Australian public M&A activity surged in FY22, with deal value increasing to three and a half times the five year average. Despite a complex economic backdrop and the cost of capital rising, bidders will continue to pursue their wish-list targets, with continued strong private capital interest coupled with increased consortium activity expected to fuel dealmaking, say legal experts in Herbert Smith Freehills’ latest Australian Public M&A Report, released today.
Now in its fourteenth edition, the Report examines the 65 control transactions involving Australian targets listed on the ASX that were conducted by way of takeover bid or scheme of arrangement in the 2022 financial year.
The Report found that the total value of public M&A deals announced reached new heights at A$123.7b — more than three and a half times the five-year average and three times FY21’s aggregate value.
Herbert Smith Freehills partner Nicole Pedler explained that Australian M&A volumes have never been as robust as in FY22.
“Not only were the number of deals significantly up from previous years, but the value of the deals at the top end was also much higher, with 13 deals above A$1 billion compared to just seven in FY21, and a five-year average of only six such mega deals per year. By the end of the calendar year 2021, the total deal value had already reached an aggregate of over A$100 billion, setting a new record in Australia.”
The Report found that FY22 was an active year for consortia, as bidders came together in pursuit of larger targets. Four of the 10 largest deals involved a consortium bid, including the Brookfield Consortium’s acquisition of AusNet Services, the KKR consortium’s acquisition of Spark Infrastructure, and Sydney Aviation Alliance’s acquisition of Sydney Airport — the largest completed deal in Australian public M&A history, which Herbert Smith Freehills advised the bidding consortium on.
Pedler said, “The significant size of the cheques these consortia were able to cut meant that no ASX-listed entity was immune from a takeover approach.
“Further, the use of consortium bids highlights the evolving and complex nature of the relationship among private capital sponsors, who are increasingly friends not foes.
“Consortium bids will continue to be a feature of FY23 — private capital players teaming up with one another and with founders or major shareholders will continue to increase, as sponsors bring a relationship-focus to securing targets with deal certainty.”
The consortia bids highlighted another trend, being the desirability and scarcity of infrastructure targets, as the immense deployable capacity of superannuation and pension funds continued to search for assets that delivered long-life and stable cashflows.
Pedler said, “Consortium bids allow for the pooling of significant capital required to acquire high-value, sought-after assets, including critical infrastructure and infra-like assets, sharing the asset and spreading the funding burden among consortium members.
“Participation by super funds in larger infra-focused or infra-like public deals appears to reflect both their scarcity of opportunity and the significant cost of capital advantage for these funds relative to public markets. The increase in investment by super-funds in infra-like assets looks to continue to follow macro themes relating to an aging and increasing population.
“This is echoed by announcements by Australia’s top three superannuation funds that they would increase their direct exposure to infrastructure and more ‘active’ private funds, and we expect super funds to continue their involvement in significant deals in FY23.”
The private equity story in FY22 was more complex than before. The proportion of announced private equity deals against total deals declined. However, not captured in that data is a dramatic rise in multi-billion dollar indicative offers for ‘take-privates’ that have not yet eventuated to announced deals.
HSF partner Kam Jamshidi said, “Large take-privates are an incredibly efficient way for private equity to deploy capital. Big indicative bids in FY22 such as those by KKR and CVC for the likes of Ramsay and Brambles, respectively, highlight the desire by general partners to access those efficiencies.
“The complex economic environment and dislocation in valuations is a significant opportunity for private equity to do public deals in FY23. Active management of inflationary pressure, supply chain challenges and cost of debt, together with an opportunity for future multiples expansion, will entice private equity to make their moves now.”
This demand for public deals by private equity is expected to give rise to more contested situations. Private equity bidders have been intensely focussed on deal certainty in the face of the risk of contested situations, which will lead to more creativity in pre-bid activity, both with target boards and shareholders, and greater structuring complexity.
Jamshidi added, “We expect to continue to see participants use all the tools in their arsenal. In recent years, there has been an increase in the use of multiple deal alternative structures presented to shareholders designed to limit the risk of interlopers or shareholders frustrating a deal. This has featured the use of multiple alternative schemes or a takeover bid coupled with a scheme. In particular, there has been a renaissance of sorts for takeover bids in larger contested deals, which has been exciting to see.
“Pre-bid engagement with a target, of course, got very interesting this year, and a question arose as to how much scope a board should have to grant pre-bid exclusivity without a fiduciary exception. For bidders, we expect a shift towards preferring confidentiality over ‘hard’ exclusivity, certainly until there is more certainty on this scope, which may be delivered when the Takeover Panel revisits its Guidance Note on lock-ups.”
The Report notes a series of themes that look to be enduring, including:
- Strategic bidders: industry bidders are leading the way on determining equilibrium for valuations, as they go for their ‘wish-list’ strategic acquisitions in a softer market, and this is acting as a catalyst for more deals.
- Technology sector: equity value softness is driving bidder activity searching for technology-enabled growth. In tech, the timing is ripe for: (i) global technology companies to acquire wish-list targets; (ii) private equity to fulfil their desire to position for technology-enabled growth; and (iii) non-tech strategics searching to embed or enhance technology angles.
- Metals and mining: energy transition-related mining M&A is continuing to boom, driven by: (i) portfolio reconstitution towards future-facing commodities; (ii) industry players looking for supply certainty and vertical integration; and (iii) mining companies in future-facing commodities looking to scale up to position for the opportunities ahead of them.
- ESG: ESG-driven deals are increasing, and the strategies underpinning them are evolving past simply exiting increasingly ESG-challenged sectors.
Other key findings of the Report:
- The two most prominent sectors in FY22 by value of deals were Industrials & Utilities (37.3% of all deals) and Information Technology (35.5% of all deals).
- 78% of all deals in FY22 were launched with target board support (‘friendly’ deals), slightly higher than the levels seen in previous years.
- There has been a continued upward trend since FY18 of bidders preferring to use schemes over takeovers. This trend continued in FY22, with the use of schemes at a record high, being the preferred structure of 66% of all deals.
- FY22 continued the trend of an increased use of scrip consideration. Similar to FY21 levels, 46% of all deals in FY22 involved some element of scrip consideration, and 35% of all deals only offered scrip consideration (compared to 28% in FY21 and 16% in FY20).
For more information or a copy of the Report, visit: https://www.herbertsmithfreehills.com/insight/australian-public-ma-repor...