Grant Thornton says dealmakers are cautious as economic conditions weaken M&A activity

Australia is recalibrating after a period of pandemic-induced upheaval with industrial deals now dominating M&A activity.

Australia is returning to an industrials focused marketplace as it recalibrates after a period of pandemic-induced upheaval and shores up domestic resilience in the midst of an uncertain economic environment that has seen the volume of mergers and acquisitions deteriorate.

Grant Thornton’s ninth Dealtracker report, which spans the 18 months to June 30, says that while deal volumes were strong in 2022, activity fell sharply during the first half of 2023 due to a weakening global economy, geopolitical uncertainty and other factors including labour shortages.

In total there were 1710 deals worth more than $5m registered during the 18-month period, which was less than 1853 in the previous period. M&A activity in the first six-months of 2023 was down 25 per cent from the same time last year to 444.

Australian M&A activity was dominated by industrials sector, with the sector holding 31 per cent of total deal flow and an increase in deal volume from 503 to 523, which is 4 per cent growth since the prior Dealtracker period.

The firm noted that the pivot to industrials is reflective of the government’s investment in sovereign capabilities over the past three years to encourage activity in the sector.

“We are seeing that in industrials there has been a real focus of investment for companies to really make sure that they can have a secure supply chain,” Grant Thornton partner Jannaya James told The Australian.

“While the importance of innovation through the adoption of new technology remains, we have seen a resurgence in deals in industrial services driven by government investment in local manufacturing in an effort to improve supply chain resilience.

Ms James said that sentiment was cautious with companies prolonging the period it takes to get a deal completed given economic uncertainty, supply chain issues and collapses particularly in the construction sector.

“Uncertainty in the economic environment generally leads to slower deals. It doesn’t mean that deals will go away. They just take longer to occur and the valuation expectations between buyers and sellers might broaden too,” she said.

“More broadly, private equity still has a lot of capital to deploy and they will still be active in the market. It will come down to finding the right opportunities that will provide them with the growth opportunities that they’re looking for.”

Ms James said the market was likely to remain cautious for the foreseeable future while economic and geopolitical clouds hang over the market. She added that renewed tensions in the Middle East as a result of Hamas’ attack on Israel could add to jitters in ways that it did with Russia’s invasion of Ukraine.

BHP had the biggest deal of 2023 with its Oz Minerals takeover. Picture: NCA NewsWire / Sharon Smith

“Until everything moderates, the market will act quite cautiously,” she said.

Initial public offers (IPO) recorded a significant decline following record levels of post-pandemic listings with numbers down 63 per cent in the 18 months to June 30. During the 2022 calendar year $71bn was raised in IPOs, but that fell to $16bn in the first six months of 2023.

Ms James said that a deterioration in companies accessing IPO markets was likely to continue if volatility caused by inflationary pressures and geopolitical issues continued.

“The reduction now is somewhat a bit of a return to normal, but at the same time, the themes around economic uncertainty are prevailing,” she said.

“A number of those IPOs that occurred through 2021 did have pretty significant declines in value post-listing and that’s another source of hesitation for people seeking capital through the listed markets.”

The average IPO value decreased to $48m from 54 listings in 2022 compared to $63m in 2021. There was only 15 IPOs logged in the six months to June 30. The largest new share offers for the period were Chrysos Corporation at $183.5m, Leo Lithium at 100.1m and Conrad Asia Energy at $45m.

Ms James said that companies which were well placed to access capital outside of equity markets such as Virgin Australia’s much talked about planned IPO were likely to hold off until volatility settles.

The current climate could see Virgin Australia hold off on its potential IPO. Photo - iStock

The biggest deals in the 18 months to June 30 included the $38.5bn sale of Afterpay to Block, followed by the $32.6bn takeover of Sydney Airport. The biggest M&A deal of 2023 was BHP’s $10.7bn buyout of Oz Minerals and Squadron Energy taking over CWP Renewables for $4bn.

Origin Energy is expected to the next big transaction after theACCC approved Brookfield and EIG’s $18.7bn takeover bid for the utilities giant.

Corporates were the most active buyers, with 95 per cent of acquirers being classified as corporate M&A deals and 5 per cent as IM or private equity deals. Wall Street-listed Arthur J. Gallagher & Co. Group was the most active in the Australian marketplace with 11 deals, followed by DGL Group with nine.

Both Honan Insurance Group and Software Combined (research and consulting) completed six deals. Eleven other entities made four acquisitions and six others made three across a wide range of industries.