What a difference six months makes! In our report earlier this year, dealmakers were riding high from the record number of deals in 2021. Since then, we have seen deal values drop significantly across the board – almost 20% in some sectors.

As we anticipated, stronger headwinds, interest rate and inflation rises, supply chain challenges and deepening geopolitical tensions have impacted not only the number of deals getting done but the structuring of deals.

Clayton Utz has specialist teams around Australia that can advise on every stage of your deal. In addition, our deep knowledge of sectors that range from agribusiness and food to real estate to energy and resources to healthcare has provided us with an unique perspective to look at how deals are being done today and how the M&A market will evolve in 2023.

The Corporate and M&A team are pleased to have collaborated with our Partners across the firm in Tax, Insurance, Competition and Banking and Finance to produce our final report for the year which looks at trends and developments that impact deal makers and senior legal leaders across Australia.

In addition to insights that our Tax, Insurance, Competition and Banking and Finance specialists have published in relation to the structuring of deals, we also provide reflections and insights into trends that will materially shape how deals are being done, including:

  • what trends have been observed in deals in the last 12 months – taking into consideration factors such as the volume of friendly vs unsolicited deals, sources of funding, consideration values and premiums as well involvement from PE Funds;
  • which economic and regulatory trends are shaping deals in Australia; and
  • what we can expect in 2023 in relation to the structure of deals,

While we do not intend to predict the future, our M&A reports are meant to be food for thought to promote in-depth discussions amongst dealmakers, senior legal leaders, and other subject matter experts – and we are happy to be part of that debate.

Who are the players?

Since our last report on M&A activity, we are noticing a continuing trend of uncertain conditions such as rising inflation, interest rates and oil prices, geopolitical tensions, ongoing COVID-19 impact (though improving), and supply chain disruptions.

With the rapidly changing environment and novel economic scenarios, it is not surprising that the number of M&A deals for the first half of 2022 compared to the second half of 2021 is decreasing. Whilst it is hard to predict whether the current conditions are short, medium or long terms, the market sentiment still seems to be optimistic! Perhaps a reset to consider how valuations may be effected by economic headwinds (whether short- or long-term)

It may not be an equal playing field for everyone, but there are opportunities to be grabbed. Potential economic challenges will create opportunities for acquisitions for companies with a strong balance sheet and cash position as the market becomes less competitive to acquire targets at more reasonable valuations.

Although decreasing from historic high levels the deal flow has not dried up, and the sentiment is not one of doom but of confidence. TMT and Energy are top contenders regarding the availability of potential deals for Australia. A snapshot of the trends for the first half of 2022 reflects such sentiments with:

  • The acquisition of Ramsay Health has put health as a leading sector in terms of value (AUD 28 bn) with an initial all-cash bid, eventually withdrawn and re-engineered as a cash and scrip offer in August 2022. The outlook for this sector is that it will continue to offer healthy opportunities due to the increasing demand for aged care services due to Australia’s ageing population.
  • TMT (Technology, media and entertainment and telecommunications) deals in Australia made up around one-third of the deals, and the sector is expected to continue to funnel in deals in the wake of the digital transformation of organisations.
  • Decarbonisation and energy transition driven by increasing consumer activism, interest in the renewables (green energy) sector is just starting. ESG is now considered a dominant motivator in deals and can make or break deals (e.g., deals being abandoned due to ESG concerns).
  • In a post-pandemic era, deals will continue to flow in the leisure and travel sector due to the reopening of travel and tourism.
  • Despite pressures on the mining sector by ESG activism, the prospect for Australian mining is positive, with rising oil prices creating opportunities for alternate sources such as critical minerals and nuclear power, thus increasing demand for uranium. And new legislation from the US (US Inflation Reduction Act) requiring the sourcing of critical minerals from countries such as Australia, which has a free trade agreement with the US, could increase demand for those minerals.
  • Globally, the IMF, in its April 2022 forecast, said it expects Asia’s economy to expand 4.9% this year, and the potential for deals in China and Asia creates confidence for M&A transactions. A less competitive market should provide many targets with more opportunistic valuations.

The bidders

This year has been strong participation from foreign investors, which is expected to continue. The trend is driven by Australia’s strong fundamentals, economic growth, and political stability. On the other hand, PE participation dropped to its lowest in recent years (excluding KKR’s offer for Ramsay Health). It is expected that PE buyers will continue to watch the volatile market conditions unfold before making decisions. PE (and now increasingly SPACs) have cash to deploy and will be watching revaluations closely. The ability for foreign investors to return to Australian shores to undertake proper due diligence will ensure they remain a competitive force in the Australian M&A market.

The future

Going into 2023, watching the macroeconomic factors play out is only part of the picture. Advisers, boards and management, in their assessment of potential deals, should pay close attention to the following factors:

  • impact on deal values, as the economic fallout through inflationary pressure and continued supply chain disruption makes its way through global markets;
  • availability of other forms of capital due to the increasing cost of debt;
  • look at deals through an ESG lens; pressure from consumer and shareholders are redefining deals. The strong focus on ESG continues;
  • increasing regulatory scrutiny, given the challenging market conditions – FIRB, ACCC remain active and inquisitory;
  • M&A is seen as a gateway to accelerate changes – whether ESG / carbon neutralisation changes are required – or digital transformation in a business; and
  • growing possibility of distressed M&A (as government COVID protections are wound back)

Deal structures

In the face of unpredictable market conditions and higher interest rates, debt will be less attractive, creating an increasing acceptance for scrip instead of cash consideration? Consequentially, premiums may become more uncertain and subject to market conditions, eg. movement of commodity prices, decreasing asset valuations.

