Merger mania drives M&A deals to a record $415bn, strong fourth quarter tipped

Mega deals in infrastructure and energy have propelled announced annual Australian deals to crack $US300bn for the first time.

Citigroup’s head of banking, capital markets and advisory Tony Osmond said there was still a lot of M&A activity to come. Picture: David Geraghty

Mega deals in infrastructure and energy have propelled announced annual Australian mergers and takeovers to crack $US300bn ($415bn) for the first time, with momentum set to continue in the final quarter buoyed by ultra low funding costs.

A trio of deals outlined on Monday have added to a M&A bonanza in 2021, as cashed up buyers seek to deploy capital, find opportunities to boost growth or plot a transition to cleaner forms of energy.

Transurban and its partners dominated the M&A landscape on Monday after agreeing to pay $11.1bn to snap up the remaining 49 per cent stake in WestConnex, Sydney’s biggest toll road project.

Victorian electricity operator AusNet attracted a bid from Canada’s Brookfield which lobbed a $9.6bn offer, while Charter Hall and Hostplus revealed a $1.7bn bid for pubs owner ALE Property.

Bankers and lawyers say the takeover mania and the deal pipeline suggests a strong December quarter, while there are mixed views on whether the rapid pace of transactions can be sustained in 2022.

“Everyone is on the front foot trying to work out how they can grow their business or seize a strategic opportunity,” said Citigroup’s head of banking, capital markets and advisory Tony Osmond.

“It feels like it was in 2006 and 2007, that was the last time we had M&A like this. There is still a lot to come. I honestly don’t see any change (in elevated deal levels) in the next few years.”

Mr Osmond believes interest rates would need to rise “quite materially” and inflationary pressures persist for takeover activity to cool, although that would do little to curb the accelerated demand for technology and transactions linked to the energy transition.

Activity this year was also being underpinned by unprecedented global monetary stimulus, which was boosting liquidity, he added.

Deals such as US group Square’s $39bn tilt for Afterpay, a $23.6bn bid for Sydney Airport led by IFM Investors and the $21bn marriage of Oil Search and Santos, have buoyed transactions in 2021.

 

Deals involving Australian companies have rocketed to a record $US311.2bn so far in 2021, according to Refinitiv data. That tally – which includes inbound, domestic and outbound deals – is up from a Covid-19 hit $US45bn in announced transactions as at September 20 last year, and is more than three times 2020’s full year total of $US97.8bn.

The materials industry has been the busiest sector for M&A in 2021, with $US96bn in deals announced, followed by the energy and power industries at $US61.9bn and financial services at $US45.9bn.

The prior full-year record for deals was in 2007 during the pre-global financial crisis hype which saw $US196.5bn in transactions announced.

Goldman Sachs investment banking co-head Nick Sims said the firm’s pipeline suggested a “really busy” period ahead as acquirers were more confident in the global economy’s resilience, despite the lingering pandemic impact.

“There is a huge amount of capital available and the cost of capital, given where the risk free rate is, is at all time lows,” he added, noting in sectors offering long-term predictable returns buyers were also aware of the “scarcity value” of assets.

Mr Sims said while deal volumes would be strong in 2022, the pace of M&A seen this year may not be sustained.

Mr Osmond said private investors with huge pools of capital to draw on typically had a lower cost of capital than their listed targets, helping to get transactions across the line.

Citigroup and RBC advised the NSW government on the sale of the final tranche of WestConnex. The Transurban-led buying consortium – including AustralianSuper and the Abu Dhabi Investment Authority – was tended to by Barrenjoey, Macquarie Capital, Morgan Stanley and UBS.

But while it’s been a bumper deals year, there are still those that are falling over. Last week, private equity firm EQT and financial services technology group Iress ended takeover negotiations, while earlier this month BGH withdrew a bid for Hansen Technologies.

Star Entertainment scrapped its offer for Crown on concerns related to Victoria’s royal commission, while AMP opted to pursue a demerger over a deal with Ares Management.

Rising asset prices, concentration in some industries and foreign investment restrictions may slow future deal activity.

But Macquarie Capital’s joint local boss Tim Joyce said Australia remained an attractive M&A destination and also highlighted a technology and digital theme supporting transaction flow.

“Many of Australia’s largest companies have had a deficiency in digital and that has created a greater need for M&A,” he added.

Mr Joyce said levels of deal activity in 2021 were “very elevated” and he expected next year they would continue to be elevated, although not to the same degree.

He noted that while a spate of large companies were expected to delist from the ASX due to takeovers, the number of IPOs was vibrant enough to help compensate.

MinterEllison partner Con Boulougouris said the firm’s pipeline suggested M&A would continue to rise.

“Infrastructure and real estate based M&A will be sectors which will drive deal volume. More generally … there‘s a lot of interest in financial services related assets and new entrants in the Australian market will include international industry sector based private equity funds looking for opportunities,” he added.

“With all this deal activity, and relatively easy access to debt, valuations should be expected to rise.”