Conditions improving for M&A provided safeguards are in place, says Corrs Chambers Wesgarth
Corrs acknowledges rising interest rates aren’t ideal and asset values are debatable, but believes regulatory changes make certain sectors attractive to M&A.
Persistent macro-economic volatility and “fundamental differences” between sellers and buyers on asset values may weigh on M&A activity, making protection against the downside in transactions more important.
That’s the view of Corrs Chambers Westgarth, which is cautiously optimistic about the prospects for deal this year, highlighting a number of challenges as interest rates rise, consumer demand tempers and the economy slows.
Interest “rates are just one input in the overall macro volatility landscape, which includes input cost and wage pressures, supply chain uncertainties and de-globalisation,” Corrs partner Chris Allen said.
“We see a range of catalysts for M&A, for example potential changes to gaming regulation could impact … casino resorts as well as family owned, private equity-backed and listed hospitality and leisure assets.”
Mr Allen said there were companies and financial buyers such as private equity, infrastructure and super funds which wanted to transact and deploy billions of dollars in capital, albeit different opinions around valuations were often hampering acquisitions.
“There is a chasm caused by a range of factors … buyers and sellers may still have some fundamental differences on asset values, which is not easy to bridge,” he added. Mr Allen noted ways to facilitate acquisitions and mitigate “downside risk” on deals including the use market instruments such as hybrid equity, debt or convertible products or opting for deferred payment structures within terms.
AMP this week outlined how deferred payment structures can hurt a seller. The wealth group on Monday admitted it had less than three weeks to get the sale of its local infrastructure and real estate business to Dexus across the line before $25m was sliced off the purchase price.
The parties are still awaiting regulatory approval in China – necessary due to AMP’s stake in China Life AMP Asset Management.
Last year, Corrs advised Anchorage Capital Partners on the acquisition of David Jones from South Africa’s Woolworths Holdings. The firm also worked on the sale of market research group FiftyFive5 to consulting behemoth Accenture. But those transactions occurred in a markedly quieter 2022 for announced M&A versus a record period in 2021. Slower activity dented 2022 fee revenue at investment banks and law firms that provide deal advice and other related services.
Announced M&A of Australian targets tumbled almost 60 per cent to $US91bn ($131bn) in 2022, according to Refinitiv, marking the lowest annual total since the pandemic-impacted 2020. Last year surpassed 2019 which had $US69.2bn in announced deals. Including outbound Australian deals, announced M&A amounted to $US145.4bn in 2022, less than half 2021’s $US384.2bn.
While dislocated debt and funding markets were an issue for some acquirers last year, Corrs is adamant credit will be available in 2023 for the “right deals”.
Corrs partner Ricky Casali said: “While the term loan B market is challenging at the moment, unitranche funding continues to be available, noting that we continue to see new credit funds being established in Australia, including by large international funds who are looking to build a presence in Australia.
“Conventional banks are also continuing to lend … We are therefore optimistic that with early engagement with lenders, any pullback in certain parts of the market can be supplemented.”
Mr Casali noted that highly leveraged buyout deals with aggressive terms would likely be less prevalent this year.
Corrs expects deal volumes and values in 2023 will be similar to last year, although tips busier transaction levels in the final six months. “The latter half of the year should definitely be more active and will surpass the equivalent prior period,” Mr Casali said.
“Market participants are getting their heads around the known volatility drivers that dominated the second half of 2022. If macro conditions remain relatively bounded within those expectations, we think the conditions are right for improved M&A execution.”
Corrs also expects heightened levels of deal activity related to the nation’s transition to cleaner forms of energy and potentially further transactions in the resources sector if China navigates its Covid-19 reopening well.
Refinitiv’s data analysing deals across the Asia Pacific, excluding Japan, showed Australian targets accounted for three of the biggest M&A transactions in the region last year. That was down from Australia accounting for five of the top 10 in 2021.
Brookfield and EIG’s $18.4bn tilt for Origin Energy – was the biggest deal in the APAC region with any Australian involvement – ranking fifth in 2022. Refinitiv’s analysis also showed Australia accounted for the third-biggest proportion of deals in the region last year, behind China and India.
The data put Australia’s estimated investment banking fee pool at almost $US3.2bn in 2022, second to only China which had $US19.6bn. Australia last eclipsed China in the size of the investment banking fee haul in 2008, and prior to that 2006 in the deals boom that preceded the Global Financial Crisis.
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