Though we expect friendly structures such as scheme of arrangements to remain popular. Schemes will remain attractive due to their flexibility if the terms of a deal require a change in the face of growing uncertain market conditions and the certainty that Schemes offer to deal outcomes and timetables. Nonetheless, there may be a rise in opportunistic and less friendly deals as balance sheets weaken, and opinions vary in valuing assets in volatile market conditions.

Agribusiness and food

Question 1: Breakdown of deals in the last 12 months – what trends have been observed

  • M&A activity returned to normal historical levels in 2022. The momentum from record M&A activity in 2021 carried into 2022 but is slowing.
  • Cash remains king in Agribusiness and Food M&A deals, whether a domestic or foreign acquirer.
  • IPOs were at all-time lows in the industry in 2022. To date, there have been only 3 IPOs for 2022 – My Foodie Box, Catalano Seafood and RLF Agtech.
  • The first Australian Agribusiness Index, the S&P/ASX Agribusiness Index was introduced in mid-2022. This is likely to assist the connection between agricultural companies and the investment community. This development may lead to new agribusiness ETFs, allowing for investment in agribusiness companies through a single "basket" transaction.
  • The 2021 trend of increased participation by financial investors (private equity and family office investors) in M&A deals continues in 2022-23 – 22 of 75 transactions announced in 2021 (29%) involved financial investors. This compares with 20% in 2020.
  • The 2021 trend of the majority of M&A deals being asset sales continues.
  • The median EV/EBITDA multiple (transaction multiple) for 2021 decreased to 9.3x from the historical average of 10.0x, with packaged foods and meats having the largest deal volume (64%) and the largest range of multiples due to variety and innovation. [Source: Grant Thornton report – Bite Size Dealtracker, Agribusiness Food & Beverage December 2021]
  • Some segments that are showing growth and increased investor interest include:
    • craft beer and cider;
    • pre-packaged, ready-made meals, as consumption of fresh vegetables, tender meats, healthy sides and a variety of sauces from a range of cuisines in a pre-packed and convenient serve grows;
    • plant-based meat and food products;
    • innovative agricultural products; and
    • carbon capture product.

Question 2: Which economic and regulatory trends are shaping deals in Australia?

M&A in the industry slowed during 2022 as a result of a decrease in investor confidence – due mainly to soaring inflation, increased input prices, continued labour shortages, interest rate increases and additional costs to comply with COVID-19 regulations including cleaning costs and running dual teams. The interest rate rises are expected to continue to have a negative effect on consumer demand. These factors will cause difficulties for deal-making in the short term.

A target company’s environmental, social and governance (ESG) credentials are increasingly important for M&A transactions. Broad ESG themes relevant for companies in this sector include climate-related risks, environmental sustainability, sustainability of operations (including a review of weather and seasonality dependency), supply chain disruptions and risks, ethical sourcing of input goods, animal welfare matters, and biosecurity measures.

ESG has also impacted some recent M&A transactions – eg. 2021 acquisition of Huon Aquaculture by Brazil’s JBS where Tattarang acquired 18.5% of Huon, and sought from JBS a "commitment to animal welfare and environmental sustainability". Ultimately, JBS made a successful off-market takeover bid for Huon. This was followed by another major transaction in the sector, being the $1.1bn acquisition of Tassal Group by Canada’s Cooke Inc, which occurred this month.

Some other economic trends include:

  • exceptionally high grain prices are forecast for 2022-23 due to successive poor seasons for major overseas producers and the war in Ukraine,
  • livestock prices are expected to ease from all-time high prices, while livestock production grows after successive good seasons.
  • food prices globally are now at their highest levels in a decade (78% above the average price between 2015 and 2019), and are not expected to ease during 2022-23, and
  • higher energy prices are leading to higher fertilizer prices. [Source: ABARES]

With Australia to reduce overall carbon emissions by 43% by 2030 (from 2005 levels) leading to net zero emissions by 2050, this will drive change, innovation and technological advances in the industry. Increased innovation and technological advancements continue to create opportunities and attract interest from domestic and foreign investors.

The agriculture sector has been pinpointed as a priority for the ACCC. ACCC regulation will continue in 2022 and 2023 in selected sub-sectors.

Water regulation and policy (such as the Murray Darling River Plan) will continue to shape matters within the sector.

Question 3: What can we expect in 2023 in relation to the structure of deals in the agribusiness and food sector?

As there are relatively few listed Agribusiness and Food companies in Australia, private deals will likely continue to dominate in 2022 and 2023 with 75% or more expected to be private deals relating to small to mid-sized businesses (less than $100m). Any larger private deals which do occur may be prompted by overseas investors or combined acquisitions, such as Pacific Alliance Group’s $550 million acquisition of Patties Foods and Vesco Foods announced in September 2022 (which, at the time of writing, is subject to clearance by FIRB, its NZ equivalent the Overseas Investment Office and the ACCC).

We expect to continue to see the aggregation of assets in particular segments of the agribusiness and food sectors by those seeking to compete in international markets or, particularly in the food sector, seeking to grow to capture market penetration or share, leading to either an IPO or trade sale. Some industry segments that are showing growth and acquisition interest are listed above.

Question 4: Questions you need to consider asking your legal adviser?

Acquirers should assess the ESG practices of targets. How does the Board manage ESG-related risks? How is ESG-related risk identified and monitored through supply chains? What ESG-related obligations are imposed on the target by third parties? What are the target’s WH&S and governance practices? Does the target comply with ESG-related reporting? Does the target have any ESG training for employees? What alignment is there between the target’s and the acquirer’s ESG practices?

