M+A takes off
Gilbert + Tobin has released its 2022 Takeovers + Schemes Review, which examines 2021’s public M+A transactions valued over $50 million involving ASX-listed companies. The Review provides our perspective on the trends for Australian M+A in 2021 and what that might mean for you in 2022.
Set out below are the Key Highlights from our Review.
Largest public M+A year in Australian history
2021 was a landmark year for M+A in Australia.
Who would have thought that could be the case with COVID-19 disruptions, closed borders, supply chain challenges, climate change concerns and a spotlight on ESG (We did actually!! See our 2021 Takeovers and Schemes Review.).
Nevertheless, public M+A activity skyrocketed in value and volume in 2021.
62 deals valued at over $50 million were announced in 2021, up from 42 in 2020 and 41 in 2019. Aggregate transaction value almost quadrupled from $32.8 billion in 2020 to $130.5 billion in 2021. Unbelievable really.
This significant increase was driven by six transactions exceeding $5 billion, being the $39 billion acquisition of Afterpay by Block, Inc (formerly known as Square, Inc), the $23.6 billion acquisition of Sydney Airport by a consortium led by IFM and Global Infrastructure Partners, the Brookfield-led $10.2 billion acquisition of AusNet Services, Seven Group’s $9 billion takeover of Boral, the $8.1 billion merger between Santos and Oil Search, and the $5.1 billion KKR-led consortium’s acquisition of Spark Infrastructure.
The second half of 2021 was particularly prolific, with 63% of all deals (totalling 78% of aggregate transaction value) occurring in this six-month period.
In our view, the strong M+A conditions in Australia were driven by low interest rates, strong capital markets, the continuing growth of superannuation funds, increased vaccination rates and a sense that the COVID-19 threat was diminishing, which all supported a growth in confidence. At the same time technology trends, digitisation, decarbonisation, energy transition and other ESG matters created a need for portfolio management and acquisitions or divestments.
Many of these ingredients continue on into 2022 and we expect, at least, a strong first half of M+A. However, how long that continues may well depend on interest rates and inflation, which seem on the move up, as well as capital markets, which having risen strongly in 2021 and may feel too high for some. The Ukraine war and geo-political tensions may also dampen activity.
Ultimately while 2022 may fall short of 2021’s heights, we expect a year that will be stronger than most before 2021.
Private equity and private capital investment going from strength to strength
After a softer 2020 in terms of overall deal value, 2021 saw private equity and private capital investment return to prominence in public M+A. Despite being involved in fewer public M+A deals in 2021 compared with 2020 (seven down from 10), private equity / private capital involvement in public M+A hit $44.8 billion and accounted for 35% of deals by value – almost double the 18% seen in 2020, although still less than the 44% recorded in 2019.
Private equity was a key player in many of the largest deals, with three out of the six transactions (Sydney Airport, AusNet Services and Spark Infrastructure) exceeding $5 billion involving private equity / private capital bidders. Notably these transactions all involved prized infrastructure assets.
We expect private equity / private capital investment to be strong in 2022. All the major global and Australian based firms have, or are, raising new funds supported by increased superannuation / pension funding. These funds will need to be deployed. Indeed, should stock markets be rocky at times this year, further opportunities for private equity may arise.
Supercharged superannuation moves to the M+A front line
Following on from the earlier general comment on private equity activity, 2021 also highlighted the increasing direct involvement of superannuation funds in public M+A in 2021.
Perhaps most prominent was Aware Super playing a role in the successful $3.4 billion acquisition of Vocus Group, Future Fund and QIC teaming with AGL and Mercury NZ to takeover Tilt Renewables for $2.8 billion, Sunsuper participating in the $10.2 billion AusNet Services transaction, and AustralianSuper and QSuper forming part of the bidding consortium for Sydney Airport (with UniSuper also critical in that the entire deal was conditional on UniSuper, as the largest shareholder, seeking to retain its investment). The combined market value of these four transactions was $40 billion plus.
