At the start of the year, in our annual public company mergers and acquisitions review, we forecast that Australia might be in for a Roaring ‘20s of M&A.
Well… it certainly has been roaring…
Indeed, the market for mergers and acquisitions is supercharged, with almost $150 billion of public and private deals announced in Australia and New Zealand in the first half of 2021. This figure includes $67.2 billion in binding deals involving ASX listed targets.
The first Monday morning in August alone saw the announcement of public company deals (in some form) with an aggregate value of over $60 billion!
Notwithstanding the pandemic and geopolitical tensions, M&A confidence is high. It seems that many of the ingredients for successful M&A are present right now: plenty of pension / super fund money, low interest rates, companies seeking to position themselves to take advantage of technological changes or energy transformations (and wanting to shed themselves of low growth assets of yesteryear) and also bidders seeking to take advantage of targets whose businesses have struggled through COVID-19. Even ESG and shareholder activism is leading to M&A.
The market has seen a number of cash deals driven by private capital and pension money such as Macquarie Infrastructure and Real Assets (MIRA) acquiring Bingo and also Vocus (the latter in partnership with Aware Super) and PowAR (which includes the Future Fund and QIC) acquiring Tilt Renewables. There are also deals which are still works in progress including unsolicited approaches for Sydney Airport and Spark Infrastructure, each of which involve private equity, private capital and pension money. Mega deals involving scrip or share exchanges, such as Square’s $39 billion proposed acquisition of Afterpay and the proposed $21 billion merger of Santos and Oil Search, are also emerging.
This article examines some of the key highlights of Australian public M&A so far in 2021. It is based on our analysis of transactions valued at more than $50 million involving ASX-listed target entities which were announced between 1 January and 2 August 2021.
Public M&A in Australia booming
The value of public M&A in Australia in 2021 has already eclipsed aggregate annual transaction values identified in the last decade, with 5 months of the year still remaining.
The aggregate transaction value of binding transactions valued over $50 million in 2021 to date is $67.2 billion. This is more than double the total value of binding transactions announced during the entirety of 2020 and almost 40% greater than the $48.7 billion recorded for announced deals in 2018 (which, at the time, was highest in the 10 plus years we have been analysing public M&A data).
It is important to understand that this aggregate transaction value represents public M&A subject to binding agreements or takeover bids actually made. If one includes non-binding indicative offers which have been announced, then the aggregate value of public M&A deals is almost $120 billion.
Total deal value has been driven by a number of multi-billion dollar binding deals including:
- Square, Inc’s proposed $39 billion acquisition of Afterpay which, on implementation, will be the largest public M&A deal in Australia’s history and the largest cross border fintech deal globally;
- Seven Group Holdings’ successful $9 billion off-market takeover offer for Boral;
- Washington H. Soul Pattinson’s proposed $4 billion acquisition of Milton Corporation;
- MIRA and Aware Super’s successful $3.4 billion acquisition of Vocus;
- PowAR consortium (comprising QIC, Future Fund and AGL) and Mercury NZ’s successful $2.8 billion acquisition of Tilt Renewables; and
- MIRA’s successful $2.3 billion acquisition of Bingo Industries.
Gilbert + Tobin is pleased to be advising parties in two-thirds of the largest announced binding deals in 2021 including Afterpay, MIRA and the PowAR consortium.
There were 27 transactions valued at $50 million or more in the first seven months of 2021. This included three competitive bids for Mainstream Group including from Apex Group, SS&C Technologies and Vistra Holdings. Interestingly, the first bid for Mainstream was $171 million and yet the final bid was almost 2.5 times more at over $400 million.
There were nine transactions with a value over $500 million.
We expect that the remainder of 2021 will be particularly active.
Santos and Oil Search recently announced a $21 billion all-scrip merger, subject to the completion of confirmatory due diligence and the execution of a merger implementation agreement. There are also a number of potential billion dollar deals in the pipeline, including non-binding proposals for Sydney Airport ($22 billion), Spark Infrastructure ($5.2 billion) and Hansen Technologies ($1.3 billion) – see further below.