Real estate

Question 1: Breakdown of deals in the last 12 months – what trends have been observed

  • Friendly vs unsolicited deals: In order to achieve the best price, we have not recently seen sellers willing to sell their interest in a commercial property on an unsolicited basis and instead would prefer to conduct a competitive auction process.
  • Consideration: Pricing in real estate M&A deals was buoyant for the last 12 months, particularly industrial property deals which have seen record low yields. However, the current rising cost of debt is expected to put a brake on decreasing yields.
  • Source of funding: For fund managers, the main source of funding for the last 12 months continues to be a mix of investor capital and debt. We have recently seen increasing interest by investors to borrow from non-bank lenders/debt funds as the major Australian banks continue to reweigh their exposure to commercial real estate debt. However, we anticipate access to debt funding will become more challenging with debt costs rising, reduced credit ratings and availability of debt financing. Capital management must be carefully considered, including ensuring that there is an adequate spread of maturities of borrowing facilities and an adequate diversification of funding sources so that refinancing risk is not concentrated in certain time periods and lenders.
  • PE involvement: According to Refinitiv, the value of PE-backed mergers and acquisitions targeting Australian companies surged to a record $40.1 billion in the first five months of 2022. While real estate markets will face geopolitical and macroeconomic headwinds in the short-term, sovereign wealth funds and public pension funds will continue to tap private equity firms and fund managers to deploy billions of dollars of capital to take advantage of any opportunities which emerge as a result of any irrational fear arising out of the growing volatility and weakening investor sentiment in Australia. The weak Australian dollar will continue to attract investment from these funds.

Question 2: Which economic and regulatory trends are shaping deals in Australia?

Trends which are currently shaping real estate M&A deals in Australia, include:

  • Rising debt costs and availability of debt: As the cost of debt rapidly rises, commercial property valuations has shot to the forefront as one of the key challenges to real estate M&A deal making in Australia. The uncertainty around future interest rates and access to debt, has led to many institutional and fund investors becoming more cautious and a reduction in transaction volumes compared to 2021. Rising interest rates will also add to the many existing headwinds in real estate M&A deal making in the retail sector given that higher interest payments will curb discretionary spending by Australian households. On the other hand, companies with variable interest rate exposure may look to dispose of their non-core assets, which may create opportunities for investors, including potential sale and leaseback deals.
  • Chinese capital leaving Australia: As China’s housing crash continues, Chinese property developers and investors will continue to liquidate their Australian interests, including Australian commercial property, to reinforce their financial position in China. Recent examples include local developers seeking to acquire Country Garden’s flagship Mambourin estate in Melbourne, China Aoyuan’s sale of its 49% interest in its Australian division, Bright Ruby’s sale of the Hilton Sydney, Greenland’s sale of its Erskineville site to Coronation Property and Poly Global which has put multiple projects in Sydney and Melbourne up for sale. This trend is consistent with the Foreign Investment Review Board’s annual reports where in 2020-21 China was only the fourth largest source investor country, compared to second largest source investor country in 2017-18.
  • ESG: As fund managers become more accountable to their investors from an environmental and social perspective, capital will continue to flow into buildings and infrastructure that have market-leading green credentials. In response to a growing pool of investors who highly value ESG, many superannuation and pension funds now provide their investors investment options which offer attractive ESG fundamentals. Recent rules proposed by offshore regulators such as the European Securities and Markets Authority and the US Securities and Exchange Commission which seek to minimise the practice of “greenwashing” will provide further support for investment proposals which meet EST fundamentals.

Question 3: What can we expect in 2023 in relation to the structure of deals in the real estate sector?

  • WFH impact on office assets: As Australian employers largely continue to support work from home arrangements, with some employers encouraging a full-time work from home model for employees, market sentiment suggests that demand for office space and buildings may not return to pre-COVID-19 levels, subject to a rerate in valuations and a rebound in office attendance. That being said, the office market remains active, with the majority of employers adapting existing office spaces to increase efficiency and employee collaboration in the post-pandemic corporate workplace. Furthermore, a raft of property developments boasting cutting-edge technological capabilities and sustainable features (such as Sydney's Atlassian Central) continue to attract significant interest from institutional investors and prospective blue-chip tenants. However, we have not seen a similar level of investor interest in B-grade office towers, indicating a likely correlation between office quality, the expected rate of return of employees to the workplace, and the overall impact of work from home arrangements. Travel data, including that made available by Transport for NSW via its Open Data Program, so far suggests that the number of trips to and from the CBD has reached a ceiling well below pre-COVID-19 levels. We anticipate that this trend will continue among the majority of office workers unless Australian employers mandate greater attendance in the office.
  • Rebound in tourism: With the re-opening of its borders to fully vaccinated tourists and the ending of its ban on cruise ship entries this year, Australia is expected to see a rebound in tourism. We therefore anticipate that 2023 will build upon record-breaking deals in the hotel sector, many of which we have advised upon, including Blackstone’s acquisition of Crown Resorts, the sale of the Sofitel Sydney Wentworth and the sale of the One Circular Quay development which will be the location of Australia’s first Waldorf Astoria.
  • Emerging build to rent sector: Several factors in favour of the build to rent sector will continue to strengthen, including rising rent for residential properties, unaffordable residential property prices, increasing inbound foreign migration, low unemployment rates and lack of rental properties particularly in Sydney. In addition, it is likely that policies which address affordable housing will be prioritised by the newly elected Labor government and will encourage investment in the build to rent sector. For example, Labor’s proposal to create the $10 billion Housing Australia Future Fund will see 30,000 new social and affordable housing properties being built within its first five years.

