Energy transition is big business: Citi bankers

Alex Cartel, the head of banking capital markets and advisory at Citi and Mark Woodruff who is head of markets. Picture: John Feder

The supercharged M&A environment has cooled but there is one sector that promises plenty of action in the next 12 months: energy transition is big business.

For those looking for a surprise, the market could be underinvested if a more positive story emerges faster than expected.

These are the call-outs ahead of Citi’s annual conference this week, from two of its top bankers.

Alex Cartel leads banking, capital markets and advisory and Mark Woodruff is the new head of markets in Australia and New Zealand. “There was a stage where we used to say every company on the ASX was potentially a takeover target and that’s how it felt. That was only six months ago,” says Cartel. “Access to capital is much more constrained, but will we continue to see activity? Yes, yes, we will.”

Debate still rages on how quickly central banks should tighten and precisely what the terminal rate will be. This is the peak interest rate set by central banks before the cycle turns.

The Reserve Bank decision to move only by 0.25 per cent last week positions it as an outlier among peers. Woodruff says repricing has come back into the market beyond where the RBA sits. “I think that we’re going to end up with a terminal rate closer to where the markets price than where the economists and the central bank are indicating. Inflation is likely to be much stickier for longer,” he says.

Citi’s keynote address from RBA assistant governor Lucy Ellis will table the bank’s first report this year on the other reading that fixates markets, the neutral rate. This is the Goldilocks cash rate that neither stimulates nor restricts economic growth.

Woodruff will also talk to former US treasury secretary Larry Summers on the inflation cycle. At last year’s conference, Summers aggressively called out inflation and the Great Resignation.

Central banks have taken the puff out of rampant takeover activity, but Cartel says that needs to be put in context.

Last year was a bookend record for global M&A. In Australia, he says, the market was very resilient in the first half, volumes slowed in the third quarter, and he expects that will continue. “But we’re really talking about pre-pandemic level volumes, more of a reversion to the norm,” he adds.

In September, figures for completed deals in 2022, where fees have been banked, showed Citi second behind Goldman Sachs.

Cartel, who is also president of the Australian Takeovers Panel, says tighter access to financial markets is curbing private equity led transactions in particular. “We are starting to see a number of deals fail, (KKR’s takeover of Ramsay Health Care) being the biggest one that was hit, Infomedia and Link, which was not PE but that has been withdrawn. This is a trend which will continue to affect M&A volumes,” he says.

The blue sky is energy transition where boards are being forced to invest in change and in some cases, like AGL Energy, to shapeshift entirely. Decarbonisation requires capital.

“One moment we are talking about an environment where M&A looks to be under pressure in the near term. Then on the other side, we’re saying AGL has a takeover premium built into the share price – some would agree with that,” says Cartel.

He says AGL has challenges but also opportunity. “Perhaps it is not a normal takeover premium in there. Perhaps it is opportunity value in general or optionality in general that is in there.”

Either way, interest in AGL and energy transition goes to the heart of Cartel’s thesis. “It is real. Companies are not investable unless they have a real strategy around it. And that is going to be a continued driver of activity.”

Beyond energy, there are still deals being done, Cartel says. Boards of well-capitalised companies are willing to look at opportunities. He cites Orica, where this year Citi advised on a mid-size bolt-on acquisition and even used an equity raising in support.

Supply chain risk is a new motivator – take Brickworks buying a stake in a robot manufacturer of bricks, in a technology play that gives the business more control over its supply chain.

Cartel says boardroom confidence is an important factor in M&A volume. It can change with share price psychology and volatility. So far it has not moved the dial as much as expected. “We’ll see how that plays out,” he says.

Overall Australian M&A is lifted by vast private capital. Private equity and superannuation funds are looking to put money to work.

This story has been just as important for Citi’s markets business. Woodruff says in five years the way industry super funds have consolidated to create scale and internalised the investment function transforms them from asset owners to asset managers.

“That transformation for us as a markets business is critical,” he says. “We engage with them across all asset classes directly and in private markets, so they are a key target.”

Corporates remain a core market. Woodruff says Citi’s international platform is well placed for corporate treasurers juggling dramatic change in interest rates and currencies. “They need solutions. They need access to international markets and derivative solutions.”

For those looking for surprises, Woodruff says one is that RBA governor Philip Lowe turns out to be right and the market is under-invested. “A market positive story would probably be something that the market is not positioned for. Maybe the lag in monetary policy is significant enough that a slower pathway towards higher interest rates is the smart move,” he says.

For Cartel, higher rates means boards must move from a growth focus to a more introspective one.

“Is my portfolio the right portfolio to go through the market? Do I have to divest assets? Am I properly configured to get the best shareholder returns?” he says.

“We think it plays well to the advisory-focused business that Tony Osmond and I have built, working with our clients to ride cycles, not just a straight acquire, acquire mentality. And that’s where we’re heading to.”

Asked about the expected right-sizing in investment banking after a wave of high salaries were locked in during the boom, Cartel admits investment banking is cyclical but he and Osmond consciously built a platform to be resilient through cycles, including the team size.

“The rise of new entrants and the departure of others, it has been a hot labour market for the last few years and that is starting to change now,” he says. “We’ve been incredibly stable in terms of our platform and that is a big part of our offering to our clients.”

On the markets side, Woodruff sees the battle for talent as still pretty hot. “There has been significant turnover on the street in markets. It is important for us to stabilise that and we have done that. But we are also seeing people come back from offshore.”