Rich pickings on ASX for veteran deal-maker John Wylie

John Wylie of Tanarra Capital. ‘There are something like 90 [ASX] companies where the share prices are still less than where they were five years ago. So it is a target-rich environment here.’ Picture: Stuart McEvoy

For anyone wanting to understand what is going on in this high-octane takeovers market, John Wylie is the man.

In almost 30 years in mergers and acquisitions for investment banks in London, New York and Australia, Wylie has built a best-in-class reputation at the negotiating table.

In more recent years he has shifted to investing with his fund Tanarra Capital. Still very much an adviser, he now has skin in the game alongside his investors, including some of the latest target companies such as Boral and Tabcorp.

“I thought the early 2000s leading up to the GFC for M & A was never likely to be topped,” Wylie says. “The current level of activity exceeds it and it is likely to be exceeded by some margin.”

John Wylie unpacks what is behind all the action and it is much more than cheap money and low interest rates.

“In the Australian market we’ve got a tonne of companies with languishing share prices,” he says. “There are something like 90 companies where the share prices are still less than where they were five years ago.

“So it is a target-rich environment here. Surprisingly the overall ASX 300 is up by 35 per cent in the last five years, there are still a lot of companies that have underperformed.”

Wylie agrees Covid-19 has left certain businesses vulnerable: “Buying Sydney Airport at a time when Australia has got the borders closed to the world, if you are long-term patient capital that’s pretty smart play, but that’s not a defining narrative.”

Instead, he says the activity is due to big shifts in strategy on the corporate side and the huge pools of private money looking for a return on the investor side.

And it is a deconstruction of companies, rather than companies getting larger, that is driving much of the play.

Historical underperformers are reshaping portfolios by demergers and asset sales to bring more focus and deliver better returns: “Boral, Telstra, Tabcorp, and even Woolworths by spinning off Endeavour Drinks Group, although you wouldn’t put Woolworths in the long-term underperformer category.”

In late June, Telstra’s share price jumped more than 4 per cent on announcing a $2.8bn sale of half of its mobile infrastructure business.

“What John Mullen and the Telstra board are doing is absolutely in the right direction,” Wylie says. “Telstra has a services business which operates in a competitive services market but it also has fantastic infrastructure. They sold a minority stake in the towers portfolio of assets for 28x Ebitda; that is a fantastic transaction.”

Wylie believes there is more to come from Telstra. “We think they have got a fantastic opportunity to unlock value in a constructive negotiation with NBN Co in relation to the Infrastructure Services Agreement payment, which is $1bn a year from NBN Co to Telstra.”

This year has been a compelling watch from the sidelines as boards have been put through their paces on defending or justifying a growing list of takeover plays such as Boral, Tabcorp, Sydney Airport and Spark Infrastructure. Tanarra Capital led the thinking on Boral’s serial problem with undervalue. On Thursday, Seven Group emerged with a 52.7 per cent stake in the company.

“Boral has been comprehensively outplayed by Ryan Stokes,” Wylie says. “It is one of the very rare situations where control of a public company is passing below the bottom end of an independent expert’s valuation range. He has played a brilliant game and he’s got a company with great assets. We were happy we identified the opportunity at Boral even before Stokes did and so it’s been a fantastic investment for Tanarra.”

Wylie is less flattering about the Boral board: “There are moments in time where there are opportunities for boards to exercise leverage.”

One of those moments came when Seven Group first wanted representation on the board. “Two directors were invited on to the board and every subcommittee of the company without any standstill agreement and without any come along agreement that would have enhanced the interests of all shareholders. And it may have been a difficult thing to negotiate, but if you don’t try you are never going to succeed,” Wylie says.

Under a standstill agreement a company cannot buy shares unless it accepts conditions such as a board-approved takeover offer, which gives power to the board.

“That is the price and the privilege of being on the board,” Wylie says. “You have inside information but you are not going to be able to take advantage of that by making a takeover offer in a situation where there is asymmetry with the rest of the shareholders unless the board is willing to recommend your offer.”

A “come along” agreement works the other way, ensuring the shareholder cannot block a takeover offer from any third party.

“Hat’s off to Stokes but they were dealing with a shareholder who has a proven history of acquiring effective control without pay full price and making conventional takeover offers,” Wylie says.

“When you are dealing with an unconventional adversary you need to think in an unconventional way.”

Tanarra also holds a position in Tabcorp, which last month rebuffed bids from private equity and announced a demerger.

Here, Wylie believes the board chaired by Steven Gregg played its hand well.

“By not jumping to a decision too quickly, they have allowed an auction dynamic to develop really well,” he says, unconcerned by the sell-off in the shares. “That is just classic short-term financial market dynamics, where you have a bunch of hedge funds that were hoping for a short M & A pop and disappointment sets in when there is no deal and so they sell.

“We think both the wagering company and the lottery company are going to prosper as independent companies. And the possibility of an M & A premium remains very much on the table for both companies.”

Wylie sees three more forces buoying M & A activity.

The huge and growing pool of private capital from private equity and industry super in particular is looking for returns.

“We are seeing a lot of financially driven transactions, superannuation fund investment in the Telstra towers, Sydney Airport, and the latest one was Spark Infrastructure, a lot with a long-term capital searching for yield.”

In an already highly concentrated economy, there is also further consolidation at the big end of town with Star trying to come together with Crown, IOOF buying MLC and Bega buying Lion Dairy.

The third force is the reshaping of industries through new entrants, as a result of digital disruption and other changing factors including regulation. The energy space is one example, Wylie says, and pharmaceuticals is another, with Wesfarmers bidding for API.

“It is good to see companies like Wesfarmers getting on the front foot and looking to expand into new industries that do represent long-term opportunity and be willing to take risks to do that.”

One sector where several new entrants have appeared is in corporate and M & A advisory. The likes of Barrenjoey, Jardens and a revamped Lazard Australia seemed to have timed things perfectly for the 2021 frenzy.

“I did it while I was trying to work out what I was going to do when I grew up,” Wylie jokes about his 30 years in the M & A business.

“I’m not going to presume to speak for other people but Australia has a very heavy concentration in the service industries of people advising companies.

“I think it’s a good thing for more people to take some risk and get involved with investing to try to help companies grow and try to grow the national pie rather than clipping the ticket on transactions that are happening.”

With a strategy of investing alongside its investors, Tanarra’s funds under management have now reached $2bn.

Its fifth fund, with more than $270m of commitments and closing soon, is a restructuring partners fund led by Transurban chairman Lindsay Maxsted, insolvency expert Ian Carson and Tanarra CIO Michael Phillip. “That fund is going to invest in companies that need their capital structure restructured, whether it’s distressed debt or special situations debt,” Wylie says.

“And they will be bringing an ESG perspective, investing with a perspective to try to the maximum extent possible preserve employment – at the opposite end of the spectrum from a lot of these distressed debt funds internationally which are more vulture funds.”

It is a pitch that would sit neatly with Tanarra’s co-investors in industry super.