Australian Public M&A Report 2022

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ACTIVITY OVERVIEW

As we predicted in last year’s report, FY22 was a standout year for Australian public M&A. There were 65 deals announced in FY22 (compared to 57 in FY21 and 51 in FY20). Total deal value for FY22 reached record heights, at an aggregate $123.7bn (compared to $44.4bn in FY21 and $13.4bn in FY20). The significant increase in deal value when compared with previous years highlights the boom in ‘mega deals’ (being deals valued at over $1bn), with 13 mega deals announced this year, including the Afterpay and Square merger (initially valued at $39bn) and Sydney Aviation Alliance’s $23.6bn acquisition of Sydney Airport, the largest completed public M&A deal in Australia. Overall success rates in FY22 were slightly higher than in previous years (83%, up from 77% in FY21), possibly encouraged by the fact that 78% of all deals were friendly deals launched with target board support.

OVERALL SUCCESS RATE (FY17-FY21 average: 70.4%)

ANNOUNCED DEALS FY17-FY21 average: 57)

KEY FINDINGS

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The Australian market has never seen public M&A activity like it did at the start of FY22. A culmination of favourable market conditions, including strong equity market valuations, incredibly low interest rates and high market confidence, saw the market firing on all cylinders at the start of FY22. This included mega deals which have set new records in the Australian public M&A market, including Square’s merger with Afterpay which was initially valued at $39bn in August, followed by the $23bn merger between Santos and Oil Search less than a month later in September (largest completed deal in Australian public M&A history, in November valuing Oil Search at $7.9bn), topped by Sydney Aviation Alliance’s $23.6bn acquisition of Sydney Airport, the largest completed deal in Australian public M&A history in November. By the end of 2021, total deal value had already reached an aggregate of over $100bn, a new record in Australia.

RECORD DEAL VALUES

Consortium bids

Deal completion risk

Private equity bidders

Australian Bidder activity

Shareholder Influence

Scrip bids and market volatility

‘Hard’ exclusivity gets even harder

Demergers galore

In FY22, we saw a significant number of consortium bids for high value assets and businesses. 4 of the 10 largest deals in FY22 involved a consortium bid, including the Brookfield Consortium’s acquisition of AusNet Services, the KKR consortium’s acquisition of Spark Infrastructure, and Sydney Aviation Alliance’s acquisition of Sydney Airport. The continued use of consortium bids is not only a function of the number of mega deals this year, but also highlights the evolving nature of the relationship among private capital sponsors, who are increasingly friends not foes.

While the start of FY22 saw extremely favourable deal-making conditions, with equity market valuations at all-time highs and interest rates at all time lows, the second half of FY22 painted a different picture. The impacts of inflation, rising interest rates, geopolitical tensions (including the Russia and Ukraine conflict) and economic uncertainty and softened equity market valuations have been reflected in deal activity. Given this market volatility flowing from these events, deal completion risk has increased, with a number of announced transactions requiring re-cutting or failing to complete. One of the biggest contributors to this deal risk is a long time period between announcement and completion, usually driven by regulatory approval processes, which allows intervening events or stakeholders to affect completion. Deals signed up at the end of 2021 face a completely different deal environment in 2022. For example, Dye & Durham’s $2.5bn leveraged play for Link Group, which signed in December 2021, was recut in July 2022. For targets, now is the time to focus on how to ensure deal certainty.

Following significant changes to Australia’s foreign investment regime in FY21 with the introduction of a new ‘national security business’ regime, there have been continued lower levels of foreign bidder activity. Similar to FY21, there were significantly more Australian bidders than foreign bidders in FY22 by deal volume (74% of all deals). North American bidders featured most prominently by deal value (representing 54% of all deal value as at time of announcement), largely as a result of Block’s merger with Afterpay, and the KKR Consortium’s bid for Spark Infrastructure.

The private equity story this year was more complex than before. The proportion of private equity deals against total deals declined, but behind that data we saw a dramatic rise in multi-billion dollar indicative offers for 'take-privates' that have not yet eventuated to announced deals. This shows private equity is still highly active and building a pipeline of mega deals for the future. We are seeing increased competition to acquire public companies and a willingness for PE bidders to deploy novel takeover tactics to win the asset (for example simultaneous bid structures to overcome rival bidders/blockers). Deal certainty perceptions continue to be the biggest question with this bidder set, and there are instances of attempts by PE bidders to ‘re-trade’ deal terms post announcement of an approach which the market and targets tend to react negatively to despite knowing the usual caveats about the bidder having complete its due diligence.

