Earnings season set to test confidence and deal flow

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Monday 4 February 2013 — The next month of earnings reporting will be a key test of renewed market confidence and largely determine the level of deal activity for 2013, according to Graeme Browning, EY’s Oceania Transactions Advisory Leader.

“We’ve had a relatively stable economy for a while now and a strengthening equities market for the better part of the last six months. Confidence is crucial to get deals off the ground, and that’s what was missing for most of 2012,” he says.

Browning says as well as the stronger equity markets, a stronger outlook for sustained Chinese economic growth, relative stability in the Eurozone, and some resolution of the US fiscal cliff have seen a renewed confidence in the outlook for 2013 which should see an uptick in divestments.

EY’s recent Global corporate divestment study, suggests more corporates are preparing to sell, with 36% of Australasian respondents saying they intend to do a sale in the next 12 months, and 51% in the next two years.

“That is a significant change in sentiment. So while we’re just starting to see companies prepare to sell, I think we will see a lot more activity as an improving outlook flows through to confidence to invest and transact,” says Browning.

“We know most larger companies are cashed up and able to transact. The last few years have been more about buyers and sellers not being sure that now was the right time. Buyers want to be confident about the global economic landscape, while sellers will now be more assured about the price they can expect for their assets.”

“While valuation multiples vary from business to business, we expect to see deals done in the 6-7x EBITDA range, with some businesses able to command multiples of 8-9x EBITDA and sometimes more.”

“There’s also a lot more talk about the IPO window opening. Sooner or later it will, and companies want to be ready when it does.” Browning says smart companies are realising that the ‘new world’ lower growth environment means they cannot sit on the sidelines indefinitely if they want to achieve sustainable longer term growth.

EY’s divestment study found the top three reasons for Australasian companies selling an asset were: ability to secure an attractive price in the current market; need to release cash into the business, and; to focus on core business.

The survey also found:

  • 88% of Australasian respondents intend to accelerate their divestment strategy over the next two years.
  • 50% of planned divestments by Australasian respondents expect deal size to be more than US$250 million, while 33% expect a deal size of US$50-$250m and 17% US$50m or less.
  • 61% of Australasian respondents said when divesting assets in the past they had left it too late and with hindsight wished they had completed the sale earlier.

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EY Australia
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