Question 4: Questions you need to consider asking your legal adviser

  • Broadening application of Australia’s security of critical infrastructure legislation: In Australia, owners and operators of “critical infrastructure assets” and entities which hold an interest of at least 10% in such an owner or operator or a critical infrastructure asset have certain initial and ongoing obligations under Australia’s security of critical infrastructure legislation. Investors should ask their legal adviser whether their proposed investment involves a critical infrastructure asset as Australia’s security of critical infrastructure legislation has defined “critical infrastructure assets” broadly such that that term captures significant assets in several sectors of the Australian economy, including for example data storage and processing, energy, telecommunications, health care and medical, education, aviation and food and grocery. Given the broad meaning given to “critical infrastructure assets” by Australia’s security of critical infrastructure legislation, there is a risk that an asset acquired by an investor could constitute a critical infrastructure asset and therefore require the investor to establish and maintain systems to comply with its initial and ongoing obligations under Australia’s security of critical infrastructure legislation, the cost of which will adversely impact their returns.
  • Rising transaction costs: Foreign investors who need FIRB approval should check with their legal adviser on the new fees for seeking a no objection notification from the Australian Treasurer in respect of their proposed investment. On and from 29 July 2022, such fees have generally doubled.
  • Rising inflation: Rising inflation should cause investors interested in fund through transactions and joint ventures to develop property to make sure their legal adviser’s legal due diligence considers the credit strength of the developer and the builder and the terms of the building contract, particularly in the context of the investor stepping in to the building contract and the level of contingencies in the development budget.
  • Stamp duty developments: Real estate investors should consider recent developments to the stamp duty regime of the relevant State or Territory. New South Wales has recently introduced a new head of duty which imposes duty on transactions which result in a change in beneficial ownership of dutiable property. Prior to this amendment, changes in beneficial ownership of dutiable property without an accompanying change in legal ownership would not trigger a duty liability. Tried and tested transaction structures that worked prior to 19 May 2022 will need to be reviewed as a result of this new head of duty.

Energy and resources

Question 1: Breakdown of deals in the last 12 months – what trends have been observed

We are seeing a combination of M&A transactions being executed by private treaty and by way of public tender process. We are not seeing a great deal of on-market takeover activity.

From a pricing perspective, as is always the case, we are seeing pricing reflective of commodity prices. With interest rate rises and fluctuations in markets, some vendors are delaying their sales processes due to market uncertainty (particularly for those transactions subject to debt finance), and some buyers are holding-off on bidding for assets on the hope that prices drop in the future.

Despite this, commodity prices remain strong with long term structural supply imbalances for certain commodities (particularly battery/future metals such as copper, nickel and lithium). Once markets settle and asset prices are re-valued, we expect Energy & Resources-related private and public M&A activity to pick up again towards the end of CY 2022.

Question 2: Which economic and regulatory trends are shaping deals in Australia?

Certainly in the energy sector we are seeing increased intervention by regulators. AEMO took the unprecedented step of suspending the national electricity market earlier this year. The ACCC has recently published its July interim report into the East Coast Gas Market which makes its most interventionist and critical comments targeted at the gas industry to date. The Commonwealth government is also looking to extend the operation of, and amend, the Australian Domestic Gas Supply Mechanism in early October 2022 which has the potential to impact the East Coast LNG producers.

In the oil and gas sector, decommissioning is receiving heavy focus from the regulators so as to ensure sector participants have the financial capacity to meet their decommissioning obligations and liabilities, following the liquidation of NOGA and the abandonment of the Northern Endeavour FPSO in situ offshore Western Australia.

In mining and metals, energy transition and decarbonisation will continue to drive deal activity in Australia. The building of renewable energy projects and infrastructure and the transition away from internal combustion vehicles to EVs demands is another industrial revolution and demands huge amounts of raw materials. Regardless of recent market dislocations, there will be continued activity in mining, particularly for battery metals such as nickel, copper and lithium.

Recent examples of this include BHP’s recent takeover bid for copper and nickel focused OZ Minerals, and the sale by South32 of a portfolio of battery metal focused-royalties to LSE-listed Anglo Pacific Group (including over OZ Mineral’s West Musgrave project, which recently obtained final investment decision). The lithium sector remains strong – following it’s A$1.9 billion transaction with ASX-listed IGO creating a global lithium joint venture, Tianqi Lithium Corporation in July listed on the Hong Kong Stock Exchange – the US$1.7 billion listing being the largest so far in Hong Kong this year.

The renewables sector is very active with sale process currently underway for Enel Green Power, CWP, Wirsol Energy and Goldwind. These sales are taking place during a time of Australia’s energy transition, with the growth of wind and solar generation along with pump hydro and battery storage and a large appetite for green funds and sustainable investment funds to find a home for their investment dollar.

Question 3: What can we expect in 2023 in relation to the structure of deals in the Energy & Resources sector?

Vendors continue to seek a “clean exit” in private M&A transactions in the Energy & Resources sectors, regardless of commodity. In the oil and gas sector, this has been complicated by the introduction by the Commonwealth Government of trailing liability legislation that is similar to that of the Queensland Government. With ESG considerations continuing to drive corporate behaviour, the reputational risk of selling to a buyer without sufficient financial substance to properly remediate or rehabilitate a project is driving the increased use of rehabilitation funds or closure trusts.

Contractual allocation of risk is ever important and indemnity and hold harmless regimes can be expected to extend for very long terms rather than the shorter 2-3 year periods we would traditionally see.

