Dealmakers see M&A recovery on the horizon, eye strength in industrials and resources

A resurgence in mergers and acquisitions around the globe has yet to reach Australian shores but a pick-up in other markets will filter through here in the months ahead.

A resurgence in mergers and acquisitions around the globe has yet to reach Australian shores, with local deal activity slumping by more than a third in the first quarter.

But a pick-up in other markets, including the US, will filter through here in the months ahead, advisers say, as companies position for the next growth phase and private equity shakes off a horror 2023.

Following a flurry of M&A ­activity in the run-up to the end of last year, including buyout proposals for share registry Link, building materials provider Adbri and dental group Pacific Smiles, dealmakers were hopeful 2024 would start on a strong note.

But the first three months of the year failed to deliver, with Australasian-targeted M&A dropping to $US19.2bn ($29.4bn) as of March 27, well down on the $US30bn recorded in the first quarter of 2023, according to preliminary data compiled by Dealogic.

And Australia isn’t the only market suffering a downbeat start to the year, with M&A activity in Asia faring even worse. Asia ex-Japan fell to $US72bn over the quarter to date, down from $US133bn in the first quarter of last year.

This contrasts with the US, where M&A surged 53 per cent to $US411bn over the first three months of the year (to March 27).

While volumes coming through in the local market are below long-term averages, it should still be a constructive year for dealmaking, according to Nick Brown, UBS co-head of Asia-Pacific M&A.

Nick Brown, UBS co-head of Asia Pacific M&A, sees corporates and PE driving an uplift in activity this year.

“There’s three themes here. First, we expect corporate buyers to continue to look at undertaking strategic M&A transactions,” Mr Brown told The Australian.

“Second, we’re expecting stronger private equity interest underpinned by increased visibility around the economic and interest rate outlook, and strong financing markets.

“And third, for overseas buyers, Australia remains an attractive area to allocate capital, given our growth and economic outlook. So we expect to see more cross-border activity.”

Already, some of that cross-border activity has come through. Following overseas bidders lobbing offers for Link and Adbri in the closing weeks of last year, the biggest deal of the March quarter was French building giant Saint-Gobain’s $4.32bn offer for building products company CSR, with the bid getting the support of the target’s board ahead of a shareholder vote expected later this year.

The deal is also subject to approval from the Foreign Investments Review Board.

Companies were pushing ahead with M&A as they set up for the next phase of growth, Mr Brown said.

“Increased activity from corporates is driven by a focus on strategic portfolio positioning, gaining exposure to additional avenues for growth, and also the extent to which additional growth can be driven from synergies,” he said.

Industrials and resources are likely to be the key sectors driving deal activity this year.

While first-quarter activity has been subdued, UBS has been busy, taking out the top spot on the adviser rankings for the year to date, according to Dealogic. The investment bank has been working on the largest deals of the year, advising CSR following the takeover offer from Saint-Gobain, as well as Alcoa and its bid for its joint-venture partner, Alumina.

Private equity firms, meanwhile, are dusting themselves off and looking ahead to a recovery after a bleak 2023.

 

Australia is seen as an attractive investment destination by both regional and global counterparts, according to Bain partner Liam Connolly.

“Australia’s mature economy, legal certainty and exposure to new technologies, coupled with recent stabilisation of geopolitical relations, sets up a strong stage for dealmaking for the rest of the year ahead,” he said.

“Stabilisation of rates, with ­potential for future cuts, has contributed to increased optimism and appetite for dealmaking.”

While the outlook for PE is tempered by lingering uncertainty over macroeconomic conditions and the gap in buyer-seller expectations, pressure to sell ageing portfolio assets will act as a push to get deals over the line.

Two years of subdued exits has extended the average portfolio company age, while dry powder climbs ever higher. The fundraising cycle will be an increasingly important driver of exit momentum, a recent report by Bain found.

At the same time, the timing and pace of PE exits will depend on confidence in the broader economy and conviction that interest rates have peaked.

Bain expects exit processes to be stretched out, with more bilateral deals likely. IPOs, meanwhile, will take longer to recover, but once “open”, will gain ­momentum.