Merger and acquisition activity in Australia
05 Nov 2015
By Shadforth Financial Group
2015 is shaping up to be one of the biggest years for mergers and acquisitions (M&A) activity in Australia since the global financial crisis.
Weak economic growth is making it difficult for Australian companies to grow their earnings organically, resulting in cashed-up companies looking for bolt-on acquisitions to boost profits. This has been amplified by the falling Australian dollar, which has made local companies more attractive for overseas predators.
Falling commodity prices have seen a number of smaller resource companies come under pressure as they struggle to survive. This has made them easy prey for the larger players that have the scale and balance sheet strength to survive in the low commodity price environment.
Woodside Petroleum (WPL) recently surprised the market by announcing an $11.6 billion takeover bid for Papua New Guinea based Oil Search (OSH). The offer highlights Woodside's concerns about future growth prospects after years of spending cash on increasing dividends and buying back shares. The offer was rejected by the Oil Search board.
Australian infrastructure type assets have been in high demand from international investors due to their relatively stable revenue streams. This has been highlighted by the $9 billion takeover offer for port and rail operator Asciano (AIO) from a consortium of Brookfield Infrastructure Partners, Brookfield associated funds and two institutional partners. If approved by regulators and shareholders, the acquisition is expected to be completed by mid-December 2015.
Toll Holdings (TOL) surprised the market by accepting a $6.5 billion takeover offer from Japan Post. Japan Post has been looking for growth opportunities in Asia as conditions in its domestic market slow. Japan Post commented that buying Toll would help diversify its revenue as well as boost its enterprise value ahead of the planned share market listing.
Credit report provider Veda Group (VED) recently accepted a takeover bid from US-listed company Equifax. If approved, the acquisition will provide Equifax with a solid platform to expand its business into the Australian market.
Recall Holdings (REC), the second largest global provider of information management solutions, recently entered into a Scheme of Arrangement with US-based company Iron Mountain. The offer is subject to a number of conditions, including due diligence, regulatory and shareholder approval.
Cheap debt and solid yields have seen corporate activity in the property sector remain high, with property trusts seeking economies of scale. Highlights in the sector have been the $12 billion merger between Federation Centre's and Novion Property Group (NVN) to create Australia's second-largest retail landlord and the sell down of Investa Property Group assets. There has also been speculation of a number of other deals in the pipeline.
M&A activity in the telecommunications sector is expected to increase due to the rapid rate of technological change and the need for scale. This has been highlighted by the proposed $3 billion merger between Vocus Communications (VOC) and M2 Group (MTU) to create Australia's fourth largest telecommunications company.
The media sector is also ripe for corporate activity. Prime Minister Turnbull has made it clear that he is pro-liberalisation of media ownership laws, and if we do get a change in ownership rules over the next year or two, that could herald a spate of consolidation among media companies.
Currently media ownership rules prohibit media companies from owning more than two out of three traditional media assets (TV, radio and newspapers). The rules also prohibit TV networks from having more than 75 per cent audience reach across Australia.
Before he became Prime Minister, Turnbull showed interest in scrapping these rules, arguing that technological changes such as greater internet broadcasting and pay television rendered the existing regulatory framework out of date. If the federal government does abolish these rules, this could prompt a spate of M&A activity in the media sector.
While M&A can be a source of strong growth for companies, it is not without risks. Studies have shown that the majority of acquisitions have been value destructive for the acquiring company. An obvious exception was Amcor's acquisition of Rio Tinto's Alcan packaging business in March 2009, which proved one of the best decisions in Australian corporate history.