Transport and infrastructure

Question 1: Breakdown of deals in the last 12 months – what trends have been observed

According to connect4 data, in the public M&A space across the Global Industry Classification Standard industrial industry (which crosses a number of sectors, including transportation, capital goods and commercial services and supplies) there have been five successful deals with two still currently on foot. The primary consideration type across these deals was cash, with two deals (including the acquisition by Qantas Airways Ltd of Alliance Aviation Services Ltd for around $763 million) primarily utilising scrip consideration. In relation to private equity investments, the transport and infrastructure sector has seen a substantial increase in private equity firms (and superannuation funds) investing in transport and infrastructure assets. By way of example, a consortium consisting of US private markets manager KKR, Canada’s Ontario Teachers' Pension Plan Board and Public Sector Pension Investment Board acquired all issued securities of Spark Infrastructure (ASX: SKI) for an all-cash consideration of A$5.2 billon. In addition, AusNet Services (ASX: AST) (an Australian electricity and gas distribution company) accepted a binding takeover offer from a consortium including Brookfield Asset Management in a deal that valued the business at A$10.2 billion.

Question 2: Which economic and regulatory trends are shaping deals in Australia?

Infrastructure and transport deals have been affected by continuing instability in supply chains globally and within Australia resulting from the COVID 19 pandemic and the regional instability (including a difficult trade relationship between China and Australia) and the ramifications of the Russia-Ukraine conflict.

Domestically, the increases in interest rates and inflation, together with higher labour costs, have impacted valuations in the transport and infrastructure sectors. From a regulatory perspective, the Australian Government’s increasing focus on security for critical infrastructure – from an operational and reporting perspective, and a foreign investment review perspective – has meant that transport and infrastructure transactions are subject to greater regulatory costs and scrutiny.

Environmental, social and governance (ESG) considerations continue to play an important role in the minds of the investors in this sector, particularly given the nature of the sector – with a company’s ESG performance now having the ability to taint transactions for some dealmakers. For prospective sellers, the continuing regulatory scrutiny means that "greenwashing" will likely no longer be tolerated in the market, and instead ESG targets will need to be specific and measurable, with performance being reported transparently. In addition, acquirers have been ramping up the due diligence of assets – putting to the test the authenticity of a target’s ESG claims – with acquirers turning their attention not only to past and current performance but an asset's ESG performance in the future and beyond.

Question 3: What can we expect in 2023 in relation to the structure of deals in transport and infrastructure sector

Given the resilience of these sectors and the relative attractiveness of transport and infrastructure assets to superannuation and private equity funds, in addition to trade players, we expect continuing activity in the sector including in relation to rail and commercial real estate assets which have, generally speaking, proved to be relatively resilient (and have provided relatively stable returns) during the COVID-19 pandemic.

From a due diligence perspective, buyers will be increasingly focused on supply chain and force majeure risks in target businesses given, particularly, the challenges that have been experienced in supply and delivery over the last two years.

Question 4: Questions you need to consider asking your legal adviser

Participants in the transport and infrastructure sector should consider, from an acquisition perspective:

  • whether or not early engagement with the Foreign Investment Review Board (FIRB) and / or the Australian Competition and Consumer Commission is beneficial (where required);
  • the impact of any regulatory approvals on deal timetables, particularly in a competitive bid process;
  • COVID-19 and supply chain due diligence; and
  • ESG track records in supply chains and otherwise and how the acquirer could address ESG related issues following the acquisition.

From an operational perspective, buyers will need to pay close attention to (and consider in any due diligence) the significant changes to the Security of Critical Infrastructure Act 2018 (Cth) that require organisations that control "critical infrastructure assets" to comply with broad, new, cyber risk management obligations. These changes came into effect in July 2022 and impact the way cyber security risks and incidents must be managed from an operational perspective.


Question 1: Breakdown of deals in the last 12 months – what trends have been observed

In 2022, the healthcare sector saw an increase in the number of smaller M&A deals. Excluding deals which did not disclose details, a majority of completed deals were under AUD $100 million.

Despite this, there were a number of larger deals that have been topical such as KKR & Co Inc's proposed acquisition of Ramsay Health Care Limited (ASX: RHC) (valued at over $20 billion) and equity firms CapVest Partners and BGH Capital's bidding war for fertility company Virtus Health (ASX: VRT).

Our research indicates that:

  • The pathology and diagnostic technology subsector continued to be the most active within the healthcare sector, making up just over 35% of all completed deals.
  • Over 80% of M&A deals were private deals.
  • While private equity funds were not as active as 2021, they still comprised over 30% of all announced deals and 25% of all completed deals.
  • The consideration for almost all disclosed deals was cash with some companies offering additional earn-out payments. This could be reflective of the recent volatile market conditions which may have contributed to some unease towards script offers.
  • KKR & Co Inc's acquisition of Ramsay Health Care Limited was looking to be the biggest healthcare deal in 2022, valued at over $28 billion. However, due to an inability to complete due diligence, KKR withdrew its initial offer and made a subsequent offer which Ramsay Health Care Limited ultimately rejected.

Question 2: Which economic and regulatory trends are shaping deals in Australia?

As is the case with the economy generally, COVID-19, the war in Ukraine and geopolitical tensions have contributed to ongoing supply chain disruptions. Due to COVID-19 impacts, employee burnout is prevalent in this sector and this, combined with staffing shortages are impacting labour costs. Companies in this sector may therefore be exposed to greater financial stress than the wider economy. This is also exacerbated by rising interest rates and inflation.

These factors have led to an extremely uncertain and complex environment which has resulted in a global reduction in M&A activity, forcing some companies to focus on consolidating their core and capital allocation. On the other hand, the same factors have also pressured companies to look for, and invest in, innovative solutions such as technology to streamline their operations and improve efficiency.

In addition to the rising costs, on 29 July 2022 the Foreign Investment Review Board's (FIRB) application fees doubled, directly impacting the cost for foreign investors looking to acquire businesses in Australia. According to the Australian Financial Review, the receipt numbers received by FIRB applicants indicated that at least 114 applications were filed in the day before the fee increase. The AFR reported that this is the equivalent of approximately 10% of annual filings. As a result, it is likely there will be an ongoing backlog of FIRB applications. Deals that require FIRB approval may be faced with longer than expected delays.