Of course, a key aspect of these deals was superannuation / pension funds, with large amounts of capital to deploy, seeking to acquire companies with long term stable cash flows.
Australian superannuation assets now total more than $3.5 trillion significantly exceeding the total market capitalisation of all companies on the ASX. The $3.5 trillion will only increase given Australia’s compulsory superannuation system. It seems clear then we will see even more involvement of superannuation in Australian public M+A in 2022 and beyond.
Infrastructure, energy + resources remain prolific while value of deals in retail + consumer soars
There was significant interest in infrastructure assets (which cross a number of sectors, including transportation + logistics and utilities) in 2021. This included transactions involving Sydney Airport, AusNet Services, Spark Infrastructure, BINGO Industries and Tilt Renewables and with a combined aggregate deal value of $44 billion (or 34% of total public M+A spend).
Interest in energy + resources also continued strongly from 2020, a year which saw the sector lead the market in terms of both deal activity and aggregate transaction value. The largest number of transactions occurred in the energy + resources sector in 2021 (14 deals) with Santos’ $8.1 billion merger with Oil Search being the largest.
Despite the keen bidder interest, energy + resources was no longer the dominant sector in terms of aggregate transaction value. Retail + consumer services accounted for 31% of total deal value bolstered by the market-leading $39 billion Afterpay / Block, Inc transaction. Transportation + logistics came in second by aggregate transaction value (18%), with utilities coming in third (16%).
Schemes become the norm once again
In 2020, the divide between schemes of arrangement and takeovers was almost 50:50. 2021 saw schemes return to prominence for deals over $50 million, with 79% of transactions using the structure.
This result is more consistent with the norm prior to 2020. It indicates that last year was likely an outlier driven by the rapid decline in equity markets with the onset of COVID-19 in the first half of 2020. This led to a larger than usual gap in the bid-ask spread of buyers and sellers and made takeover bids a more viable structure in many cases. Indeed, hostile transactions reduced from 26% of all transactions in 2020 to 13% in 2021. For transactions valued over $1 billion, schemes also remained the preferred structure (94%).
All scrip consideration rises in prominence
The reduced use of cash consideration continued in 2021. All-cash was used in 63% of deals in 2021, consistent with the 2020 level (62%).
Scrip deals rose to prominence this year, with 31% of all transactions relying solely on scrip consideration, up from 21% in 2020. In our view, this reflects the rise in the number of mergers between equals and industry-based mergers (notably the $8.1 billion merger between Oil Search and Santos), inflated stock prices, potentially a desire amongst some investors to retain exposure to a target’s underlying assets post-acquisition and participate in synergy benefits but also the fact that larger deals maybe easier to fund by scrip rather than cash.
Only 6% of transactions involved the offer of a fixed combination of both cash and scrip with no cash alternative, down from 17% in 2020.
Foreign investment up in absolute value on back of Afterpay / Block, Inc deal but down on a relative basis
Deals involving foreign bidders accounted for $61.9 billion (a high in the 10 years we have been preparing this Review) or 47% of total transaction value of all public M+A deals. These numbers are led by American-based Block, Inc's $39 billion acquisition of Afterpay and the KKR-led consortium’s $5.1 billion acquisition of Spark Infrastructure. In this respect, foreign bidders remain key players in Australian M+A.
However, interestingly, on a relative basis, foreign interest in Australian ASX listed companies declined further in 2021 with only 32% of deals involving a foreign bidder. This continued the recent trend which saw foreign interest decrease from 63% in 2017 to 45% in 2020.
A variety of factors may have caused this reduction, including the difficulties associated with physical due diligence stemming from travel restrictions, political tension between Australia and China and more strict regulatory settings with the now annual round of changes to the Foreign Acquisitions and Takeovers Act 1975 (Cth). For the first time in many years, there were no Chinese bidders making an acquisition of an Australian public company.
However, more than anything, the fall in foreign acquisitions should be seen as a relative reduction. As discussed above, the rise in superannuation funding and funds has led to more Australian based capital being used for M+A.