M&A Trends and Insights
The economic impact of COVID-19 has led to a material decline in M&A activity globally including Australia. As a result, we have seen fewer transactions and according to Refinitiv (formerly Thomson Reuters), worldwide M&A activity totaled US$1.2 trillion during H1 of 2020, a drop of 41% compared to a year ago and the slowest opening six-month period since 2013. M&A activity abroad appears to have rebounded to some degree since the end of June 2020, presumably as economies have started to reopen. The Financial Times reported that since the end of June, 8 deals each worth more than US$10 billion have been announced.
Australian Private Equity History
Compared to the US and UK private equity (PE) markets, the Australian PE market is relatively immature. The first venture capital fund was established in the mid-1980s by Bill Ferris, and the fund performed well but it was not until the Australian Government set up an Innovation Fund in the mid-1990s offering A$2 funding for every A$1 raised that the venture capital industry accelerated.
Between 2000 and 2010, deal sizes and fund sizes grew exponentially in Australia and many global private equity players such as KKR, Carlyle, TPG and Blackstone opened offices in Australia with a view to acquiring large businesses beyond the reach of the smaller newly formed local funds.
Australian Private Equity Landscape
Fundraising in Australia has become global with Australian institutions seeking global exposure and Australian PE managers having to raise funds abroad in competition with fund managers across the globe. Consequently, only the best performing funds have raised new and larger funds in Australia, while only a small number of Australian fund managers from the early 2000s are still active.
A decade ago, the vast majority of PE deals in Australia were by Australian managers investing Australian institutional money. By 2019, between 60-70 % of PE investment in Australia came from offshore funds with many adopting the “fly in fly out” model investing from their home base or from regional APAC offices in Hong Kong or Singapore. This trend for increased investment by offshore PE in Australia is set to continue for a number of reasons including:
Higher levels of local competition and high prices in their home markets of US and Europe, some growth capital funds, and buyout funds, have abroad for investments;
Australia has a stable political environment, first rate governance and rule of law, a strong economy and a reputation for technology and innovation;
Australia has reduced competition from local funds due to consolidation and the relative weakness of the Australian dollar to the US dollar, it is easy to see why Australian deal values have been attractive to US investors.
Australian M&A Market
In Australia, M&A activity for the first half was subdued. Announced deals in Australia and New Zealand dropped 51% in value terms with the largest public company transactions being:
Iberdrola’s bid for Infigen at $1.5 billion (topping an earlier bid by UAC Energy, a joint venture between AC Energy and UPC Renewables);
Uniti Group’s proposed merger with OptiComm, valued at $540m;
Shandong Gold Mining’s bid for Cardinal Resources, valued at $335m.
All other deals announced in that period had a lower value, though this excludes a number of significant transactions including:
Bain Capital’s acquisition of Virgin Australia (in administration), agreed in June, but not strictly a public company transaction, given the nature of the transaction;
TPG’s $15 billion merger with Vodafone which completed in July, as that was announced in 2018;
BGH’s $542m recommended bid for Village Roadshow as it was agreed in August.
“CONTENTS
> Introduction
> Australian PE History
> Australian Private Equity Landscape
> Australian M&A Market
> Recent Market Developments - Revised Foreign Investment Rules
> Impact of COVID on Asset Valuations - Digital and Technology assets
> Variable Consideration as part of Asset Valuation
> Renegotiation and Reneging on Agreed Transactions
Key insights from the 2H of 2020
> Deal makers widen assessment of value creation to non-traditional sources
> The impact of a hot IPO market on M&A
> Looking ahead: Resilience and innovation”
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