The outlook for Australia's corporate/M&A markets in 2016 is positive, with the increased deal volumes of 2015 likely to drive continued appetite for activity across most sectors in the next 12 months.
2015 was the strongest year since 2007 for global M&A, with US$4 trillion in deal value. In Australia, deal volumes have increased over the course of the year, with affordable and available debt, a lower dollar and a sluggish economy seeing Boards turn to M&A as the best way to increase shareholder returns.
MinterEllison has picked 10 key trends to look out for in 2016:
1. Strong global and local M&A markets
- Expect to see a robust middle market, continuation of the focus on particular sectors and continued strong inbound investment.
- Some friction will be created by changes to the Foreign Acquisitions and Takeovers Act and FIRB's approach in reviewing and enforcing stronger foreign investment guidelines, as well as a continued robust assessment of vertical and horizontal integration by the ACCC.
- While still more conservative than before the GFC, Boards will have more appetite for risk.
- Directors of targets will be more pragmatic as they become more realistic about price expectations – or else face the increasing likelihood of a hostile takeover down the track.
2. Not all industry sectors will be winners – some hot, some not
- Hot sectors for 2016 M&A will be agribusiness, health & aging, real estate, infrastructure, gaming/leisure/tourism, business services and, potentially, media.
- Energy & resources will also be in the spotlight, but for different reasons. With balance sheets under pressure across the sector, we can expect significant write downs of oil & gas assets in mid-year updates; restructuring and sale of distressed iron ore and coal assets; and increased interest in resources and mining services as we get closer to the bottom of the cycle.
3. Foreign bidders will continue to dominate M&A
- The China agribusiness investment wave (talked about for the last two years) is here and involves significant interest in beef, dairy and aquaculture.
- Foreign investor demand for infrastructure assets (including through Government asset sales) and for development opportunities in commercial, industrial and mixed use residential/commercial sites, is strong and will continue.
- More generally, the spotlight will be on whether foreign investors continue tentative moves beyond traditional cash offers to scrip.
4. Boards will need to be agile in the face of increased shareholder activism
- Disruption by competitors and investors with a short-term focus in bid situations is not going to go away.
- Boards will need to engage sensibly with bidders to avoid hostile outcomes.
5. Venture capital is back in vogue
- The venture capital industry will continue to receive a significant boost, driven by the introduction of Significant Investor Visas (SIVs), successful venture-backed IPOs (eg, Atlassian) and the continued rise of equity crowd funding, including changes to regulations to permit investments by retail investors.
- The Turnbull Government’s innovation agenda, particularly tax concessions for early investors, is expected to boost investments in start-ups.
6. Banking market will have ample liquidity, with Asian banks growing market share
- Asian banks are filling the void (and more) left by several European banks that exited after the GFC. They will continue to take market share. In the area of corporate lending, for example, Asian bank lending in Australia has now eclipsed that of European banks in 2008.
- More Chinese banks will open in Australia and their share of the market will continue to grow – they have good insight into certain sectors of the Australian economy, such as tourism, agriculture and healthcare, and inbound investment in these sectors will be fed by Chinese domestic demands.
7. As more Asian money pours into the Australian economy, government will face increasing pressure
- As Asian investment continues to surge, there will be increasing issues for government on inbound investment policy.
- Some of the complexity from the changes to the FIRB regime, including the strengthened relationship between FIRB and the ATO, will make it more difficult to obtain timely approvals and likely turn some investors away.
8. Expect more simple bonds and bond market activity
- Simple bonds will continue to slowly develop and are likely to be focused on specific areas, such as mid-cap industrials and non-bank financials. Real take-up of simple bonds will only happen when Treasury introduces regulatory reform to give simple bonds parity with equity raising rules – ie, short form prospectuses/cleansing notices.
- Continuing a trend started this year, major offshore corporations will look to place long term debt with Australian bond investors. Australia is a maturing market into which issuers can source their offshore funding needs.
9. Non-bank lenders as a sector will continue to grow
- The private corporate lending sector, which currently has about 5% of the market, is growing with new entrants and there will be further expansion in 2016.
- Highly sophisticated investor demand in the area of complex debt transactions will be a key driver of this sector.
10. Tax transparency may drive best tax practice
- Greater publicity and the expectation that everyone pay their 'fair share' will impact acquisition structures and inbound investment as the focus on tax issues continues in 2016.
- Transparent tax structures will become essential for companies – their social licence to operate will depend on this.
- The reform of the Managed Investment Trust regime, expected to be in place from 1 July 2016, will reduce complexity, increase certainty and minimise compliance costs for MITs and their investors – and this will drive activity especially in relation to property investment and Government asset sales.