M&A activity picking up in Australia as interest rates stabilise

Merger and acquisition ‘pipelines’ are gathering momentum after fizzling out earlier this year, with bankers reporting company bidders moving in from the sidelines.

Merger and acquisition “pipelines” are finally picking up steam after fizzling out earlier this year, with bankers reporting discussions are quickly reigniting as company bidders no longer wait on the sidelines, expecting assets to get cheaper.

Year to date M&A volumes in Australia have plunged by a third compared to last year, reaching their lowest level since 2019, Dealogic data shows. That is 34 per cent below the 10-year average, amid the swiftest increase in the cost of money in decades.

But several bankers told The Australian things are finally turning around as global interest rates, particularly in the US and in Australia, are seen to be at or very near their peaks, providing certainty for deals.

“The year started quite busy, and then I’d say the second quarter was much quieter all across the street,” says Julian Peck, head of investment banking for Australia and New Zealand at JPMorgan. “More recently in the last six weeks I’d say it seems like activity is picking up. Clients are looking at a range of transactions.”

Newmont’s Granites gold mine in the Northern Territory. Newmont spent $29bn to buy gold producer Newcrest.

The US bank has advised on two of the three largest local M&A transactions this year: Newmont’s $29bn buyout of Newcrest, Australia’s largest listed gold producer, and Albe­marle’s $6.6bn takeover bid for WA lithium miner Liontown ­Resources.

“Mining and energy are obviously active. There are infrastructure transactions that have commenced – airports and some other deals that might come through – and there’s been some activity in other industrials too. It’s always dangerous to say what’s not busy but there hasn’t been a lot of activity in financial institutions this year and technology has been quieter.”

Another example of the recent pick up in M&A is Orora’s recent €1.29bn acquisition of glass bottle manufacturer Saverglass from Carlyle, which came partly financed by a $1.35bn equity raising through Citi and Macquarie ­Capital.

“Strategic deals are still getting done,” says Geoff Joyce, Macquarie head of M&A for Australia and New Zealand, adding that transactions the bank is advising on were “proceeding at pace.”

Macquarie is helping Newmont on its equity capital (CDI) listing as part of the Newcrest acquisition, and advised United Malt in its $1.5bn sale to Malteries Soufflet, a branch of French agribusiness InVivo – another top 10 M&A deal according to Refinitiv.

It is also one of a consortium of banks leading the initial public offering of $2bn-plus mining services business Molycop, which would be the largest Australian IPO in years. “We are seeing an uptick of preparation in the general market,” Joyce says.

“Interest rates have stabilised, equity market volatility has reduced to more normal levels on the back of an in-line earnings season, and there’s no longer the feeling that things will be cheaper next week or next month or next year. Whether that turns into actual announced transactions is the next challenge.”

Julian Peck, head of investment banking at JPMorgan.

Macquarie last week said it expected asset sales in its own $871bn asset management division to be delayed until the second half of its financial year, which ends in March 2024.

Rising interest rates have made it more expensive for companies to borrow money, which has dampened M&A activity. Buyers are now facing the highest cost of capital since 2014, while sellers are having to accept lower valuations for their businesses.

But large companies, which for the most part opted to sit on the sidelines while the fastest increase in base rates in decades was taking place, are now reviewing their growth strategies with a clearer picture, says Nick Sims, co-head of investment banking for Goldman Sachs in Australia. “As it’s clearer where base interest rates are, that enables people to price acquisition financing more accurately and bidders to get a better handle on their cost of capital,” he says.

“Among our client base, we are seeing the level of interest pick up. People are reviewing whether or not now is an appropriate time to be selling assets and reviewing their targets.

“And that will flow through to activity in the second half of this year but in particular in 2024, assuming there’s no other macro-economic or geopolitical shock that we are not aware of.”

Goldman Sachs ranks eighth in Dealogic’s year-to-date league tables for Australian M&A. The top three, Bank of America, JPMorgan and Gresham, were involved in the Newcrest buyout, this year’s largest by far. Cash rates in the US and Australia rose from near zero in early 2022 to 5.5 per cent and 4.1 per cent, respectively today, but most economists say both the Federal Reserve and the Reserve Bank of Australia are nearly finished hiking interest rates, as long as inflation continues its downward trajectory.

With a more stable interest rate outlook and stronger equity markets with less volatility, the market for initial public offerings is finally set for a revival following a disastrous 2022, bankers say.

IPO volumes in the year to date are down 14 per cent from last year and 81 per cent below the almost $US3bn average volumes over the last decade, Dealogic data shows.

IPO volumes in the year to date are down 14 per cent from last year. Picture: AAP

James McKena, the managing director who leads Morgan Stanley’s global capital markets in Australia, says the bank is now “pretty constructive” on the outlook for IPOs.

“We definitely see a pipeline of significant assets that is potentially building, notwithstanding the fact that there have been some well documented delays,” he says. Morgan Stanley is No.2 in the ECM rankings, Refinitiv data shows, only behind the equity capital markets team at UBS, who have had the busiest year so far.

There are hopes that a steady flow of capital raisings and a welcome reception for Molycop – which Morgan Stanley is also advising, alongside Goldman Sachs and UBS – by equity capital market investors will also fuel confidence to launch more deals.

“There is a healthy pipeline building. There’s a number of companies doing the preparation work and they’ll come when they’re ready,” says Charlie Daish, UBS local head equity capital markets origination.

“We’re only one week into September … (and) there’s been some early engagement processes already. ”

But optimism about an imminent turnaround seems to be somehow muted, and even those with a positive outlook for IPOs are far from definitive about recovery this year amid reports that one of the largest candidates, Virgin Australia, has decided to delay its $3bn-odd listing.

“I think people have held off committing to doing IPOs leading into this sort of period,” says Peck at JPMorgan.