M&A deals down, but bankers see uptick in activity

Investment bankers are hopeful of an uptick in M&A activity in coming months, after a sluggish year for deals.

JB Hi-Fi CEO Richard Murray. JB Hi-Fi took over The Good Guys in a $870m deal. Picture: Stuart McEvoy

Investment bankers are hopeful their clients will provide some cheer in coming months, after a sluggish year for deals, with signs of a pick-up in big-ticket takeovers and chunky stockmarket floats.

As markets last week grew anxious about the health of global ­colossus Deutsche Bank, some of the nation’s most senior investment bankers told The Australian corporate boards were more actively mulling mergers and acquisitions, or divestments, to deliver growth amid subdued demand.

There has been a healthy mix of major deals in the past month, including Victoria’s $10 billion Port of Melbourne privatisation, private equity’s $1bn takeover play for listed company SAI Global and JB Hi-Fi’s $870 million purchase of rival The Good Guys.

However, beneath the bullish overtones, deal-making remains a “grind” for some investment banks amid patchy deal flow and the “glacial” speed at which companies commit to transactions, bankers say.

Completed M&A — deals that pay bankers success fees when they close after being announced — is down 28 per cent to $US57.8bn ($75.5bn) this year, the slowest since 2013, according to Thomson Reuters data exclusive to The Australian.

“The challenge at the moment is you can make any deal accretive on the current equity and debt market conditions, but judging what’s true value versus price in the low interest rate environment is difficult,” said Jamie Garis, a partner at independent corporate advisory house Luminis Partners.

Jon Gidney, vice-chairman of Greenhill Australia, said companies’ acquisition return hurdles remained high, which could “hold companies back”.

Investors’ ongoing demand for yield also made some companies nervous about issuing new shares to do M&A due to the greater difficulty of maintaining dividends on a larger capital base.

By the end of the third quarter, announced M&A this year is down 31 per cent to $US60bn, outpacing the 20 per cent decline globally.

Cross-border flows have been a drag, with inbound M&A diving 51 per cent to the lowest level at this time of year since 2005, while outbound is down 61 per cent.

The value of equity capital markets deals — such as initial public offerings — is off 56 per cent.

But providing a ray of sunshine, more M&A got announced in the third quarter — up 1.3 per cent on the prior three months to $US18.4bn — and the IPO pipeline is growing with chunky potential deals like Inghams, Alinta Energy and Moly-Cop.

“There’s been a pretty strong level of underlying (M&A) activity all year, but what’s been probably more pronounced in the second half is the pick-up in ECM (equity capital markets) activity,” said Anthony Sweetman, head of investment banking at UBS.

Mr Sweetman said companies were taking economic and political concerns, such as rising interest rates in the US and the race for the White House, in their stride, and that future acquisition activity in sectors like property and infrastructure would depend on the opportunities that arose.

“You can’t say this about every sector, but generally the economy is in pretty good shape. I think most people have probably been surprised on the upside as to where the economy is,” he said.

Tony Osmond, head of corporate and investment banking at Citi, said weaker equity deal flow wasn’t surprising given last year’s large volume of issuance. He said concerns about upsetting foreign investors after the government blocked China’s bid for NSW ­utility Ausgrid were just “noise”. He said the strong response from investors to companies that had raised equity for M&A boded well, citing JB Hi-Fi’s share price rally since tapping shareholders for almost $400m.

“It shows investors and companies are swinging in the same direction, and that’s really positive for our industry and for the economy,” he said.

Geoff Joyce, head of M&A at Macquarie Capital, the nation’s biggest investment bank, said there had been a “bit of a pick-up” in the past three months across all sectors and larger deals could be coming. “It was the big ticket M&A that was missing a bit this year as our number of smaller M&A transactions is much the same as last year. But what we’re seeing now is that big end picking up.”

Mr Osmond agreed there had been an “upswing” in M&A discussions with boards and a willingness to explore bigger deals.

“The most promising thing is that at board room level there’s a reduced reluctance to be doing big M&A. There’s that boldness I’m starting to sense coming back into the thinking around the boardroom table,” he said.

Mr Osmond added that investment banks would benefit from an uptick in takeovers from the private equity industry, which made up about 20 per cent of M&A fees and had been more busy selling ­assets in recent years.

Private equity-backed M&A this year is up 1.6 per cent and the number of deals is growing, according to Thomson Reuters. Mr Gidney said despite more dialogue with clients, “whether or not deals get to announcement comes down to confidence”.

“The US economy is quite strong, giving people hope for some global growth coming through and China has been relatively quiet in terms of new negative surprises. So while expectations generally are for low growth, if markets remain relatively stable it’s an environment with low interest rates that’s conducive to M&A.”