There were 31 M&A deals worth more than $100m in FY16, an increase from 24 last financial year, according to the MinterEllison Directions in Public Mergers & Acquisitions Report 2016.
The median deal value was $398m, with 37% of all transactions valued at over $1b, up from 30% in FY2015. In addition, 57% of deals achieved a premium above 30%.
Nonetheless, the report noted that the two halves of the year were contrasting.
“FY16 was a tale of two contrasting halves, with the majority of deals in our sample size (22 or 70%) announced in the first half of the year to 31 December 2015," said MinterEllisson’s Alberto Colla in a statement sent to Australasian Lawyer
The MinterEllison partner and public M&A expert said that a range of factors and not a single one caused the decline in deal from in the second half.
The global market correction, the uncertainty in the lead up to the federal election, the slowing growth of China, the persistent concerns over the health of the financial sector as well as the Brexit contributed to the down trend in the second half, the report said.
The report also noted that the major M&A deals of FY16 were evenly spread across industry sectors. Colla identified transport as a hotspot in the year, mainly because of the Asciano deal.
Colla also said that deals are becoming more sophisticated.
“Across all industry sectors, a common theme in FY16 and continuing into FY17 is the increasing complexity of the deal landscape. The new FIRB regime, the continuing close scrutiny of M&A activity by the ACCC and ASIC, together with tax considerations, have to be carefully navigated – often in a compressed timeframe, in response to fluid deal developments,” he said.
The report also revealed that the majority of deals in the year were “friendly,” with 68% of the target’s boards recommending the deal. It is to be noted, however, that 88% of all the deals in FY15 were “friendly.”
“Although friendly bids remain the preferred approach for bidders, FY16 saw a material increase in hostile bids – up from only 12% of our sample size in FY15 to 32% in FY16. This likely reflects an increasing propensity by bidders to pursue opportunistic bids for targets whose share prices have fallen steeply,” Colla said.
A number of factors are expected to fuel appetite for M&A in FY17, the report noted.
Colla said that low organic growth prospects for many companies combined with low interest rates for funding would encourage many companies to turn to M&A activity to deliver further growth.
Moreover, the depressed share price of companies may encourage opportunistic bidders to make tender offers to shareholders.
“We're seeing many target boards that perceive they're susceptible to takeover and shareholder activism taking the proactive step of getting an independent valuation model underway so that they have an objective, credible valuation benchmark from which they confidently dismiss any approach that is materially inadequate,” Colla noted.
"On the other hand, target boards need to be pragmatic in assessing offers that incorporate a reasonable control premium, having regard to company specific risks and industry headwinds. They can't be too quick to dismiss an offer on the basis of ‘opportunistic undervalue.’ It's often a difficult balancing act for target boards,” Colla said.
Deal barriers and active sectors
MinterEllison's report predicted FIRB is emerging as a significant deal execution risk in contrast to its lower risk profile in recent years, particularly in healthcare (where patient privacy is a paramount consideration), utilities and agribusiness.
Colla also noted the increasing role that local lobbyist firms are playing in securing FIRB approvals for foreign bidders in sensitive sectors.
The report said volatility and other market factors are unlikely to weigh down domestic M&A in the next financial year.
Colla predicted that healthcare, food & agribusiness and financial services will continue to be active sectors, attracting attention especially from foreign bidders.
“In the healthcare sector, Chinese bidders have been very active – for example, the acquisition by China's Luye Medical Group of Australia's third largest private hospital operator, Healthe Care, Jangho Group's acquisition of Vision Eye, Jangho's acquisition of a 16% interest in Primary Healthcare, and the acquisition of a majority stake in GenesisCare by China Resources Group and Macquarie Capital,” he added
In food & agribusiness, the report identified continued strong underlying demand for Australian beef from North Asia as does the continuing strategic rationale for food security.
Interest has extended into vitamins and dairy/milk products, where Australia's “clean and green” brand has been of particular interest to Chinese buyers, the law firm said.
MinterEllison predicted water rights becoming valuable assets for foreign bidders as well as diversification into other protein classes leveraging Australia's “clean and green” brand.
The Directions in Public M&A Report also identified financial services as an area of strong deal flow over the past 12 months, including the sale of GE's Australian commercial lending operation to Sankaty Advisors and the announcement of Nippon Life’s $2.4b acquisition of 80% of MLC Life from NAB.
“We think the banks will continue to deleverage and divest non-core assets, including further disposals in the life insurance sector,” said Colla.
“The fintech start up industry will also continue to evolve and we may even start to see some consolidation in the crowded marketplace lending space. Based on our current level of M&A engagements in the first three months of FY17 and our pipeline, we are very optimistic that FY17 will be another strong year for public M&A activity in the Australian market,” he added.
There was an increase in the number of major public M&A deals in fiscal year 2016 a trend which may be extended to next fiscal year, a new study revealed.