Current global M&A levels
Global M&A had their strongest start ever in Q1 2018, totalling $1.2 trillion USD in value, a 67% year on year increase (CNBC, 2018). US tax reform, increased economic growth in Europe and record-low interest rates worldwide have together fuelled many companies’ dealmaking instincts. Riding on the wave of low inflation and volatility, the global “Goldilocks economy” is expected to improve with the OECD increasing its forecasted 2018 worldwide growth rate by 20 bps to 3.9%. Furthermore, these results build upon a successful 2017, where worldwide M&A activity exceeded $3 trillion USD for the fourth year in a row (Reuters, 2018).
Current Australian M&A levels
In conjunction with international trends, 2017 Australian M&A activity rose to its highest level since 2011, with this amount being $120 billion (Reuters, 2017). Although deal values were buoyed by the $32 billion acquisition of Westfield by Unibail-Rodamco, it was still not only the largest Australian deal of 2017, but also the largest ever completed deal in Australia. Furthermore, this strong level of M&A activity continued into 2018, where announced deal volumes hit $17 billion for Q1 2018, a 25% increase compared to the same period in 2017.
Key themes driving current Australian M&A activity
The rise of Amazon and the growth of online shopping has put immense pressure on traditional retailers, necessitating a wave of consolidation within the retail property market (Financial Times, 2017). The $32 billion acquisition of Westfield by Unibail-Rodamco will create a $95 billion global retail giant with shopping centres spanning major cities in 13 countries with a focus on flagship “trophy malls”. Westfield’s focus on flagship properties in wealthy cities like London, New York and Los Angeles, as well as its ability to mix high street shops with restaurants, cinemas and luxury brands, have effectively Amazon-proofed its portfolio (AFR, 2018). Following Westfield’s 2014 spin-off of its Australian and New Zealand assets to Scentre Group, Unibail-Rodamco has also sold some of its weaker European retail centres and begun reinvesting the proceeds in its development pipeline, larger malls that are better able to withstand e-commerce growth. Thus, given each firm’s current predicament, consolidation of these two retail giants makes strategic sense.
Elsewhere, the oil and gas sector in Australia has also been subject to persistent M&A activity with the mooted $13.5 billion takeover of Santos being the most notable deal in the pipeline. This flurry in activity and pursuance of future deals is driven by a rise in oil prices that has increased firm revenues and created positive market sentiment. With booming Australian LNG export levels (predicted to reach $35 billion in 2018 alone) and private equity sitting on a record $633 billion USD of “dry powder”, inflated valuations within this sector are here to stay (AFR, 2018).
The $13.5 billion offer for Santos by Harbour Energy, a US private equity firm, was also motivated by Santos’ investments in three LNG projects across Australia and Papua New Guinea. The bid of $6.50 per share is not Harbour Energy’s first bid, but their third, having previously had two bids rejected by Santos. Whilst this deal is far from done, if Santos does get acquired by Harbour Energy for $13.5 billion or more, that would make this the world’s biggest ever private equity deal in the oil and gas sector (AFR, 2018).
Future outlook on Australia M&A
Looking back at Australia’s 2017 M&A activity, we see that cross-country takeovers gained considerable momentum, accounting for nearly one third of the deal volume. This trend is expected to continue and seems to be peaking at the perfect time, with China seemingly regaining interest in Australian investments following their appreciation of the Yuan. Additionally, US private equity firms have already begun to take advantage of the low interest rate environment in Australia.
Another key trend seen in 2017 was shareholder activism. With BHP, Ardent Leisure and Myer targeted all by activist investors like Elliott Management, there has been growing pressure on management to perform. Historically, activism tends to result in takeover activities following periods of poor management performance. Thus, in 2018, it is expected that the “shareholder revolution” will continue strongly in 2018, further driving M&A activity (Herbert Smith Freehills, 2018).
Whilst M&A activity is on the track to reaching new heights, global political instability, increased market volatility and stricter regulation could still threaten to hinder the growth of M&A deal volumes in 2018. Given Australia’s strong reliance on the US, especially when it comes to stock market spillovers, Australia may be vulnerable. However, with such strong economic fundamentals and huge investments in technology on the way, it is very likely that Australian M&A activity will continue its stellar form.
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
