Afterpay, Santos and Oil Search in $60bn Australian deal bonanza

Big deals could mean big bonuses for investment bankers.

Australia has recorded one of its biggest days in history when it comes to mergers and acquisitions, with $60bn worth of announced transactions.

Should the $US29bn ($39bn) transaction involving US-based Square buying the Australian-listed buy-now-pay-later provider Afterpay be completed, as expected, it will be the largest buyout of an Australian-listed company in corporate history, ahead of Unibail-Rodamco’s $32bn acquisition of Westfield in 2018.

Investment bankers say the announcement of the agreed Afterpay buyout by US-based financial technology firm Square on Monday, and the $21bn sweetened merger offer by Santos for Oil Search, is a throwback to the mergers and acquisition boom that unfolded before the global financial crisis between 2006 and 2009.

That boom was fuelled by groups taking on debt and buying up competitors to gain growth in fear of themselves being swallowed by a larger rival.

The latest round of deals is driven by a market awash with cash and a recognition for a need for consolidation, as environment, social and governance concerns among institutional investors makes funding harder for some groups, particularly those in the resources industry.

The $16.3bn buyout of building materials provider Rinker by Cemex in 2009 was then the biggest cash-only company takeover in Australian corporate history.

Before that, in 2007, Wesfarmers acquired Coles Group for $19.3bn, in Australia’s then biggest corporate takeover.

However, one can’t forget BHP’s attempt to buy Rio Tinto, in a $US68bn transaction.

BHP Billiton, as it was then known, in 2008 abruptly broke off its 18-month pursuit of its mining rival on the back of a fall in commodity prices and a worsening world economy, which made the deal too risky.

 

The only other deal of such magnitude was in 2001 – the merger between BHP and Billiton to create a company worth $US38bn, including debt.

The question now is whether there are still more transactions to come, as companies take advantage of the low interest rates brought on by the global pandemic.

Sydney Airport recently rejected a $21bn buyout proposal by an IFM-led consortium.

But there is a strong sense in the market IFM will come back with a higher offer close to $9 per share, with talk it has been trying to drum up additional Australian funds in recent days.

There is also talk in the market that a mooted $US15bn-odd acquisition of all or part of BHP’s petroleum business by Woodside could be looming.

Sources have suggested that BHP’s petroleum head, Geraldine Slattery, has sold her Houston home, leaving some to question whether she could be moving back to Australia ahead of a Woodside-BHP transaction.

Market experts say that in the years during the pre-GFC boom there was consistently a higher amount of large transactions by value than there are currently.

The latest M&A rush means the market is moving in a similar direction.

The deal bonanza could not have come at a better time for investment bankers in Australia, particularly for recently-launched firms such as Barrenjoey Capital Partners and Jarden. But when it came to Monday’s two giant deals, the glory belonged to other banks.

Goldman Sachs and Highbury Partnership, advising Afterpay, were the big winners along with Morgan Stanley, which was advising its US-based suitor Square.

Working on defence for Oil Search were Goldman Sachs, Macquarie Capital and Rothschild, while Santos was advised by Citi and JB North.

While deal fees on smaller M&A transactions are normally around the 1 per cent mark, the percentage greatly declines when transactions get into the billions, say experts.

Either way, such deals may command fees in the order of about $100m.

And it means that bonus time this year for Australian investment bankers is one they are likely to be looking forward to.