Confidence returns to spark M&A spree before holidays
A turnaround in market sentiment is driving a pre-Christmas flurry of deals, as investors and companies look to capitalise on a rally fuelled by the potential of interest rate cuts.
A turnaround in market sentiment is driving a flurry of M&A deals before the Christmas holiday, as investors and companies look to capitalise on a rally fuelled by the possibility of earlier-than-expected interest rate cuts.
On Monday alone, three companies – share registry Link, building materials provider Adbri, and dental group Pacific Smiles – said they had been approached with buyout proposals.
The deal rush, which bankers are hoping will turn into a true turnaround next year, is coming at the end of a tough year in investment banking, marked by weak confidence, low deal volumes, longer lead times and lay-offs.
“Clearly it’s coming to year end, so transactions are getting announced ahead of the end-of-year deadline,” said Nick Brown, UBS co-head of Asia-Pacific M&A.
“The fact that there have been a number of deals announced recently is reflective of the build-up of stronger activity and the improving outlook,” he said, adding there might be an “element of coincidence with a number of transactions coming at the same time”.
Adbri, formerly known as Adelaide Brighton, on Monday told shareholders that materials manufacturer Barro Group and New York-listed materials giant CRH had lobbed a $2.1bn takeover offer for the company.
The company has struggled to increase profits in recent years and has not paid a dividend in the past two halves. An independent board committee has said it is in favour of the offer.
At Link, shareholders were told the board had accepted a $1.2bn takeover offer from Japanese financial conglomerate Mitsubishi UFJ. The offer represents a 32 per cent premium to the closing share price on Friday, but comes after the company has lost 75 per cent of its value over the past five years.
Dental group Pacific Smiles told the ASX it had received an “opportunistic” takeover offer from private equity group Genesis Capital valuing the company at $223.4m, following a raid on its share registry.
UBS is advising Link alongside Macquarie Capital, while JPMorgan and Barrenjoey are serving Adbri, and Greenhill & Co is advising Pacific Smiles.
The wave of deals comes on the back of three straight weeks of gains in the local sharemarket, with the S&P/ASX 200 nearing record highs, and a big rally on Wall Street after the US Federal Reserve signalled that borrowing costs will be lower next year.
“There’s a view that interest rates have peaked or are close to peaking globally and locally, and that is giving people more visibility and confidence in the economic outlook,” UBS’s Mr Brown said.
“Having that greater visibility around inflation, the interest rate cycle and the economic outlook in particular is constructive (for dealmaking).”
Fed officials have started to push back on their dovish message after markets rallied on the back of comments indicating that there would be three 0.25 percentage-point cuts in the cash rate next year – much more than what the market had been anticipating.
Nonetheless, with interest rates stabilising and possibly falling next year, buyers and sellers have clearly started to go back to the negotiating table. This will not be enough to reverse a 38 per cent fall in completed volumes to about $US103bn ($153bn), well down on $US142bn last year, according to LSEG data.
“This year everyone was reminded that indeed debt does price equity, and we saw valuations across the market plummet as inflation and rates increased rapidly,” said Jarden investment banker Mitchell Schauer, who heads the group’s real estate unit.
The volumes look particularly dire when it comes to private equity activity, which is down 46 per cent to $US8.5bn, the lowest level since 2014, according to Dealogic data.
“It’s been a challenging year for private equity and that’s been driven by uncertainty around where rates were going to get to, and where inflation and the consumer will get to,” Citi investment banking managing director Jack Groom said.
But bidders, including private equity firms, are no longer waiting on the sidelines, expecting assets to get cheaper due to the lower valuations that result from interest rate increases.
“There’s a view that we are getting to the tail end of where rates are going and from the private equity perspective, given the amount of capital that they have raised, I think they will be looking to actively deploy in 2024,” Mr Groom said.
At Goldman Sachs, Stephan Feldgoise, co-head of global mergers & acquisitions, recently reported that “dialogue” with asset buyers and sellers was back at the record levels seen in 2021 and early 2022, even if this was yet to be reflected in executed transactions.
Mr Schauer from Jarden said: “There’s actually been a really high level of underlying activity [which is] starting to play out before the end of year break.
“That is indicative of the hard work that people have been doing behind the scenes over the year. It has been a lot busier than it seems looking at data and statistics.”
Earlier this month, oil and gas company Santos announced it was in merger talks with its larger rival Woodside Energy. The potential deal, if successful, could see Woodside pay in scrip between $28bn and $29bn for Santos, according to analysts.
As well, AustralianSuper, the nation’s largest pension fund, led efforts to reject a $20bn offer for Origin Energy, of which it is the largest shareholder.
“There is a renewed sense of optimism (and) people have had time to optimise their own business models, refocus their strategies and as part of that consider how M&A can help,” Mr Schauer added.
“But I think the macro settings and therefore markets will remain volatile over the course of next year. I still expect different perspectives on what is the right valuation for a business or for an asset,” he said.
“Whilst the gap might close, there will still be a difference between buyers and sellers.”
It is the result of that dynamic which will have to drive an actual recovery.
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