There were encouraging signs that the fundamentals of the Australian market remain strong, with deal values remaining solid.
Australian market remains strong
In FY15 there was a reduction in overall public M&A activity relative to FY14. Despite this, there were encouraging signs that the fundamentals of the Australian market remain strong, with deal values remaining solid and some interesting and strategically important deals, particularly at the big end of town.
Partner Paul Branston discusses the findings of the 7th annual Herbert Smith Freehills Australian Public M&A Report 2015. The Report shows that despite a decline in deal activity in FY15, the future outlook remains promising with a lower Australian currency, favourable financing costs, and limited organic growth options making conditions ripe for fiscal 2016.
FY15 at a glance
In FY15 we were expecting big things for Australian public M&A activity off the back of the rebound we observed in FY14 following the then-historic lows of FY13. FY14 also featured a high level of competition, which suggested Australia was poised for a very active FY15.
Contrary to our expectations, FY15 saw a contraction of activity in the Australian public M&A market. There were 55 deals announced in the 12 months to 30 June 2015, which is an all-time low during the 7 years in which we have produced this Report. Deal volumes in FY15 were approximately half of that in FY11 (104 deals) and on par with FY13 (59 deals). Total deal value in FY15 was $28 billion, down from $43 billion in FY14, but significantly higher than the $12 billion in FY13 when activity was at similarly low levels.
But some positive signs at the top end of town
Despite the reduction in activity, there were some positive signs. While the proportion of mega deals (ie valuing targets at >$1 billion) was down, the 7 mega deals in FY15 included some very large deals by value (the largest 2 being Federation Centre’s merger with Novion Property Group at $7.8 billion and Japan Post's acquisition of Toll at $6.5 billion). These deals were spread across a range of sectors including telecommunications, real estate, information management services, mining and industrials.
The mega deals involved strategic acquisitions as companies looked for growth and savings by consolidating their position in a sector or increasing scale (iiNet, Novion), expanding geographic reach (Toll, Recall) or acquiring tier-one mining assets (Sirius).
Mega deals in FY15 also featured some interesting aspects such as the contest between TPG and M2 Telecommunications for iiNet, Guangdong's second move for PanAust almost a year after its initial approach, and the demerger of certain exploration assets into a newly listed entity as part of Independence Group’s acquisition of Sirius.
Whilst FY14 was a period of intense competition in Australia’s public M&A markets, in FY15 there was a significant reduction in competition post-transaction announcement. Only 2 targets were the subject of multiple bidders (iiNet and the much smaller MEO). Despite the quality of the target assets up for grabs in the mega deals space, only one mega deal was contested (iiNet).
The percentage of deals structured as schemes of arrangement increased relative to previous years, at 45%. In the mega deals category, the trend towards schemes was particularly marked with 6 of the 7 mega deals being structured as schemes.
Combining this trend towards schemes with the limited level of competition we saw this year suggests to us that there is a trend for any auction to be carried out prior to the announcement of the transaction, with boards preferring to seek certainty through their chosen structure. The Vocus scheme for Amcom also demonstrated that with a concerted campaign it is possible to achieve voter turnout to have a scheme approved despite a 19.9% shareholder opposing the transaction.
The use of cash as consideration in M&A transactions was up this year with cash being a component of the consideration offered in 73% of transactions. Target shareholders were particularly receptive to cash consideration in what was a volatile year for financial markets, with a 75% success rate in transactions offering cash only (up on previous years), as compared to a 54% success rate for scrip only consideration (down on previous years). However, cash was less common in the mega deal space than has historically been the case, in line with the reduced participation of foreign bidders in this segment of the market.
Additional findings in the Report include:
- Deals accounting for 84% of overall value were announced in the second half of FY15, including all of the mega deals.
- The majority of bidders in FY15 were from Australia or New Zealand. However, foreign bidders continued to play a significant role, in particular bidders from Asia, who launched 25% of the deals in FY15.
- The energy and resources sectors continued to provide a baseload of activity in the Australian public M&A market, accounting for 60% of transactions by number, though deal values were down.
- Private equity activity remained relatively robust, with 10 deals launched by private equity bidders (the same as in FY14).
- The drop in competition was accompanied by high success rates at 70% overall and almost 90% in friendly deals.
- In FY2015 there was an increase in the proportion of deals with premia in the 20-40% range and reduction in the above 40% range. Premia size had a strong positive correlation with success rates, which has not often been the case in previous years.
- An increased proportion of transactions included a break fee of more than 1%.
Predictions for FY16
FY15 was a challenging year for the Australian economy, characterised by below-trend growth in the domestic economy and volatility in markets. There were significant falls in commodity prices, particularly iron ore, coal and oil as growth eased in Australia’s major trading partners, in particular China.
These factors no doubt contributed to the relatively low level of public M&A activity in Australia in FY15 despite global M&A being at very high levels.
However, conditions appear ripe for an increase in Australian M&A activity in FY16.
The Australian dollar has depreciated substantially against the US dollar to levels last seen in 2009, increasing Australia’s international competitiveness and the attractiveness of Australian targets. Inflation remains at low levels, as do interest rates, providing positive conditions for the financing of the business sector and M&A activity.
Globally, the US and Europe are showing signs of recovery, and M&A continues at a rapid rate with some very high profile deals announced in the first half of calendar year 2015 including Shell’s US$70 billion acquisition of BG and the US$45 billion merger of Kraft with Heinz.
There was a noticeable increase in deal values in Australia in the second half of FY15, with all 7 mega deals for FY15 being announced in this period. This trend has continued in early FY16, with a number of big ticket transactions being announced post-30 June 2015 including DUET Group’s $1.4 billion acquisition of clean energy producer Energy Developments and Brookfield Infrastructure Partners’ $8.9 billion acquisition of Australian logistics giant Asciano, which is one of Australia’s largest M&A deals on record.
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