Lower Aussie dollar creates both opportunity and risk
A weaker Australian dollar boosts the appeal of Australian companies to foreign predators and may create opportunities for investors but caution is advised.
A weaker Australian dollar boosts the appeal of Australian companies to foreign predators and may create opportunities for investors but caution is advised.
As economic growth stalls, making it harder for companies to grow their businesses organically, analysts are tipping greater merger and acquisitions activity as an alternative way to build scale.
The lower Australian dollar is making it cheaper for offshore predators to buy local companies as the local currency heads towards 65 US cents, having fallen to 67 US cents last week – from 73 US cents in January.
In August, we've already seen Fox Corporation’s $585 million bid for fintech Credible Labs, and the battle for software company GBST by two foreign companies.
“While the low Australian dollar is highly unlikely to be the primary reason for foreign companies looking at M&A in the Australian market, it certainly allows them to offer a higher price for assets,” says Matt Griffin, co-portfolio manager of small caps, AMP Capital.
“Industry super funds are also becoming more active in taking companies private, and are happy to partner with private equity on deals given the long-term nature of their capital,” he says.
Only the strong survive
A recent report from stockbroker Morgans predicts greater M&A activity. Subdued economic growth, falling profit margins and a low cost of capital mean firms need to consider M&A to seek growth.
"In this environment, the strong survive and weak do not - asset mispricing provides a catalyst for opportunistic M&A," says Morgans analyst Andrew Tang.
He points to high yielding stocks benefiting from structural growth characteristics as far more attractive than those in the cyclical sectors in the current environment.
"Cyclical stocks have had a few false starts and are yet to find genuine support. We think this segment is most prone to opportunistic takeover activity,” Tang says.
Morgans has identified 48 candidates for M&A, including:
- Natural gas distribution company APA Group (ASX: APA)
- Port and logistics operator Qube Holdings (ASX: QUB)
- Oil and gas company Senex (ASX: SXY)
APA was the subject of a recent prior takeover attempt by Hong Kong-listed CK Infrastructure Holdings, a deal which ultimately failed.
Tang says Qube made the list due to its attractive assets, while Senex is nominated for its solid reserves and balance sheet strength.
Don't expect floodgates to open
However, Peter Warnes, the head of equities research at Morningstar, says other than APA, there are other infrastructure companies that might be more appealing to foreign competitors. But he doesn’t expect a flood of takeovers given high prices.
“I don’t see the floodgates opening, and I’d beware of scrip-for-scrip transactions.
"The rising tide has floated all boats. Like Buffett says, if something is cheap, it’s cheap for a reason.”
Warnes points out that Warren Buffett’s Berkshire Hathaway is currently sitting on record levels of cash and has been selling down positions more recently, not buying assets.
At the end of June, Berkshire Hathaway had a record US$122 billion ($179 billion) in cash to make acquisitions and investments.
Earlier in the year Buffett said he wanted to make a big acquisition, but later in his annual letter to shareholders said prices “are sky-high for businesses possessing decent long-term prospects.”
So Buffett isn’t buying, which analysts say is a warning to investors that they too should sit on the sidelines.
Yet AMP Capital’s Griffin says we could see elevated levels of M&A activity, especially in the gold sector, an expectation Morningstar’s Warnes shares.
“The gold sector is another area where we see corporate activity continuing. Scale matters in the gold space, with larger miners attracting significant premiums over juniors as they gain index and ETF inclusion, therefore attracting flow from passive investors,” Griffin says.
“We have seen this play out recently with the Silverlake (SLR) and Doray merger, in addition to Resolute (RSG) acquiring Toro gold. M&A activity will be balanced by a general level of caution on potential macro weakness and geopolitical issues."
Having said that, the higher gold price is buoying the cash reserves of miners. With the US and China trade war escalating this month, gold rose to a fresh six-year high of US$1,500.
That’s adding to the earnings of gold miners - when the gold price goes up a certain amount, gold company earnings typically rise more sharply still.
Analysts expect the prices of gold miners to continue rising with gold, which has rallied hard on flight-to-safety buying and falling government bond yields around the world on fears of a sharp economic slowdown.
In this environment, there will be many cashed-up gold miners potentially ready to expand to leverage the rising price of the precious metal.