Herbert Smith Freehills (HSF) partners and M&A experts Tony Damian and Andrew Rich are back with their annual forecast for Australian deal-making.
They expect that 2023 will be another busy year for M&A, with the energy transition, investor contests, and private equity driving activity next year.
Tony and Andrew also assess how accurate last year’s predictions were (and have again given themselves full marks!).
Their predictions for 2023 are:
1. STILL MORE DEALS
Despite the naysayers, 2022 turned out to be a good year for deals and M&A. There were still meaningful large deals and approaches (e.g. Origin Energy and OZ Minerals) as well as M&A waves in particular sectors (e.g. the late rush in tech). Sure, there were some prominent non-deals but overall, 2022 was not a bad vintage for Australian M&A. We can expect another busy year in 2023 despite some headwinds as buyers adjust to tighter debt settings and look for high-quality assets to deploy capital.
2. LET’S BREAK UP
In 2022, we saw a number of high-profile demergers, including Tabcorp’s demerger of its lotteries and Keno business, and AGL’s attempt to demerge its energy operations. We also saw break up approaches for Origin Energy and Perpetual, and novel spin-merge transactions including BHP’s merger of its petroleum business into Woodside, and Humm’s proposed divestment of its buy now pay later division to Latitude Financial. Demergers and consolidations are becoming increasingly common for corporates looking to enhance growth opportunities and/or unlock value (e.g. Link’s proposed distribution of its interest in PEXA). Expect to see more break up approaches in 2023.
3. THE TRANSITION TAKES OFF
ESG continues to drive deal flow as the transition to cleaner energy takes off. In 2020, we called out the increasing role of ESG issues in due diligence exercises and in 2021, we also noted M&A’s continued role in the ESG space. Following the recent announcement of Brookfield’s and MidOcean Energy’s $18.4bn proposal to Origin Energy and the continued focus on energy transition and decarbonisation, we expect to see more ESG-driven transactions.
4. ASIC STRIDES OUT
We expect ASIC will take an increasingly proactive role in public M&A. In 2022, we have already seen ASIC offer its thoughts on material adverse change conditions. Early indications from the courts suggest support for the status quo with respect to the drafting of these conditions.
5. PRIVATE EQUITY’S INCREASING APPETITE
Private equity appears again in our annual forecast after featuring in a number of mega deals and proposals in 2022. Though some of those proposals have not translated into deals, there is an increasing appetite by PE to compete for control of public companies. Even pre-bid stakes and concurrent scheme/takeover structures are now on the table for PE. We don’t think that finance markets will get in the way of these vast amounts of dry powder that are ready to be deployed.
6. EVEN MORE CONTESTS
In 2022, we continued to see high levels of competitive processes, including Warrego Energy, Virtus Health, Uniti Group and Nitro Software. In some cases, competition was fierce, featuring bidding wars, Takeovers Panel proceedings, pre-bid stakes and concurrent scheme/takeover deal structures (e.g. the contest for control of Virtus Health). We predict there will be even more contests in 2023 as investors compete for high quality assets.
7. BOARDS DEFEND VALUE
Well-prepared Boards will continue to defend against opportunistic bids in 2023, deploying a range of strategies including disclosing or rejecting approaches that do not represent appropriate value as well as developing alternatives all aimed at ensuring bidders pay a full price.
8. THE FUNDING QUESTION WILL NOT BE AN IMPEDIMENT
Tighter debt settings will not be helpful to M&A, though we still expect to see leveraged deals that make sense proceed. Importantly, on the buy side, there will be plenty of equity funding playing a prominent role in public M&A deals in 2023. Australia’s largest-ever takeover – the Sydney Airport transaction, which closed this year – was entirely equity funded. That, along with the tabling of more scrip-for-scrip deals, means the impact of debt markets should be manageable on the overall outcomes for M&A in 2023.
9. THE SECTORS TO WATCH
We think the three sectors to watch are Infrastructure, Technology and Energy & Resources. Infrastructure continues to be attractive to investors looking for robust long-term returns. Technology will also see activity as tech companies continue to attract interest and the spate of approaches late in 2022 spills into next year. Energy & Resources, which had a very strong year, will continue to draw investors looking to participate in the energy transition.
10. SCHEME REFORM
2022 saw certain market participants put forward the interesting but flawed reform idea of taking schemes of arrangement outside of the Court and into the Takeovers Panel. The Treasury has sensibly indicated that this proposal will not be proceeding. However, that won’t be the end of scheme reform – we think there will continue to be a constructive discussion on a streamlined approach to Court documents in 2023. Watch this space.
REVIEW OF THE 2022 PREDICTIONS
2022 proved to be a busy year for market participants notwithstanding increasing headwinds. ESG continued to drive deal flow, while consortium bids and auctions for control were a notable feature. While stub equity and earn-out arrangements were relatively uncommon, they did appear in some interesting deals including Crestone. Relying on a slightly generous reading on stub equity and earn outs, we give last year’s predictions pretty much full marks!
1. Deals, deals and more deals
2. Super strides out
3. ESG driving deal flow
4. Stub equity and earn-outs
5. Interesting times at the ACCC
6. The sectors to watch
7. Pause for breath on W&I
8. Auctions, auctions, auctions
9. Consortium bids
10. Schemes climb the mountain