Despite these broader trends, M&A activity in the healthcare sector has remained resilient and some of these challenges appear to have incentivised deals in certain parts of the healthcare sector.

For example, there has been increased M&A activity in connection with allied health companies and companies that deal with healthcare products and services which are accessible from home. Similarly, companies are increasingly acquiring telehealth technologies which enable patients to monitor themselves and seek medical assistance remotely. An example of this was NIB's $12 million investment in telehealth provider Midnight Health. Midnight Health provides a web platform for out-of-hours and remote access to doctors and pharmacists for home-delivered prescriptions. This reflects a growing trend by companies to accelerate digitalisation and transform their business models and service delivery accordingly.

Question 3: What can we expect in 2023 in relation to the structure of deals in the healthcare sector

For healthcare entities where practitioner involvement is critical to patient engagement, such as doctors, physiotherapists and oncologists, we expect to continue to see deal structures where the practitioners hold a portion of the equity in the company. We are seeing increased complexity in such structures having regard to considerations such whether practitioners share in increased enterprise value of the group or just that part of the business over which they have influence (eg. their clinic or business unit).

Where there is heightened competition between bidders, we also expect to see the deal structures become more complex and unconventional. For example, in relation to the takeover bid for Virtus Health, CapVest Partner's had proposed a dual scheme and fall-back takeover bid structure. However, competitor BGH Capital then announced a fully financed off-market cash takeover bid. This was the ninth offer that Virtus Health had received since December and was ultimately successful. A key factor in BGH Capital's success was the 19.9% pre-bid stake it had acquired in December, noting that it was subject to Takeover Panel proceedings.

Tax considerations

Which tax issues may affect deal structures?

In 2022, deal structures are still defined by the threshold issue of whether the purchaser is looking to acquire an equity interest in a Target (share acquisitions remain typical in acquiring operating businesses) or the underlying assets of the Target (which is common in real estate transactions). This choice is principally driven by the characteristics of the Target, the preference of the parties and the kind of asset(s) being acquired. While ultimately a commercial decision, purchasers consider a range of tax issues in structuring their Australian acquisition.

Tax attributes / tax liabilities

The potential tax liabilities and tax attributes (eg. historic tax losses and tax basis in assets) of a Target remain a principal tax consideration in M&A transactions.

  • Potential tax liabilities of the Target that can be inherited by the purchaser remain front of mind in share purchases. Where Targets are exiting a tax consolidated group (TCG), achieving “clear exit” has been vital for purchasers as they obtain greater certainty against any inherent tax liabilities of the seller’s TCG. This issue does not arise on asset acquisitions.
  • Valuing historic tax losses in light of relying on the application of loss integrity rules (i.e. the continuity of business test) has proved technically difficult for purchasers as Australian businesses have adapted and changed business models during the recent pandemic.

Purchase price allocation & tax cost setting

  • Allocating purchase price across various assets remains a key issue in asset acquisitions and is relevant to the quantum of future depreciation, the “dutiable value” of assets for stamp duty purposes, and the value of supplies for the purposes of Australia’s goods and services tax.
  • The cost base setting process under Australia’s consolidation rules impacts, amongst other things, any future capital gains or losses on any future disposal of a capital asset and the depreciation available for "depreciating assets". Purchasers have recently had to deal with assets being ineligible for a step-up in tax basis due to the previous utilisation of accelerated depreciation incentives. We work with our clients to ensure that an appropriate step-up in tax basis of assets is achieved.

Capital structure

  • The capital structure of Australian acquisition vehicles (particularly in the context of acquisitions by offshore purchasers) remains a key tax consideration, given recent ATO scrutiny of related party and shareholder debt. Purchasers will need to ensure an appropriate allocation of debt to Australia.
  • While Australian companies remain the typical acquisition structure for inbound investment (ie. "Aust Holdco / Aust Bidco" structures), other investment structures (including Australian unit trusts) may be utilised depending on the circumstances.

What do sellers need to be aware of when structuring deals?

  • Capital gains tax – availability of exemptions and roll-over relief.
  • Offshore sellers need to determine whether any gain on sale is subject to Australian tax. This may include determining whether their structure affords protection under the terms of a Double Tax Agreement.
  • Sellers will need to facilitate a Target’s “clear exit” from a TCG (where relevant).
  • Purchasers will expect sellers to provide, at the very least, standard tax warranties and indemnities – extending to pre-acquisition periods, acts, omissions or transactions (including pre-acquisition restructuring events). Sellers should be aware of the limitation periods for various types of taxes covered by tax warranties and indemnities.
  • Non-resident CGT withholding – a purchaser will be obliged to withhold and remit 12.5% of the gross consideration paid for Australian real property and shares to the ATO (unless, in the case of real property, a clearance certificate is obtained from the ATO or, in the case of shares, a vendor declaration is provided that states the sale shares are not “indirect Australian real property interests” or the vendor is an Australian resident).

What do buyers need to be aware of when structuring deals?

