of hot sectors for M&A in 2022, as it was for our 2021 predictions. Resources is a broad label. We think oil and gas consolidation has a way to go and we also think mining will be active in 2022. Infrastructure, which was certainly a podium finisher in 2021, will also be important in 2022. Property, a 2021 pick for us, will have a more significant M&A year in 2022.
7. PAUSE FOR BREATH ON W&I INSURANCE
Warranty & Indemnity (W&I) Insurance has become a common feature of the Australian M&A landscape. A consequence of the M&A boom is that W&I insurers have been stretched. There are M&A participants who have as a consequence been forced to consider other risk allocation techniques (remembering that W&I insurance in the Australian market is a relatively recent phenomenon, M&A is not). We think that these events will give M&A participants pause for breath in relation to W&I insurance in 2022.
8. AUCTIONS, AUCTIONS, AUCTIONS
In 2021 we saw a number of hotly contested auctions for control of ASX-listed entities (e.g. Australian Pharmaceutical Industries, Mainstream, AusNet Services and Vitalharvest). Given the sheer weight of capital looking to final a home and the finite pool of quality assets and businesses in Australia, we predict that in 2022 there will be even more contests for control of ASX-listed entities, many of which will involve multiple bidders.
9. CONSORTIUM BIDS
In 2021, we saw a number of consortium bids for high value assets and businesses (eg Spark Infrastructure, Sydney Airport and BINGO). Given the significant size of the equity cheque required for many prized assets and businesses, with foreign and domestic players being very comfortable in joint venture ownership structures, we expect to see more consortium bids in 2022. No ASX-listed entity can consider itself immune from a takeover approach anymore.
10. SCHEMES CLIMB THE MOUNTAIN
We predict that schemes of arrangement will continue to increase in prevalence as the dominant deal structure for friendly public M&A transactions.
And on the topic of schemes, at the end of 2019, we predicted the launch of the 4th edition of our book on schemes of arrangement titled “Schemes, Takeovers and Himalayan Peaks” in 2020. Whilst we can’t claim that prediction for 2022, as it was released in November 2021, we can predict that in February 2022, there will be a fine launch to mark the moment!
REVIEW OF THE 2021 PREDICTIONS
In late 2020, Tony Damian and Andrew Rich also made M&A predictions for 2021. Those predictions have turned out to be extremely accurate.
2021 saw M&A activity at an all-time high in Australia, characterised by a series of ‘mega deals’. 2021 was a big year for M&A, with private equity (e.g. BINGO, Vocus, IRESS, Smartgroup and Link) and super funds (e.g. Sydney Airport) very active in the market. FIRB was busier than ever and we saw interesting bidder tactics in a number of situations. ESG in M&A also came to prominence and indeed emerged from a diligence issue to a driver in its own right.
The 2021 predictions were:
- 2021: consolidating the strong second half
- Private equity a key player
- …joined by super funds
- FIRB gives pause for breath
- Cross border drivers
- W&I insurance has its day
- Bidder tactics and target boards
- M&A deal diligence: the new frontiers
- The sectors to watch: property, financial services and resources
- Stressed M&A opportunities: consolidations and recapitalisations
The Herbert Smith Freehills M&A team thanks all our clients for their valued support in 2021 and wishes everyone the best for 2022.