Energy, tech sectors to drive M&A activity in 2023: Herbert Smith Freehills

The technology, infrastructure, and energy and resources sectors will drive M&A activity in 2023, with the coming year primed for robust deal flow that may surpass 2022 levels.

Technology, infrastructure, and energy and resources sectors will drive a flurry of merger and acquisition activity in 2023.

The technology, infrastructure, and energy and resources sectors will drive a flurry of merger and acquisition activity in 2023, with the coming year primed for robust deal flows that may surpass 2022 levels.

That’s the view of law firm Herbert Smith Freehills, which on Monday released its top 10 predictions for M&A in Australia across 2023.

Partner Tony Damian said the energy transition, large pools of private capital, a narrowing in vendor price expectations and improving sentiment among company boards would underpin activity next year.

“We’ve obviously got visibility into the pipeline and what that looks like, but there’s also a number of trends and factors fuelling M&A,” he added.

“The energy transition will drive more deals and just these pots of capital needing to be deployed.”

Mr Damian highlighted that the pipeline of transactions pointed to 2023 potentially eclipsing this year’s levels of transaction activity, which were impeded by volatility and challenging financing markets.

“It (2023) will be there or thereabouts (2022), perhaps slightly stronger,” he said. “I don’t think it will be 2021 (a record M&A year) but it will be a very good year.

“Australia remains a very attractive destination for global capital. That will help drive M&A out here in 2023.”

Mr Damian said he expected “significant unlisted M&A deals” in the infrastructure sector and tipped the technology industry as a busy sector for deals next year.

Tony Damian and Andrew Rich, partners at Herbert Smith Freehills, are releasing their top 10 predictions for 2023 M&A.

“The run of technology M&A is beginning rather than ending, so there’s still quite a bit to go,” he added.

Among the law firm’s other predictions is that demergers and spin-offs will feature again in 2023 and the energy transition will increasingly drive deal flow.

Last week, billionaire Andrew Forrest’s privately-owned Squadron Energy beat a raft of other bidders to secure a $4bn-plus deal to buy CWP Renewables. Mr Forrest said the transaction catapulted Squadron into the position of Australia’s largest renewable energy investor.

UBS Australasia’s joint country head Anthony Sweetman agreed that environmental, social and governance factors would continue to contribute to M&A in 2023 and beyond, and he also expects strong activity in the resources sector.

“Activity is likely to be spread amongst a wide range of sectors, with natural resources having the potential to be one of the most active sectors given ongoing strong commodity prices,” he said.

“Matters such as energy transition (are) likely to be a significant influence on transaction activity for many years.”

Mr Sweetman tipped deal numbers in 2023 would align with this year, but said on overall transaction values much would depend on whether mega deals emerged.

“As in most years, the total transaction value will be dependent on whether a small number of large transactions occur or not, which is more difficult to predict,” he said.

But announced mergers and acquisitions of Australian targets have slumped 60 per cent to $US86.4bn ($127.2bn) year-to-date, versus the same time in 2021, according to Refinitiv data. That came as a number of bids were abandoned or rebuffed in 2022, including a KKR-led tilt for Ramsay Health Care, an offer for Perpetual and full and partial bids for Link Group.

The softer period for deals follows a record M&A period last year. Excluding 2021, this year’s activity up to December 9 is the highest since the same period in 2018.

UBS Australasia’s joint country head Anthony Sweetman. Picture: John Feder

Including transactions pursued offshore, announced deals with any Australian involvement are down almost 63 per cent in 2022 compared to the same time last year.

Among the largest transactions announced this year are Brookfield and EIG’s $18.4bn tilt for Origin Energy; BHP’s $9.6 billion offer for OZ Minerals; and ANZ’s deal to buy Suncorp’s bank.

Debt and financing markets have proven challenging this year, however, amid volatile markets and aggressive monetary policy tightening that makes debt more expensive.

UBS’s local head of leveraged capital markets Holly Clements was positive on the latter half of 2022 for the domestic market, relative to those offshore.

“In the second half of 2022 as global leveraged finance markets experienced significant dislocation, the Australian market held up strongly,” she said. “In the latter part of 2022, the Australian market was arguably the best place to raise leveraged debt globally.

“On global leveraged finance markets, we are starting to see a rebound in the US. In the month of November, we saw US leveraged loan issuance of circa $US27.5bn, exceeding the aggregate issuance in the three months to the end of October.”

Herbert Smith Freehills partner Andrew Rich highlighted that leveraged deals that made sense would proceed in Australia, and noted listed companies were also increasingly opting to fund purchases with shares.

“We’re increasingly going to see more equity-funded deals,” he said, noting the firm expected private equity would be a force in 2023 and listed markets would see more contested M&A.

“There’s a finite pool of quality listed assets out there and it naturally follows in my view that there’s going to be increasingly fierce competition for control of those entities.”

Takeover tussles this year have included bidding wars for Virtus Health, Uniti Group, Nitro Software and Warrego Energy.

Mr Rich said given sharp sharemarket fluctuations this year it was “only natural” that it would take time for buyer and seller price expectations to adjust.

“We’re starting to see that they’re coming together now,” he added.

Herbert Smith Freehills does predict, though, that “well prepared” boards will continue to defend against opportunistic bids in 2023.

The firm also expects the corporate regulator will be “increasingly proactive” in public M&A, after this year releasing an outline of how it wanted material adverse change conditions in agreed deals to be structured.