Schemes of arrangement back in fashion
Schemes of arrangement have been significantly more popular than takeovers so far in 2021, with 78% of transactions announced being structured as schemes. This is a change from 2020 where the takeover / scheme mix was closer to 50:50.
Schemes of arrangement require the co-operation of the target to succeed, so this statistic reflects that 85% of transactions in 2021 year to date were undertaken on a friendly basis.
Schemes of arrangement continue to be the most popular structure for the highest valued transactions. Seven Group Holdings’ $9 billion off-market takeover offer for Boral was the only transaction exceeding $1 billion which was not structured as a scheme of arrangement. Of course, that deal was launched without the support of the independent directors of the target, although interestingly, it was still successful.
We think this reflects a shift in the market from last year where bidders and targets were adjusting to the market upheavals arising out of the COVID-19 pandemic’s initial impacts on the stock market. The uncertainty led to greater disagreement on valuations, making friendly deals harder. Opportunistic bidders, unable to get agreement from the target, made takeover offers which were not agreed (or recommended) at the outset.
As the bid-ask spread has narrowed, we have moved into a market more conducive to deals and deal making, making friendly deals and schemes of arrangement more do-able.
In essence, the uncertainty of 2020 made takeover offers more common but we are now back to the usual trend showing a preference for schemes. If anything, that preference is more pronounced.
Private equity activity high but no binding or completed public M&A yet. Don’t worry though: they are coming
Private equity bidders were not involved in any of the binding or completed transactions involving ASX listed targets exceeding $50 million in the first 7 months of 2021.
However, they are about to burst through the gate. In particular:
- BGH Capital’s $1.3 billion non-binding indicative offer for Hansen Technologies (due diligence has been granted on an exclusive basis); and
- KKR and the Ontario Teachers’ Pension Plan’s joint $5.2 billion non-binding indicative offer for Spark Infrastructure (due diligence has been granted on a non-exclusive basis),
seem destined to succeed.
Separately, other potential transactions are in the mix including EQT’s $2.2 billion non-binding indicative offer for Iress which has, at this stage, been rejected by the target.
In our commentary on PE, we are making a distinction from superannuation funds and private capital who have already been extremely active in Australian public M&A in 2021. In particular:
- PowAR consortium (comprising QIC, Future Fund and AGL) and Mercury NZ acquired Tilt Renewables for $2.8 billion following a highly competitive sale process involving strategic and financial bidders;
- Aware Super partnered with Macquarie Infrastructure and Real Assets (MIRA) to acquire Vocus Group for $3.4 billion;
- MIRA acquired Bingo Industries for $2.3 billion; and
- IFM, Qsuper and US based Global Infrastructure Partners made a $22 billion offer for Sydney Airport (which has to date been rejected by the target as highly opportunistic).
It should also not be forgotten that the acquisition of Tilt Renewables was precipitated by AustralianSuper making an unsolicited approach to acquire Infratil, Tilt Renewables’ controlling shareholder, for over $5 billion.
Foreign investment steady with approvals taking some time
Foreign bidders were less engaged in Australian public M&A at the beginning of the year, but activity is now beginning to ramp up.
Foreign bidders currently account for 44% of all public M&A transactions exceeding $50 million in 2021. This is a lower percentage than the 6 years before that.
Foreign bidders have come from a wide range of countries, with North America being the most active (3 deals). Interest from Asia has declined, with only one deal involving an Indonesian bidder included in the mix and no bids from China, obviously reflecting the challenges in geopolitics and security concerns.
The total value of foreign investment in ASX-listed companies in firm / binding deals has soared to $44.4 billion in 2021 to date, driven predominantly by NYSE listed Square, Inc’s proposed $39 billion acquisition of Afterpay. However, if we exclude this transaction, the aggregate value of the remaining eleven binding foreign bids announced so far in 2021 was only $5.4 billion, which is significantly lower than levels of foreign investment in public M&A observed in previous years.
Notably, six of the seven transactions exceeding $1 billion which have been announced so far in 2021 have involved an Australian acquirer (indeed, the second largest foreign deal announced this year was the Netherlands’ Essity Group Holding BV’s successful $760 million acquisition of Asaleo Care). This is in stark contrast to 2020, where four of the five transactions exceeding $1 billion involved a foreign acquirer.
