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Takeover activity heats up as offshore buyers target Australia
Merger and acquisition (M&A) activity in Australia is increasing, with offshore buyers targeting companies with defensive earnings and those producing critical commodities needed for the transition to renewable energy. The lower Australian dollar is also making local companies cheaper, analysts said, supporting more takeover bids.
Mathew Hodge, Morningstar’s director of equities research for Australia and New Zealand, said takeover activity in the mining sector has been notable, driven in part by demand for companies mining the metals needed for decarbonization, such as copper and lithium. More bids for Australian gold miners could also arise following Newmont’s successful acquisition of Newcrest.
“We have seen a few acquisitions of late, particularly in the mining sector, namely OZ Minerals and… Newcrest,” Hodge said. “Currency could be a factor, but I suspect the outlook is of more importance – namely for copper and gold, in those cases.”
He contrasted these deals with Japanese beer company Kirin’s recent $1.88 billion bid to take over vitamin brand Blackmores, as well as private equity firm TPG Capital’s $2.2 billion bid for funeral services provider InvoCare. “With Blackmores and InvoCare, I see those as more special situations, businesses that have had some near-term challenges and someone opportunistically wants to come in and take advantage of those.”
Jun Bei Liu (pictured), portfolio manager with Tribeca Investment Partners, also expects M&A activity to pick up for listed property trusts, which are trading at especially attractive valuations. “There are many sectors that represent significant valuation discount compared to their unlisted peers,” she said, citing as an example listed property trusts, which are trading at about a 20 per cent discount to asset value.
“Private equity investors or corporate buyers are waiting for a bottoming in the office market and commercial property before pulling the trigger,” Liu noted. And if share prices remain suppressed, she said, other companies likely to be targeted in the next year include a2 Milk Company, Treasury Wine Estates and Ramsay Health Care. “These companies’ share prices have been impacted by short-term earnings disruptions and have very strong balance sheets.”
Hodge agreed the availability of well-valued stocks adds to the appeal of Australian companies. “We have nearly 40 per cent of our stocks rated 4- and 5-star [by Morningstar]. That’s nearly double the 10-year average.
“There are a lot of stocks where we think there is value,” he added. “It appears the market right now is still happy to pay up for robust defensive earnings.”
Lower Australian dollar helps
Stephen Miller, an adviser at GSFM, believes the lower Australian dollar could be helping to attract interest as it makes Australian companies cheaper for foreign buyers.
“All other things equal, a lower Australian dollar should prompt a little more interest in investment opportunities in Australian financial assets,” he said. “That could encompass a potential increase in M&A activity as foreign companies eye opportunities in Australia.”
Structural factors are also likely attracting interest, with political and economic stability making Australia “an attractive destination for foreign investors in what looks to be an increasingly dysfunctional global political environment”, Miller said. “A lower Australian dollar in this context should elicit increased interest in foreign direct investment but also portfolio equity flows.”
Resources companies still targets
Even more M&A activity is expected in the resources sector given the rising demand for lithium, copper, graphite and other metals needed for the transition to renewable energy. The value of mergers and acquisitions involving ASX-listed mining companies has surged to a record $US30.5 billion (A$46.2 billion) so far this year, according to Refinitiv data.
In 2022, there were 1,699 M&A deals completed in Australia, down from 2,118 in 2021, while publicly disclosed deal values reached US$78 billion ($120 billion), down from US$195 billion in 2021. Despite the slowdown, 2022 was still one of the strongest years ever for M&A activity, according to a PwC report (see chart).
Buyers who “take advantage of the slowing economy and use it as a chance to make strategic acquisitions at a reasonable price will see the highest returns,” the report said.
