Your Capital Agenda:
ready to prosper in 2013?
Impact of increasing Asian private capital competing for deals
*Includes Korea ** Includes Hong Kong, Macau, Mongolia and Taiwan. Source: Thomson One×
Stronger equity markets, 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 – all encouraging signs for M&A activity.
Merger activity to resume
The first earnings reporting in 2013 will be a key test of renewed market confidence and will largely determine the level of deal activity for the next 12 months.
“We’ve had a relatively stable economy for a while now and 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” according to Graeme Browning,
EY’s Oceania Transactions Advisory Leader.
Signals for an uptick in deal activity this year include:
- ASX at a two year high
- Debt margins narrowing
- ‘Solid’ reporting seasons
- M&A activity rising in the US
While deal activity is anticipated to increase this year, it will be important for companies to consider the following trends in the transaction landscape:
Extended transaction timetables and increasing costs of doing deals
Following the Global Financial Crisis (GFC), management and boards have become increasingly conservative in their approach to deals. Boards are focusing on immediate Earnings Per Share (EPS) accretive transactions, and are more cautious to rely on the realisation of synergies. Consequently, companies are taking longer to assess deals before seeking board approval. This has a number of flow-on effects:
- The vendor is subject to increased risk of economic fluctuations. The longer the lead time for a transaction, the greater risk that both the company and/or stock exchange will have a negative impact on valuation, and in turn, the greater likelihood of incompletion.
- Additional management time from both the buyer and seller.
- Increased due-diligence and evaluation costs as a result of the delay in timetables - buyers generally request current analysis.
- Companies seek to reduce acquisition costs by undertaking more work themselves or limiting the scope of advisors.
Increased scrutiny from the ACCC
The Australian Competition and Consumer Commission (ACCC) has indicated they will be more active in assessing transactions this year.
In an interview outlining the priorities for the ACCC in 2013 - chairman Rod Sims vowed to target larger companies under the Australian Consumer Law and to bring more cases to court even where the outcome is uncertain. Sims commented -
"(there is) always inevitable concern over how long our assessments of mergers take" - but it was “up to businesses to give the regulator more information earlier in the review process1."
Mr Sims also vowed the ACCC would ramp up its campaign this year in consumer-related areas such as pressure selling, consumer guarantees and unfair contract terms in mass market services - and focus more on competition matters2.
The introduction of the ASX BookBuild tool and how it will affect capital raising
The ASX describes the tool as a ‘new capital raising service that will allow ASX listed companies to price and allocate new securities through an on-market, automated BookBuild mechanism3’. Set to be released in April 2013, it will be crucial for ASX-listed companies to understand the advantages of using the ASX BookBuild tool as an alternative to traditional off market methods. ASX Deputy Chief Executive Peter Hiom commented,
"ASX BookBuild would be of particular benefit to small to mid-cap companies that are looking to raise capital from the broadest set of investors possible to meet their needs for growth4".
Companies looking to raise capital in the next six months should monitor the development of the tool and assess its merit accordingly. It will be interesting to see how the market reacts, especially in the early stages of its release.
Growing appetite for divestments
The EY Global Corporate Divestment Study suggests there are an increasing number of companies preparing to sell assets, with 36% of Australasian respondents saying they intend to transact in the next 12 months, and 51% in the next two years. According to Graeme Browning,
“this 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.”
“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.
Leading companies are realising the ‘new world’ of lower growth environment means they cannot sit on the sidelines indefinitely if they want to achieve sustainable longer term growth. The study shows the top three reasons for divestment in Australasia are around having 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.
Impact of increasing Asian private capital competing for deals
During 2012, the investment flow for Oceania was predominantly inbound, with total inbound investments at US$41.6 billion, and total outbound investments US$7.6 billion. The largest investors in the Oceania region in 2012 were North America, Greater China and South East Asia, contributing 76% of inbound deals.
There has been a consistent trend of Asian buyers and investors seeking Australasian assets, and this interest has moved from resource assets to wider business segments. The relatively high exchange rate has not deterred offshore investors, and there is now a more fluid and integrated Asian-Pacific deal flow.
As a result companies in Australasia will experience increased competition from Asian buyers and investors this year. Technology and Agriculture will be key targets, as well as brands with international distribution potential and an existing manufacturing capability; and businesses with a niche position and strong market share.
It’s likely that there will also be an increased number of Asian investors taking minority stakes in growth businesses, and similarly, Australasian private companies will also be seeking access to Asian funds for business growth.
Longer term patient capital is more prevalent in Asia, and despite the media focus on mainland Chinese investors, the other Association of South East Asian (ASEAN) nations of Indonesia, Singapore, Malaysia and Thailand are sources of potential finance or acquirers. An increasing trend of inward capital flow from these nations will mean companies will now face increasing competition on transactions. Further, as private equity continues to resurface and become active it has created additional competition for companies seeking acquisitions.
If you haven’t already done so, now is the time to ensure you capital agenda is ready to prosper in 2013. Companies looking to divest non core or underperforming assets should start dialogue with potential buyers early, as a cautious approach to transactions means that a longer lead time is needed to conduct due diligence.
Buyers must thoroughly prepare for the impact of extended timetables, potential ACCC involvement, and consider cashed-up competitors similarly looking to make a move this year.
Questions to ask yourself:
- Are you considering strategic divestments in 2013? If not, should you be looking to sharpen your focus and release valuable capital back into the business?
- If looking to divest, have you considered the impact of increased transaction timetables and subsequent flow-on effects and costs in your next transaction?
- Have you considered the impact of increased ACCC scrutiny and do you know how this could affect your transaction strategy?
- Have you assessed the ASX BookBuild tool and its merit for use in future capital raising initiatives in 2013?
- As Asian buyers turn their attention more broadly beyond resources and property-based assets, what will be the impact on your transactions? Companies looking to divest should refine value propositions for these buyers, and those seeking growth opportunities should be prepared for increased competition.
1‘No let-up in ACCC merger scrutiny’, Annabel Hepworth, Damon Kitney, The Australian, 4 December 2012
2‘No let-up in ACCC merger scrutiny’, Annabel Hepworth, Damon Kitney, The Australian, 4 December 2012
3‘More about ASX BookBuild’, Australian Securities Exchange (ASX) website - http://www.asx.com.au/professionals/about-asx-bookbuild.htm
4‘ASX Eyes World's First Book-Building Tool For IPOs, Capital Raising’, Caroline Henshaw, The Wall Street Journal - http://www.onmarketbookbuilds.com/uploads/contentFiles/files/20120921%20-%20WSJ%20-ASX%20eyes%20world's%20first%20book-building%20tool%20for%20IPOs,%20capital%20raising.pdf