ECONOMIC FACTORS have combined to create a global “perfect storm” and 2006 is set to be “one hell of a ride” for Australia’s transactional lawyers.
David Friedlander, M&A partner at Mallesons Stephen Jaques, said the mood had shifted from that of caution and expectation of a flat year to come last October and November, to one of wild optimism.
Towards the end of 2005, the Australian economy, the oil price, the fact that there had been significant and consistent M&A activity in recent years and T3 looming on the IPO horizon had most people forecasting a “flatter year” for 2006.
But activity in the global M&A and securities markets at the turn of December boded well for a strong year, Friedlander said. “For the first time in a long time we have got the US economy looking good, the European economy is looking OK, and India and China are looking very, very strong.”
Also, the oil price had abated slightly, increasing confidence. “And the simple fact that China found an extra $400 billion the other day hiding in its GDP — the mood in the last month has really changed,” he said.
Coming on the heels of “a huge year” in both IPOs and M&A, Bill Koeck, joint head of M&A at Blake Dawson Waldron, said the biggest problem in 2006 could be finding “enough good investments to make”. “There’s so much money washing around the system,” he said.
“The biggest issue at the moment is that our market is over-valued compared to the Morgan Stanley combined index, and the question is whether people are prepared to take the currency risk and invest offshore.”
As it stood, there was a lot of offshore investment occurring, and Australian investment managers who set up funds for offshore investment were doing “extremely well”, said Koeck. “I think people are really weighting their investment towards a higher overseas component.”
He also predicted that 2006 would see private equity funds combine to complete market takeovers. “That may happen where their constitution and other constraints limit the amount they can have in one investment.
“The other thing is that hedge funds are lowering their expectations as to what returns they require, because they are just not getting opportunities.” He said some of the hedge funds would likely become “more of a hybrid”.
Mark Rigotti, head of Freehills’ corporate practice, anticipated a lot of IPO activity in the $500 million to $1 billion category. “There are a lot of private equity people looking to exit their investments,” he said.
Potential floats such as Dyno Nobel, Snowy Hydro and Medibank Private would depend largely on the identity of their owner. “Where there is a financial owner, they will find a way to float because there is such a driven imperative to do it,” he said.
Government owned assets would be interesting to watch, he added.
Jon North, head of capital markets at Allens Arthur Robinson (AAR), said the firm had been working on a number of dual track deals. Given the current strength of the market, “a number of those could end up being floated”.
North predicted an early rush to the market, partly due to the prospect of T3 in the final quarter, with people preparing to get to market as soon as possible, “starting in late February, early March”.
Michael Ziegelaar, Freehills’ M&A partner, saw the same scenario for the M&A market. “The habitual acquirers are going to be acquiring more and more this year,” he said.
“People are ready to move fast and they want quick acquisitions if the price is right. So I might not know today of a deal that I will complete in a few weeks — it’s that quick.”
A lot of companies needed to maintain their M&A activity in order to “keep the market interested in them”. “They need to be seen to be growing revenue and earnings, because some are trading at quite significant multiples,” Ziegelaar said.
The “relatively” stable interest rate had worked to maintain strength in the equity markets as it made “yield plays and hybrids” more attractive to investors. “The market has become more and more sophisticated and people are looking at more sophisticated ways of structuring their securities offerings,” he said.
“We are also seeing more reverse inquiries where financial intermediaries are being asked by groups of wealthy investors to structure a financial product that suits their particular needs.”
More de-mergers are likely to occur in 2006, following the successful float of Goodman Fielder by Burns Philp last year. AGL is expected to be on the board as two separate companies by March, and the Coles-Myer transaction could be completed in the first quarter. “People are starting to look very hard at whether the market is rating their companies appropriately or whether they’d be better off organised separately,” BDW’s Koeck said.
For the year ahead, AAR’s North believed the resources sector would continue to see a lot of activity, and felt there was a possibility foreign resources companies in Asia would look to Australia to raise capital.
Sebastian Hempel, equity markets partner at Minter Ellison agreed that the energy and resources sector “had considerable strength” and would consider to be driven by commodities and “the China factor”.
However, Koeck said he didn’t think there was much left to happen in the sector, at least in terms of M&A. “Just about everything has been taken over,” he said, adding, however, that the gold and oil sectors held a lot of interest.
Healthcare was another area that was “pretty much done”. “The area that hasn’t been done is the private health funds,” Koeck said.
“There are about 40 or so private health funds, and I think they’re pretty inefficient. In a country this size, who needs 40 private health funds?” He also predicted activity amongst the credit unions.
“There are inefficiencies in that sector but they are hard to unlock because you can only do friendly bids.”
Freehills’ Rigotti anticipated a number of big hybrid or rights issues, where listed companies would go to shareholders to raise money for more acquisitions. Also, the vibrant equities market would likely see listed companies making acquisitions on cash offers rather than offering their own shares.
Property and the media were other sectors expected to yield a lot of activity in the coming year.
Minter Ellison’s Hempel said private equity had become a “major new facet” of the Australian M&A and capital markets scene, and the very big funds were actively involved in all aspects of M&A. “Any company that wants to sell something at the moment doesn’t just look at what trade buyers might buy, you look at what private equity interest there might be in buying it as well,” he said.
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