Merger and acquisition boom set to continue after bumper year

This year was a record one for mergers and acquisitions in Australia in terms of value, but in terms of the volume of deals, the market boom before the GFC saw more transactions completed by number.

It’s been a year most investment bankers will not want to forget in a hurry.

Mergers and acquisitions dominated the Australian business world in 2021, hitting a record in terms of value, filling the coffers of firms across Australia’s financial districts thanks to big fees, and transforming some of Australia’s largest companies into major global players.

But deal-makers don’t see signs of the activity slowing down in a major way yet.

More major transactions are expected to emerge in 2022, but perhaps not at the same pace we have seen in 2021 when it seemed a major deal was being announced almost every week.

According to data supplied by Refinitiv, 2021 saw at least 2275 M&A-related transactions being announced, worth at least $US391.bn.

This was a record year for Australia in terms of value, but in terms of the volume of deals, the market boom before the GFC saw more transactions completed by number.

“It was an absolutely standout year for M&A generally and for Macquarie, it was probably one of our best years ever,” said Geoff Joyce, head of mergers and acquisitions for Macquarie Capital.

Macquarie, like other investment banks in the Australian market, shared in large fees from mega-deals.

The standout this year in terms of size was Square’s $US27.7bn acquisition of Afterpay.

Next was the $US23.2bn buyout proposal for Sydney Airport by an IFM-led consortium, and then there was the $US14bn purchase of BHP’s petroleum business by Woodside Petroleum.

The major upswell in M&A proposals came after a more subdued 2020. Covid-19 arrived on the scene early that year, restraining groups from making buyout proposals and instead causing corporates to focus on mammoth equity raisings to ensure that they were well capitalised to face what lay ahead.

Top M&A deals announced in Australia.

But by 2021, interest rates were very low, companies were well capitalised and the world had grown familiar with the Covid-19 virus, propelling corporates towards a focus on transformation – they made big bets to reshape their businesses in a now-or-never approach.

Also fuelling the deals was the fact that the sharemarket was trading at a high level, meaning corporates had plenty of firepower to fund big transactions, not to mention the rock bottom interest rates.

The number of deals this year – 2275 – is still lower than each of the years in the period between 2004 and 2010, incorporating the boom leading up to the GFC crash between mid-2007 and 2009.

Citi’s head of investment banking for Australia and New Zealand, Alex Cartel, said the activity in M&A was across all sectors.

“It has been dominated by large deals rather than volume of deals,” he said.

“Covid has made M&A difficult because it has been hard to do due diligence and travel.

“The run of the mill M&A has been on the back burner, so now is the time to do strategic acquisitions.”

Mr Cartel said cheap financing had driven the activity, along with the transformational aspirations of some companies.

An example was a move by Sandfire Resources to buy Spanish copper mining complex MATSA for $US1.9bn in a transaction that more than doubled its market value.

Australian involvement in mergers and acquisitions.

Australia’s largest biotechnology company, CSL, capitalised on its soaring share price, linked to the upswing biotechnology companies have experienced due to pandemic-associated work.

It has made a $US11.5bn proposal to buy Vifor Pharma – the largest in its corporate history.

Ampol looked to further distribution opportunities with the $2bn acquisition of New Zealand rival Z Energy after the only oil refinery was closed across the Tasman, generating a greater reliance on imported fuel.

Wesfarmers and Woolworths have both been making efforts to enter the pharmacy space with competing bids for API, Aristocrat bought Playtech for $5bn in the UK and Ramsay purchased Elysium Helathcare for $1.4bn.

Logistics group Aurizon took on substantial scale through the acquisition of rival One Rail Australia for $2.35bn.

It was a similar story with Woodside’s BHP acquisition and the acquisition by Santos of Oil Search.

They were deals that pushed them up the rankings in terms of the largest global energy players, and they have carried out the transactions at a time when financing is hard to get for the oil and gas industry due to environment, social and governance (ESG) concerns.