  • The need for upfront structuring advice to:
    • ensure acquisition structure achieves a step-up in tax basis of assets;
    • facilitate the introduction of new and an appropriate level of debt by the use of Holdco/Bidco acquisition entities;
    • ensure offshore buyers do not unnecessarily create a permanent establishment in Australia;
    • ensure, to the extent possible, the structure considers potential taxation on a future exit, including the ability to access relief under double tax agreements.
  • Tax attributes of the Target (ie. franking credits and tax losses) and whether they can be transferred along with the Target (subject to satisfying integrity rules).
  • The expected tax characteristics of an asset (ie. depreciation) – understanding this assists in developing financial models etc.
  • FIRB (if relevant) – for significant acquisitions of Australian businesses, Treasury will expect full disclosure of capital structure of acquisition vehicles.
  • The distribution of profits and capital from an Australian company is limited to dividend distributions and capital returns.
  • Thin capitalisation – denial of interest deductions where debt-equity ratios exceed prescribed limits.
  • Transfer pricing – shareholder loans and related party dealings are regularly scrutinised by the ATO.
  • Hybrid mismatch rules – increasingly relevant, these rules need to be considered in the context of structuring any transaction to ensure no deductions are denied.

Questions you need to consider asking your legal adviser

  • What is the optimal structure in the case of an acquisition or disposal? Purchasers and sellers should obtain appropriate advice from their tax advisers.
  • What are the tax risks and how can we obtain protection – Purchasers should engage their tax advisers to conduct appropriate tax due diligence in order to identify any tax exposure associated with a proposed acquisition. Advisers should be able to recommend appropriate contractual protections by negotiating tax warranties and seeking a tax indemnity to cover historic tax liabilities.
  • W&I Insurance – W&I is a very common feature of Australian transactions, particularly for private equity vendors. Clients need to be aware of the extent of coverage, noting that it will not respond to matters which are known or disclosed. Consideration should also be given to whether vendors are willing to provide backstop coverage for any W&I insurance gaps.
  • Need for an ATO ruling or tax insurance? – A buyer, seller or the target (on behalf of its shareholders) may seek certainty from the Australian Taxation Office ruling in respect of complex tax issues identified during due diligence. A ruling is not uncommon in listed acquisitions. Bespoke tax insurance may be a viable alternative to obtaining a tax ruling in order to manage known tax risks.

Rise of W&I insurance in deals

Warranty & indemnity (or “W&I”) insurance is a risk management tool commonly used in M&A transactions. It protects a party to a transaction (typically the buyer) for loss arising from breach of warranties, or under particular indemnities, given by the seller. Where there is a breach of a warranty covered by the W&I policy, the insurance permits the insured to claim against the W&I insurer for recovery of losses for a breach of warranty or indemnity.

W&I insurance does not necessarily cover breaches of all warranties in a sale agreement, and it is not a substitute for due diligence. The W&I insurance is taken out after a comprehensive underwriting process which will include, in particular, a review of the due diligence conducted in respect of the transaction. The W&I insurer will want to know that the buyer has undertaken satisfactory due diligence regarding the accuracy and veracity of the warranties being given by the seller.

There are some losses that W&I insurance will typically exclude (including, for example, consequential loss, loss arising from forward-looking statements, criminal or civil fines and penalties). W&I insurers will also exclude cover for matters known to the buyer, and may also seek to exclude matters that have not been subject to sufficient due diligence.

In short, W&I insurance protects against loss arising from breach of warranties and certain indemnities, but can be narrower in the cover it provides compared with the rights that a buyer would have against a seller under the sale agreement.

W&I insurance as part of a transaction

Although it is possible to purchase a W&I insurance policy solely as a traditional risk management tool without the counterparty to the transaction knowing of the policy, it is now most commonly purchased in circumstances where both parties to the transaction know of the policy being put in place.

W&I insurance has become especially popular in M&A deals where there are also contractual limitations in the sale agreement on the seller’s liability for breach of warranties. Sellers are now frequently insisting on a “no recourse” or “limited recourse” structure while requiring the buyer to procure a W&I policy. This structure provides a so-called “clean exit” that is often touted as a benefit of W&I insurance. The result is that the W&I policy becomes the primary right of recourse for the buyer, with the benefits that:

  • the seller can complete the deal without an ongoing risk of liability for warranty breaches; and
  • particularly for parties that will have an ongoing relationship, the W&I policy can assist to preserve the parties’ relationship by avoiding disputes between those parties in the event of a breach of warranty.

In competitive bid scenarios, a bidder may adopt this structure in its offer as a way to make its bid more attractive to the seller. In fact, it is now common for sellers make this a requirement of any bid.

W&I insurance can serve both buyers and sellers in M&A deals, by giving certainty to the parties regarding risk allocation and the sale price. W&I insurance, together with a “no recourse” or “limited recourse” provision in the sale agreement, can facilitate a transaction by transferring the risk for breaches of warranty from the buyer or seller to the insurer. The W&I insurance can therefore help negotiations by bridging the gap between parties on key risk issues.

However, since the W&I policy has limitations and exclusions, these transaction structures can give rise to an uninsured risk which is carried by the buyer.

Recent trends

The popularity of W&I insurance is not showing any signs of abating at the moment. However, there does seem to be an ongoing tightening of the underwriting of these policies, particularly regarding employment-related risk and cyber risk. The result is that the cover under a typical W&I policy available today may appear to be not quite as broad as in the past. On the other hand, insurers may be willing to insure a broader sweep of warranties than was the case when W&I insurance was first gaining traction in the market.

At same time, while there are no longer the same high levels of pricing as seen in the latter half of 2021, there are certainly signs of an increase in the costs of W&I policies. This may result, in the short term, in buyers taking a more robust approach on the level of cover that they want to buy. This in turn can increase the uninsured risk to buyers associated with the “no recourse” or “limited recourse” structure. It remains to be seen whether more traditional risk management structures, like holdbacks and escrows, will become more popular if the breadth of W&I coverage, its pricing, and the level of uninsured risk becomes less appealing.

Takeaways for buyers

Buyers should remember that W&I policies are bespoke policies, the terms of which are traditionally negotiated and not simply purchased “off-the-shelf”. Furthermore, W&I insurance, like most other insurance lines, is susceptible to cyclical market trends which affect both pricing and underwriting.

