Bumper start to 2023 for takeovers overshadowed by caution and softer M&A outlook
Bankers and lawyers are cautious on the outlook for takeovers for the rest 2023, despite large deals underpinning the strongest start to a year since 2007.
Bankers and lawyers are cautious on the takeovers outlook for the rest of 2023, as macroeconomic uncertainty weighs on transactions, despite large deals underpinning the strongest start to a year since 2007.
Materials and mining, consumer products and healthcare merger and acquisition transactions have dominated activity so far in 2023, according to Refinitiv data. Among the biggest announced M&A deals this year are Newmont’s sweetened $32bn tilt for Newcrest Mining, Albemarle’s bid for lithium producer Liontown Resources and skincare group’s Aesop sale to L’Oreal.
But bankers and lawyers warn M&A transactions are taking longer to complete as volatility persists, funding markets remain challenging and the domestic economy slows.
“The ongoing underlying level of activity late last year and this year to date has surprised on the upside, given market volatility and different perspectives on the macroeconomic outlook,” said Anthony Sweetman, UBS Australia’s joint chief.
“But transactions are generally taking longer to complete and the completion rate has been lower than historically, so it’s difficult to predict the outlook for the balance of the year.
“Despite the activity that we are seeing, it’s slower now than the very elevated activity levels of 2021 … and is likely to remain slower for the rest of 2023.”
Announced M&A with any Australian involvement – which includes domestic, inbound, and outbound deals – amounts to $US46.1bn ($68.4bn) so far this year, the strongest start since the $US50.9bn tally to April 14 seen in 2007. Refinitiv‘s data shows this year’s tally is 441 transactions, down from 574 deals at the same time last year, but reflects an increase in dollar terms from 2022’s $US43.2bn.
Inbound and domestic announced M&A of Australian targets amounts to $US39.4bn so far this year, up from $US21bn at the same time in 2022.
The data includes Genesis Minerals agreeing to pay $600m to buy St Barbara’s Leonora district assets and announced bids such as that by private equity house TPG for ASX-listed funeral services firm InvoCare. The latter transaction remains stalled over differing price expectations.
Last year marked a soft period for M&A following a record 2021, when activity was turbocharged by historically low interest rates.
Law firm Allens’ head of public M&A, Guy Alexander, said the ructions in global banking markets triggered by the collapse of Silicon Valley Bank this year had prompted some acquirers to press pause on deals.
“When SVB issues started to arise and then Credit Suisse and the meltdown there, that week it was a really weird week and I got the feeling there were a whole bunch of people that just hit the pause button,” he added. “Then came the bailout by UBS … The last couple of weeks have been full bore. At the moment it’s full bore but whether it continues who knows.”
UBS’s head of leveraged capital markets Holly Clements said financing markets were continuing to recover from mid-2022 lows, notwithstanding heightened volatility brought about by US bank collapses and the woes at Credit Suisse.
She expects private equity deal-making to pick up in the latter half of the year.
“Leveraged buyout activity in ANZ YTD (year-to-date) 2023 has been subdued, particularly compared to 1H (the first half) 2022. We expect leveraged buyout activity to be weighted towards the second half of 2023,” Ms Clements said.
Australian Investment Council data points to locally based private equity and venture capital firms having about $10bn in capital to deploy for transactions.
Morgan Stanley co-head of investment banking Tim Church said many boards were focused on assessing how the rising interest rate climate would impact earnings and whether consumer demand would pull back sharply this year.
“Until central banks around the world hit their final increase, their peak interest rate level, then it’s difficult to see that changing a great deal,” he added.
“The good news about that is I think we’re close to the peak. We’re starting to see inflation get under control, there’s still relatively full employment, although we are starting to see a number of redundancies, in particularly the unprofitable tech sector.
“That’s a bit of a lead indicator that the labour market should start easing up somewhat, and then the central banks can take their foot off the pedal of increasing rates … that will start to get people more conducive to further M&A activity.”
