Merger and acquisition activity in Australia is likely to increase over the next year, with the lower Australian dollar providing an incentive to offshore buyers to make bids, including cashed-up private equity funds, according to several experts.

Such activity is generally closely watched by investors, given the material effect such transactions have on company share prices - either positive or negative, depending on how the bid is received by the various stakeholders.

A new report from business advisory group Pitcher Partners reveals there were 903 takeovers in Australia in the year to 31 October 2018. More than $117.9 billion worth of deals were done during this period, up from 805 deals worth $67.8 billion in the same period last year. A little over one-third of these involved foreign bidders.

Private equity and venture capital firms have been active, with 29 deals valued at $2.3 billion, up 18 per cent from 2017 over the same period, according to a third-quarter 2018 report from research firm, Mergermarket.

Michael Sonego, a senior figure within Pitcher Partners’ corporate finance division, says interest in Australian assets is intensifying, particularly from North American buyers.

“Australia and North America have a long history of doing business, which lends greater confidence and certainty to both parties when transacting.

“While the wildly-held belief is that a lower Australian dollar makes M&A more attractive to overseas entities, the truth is that most acquisitions relate to long-term strategic decisions and returns or revenue from the Australian acquisition that goes back to the host country are also reduced by the same exchange rate,” he says.

Rising US interest rates is a key driver of this increased deal activity, says Jun Bei Liu, portfolio manager with Tribeca Investment Partners. She says this has created a sense of urgency for some businesses wanting to raise cheap money and buy struggling businesses before rates rise further.

“We are certainly seeing more activities with falling Australian dollar. A number of transactions that come to mind include APA Group, Reject Shop, Healthscope and Trade Me, all bid for by offshore buyers.

"Even in some of the domestic private equity bids, such as Navitas, part of the funding is from offshore,” says Liu.

She notes that most private equity firms have raised a substantial amount of money globally, "and are simply scouring the world for opportunities".

"Australia has always been a quality market with assets that are interesting to those global buyers, particularly assets with a property angle,” says Liu.

Offshore bidders circling tech, aged care

The technology and aged care sectors appear to be particularly attractive targets for 2019.
“There have been many large private equity and technology specialist funds set up in the past three to four years targeting purely in the tech space; we have a very small technology sector with mostly mature businesses but there are that stand outs such as Afterpay and Wisetech.

"With share price weaknesses, there could be interested parties from offshore,” says Liu. She also believes the attractive returns offered by aged care facilities in Australia will be particularly appealing to foreign bidders.

Stephen Bruce, director of portfolio management at Perennial Value Management, says offshore interest in the retirement living sector continues, following US-based Hometown’s recent takeover of Gateway Lifestyle.

Ingenia Communities Group recently received a capital injection from US heavyweight, Sun Communities, which he believes could foreshadow a move to full control in the future.

Bruce says private equity buyers particularly have raised a record level of funds globally which need to be deployed.

“These firms don’t get any fees until they do a deal, so have a powerful incentive to find investments. However, perhaps the more interesting development is the increasing role that large asset owners such as pension funds are taking in M&A transactions.

"A good example of this is the participation of AustralianSuper in the takeover offer for Healthscope which is currently afoot, as they seek out direct investments in long-duration assets,” he says.

Another factor that makes many Australian companies attractive is that their balance sheets are generally in very good shape, with quite low levels of gearing.

This characteristic distinguishes Australian companies from those in other markets such as the US, where corporates have been gearing up their balance sheets, for example by undertaking buy-backs, says Perennial’s Bruce.

pipeline

Foreign investment concerns scuttled Hong Kong utility CKI's $13bn APA takeover bid

Regulatory red tape

Of course, not all takeover bids are successful. The Federal Government has recently disallowed Hong Kong utility CKI's $13 billion takeover bid for Australian gas pipeline company APA. Federal Treasurer Josh Frydenberg said it would result in a single foreign company group having sole ownership and control over Australia’s most significant gas transmission business.

Education provider Navitas recently rejected a $1.97 billion takeover bid led by Australian private equity firm BGH Capital, along with AustralianSuper and the company’s co-founder Rod Jones. Healthscope also recently rejected a bid from BGH, on the basis that its proposal is significantly less attractive than a proposal from Canadian group Brookfield Capital, with whom it is currently negotiating.

Accounting software company MYOB has also received a takeover bid from New York-based private equity firm KKR, which is bidding $3.77 a share for the company.

Perennial’s Bruce says another potential target is Ansell, a global leader in protective gloves worn in workplaces from operating theatres to factories to oil rigs.

“The bulk of their earnings are from offshore with good leverage to the strongly growing US economy. Importantly, the company has a new cash position on the balance sheet and a wide-open share register,” says Bruce, who adds that mining explosives company Orica, Aveo Group and Atlas Arteria could also receive takeover bids, as well as APA from another potential buyer.