Midcaps in sight as bankers back M&A to stay strong

James Dunn

There is nothing like an M&A boom to make bankers and advisers happy, which explained the jovial mood around the table at the KPMG/AFR M&A round table.

Buoyed by Thomson Reuters figures showing $US69.5 billion ($73.8 billion) of mergers and acquisitions in the first half – the strongest first half since 2011, and twice the activity of the same period last year – M&A players see the strong market continuing until the end of the year.

“You always find that activity breeds activity,” says Geoff Joyce, executive director of Macquarie Group. “The M&A market has been very strong, volatility is low, valuations are high, debt is available to most people, and global yields are very low, so the desire for growth is stronger.

“Also, the IPO [initial public offer] market is very active, and that has brought more M&A activity. You have a company like [education and training business] Vocation, which comes to the market through an IPO, and then makes two acquisitions itself.

“We think the two fundamental drivers are industry consolidation and the desire for growth, and those drivers have really come to the fore.

“A feature of the market is that the big deals are back, with 20 transactions worth more than $1 billion, compared with just two in the first six months of 2013.”

But the market is also very active in the less-noticed private markets, says Curtis Smith, mergers and acquisitions partner at KPMG.

“About two-thirds of the transactions we work on are private companies. We think what’s driving activity [is that there are] people who have been waiting since the financial crisis for an exit. Interest rates are very low and buyers are confident – whether they are other private businesses, or listed businesses. What makes us confident is that the larger end of town is buying these businesses, because it needs to back-fill with growth.”

Power sector busiest

Activity more than doubled in the second quarter, with the energy and power sectors, along with real estate and infrastructure, the busiest. Dane Fitzgibbon, co-head of capital markets at UBS, expects the market to remain very strong over the remainder of the year, if global conditions remain stable.

UBS expects a further $60 billion of M&A transactions to come to market in that time, which would make the year the most active since $170 billion of deals in 2011.

Fitzgibbon says most balance sheets remain conservative, and no one is gearing up irresponsibly – but if a deal makes sense, there is greater willingness to do it. “I think the ghosts of the GFC are still in the back of people’s minds, so there’s no trend towards leverage ticking up again. But certainly we’re seeing from our own clients that if there’s a smart deal that they should do, they’re willing to push beyond their leverage limits in a short term sense.”

Though the hot sectors for M&A in 2013 were areas such as agribusiness, food and beverage, and property, Crispin Murray, head of equities at BT Investment Management, contends that in 2014, activity is more targeted at capitalisation levels.

“A lot of the actual corporate M&A is going to be in the midcap area, so if you look at what we’ve seen so far with David Jones [under offer from Woolworths of South Africa], Goodman Fielder [under offer from Wilmar of Singapore and First Pacific of Hong Kong] and PanAust [which received a bid from its Chinese shareholders], which reflects the fact that we’ve got a lot of consolidated industries at the large end of the market, it’s going to be very hard for those companies to really do a lot.

“Foreign companies are certainly more aggressive in terms of their preparedness to take that leap of faith.”

But at the large end of the market, Murray says, more “asset transactions” are likely to be the theme, as opposed to corporate transactions.

“We’ve seen this theme so far with Transurban buying Queensland Motorways, Origin buying a 40 per cent stake in the Poseidon gas field, and IAG buying Wesfarmers’ underwriting business. There’s been a real theme of the shuffling of sizeable assets into better hands, and they’re logical transactions. That’s more what the larger corporates are looking to do, which reflects a continued conservativeness.”

The Australian Financial Review