King & Wood Mallesons Australia chairman David Friedlander noted while the law firm was managing a healthy pipeline of potential M&A, there was less urgency for boards to execute transactions as the economy slowed.
“We’re sort of bullish because we’ve got really good deals in the hopper, but we’re not very certain about the timing or likelihood of launch,” he said, adding that uncertainty about the interest rate tightening cycle was also weighing on activity.
Mr Friedlander expects energy and related sectors to continue to see deal activity in 2023.
“The energy transition seems to be driving so many things. That’s probably the sector we’re most focused on at the moment,” he said.
Despite a host of collapses among building companies and those in other sectors suffering from a tougher financing climate, the law firm is not extremely busy on acquisition work targeting distressed companies, Mr Friedlander added.
Regal Funds Management’s Mark Nathan expects robust M&A activity for the rest of the year across a broad range of industries.
“There is a chance of M&A in just about every sector and we’re certainly seeing it in the resource sector. In the financials there are companies like Tyro, which is still in the wings,” he said.
“I’m surprised we haven’t seen more in the resources space, especially with the US focus on the Inflation Reduction Act (2022), where they get a benefit from sourcing materials from friendly countries.”
The growing list of companies that will or may leave the ASX this year due to takeovers follows Sydney Airport, which delisted last year, and Pendal, which left the ASX in January.
The exits from the local bourse – alongside very few sharemarket listings – have some analysts warning the size of the local market is likely to shrink notably in 2023.
“We would have had the Aussie equity market shrink last year if it wasn’t for BHP collapsing its dual listing. That was around a $100bn equitisation,” said Hasan Tevfik, MST Marquee’s senior research analyst.
“This year with Newcrest, Origin (Energy) and OZ Minerals potentially leaving (the ASX), and there being little in the way of IPOs and capital raisings, partly because companies are just so well capitalised … we’re likely to see the equity market shrink.”
Mr Tevfik said a spate of listed companies were buying back shares this year, which also contributed to ASX shrinkage.
Newmont has signalled it may seek a secondary listing on the local market if its latest revised bid for Newcrest is successful.
Refinitiv data shows a paltry $US13.3m has been raised for Australian initial public offerings so far in 2023, the lowest year-to-date tally since the depths of the Global Financial Crisis in 2008. This time last year, sharemarket listings amounted to $US195.4m.
Overall equity capital markets activity, including follow-on raisings to shore up balance sheets or fund takeovers, sits at $US4.7bn as at April 14, up from $US3.8bn at the same time last year.
Regal’s Mr Nathan expects IPOs will return to the local market if conditions become more conducive.
“Part of it is IPOs do better when markets are going up. We’ve seen the markets sort of bottom and start moving so hopefully that lasts,” he said.
“It’s really finding the right sort of company. Anything which is consumer-facing will have to be priced appropriately, because that, and construction, is what the market is most concerned about.”
While there is a scant pipeline for new floats, domestic fund managers are scheduled to attend preliminary meetings about Virgin Australia’s mooted IPO this week, ahead of a potential listing later this year.
Australian Eagle Asset Management’s Alan Kwan said some investors remained “a bit gun shy” of private equity-led listings, but would still assess any deal on its merits.
“Virgin have great operating conditions at the moment … But airfares are pretty high and we don’t know how long they’ll stay this high,” he added.
Mr Nathan said Virgin had a “real chance” of doing well at IPO.
“(It will do well) if it’s priced appropriately.
“It is a cyclical industry and as long as the pricing recognises that it’s a cyclical industry, it’s got a real prospect of doing well … it’s likely to be a big IPO if it goes ahead,” he added.
Refinitiv’s ECM league tables for 2023 so far have Barclays/Barrenjoey ranked first, followed by UBS and Macquarie Capital. Goldman Sachs and JPMorgan round out the top five firms.
In the M&A league tables, JPMorgan leads the pack so far this year, buoyed by its defence advisory work for Newcrest. The bank is followed by Gresham Partners, Bank of America, Centerview Partners, Lazard, Goldman Sachs and UBS, respectively in the pecking order.
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