Election uncertainty crimps IB deal flow
(17 January 2019 - Australia) An Australian federal election in May has reduced foreign corporate merger and acquisition (M&A) transaction demand as the political cycle continues its unpredictable progress.
Acuris stated that the total value of deal making activity in Australia in 2018 reached US$88.5 billion across 583 public market transactions. The volume of deals was down by 35 transactions compared to 2017, but the value was higher from $US86.6 billion. M&A activity, especially from private equity (PE) firms, is expected to remain bullish but the federal election is being factored into the considerations of companies looking at Australia to carry out a deal. Acuris found that the value of private equity buyouts in 2018 was the highest in its record-keeping history and there were no indications that interest was about to fall. 72 buyouts were executed in 2018 worth a total of US$19.8bn, up 85 percent from 2017, when there were 67 deals worth US$10.7 billion.
Nick Sims, Goldman Sachs’s head of M&A, said the size of the Australian market could stop some larger local companies from continuing to grow, which would mean they would need to start pursuing international acquisitions. Credit Suisse’s investment banking co-head, Mark Carlisle, said corporate balance sheets in Australia were in strong shape, which would help fund deal making activity.
UBS’s co-head of investment banking, Aidan Allen, said boards were looking more closely at the performance of Australia’s domestic economy. He said PE activity and Australian companies buying assets overseas would provide most of the deal making activity this year. “The one concern that sits out over the horizon is the prospect of local economic deterioration impacting confidence and activity due to increased political uncertainty at home and abroad and credit rationing particularly in the housing market.”
BAML Investment Banking Head Joe Fayyad said local and international PE buyers were keen on picking up Australian assets, but the election was adding an element of risk. “The traditional private equity and infrastructure funds continue to have significant dry powder at their disposal. We believe both strategic consolidation and public-to-private transaction activity will continue to be elevated in 2019. But we also expect foreign inbound investment to lag given the policy uncertainty we typically experience in a given election year, which means domestic buyers should be relatively well-positioned to capitalise on their growth ambitions this year.”
JPMorgan Australia CEO Paul Uren agreed that a growing number of local companies would start to look offshore for deals, especially as regulators were against acquisitions in the domestic market. “The outlook for M&A will be affected by sentiment in capital markets, which experienced significant volatility in the latter parts of 2018. It is early days for 2019 but initial indications are positive. There are many sectors of the Australian economy, which is already highly consolidated, and in many sectors regulatory intervention may preclude domestic M&A. That means that many Australian corporates are increasingly focused offshore.”
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