$5.4bn day: Why dealmaking is suddenly hot again

A late frenzy shows the mood is rapidly changing after what has been a pretty ordinary year for mergers and acquisitions.

There’s been a last minute – and very significant surge – to bring some life back into what has been a pretty ordinary year for dealmaking. More than $5.4bn in mergers and acquisitions were unveiled locally on Monday and that comes on the back of confirmation this month of blockbuster talks between Santos and Woodside for a potential $25bn buyout.

Fast rising interest rates over the past year pushed up the cost of debt and battered confidence globally, and this has kept dealmakers well on the sidelines.

But now a stabilising to even falling interest rate outlook, led by the US, is fast changing the deal landscape.

The consensus trade is now running with the idea that US the economy is headed for a soft landing and with signs inflation us falling there is room for interest rates to move lower. These bets become even more pronounced after the US Federal Reserve turned decidedly dovish last week.

A more normal interest rate world entering 2024 should see the deal flow run again – particularly given pent-up demand and opportunistic moves on undervalued companies. Confidence is already rushing back to equity markets, with Wall Street tracking near record highs and the broad S&P 500 up 15 per cent since the end of October.

Australia’s benchmark S&P/ASX 200 is up 10 per cent over the same period.

Excluding Monday’s flurry, total transactions announced in Australia during 2023 were worth a combined $US103bn, and this well down on $US142bn for 2022, according to data from LSEG Data & Analytics. Brookfield’s collapsed $20bn buyout of Origin out a further hole in activity. Brookfield has threatened to return with a lower priced bid.

Monday’s frenzy was led by the $2.1bn proposal to buyout AdBri falls well in the opportunistic camp given inherent risks around residential construction. The buyout has been led by AdBri’s biggest shareholder the Barro Group and US building materials major CRH. Barro is in the box seat with a 47.3 per cent stake in AdBri built up over decades of “creeping”. Effective for patient capital, this allows an investor to lift its stake by a few percentage points every six months without the requirement to launch a full takeover. The $3.20 a share represents a 41 per cent premium to AdBri’s last close but remains a heavy discount to Barro’s previous “creep” purchases over two decades.

The competition regulator has previously looked at Barro’s holding and concluded the products and locations where AdBri and Barro compete are “limited”. This is not a green light for a takeover with a review still to follow.

Opportunity was also on the mind of Japan’s Mitsubishi UFJ that offered $1.2bn for the substantially slimmed down share registry Link Group. The friendly deal is set to end years of pain for investors following heavy losses in the UK and multiple takeover talks. The most recent $1.3bn takeover approach from Canadian software major Dye & Durham collapsed this time last year.

The $1.3bn Stockland-led buyout of Lendlease’s communities development portfolio M&A may not necessarily be a whole company proposition, but a sign of deals likely to come. With a prospect of a slowing economy, management teams will be running a review of their operations looking to jettison underperforming businesses to help pay down debt or lift average returns.

Elsewhere, Tabcorp’s $864m winning bid for a 20-year exclusive wagering licence in Victoria is not technically M&A transaction, however it secures long term access to a critical market for the gaming group. The deal represents the biggest transaction for Tabcorp following the spin out of the Lotteries Group some 18 months ago. The long-term deal with the Victorian government promises to lock rivals out of the state’s racing industry and is worth as much as $140m in annual earnings for Tabcorp. The bulk of the Tabcorp deal will be funded by debt.