Shareholder activism is on the rise again following a pandemic dip, and shareholder intervention appears to be getting more effective. This year we observed ESG-driven activism seemingly converging with activism focused on determining the outcome of transactions. The most notable examples are Grok Ventures involvement in the AGL demerger and Latitude’s proposed acquisition of Humm’s buy now pay later business, both of which involved shareholders convincing Boards to withdraw the transaction, or their fellow shareholders to vote against the transaction.

In FY22, 46% of public M&A deals involved a scrip component. The favourable market conditions at the start of FY22 were in contrast to the second half of the year, with the impacts of inflation, rising interest rates, geopolitical tensions and economic uncertainty and softened equity market valuations impacting market activity. There were 11 scrip deals announced in 2HFY22, and of the deals that have completed at the date of this report, only 50% were successful. We put a lot of this down to the market volatility that characterised the last six months of FY22. The unsuccessful scrip deals in 2HFY22 include Keybridge Capital’s takeover bid for WAM Active as well as the Zip/Sezzle and Health House/Zelira schemes.

Pre-deal exclusivity arrangements were a key point of focus for the Takeovers Panel in FY22. In both AusNet Services and Virtus Health, the Takeovers Panel declared the pre-deal exclusivity arrangements granted by the target to be unacceptable. For bidders and targets the challenge is to strike the right balance at the critical early stages between giving bidders the confidence to dedicate the substantial time, deal team focus and cost required to take a non-binding proposal to a binding proposal, with the target’s need to retain the flexibility necessary to meet its directors’ duties and preserve an efficient, competitive and informed market for the acquisition of control. A key philosophical question has emerged: should boards be left to determine how they negotiate the best outcomes for shareholders (which may include trading exclusivity for deal certainty or better terms) versus maximising the prospects of competition. We moved closer to finding an equilibrium in this tension, but suspect there is a little bit further to go for the market to have certainty on what that ultimately is.

The separation of businesses within a group into separately listed public companies have spiked dramatically. Notable demergers included Woolworths’ demerger of its drinks and hospitality business, Endeavour Group, Tabcorp’s demerger of its lotteries and Keno business and AGL’s attempt to demerge its energy operations. In no other year have we seen the number of large demergers as we did in FY22. We are finding that companies seeking to divest a business prefer the greater execution and timetable certainty of demergers over a sale to a third party. FY22 also saw the emergence of the novel structure we are calling the ‘spin-merge’. We acted on both of the BHP/Woodside and Humm/Latitude transactions that involved sale of a division to a listed company in exchange for scrip. This new structure gives companies another string to their bow when looking at divestments.

Looking forward

As market participants adjust to the increasing market volatility and tightening interest rate and debt environments, we predict that FY23 will again be a strong year for public M&A activity. The recent slowdown in activity towards the end of FY22 and start of FY23 will be short-lived as bidders continue to look to deploy capital and as the contest to secure ‘prized’ high value assets (including one-of-a-kind infrastructure assets) heats up. With the increasing cost of debt finance, we have been seeing more work being done at the front end on mapping out possible downside scenarios and more focus on due diligence in relation to refinancing obligations and expect this to continue.

Competition

The timing of conditions to maximise deal certainty

Levels of competition in FY22 remained high, although lessened in number compared to FY21 levels. There were 10 targets being subject to a competitive process (including non-binding indicative offers), including AusNet Services and Uniti Group. Competition for the larger assets was fierce, as evidenced by the Takeovers Panel proceedings in relation to AusNet Services and Virtus Health.

Targets have become increasingly focused on how to fit the scheme process around conditions precedent (especially regulatory approvals). Crown/Blackstone was an example of this. We acted for Crown, who decided to take the less common route of holding the shareholder vote before key regulatory conditions had been satisfied to reduce the time to completion and secure the deal.

83%

worth of transactions

$123 bn

record breaking