This fall in the number of high value foreign bids (and overall percentage of foreign bids) is perhaps reflective of various factors including an increase in Australian based superannuation money and private capital, longer time frames involved in obtaining foreign investment approvals (clearly FIRB and the Government are thinking more deeply about signing off on foreign takeovers) and perhaps also the continuing challenges of doing cross-border deals in a pandemic where basic due diligence like site visits can be difficult due to border closures.
Service sector M&A flying high
The retail & consumer services sector is currently the dominant sector for 2021, contributing to 60% of the aggregate transaction value, albeit this could be said to be distorted by the enormous Afterpay / Square, Inc transaction. While there are still five months left in 2021, this is still significantly higher than 2020 where the sector contributed to only 4% of aggregate transaction value and to 7% of the number of deals.
The second largest contributor to deal value has been the industrial products sector, largely due to Seven Group Holdings’ successful $9 billion off-market takeover offer for Boral.
The utilities sector has come in third (7%), as a result of PowAR / Mercury NZ’s successful $2.8 billion acquisition of Tilt Renewables and MIRA’s successful $2.3 billion acquisition of Bingo Industries.
The size of the Afterpay deal relative to others in the market in many ways diminishes the usefulness of any sectoral analysis based on deal value data. Using data based on the volume of transactions, the professional services sector is currently the largest contributor to transaction volume (22%), followed by retail and consumer services (18%), with foreign bidders showing the most interest in these two sectors. The three competing bids for Mainstream Group Holdings showed the strength of activity in the professional services sector. There was equivalent interest in utilities, telecommunications, healthcare, industrial products and real estate (which included Dexus’ successful $318 million acquisition of APN Property Group).
The energy & resources sector was the strongest performing sector in 2020 by both aggregate transaction value (37%) and number of transactions (33%). However, we have seen fewer binding / firm deals so far in 2021, with the energy & resources accounting for 11% of the number of transactions (3 deals) and only 3% of the aggregate transaction value. Transactions in the energy & resources sector have included Orocobre’s proposed $1.8 billion acquisition of Galaxy Resources and Indonesia’s PT Indika Energy Tbk’s proposed $58 million acquisition of Nusantara Resources. However, of course, all this will change if the Oil Search / Santos deal progresses through due diligence to a binding deal, which seems likely.
Cash vs scrip consideration: a tale of 2 halves?
The first seven months of 2021 saw a strong weighting towards cash deals.
In particular, 78% of announced binding transactions have involved cash only consideration. This is unlike 2020, where only 62% of transactions offered all cash. Four of the seven transactions exceeding $1 billion offered all cash with three transactions offering all scrip (Afterpay / Square, Inc; Milton Corporation / Washington H. Soul Pattinson and Galaxy Resources / Orocobre).
It seems likely that we will see more all scrip (or cash / scrip mix) deals in the remainder of 2021. Given the low interest environment with access to cash funding plentiful, target shareholders may prefer to stay invested in good companies via a scrip deal rather than cash-out. Separately, of course, mega deals (like the Afterpay / Square, Inc deal and the proposed $21 billion merger between Santos and Oil Search) also tend to involve more scrip given their size.
What’s in store for the rest of 2021?
At the start of this year, we said that 2021 could be a roaring 20s of M&A… and in this respect, 2021 has lived up to that promise!
When we have looked at the timing of deals as part of our previous surveys, the second half of a calendar year has been a particularly strong period for the announcement of public M&A deals.
The moves that private equity firms have already made are likely to result in binding deals, and we see no reason for superannuation and private capital interest to wane. We expect non-core and demerged assets to continue to attract attention, and as the rest of the world (primarily the US and the UK) hopefully emerges from the deepest throes of the pandemic, we would expect an increase in foreign interest during the remainder of the year. Who knows, we may even see a takeover bid for an Australian company from a US listed SPAC (special purpose acquisition company).
In our view, the roar we have seen so far in 2021 will not be whimpering out any time soon.
How can Gilbert + Tobin help?
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