Mergers and acquisitions set to take off as economy recovers

Takeover deals involving local companies have hit their highest level since 2018 so far this year, and buoyant conditions are expected to continue.

Herbert Smith Freehills’ Tony Damian is positive on M&A prospects in 2021, and expects private equity firms will be very active. Picture: Hollie Adams

Takeover deals involving local companies have hit their highest level since 2018 so far this year, and buoyant conditions are expected to continue given the sharp COVID-19 economic recovery and private equity firms’ need to deploy capital.

The environment is ripe for a flurry of further mergers and acquisitions in 2021 given ultra-low interest rates, while there will also be some targeting of distressed companies as stimulus — including JobKeeper payments — is wound back.

Herbert Smith Freehills partner Tony Damian said the rebound in Australian M&A in the second half of 2020 had flowed strongly into this year.

“The response to COVID has carried over into 2021 and I think the situation globally in terms of COVID has improved and vac­cines are rolling out,” he said.

“That (Australia M&A) momentum has a head of steam … and we expect that to continue. It’s not necessarily going to be across the Asia-Pacific region a completely consistent, strong level of activity across all markets and all industries.”

Mr Damian said while the paring of government stimulus would create pain and see some companies hitting the wall, he wasn’t expecting a lot of distressed takeovers and restructuring deals in coming months.

“As those packages come off you might expect a little more distressed M&A. I’m not personally expecting waves and waves of it,” he added, highlighting a marked drop in the unemployment rate and the vast savings buffers consumers had amassed during 2020.

Macquarie Capital’s local co-head Tim Joyce expressed a similar view on distressed takeover activity in coming months, and was also upbeat on M&A levels.

“The market has largely factored in the end of these stimuli, so I don’t think this is likely to be a significant prompt for an increase in distressed or restructuring activity,” he said.

“There’s undoubtedly been a resurgence in local and international interest underpinning M&A. This is being driven by strong capital markets and liquidity, optimism regarding the economic recovery, the relative success of Australia’s response to coronavirus and key macro themes ­including digitisation, decarbonisation and national resilience.”

Announced domestic, inbound and outbound Australian M&A amounts to $US28.3bn ($36.5bn) so far this year, with at least nine deals topping $US1bn, according to Refinitiv data as at March 18.

That is up from $US13.2bn in the March quarter last year when COVID-19 was gripping financial markets, and marks the best start to a year since for Australian M&A since 2018.

Outbound deals by Australian companies so far this year amount to $US11.3bn, more the double the tally in 2020’s March quarter. That was bolstered by a IFM Investors’ fund announcing the purchase of a stake in Spain’s Naturgy Energy Group.

Domestically, bids for Vocus and Bingo Industries were among the largest announced transactions.

Vocus has recommended investors support a $3.5bn takeover bid led by Macquarie Infrastructure and Real Assets and Aware Super. CPE Capital and Macquarie’s MIRA lobbed an offer for Bingo in January.

Globally, it’s been a mammoth year for M&A already in 2021.

Announced M&A totals $US1.1 trillion, according to Refinitiv, the highest level of March quarter activity in 21 years.

Foreign investment is also in focus this year, after the federal government from January unwound pandemic rules in place for Foreign Investment Review Board approval.

Mandatory screening of investments in sensitive national security businesses continues at a zero threshold, however.

The regime has prompted PwC and the American Chamber of Commerce in Australia to spearhead a push for less red tape and more timely FIRB approvals.

The initiative is targeted at attracting more US investors to Australia and making the FIRB process easier to navigate.

Mr Damian said while deals were still getting through the approval process successfully, improvements could be made.

“Things have certainly evolved for more process and longer time frames,” he said.

“I don’t know that it needs radical change, but it never hurts for regulators to be encouraged.”

Refinitiv’s March quarter preliminary report showed the US topped the inbound buyers of Australian companies, followed by Canada and China.

While interest rates and funding costs are at record lows, helping to fuel more deals, sharp movements in bond markets and ballooning valuations in some industries could temper activity.

But Macquarie Capital’s local co-head John Pickhaver doesn’t expect rising valuations to have a big impact on deal-making.

“So while we are advising buyers to maintain discipline in applying their return hurdles and vendors are regularly achieving suitable valuations, especially based on short-term metrics, this doesn’t necessarily mean that high valuations impede activity,” he added.

Freehills — which has just released its Asia Pacific M&A Review 2021 report — said in Australia the sectors to watch were property, financial services and resources, while private equity firms would be “highly engaged” in deals.

Mr Damian said private equity had plenty of capital and were “very active participants” in M&A in 2021.

The report highlighted that bid tactics, material adverse change and other conditions and environmental, social and governance factors would be prevalent this year.

In Australian equity capital markets, activity has also started strongly in 2021 with $US5bn raised so far, up 25.9 per cent on the first quarter in 2020.

Refinitiv’s numbers had Australian investment banking fees dropping 21.6 per cent across the sector to $US326.6m for the current quarter, versus a year earlier, as debt capital markets work dropped.