Powerful superannuation funds expected to boost M&A activity

Bankers and lawyers expect super fund merger and acquisition activity to fire up next year.

MinterEllison partners Con Boulougouris (left) and Alberto Colla. Picture: Stuart McEvoy.

Bankers and lawyers expect merger and acquisition activity to fire up next year after sagging confidence and the federal election saw dealmaking in 2019 slump to a five-year low despite mega-bids for Carlton & United Breweries, DuluxGroup and Caltex Australia.

The volume of mergers and ­acquisitions fell sharply this year amid capital constraints in China, global trade and regulatory uncertainty associated with a domestic federal election and the Hayne royal commission’s final report.

With clarity around some of those events and a resounding election result in Britain, anecdotal evidence suggests the Australian deal pipeline is healthier going into the new year.

Announced domestic, inbound and outbound Australian deals have amounted to $US108.3bn ($157.6bn) this year as at December 13, 35 per cent lower than the same period last year and the ­lowest total since 2014, according to Refinitiv (formerly Thomson Reuters) data. Completed transactions slid ­almost 32 per cent over the same period.

Excluding outbound deals by Australian companies, combined domestic and inbound transaction levels were also down ­almost 30 per cent.

The biggest inbound and domestic deals were the $16bn tilt by Japan’s Asahi for Carlton & United, Alimentation Couche-Tard’s spurned bid for Caltex, which could see renewed negotiations, Nippon Paint’s acquisition of Dulux and KKR & Co’s purchase of Arnott’s.

MinterEllison partner Alberto Colla expects 2020 will be a stronger year for deals as companies assess how to respond to rapid technological change and superannuation funds step up their transaction focus to “driving and shaping” M&A. “Just the sheer weight of superannuation funds, the consolidation of industry funds and the need for them to ­deploy their capital and seek ­returns, they are going to be active both in the public markets and also private markets,” he said.

Top Australian inbound and domestic M&A deals – 2019 YTD

Citigroup’s investment and corporate banking chief Tony ­Osmond said the pipeline of ­activity going into next year ­appeared “much better” than this time last year.

“Putting aside macro factors … it (2020) should be a better year,” Mr ­Osmond said, noting though that many boards were still facing pressure from investors to return capital rather than pursue M&A.

“Shareholders are addicted to dividends.”

Goldman Sachs’s local M&A operating chief, Marissa Freund, said while 2019 M&A volumes were materially down, it was a “year of two halves” as the latter six months saw improved activity.

“Assuming there isn’t some ­unexpected macro or other market shock, we are pretty positive on the outlook for activity in 2020,” Ms Freund said.

“We think the interest rate cuts of 2019 have started to create a shift in thinking that we might be looking at a ‘lower for longer’ scenario and we are seeing boards and management teams emboldened by that and changing how they are thinking about valuations and their own investment hurdles.

“This is leading to companies acting more aggressively to ­acquire growth that might be harder to achieve organically.”

A record low interest rate environment, following three cash rate cuts by the Reserve Bank this year, has prompted governor Philip Lowe to urge businesses to revise down their return hurdles.

UBS co-head of global banking Aidan Allen expects demergers, portfolio reviews, cross border ­expansion and bumper private ­equity activity will buoy 2020 M&A.

“We continue to see these drivers active in our business into 2020,” Mr Allen said, noting that while valuations were lofty in some sectors, cashed-up private equity firms were looking at ways to better structure deals and bolster returns.

“That 20 per cent (investment return) hurdle is not helping private equity in a world where discount rates are coming down,” he said. “For the most part though, the good GPs (private equity firms) are getting smarter and thinking about leveraging cheap debt structures as well as some of the capital tools we have helped develop this year to access low cap rates for property and infrastructure assets.”

Goldman’s Ms Freund is also upbeat on private equity activity next year. “Towards the back end of this year, there were lots of situations being actively assessed by PE and we’d anticipate this to flow through to announced transactions in the first half of 2020,” she said.

Sale processes are well under way for private equity-owned businesses including Archer Capital’s registries and analytics business illion, while private equity has been linked to interest in National Australia Bank’s MLC and assets including Laureate Education.

MinterEllison partner Con Boulougouris said he expected foreign bidders from Japan, Canada and the US to continue to run a rule over local strategic targets.

“The Japanese are very comfortable doing public M&A transactions,” he said.

“In the US, I think the target universe is significantly reduced, and then you have the lower Australian dollar which is encouraging a lot of inbound.”

Mr Boulougouris did caution, though, that the regulators were undertaking more scrutiny of foreign deals, particularly where they involved data or data centres, property or buildings that housed government tenants.

The Refinitiv data does not ­include transactions announced on Monday, including the takeover of ASX-listed National Veterinary Care. Northern Star Resources’s stock is in a trading halt ahead of an expected raising to help finance the purchase of Newmont’s half of Kalgoorlie’s Super Pit mine.

MinterEllison’s Directions in Public M&A report points to disruption and innovation fuelling some deals next year as companies look to buy rather than build new technology or functionality.

“We see that as a driver of M&A in terms of established market participants knowing they just can’t catch up quickly enough … to defend their market share. In the face of collapsing barriers to entry and start-ups innovating and quickly stealing market share, it is quicker to make a compelling offer,” Mr Colla said.

The MinterEllison report ­highlights the health, aged care, infrastructure, mining and minerals and consumer staples as “hot sectors” on the ASX for deals in ­fiscal 2020.

Last financial year’s busy industries included metals and mining, real estate investment trusts and medical adjacent industries.

The report, which assessed public deals of $50m or more, also found acquirers were being increasingly tactical in how they approached transactions often to outmanoeuvre a potential rival bid.

Globally in recent months M&A activity has been dominated by large deals across a diverse range of sectors. Those have ­included LVMH’s agreed purchase of Tiffany for $US16.2bn and Charles Schwab’s $US26bn tilt at TD Ameritrade.