Australia has seen some of the biggest and controversial M&A transactions in the Asia-Pacific region in 2016. The A$12.6 billion Asciano takeover was finally given the green light by the Australian Competition and Consumer Commission (ACCC), while the blocking of the sales of the Kidman cattle empire and the state owned Ausgrid have sparked strong sentiments towards Chinese bidders for Australian assets. In other sectors, the A$9.7 billion Port of Melbourne privatisation is a sign of the gain in popularity for infrastructure assets. In a review of M&A in 2016 and a look forward to next year, Asialaw discussed the hottest sectors and the latest regulation developments with some of Australia’s leading M&A lawyers.
M&A slowdown…or not?
It was always going to be difficult to beat 2015 for deal activity. Transactions have been picking up in last few months but not enough to make up for the decrease in Q1 to Q3. Inbound M&A deal values for the first three quarters of 2016 were down 2.9% compared to last year. “We’ve seen less M&A activity with the uncertainty coming out of Brexit, US election and Chinese growth slowdown, but investors are cautiously optimistic,” says Nicola Charlston, partner at King & Wood Mallesons.
“It has been a muted market with green shoots,” says Vijay Cugati, partner at Allens. “Deal volumes were down from 2015 but there have been high value deals with infrastructure sales. Despite it being an election year, there has been no usual slowdown and the effects of Brexit haven’t touched on Australia.”
“We’ve seen strong M&A volumes. The last six months have been very busy,” says Tim Gordon, partner at Gilbert + Tobin. “We expect to see a continuation of privatisations and with the prices that have been achieved, governments will be more encouraged to think seriously about sale of assets.”
Despite global stutters such as Brexit and the dampening of the Chinese economy, a number of factors are still driving for M&A activity. “The low Australian dollar and low interest rates have attracted Asian and US buyers,” says Charlston. “There are fewer organic growth opportunities and businesses are looking at acquisitions and innovation for growth.”
“There is available capital. PE funds are hedging Australia against investments in high risk economies since there is stable law and economy in Australia,” adds Cugati.
Regulatory hurdles for offshore investors
The Foreign Investment Review Board (FIRB) strengthened Australia’s foreign investment framework through amendments to the Foreign Acquisitions and Takeovers Act and introduced the Foreign Acquisitions and Takeovers Imposition Fees Act. The laws include imposing civil and criminal penalties, introducing application fees for foreign investment applications and reducing screening thresholds for agricultural investments.
“While FIRB continues to approve the majority of transactions, the Treasurer raised concerns and blocked some of the bids for Ausgrid and the Kidman cattle property in Northern Australia,” says Charlston. “Agriculture land assets and critical infrastructure also continue to be areas of focus for FIRB.”
Despite the stricter rules, Australian assets are still attractive. “We’ve seen a lot of offshore investments coming from Canadian and Asian players,” says Charlston.
With the substantial interest threshold going from 15% to 20% for foreign investment approval, meaning only acquisitions of stakes of at least 20% or more need approval, offshore investors are still finding Australia a good place to invest. “Investors can have a higher stake in Australian companies and this has facilitated M&A from South Korea, Japan and China,” says Gordon.
“Investors need to engage with the FIRB, be transparent and be clear on the reasons for the transaction,” says Cugati.
More scrutiny across the board
Whether it is the FIRB, the ACCC or the Australian Taxation Office (ATO), the story is the same - more scrutiny of transactions. “One of the major transactions we had in 2016 was the Asciano sale by way of a scheme of arrangement,” says Charlston. “There were a lot of twists and turns to go through the competition regulator. At the moment it is taking the ACCC at least four months to review complex transactions.”
“There is more interaction between the FIRB, ACCC and ATO. Investors need to engage with regulators on competition analysis, tax and foreign investment issues,” says Emin Altiparmak, partner at Allens.
While there is more regulatory scrutiny, M&A opportunities still remain attractive to foreign investors.
How businesses are going about their M&A transactions is an interesting area for potential investors to pay attention to. “Friendly transactions have been popular with a preference for schemes of arrangement,” says Charlston.
Cash may no longer be king as scrip gains more acceptance with a rise in the use of split cash/scrip deals. “Scrip potentially allows the target shareholder to participate in the upside of transaction,” says Cugati.
In negotiations and acquisition agreements, the use of reverse break fees has increased as a way of reducing the risk of a deal failing. “With reverse break fees, the target can ask to recover a fee if local approval is not received,” says Cugati.
Who are the market darlings?
The infrastructure, health and financial services are some of the sectors that are hotspots for M&A.
“Sectors that are active are food and agriculture; health care especially from Chinese bidders in vitamins, hospital operators, eye care groups; infrastructure with state government privatisation has attracted lots of interest from pension funds; and financial services especially in divestments of non-core services by banks such as insurance,” says Charlston.
“PE global sponsors are interested in education, healthcare, financial services and technology, including fintech,” says Altiparmak. “Chinese and Asian strategic buyers are going after healthcare and financial assets.”
“Disruptive innovations have been popular with large corporates looking at IT/telco disruptors and taking them in house. We’re seeing more traditional companies innovate by taking in disruptors,” says Cugati. “Infrastructure investment related areas such as toll roads and port services is another space to watch for those searching for yield. Agriculture, especially agtech, is another area. The competition is growing with deep pools of capital from PE, funds and superannuation funds.”
“On the domestic side, PE funds and pension funds are more involved with health and financial services transactions,” says Gordon. “Infrastructure privatisation has been strong. The commercial property sector will pick up, with strong interest from global and domestic funds. We expect to see more IPOs and acquisitions in the sector.”
“Mining and energy could pick up on the domestic front if commodity prices strengthen,” says Cugati.
While there may be hiccups in the global economy, low interest rates and a weak currency mean Australia seems to be doing stronger than other parts of the world with. Offshore investors are still eyeing assets in many sectors, for example infrastructure, health and financial services. It looks like anyone in the M&A sector will be looking forward to a busy 2017.