Consolidation offers more support to their balance sheets.

ESG was also a motivating factor for BHP to sell its coal assets to Stanmore Coal for $US625m and for IGO to buy lithium mine Greenbushes for $2bn and nickel miner Western Areas for $1bn as it looks to increase exposure to the clean energy trend with a focus on minerals used to make batteries for electric cars.

APA also climbed abroad the ESG train.

It made efforts to acquire Australian electricity asset owner Ausnet, seeing it as a way to diversify away from gas pipeline ownership at a time investors expect gas to be replaced with clean energy alternatives in the future.

There was also a move by Woolworths to spin off its pubs and liquor business Endeavour, worth $US11.4bn, while AGL Energy is placing its coal assets in a separate, demerged vehicle to appease environmentally-friendly investors.

The infrastructure sector had a huge year, with transactions driven by large amounts of private capital that needed to be put to work.

Pension funds and private equity firms dove into the sector in a big way.

Ontario Teachers, KKR and PSP bought electricity asset owner Spark Infrastructure for $5.2bn, a Brookfield-led consortium appears to have won the competition against APA to buy Ausnet, outlaying $US13.5bn for the asset, and Transurban bought the toll road operator WestConnex for $US8.1bn, backed by AustralianSuper and ADIA.

“Ausnet, Sydney Airport, Spark deals, we would have thought (them) not even possible to do,” Mr Cartel said.

“Targets previously thought unavailable, this year they have been seen as available. Superannuation funds and private capital are dominant.”

Then there were the telecommunication tower portfolios that were keenly sought after by infrastructure investors – Morrison & Co and The Future Fund kicked off the buying spree by acquiring a 49 per cent stake in Telstra’s towers for $2.8bn and rivals like Optus followed in selling their towers, attracting huge prices.

Infrastructure buyers also spent up on ‘‘core-plus’’ infrastructure opportunities, with the country’s largest cancer care provider Icon among the targets.

Mr Cartel said at the start of the pandemic, it was thought that private equity firms would be the big players when it came to buyout proposals, but it turned out to be private capital.

In fact, private equity firms put forward three buyout proposals for Australian listed targets that they did not complete – BGH Capital, EQT and TPG Capital made offers for Hansen Technologies, Iress and Smartgroup, respectively, and all walked away after conducting due diligence.

Some other transactions yet to be determined involve Blackstone’s $US6.8bn offer for Crown Resorts and a $2.8bn buyout proposal by Carlyle for Link, with some expecting a binding bid before Christmas.

The other deal that recently landed is a $607m bid by BGH Capital for IVF provider Virtus Health.

Mr Cartel thinks next year will bring more interest in M&A from infrastructure funds, but not at the same pace.

“Large, strategic transactions will have to slow down. There will be more run of the mill M&A as borders open up.”

Mr Joyce from Macquarie agrees that more big deals will arrive in 2022.

“We will see more private equity firms carry out M&A with dry powder. Open borders will make it easier,” he said.

Mr Joyce said ESG would continue to be a major theme.

UBS co-head of M&A for Australia and New Zealand Nick Brown said the real estate sector had a number of similarities to the infrastructure space and he predicted consolidation in that space during 2022.

Already this year, real estate fund managers have embarked on some deals as they looked to boost funds under management.

An example was the acquisition of the pub landlord ALE Property by Charter Hall for $1.7bn, including debt.

Another area likely to have activity is defensive industrials.

“Core-plus investors can dive into those names,” he said.

Telecoms companies may continue to be defensive targets, as when Macquarie Infrastructure and Real Assets bought Vocus for $3.5bn.

It also purchased industrial company Bingo Industries, paying $2.6bn for the waste management service provider, and it bought the landlord of fruit and vegetable grower the Vitalharvest Freehold Trust.

Scrip mergers, where people are looking to extract synergies from a combination and use their own scrip as consideration, could also be prevalent in 2022.

They often emerge when an acquirer’s shares are fully valued or lowly valued, he said.