In that context, buyers should be asking themselves how comfortable they are with the amount of uninsured risk associated with transactions where the sellers have limited or no recourse and where the W&I policy is not fully “back-to-back” (ie. such that all gaps are reasonably covered) with the warranty regime in the sale agreement. W&I insurance can be an excellent risk management tool to facilitate M&A transactions. However, it is not the panacea for all transaction risks.

Acquisition and leveraged finance

Question 1: What sources of acquisition finance are most popular in the current market?

For many private equity sponsors, unitranche financings (with a super senior revolving tranche) continue to be an attractive proposition for acquisition financing. With more and more credit funds establishing a presence in Australia (and existing credit funds growing rapidly), and more of the retail banks becoming comfortable with the super senior revolving structure, we see this trend continuing in the near future. We have seen some "cov-lite" unitranches executed in the Australian market (based on the European and the US unitranche markets, which have loosened terms and dropped maintenance covenants) but the majority are still single-covenant deals.

Term Loan B financing also continues to be popular in Australia. Large corporates and sponsors continue to tap the TLB markets, both here and in the US. The AUD TLB market in particular has matured over the past several years, with Australian issuers’ AUD TLB borrowings now exceeding other currencies. We have also seen some Australian TLBs drop the "ratings" requirement which is a feature of US TLBs, creating greater flexibility for Australian borrowers.

Another, relatively new, source of funding are the Australian superannuation funds (such as Aware Super), some of which are now lending directly into the market. Whilst super funds have traditionally structured their investments indirectly, some are offering finance directly to the market (either on a bilateral basis or through the pooling of funding).

Finally, all of the "Big 4" retail banks are active in the acquisition finance space, as are other domestic banks such as Macquarie. This source of funding is particular attractive to the mid-market on the basis that it is easy to execute and less expensive than unitranche or TLB financings (although it might not provide the same level of flexibility on terms).

Question 2: Do you expect this trend to continue?

We are likely to continue to see unitranche funding as a popular choice for acquisition funding. We have certainly seen no abatement in the expansion of credit funds into Australia and more and more retail banks (and investment banks) are now comfortable with lending a super senior revolving tranche.

We have seen a slight downturn in liquidity in the TLB markets in the past few months. We believe the market is merely adjusting to the higher interest rate environment and that liquidity will return following that adjustment.

Superannuation funds are likely to continue to be active in the Australian market. They have access to a significant amount of capital and lending will continue to be an attractive proposition to them.

One of the challenges which retail banks have experienced over the past several years is their cost of capital relative to interest rates. As interest rates rise, we expect to see retail banks once again aggressively chasing market share.

What are the most significant concerns to lenders in the current market? (Supply chain risk? inflation? interest rates? Do you expect this to continue into 2023?

Rising interest rates and inflation continue to make headlines and to be a source of concern for lenders. While some believe this will resolve itself once supply chains recover from disruption during the pandemic, there is no doubt that the general consensus is that markets are headed for higher interest rates. Banks are holding pricing for fairly limited time periods in the current market, increasing execution pressure on borrowers.

Sustainability-linked loans are another hot topic in the current market. Large corporates are looking to advance their environmental, social and governance (ESG) credentials and lenders are increasingly willing to meet this market. A couple of the challenges regarding these loans are (i) the lack of a market-standard framework for determining KPIs to meet ESG requirements; and (ii) ongoing compliance monitoring.

Question 4: How do you expect buyers and targets will structure deals to overcome the above concerns?

We expect that mandatory hedging requirements may make their way back into loan agreements. This was traditionally a common feature of financing agreements but became less common over the past several years of falling interest rates.

In terms of ESG and sustainability-linked loans, some borrowers and lenders are including mechanics in their documents to agree relevant KPIs once the market has settled on them. We expect that this will be a point of focus for borrowers, lenders and industry practitioners over the coming months.

Question 5: Questions you need to consider asking your legal adviser

Given the many different options available to borrowers in the current market, we would recommend speaking to us about which option might be best for your business.


Question 1: How might the ACCC’s proposed merger reforms impact deals in 2023?

In August 2021, former ACCC Chair Rod Sims proposed a radical overhaul of Australia’s merger control regime, including:

  • a new formal merger review process, with a mandatory filing regime and a ban on the parties closing the deal until the ACCC has granted clearance which would be the only means by which clearance could be granted;
  • changes to the mergers test in section 50 of the current law to lower the threshold for deals that can be blocked to cover cases where there is a “possibility” of competition being reduced; and
  • reforms to deal with acquisitions by large digital platforms.

The current ACCC Chair, Gina Cass-Gottlieb, has confirmed that the ACCC will continue to consider feedback on these proposals, but noted that ultimately it is a matter for the Australian Government to progress any reforms (and the new Labor Government has not yet indicated whether it is supportive of the proposals). If the proposed reforms are implemented, they could have the following impacts on future deals:

  • Longer timeframes to complete deals – Due to the introduction of mandatory filing, deals that may not previously have been notified to the ACCC could now be subject to mandatory filing;
  • Increased risk and uncertainty in transactions – The introduction of a deeming provision for merger parties with substantial market power, as well as lowering the threshold for the merger test by requiring that the proposed acquisition have a “possibility that is not remote” (rather than “real commercial likelihood”) of substantially lessening competition means greater uncertainty for merger parties and provides greater scope for the ACCC to block deals; and
  • More planning before beginning merger process – Merger parties may become more strategic in the level of information that they provides to the ACCC depending on the likelihood of being allowed a waiver.

Question 2: What information is the ACCC scrutinising in deals?

Merger parties can expect increased scepticism and scrutiny by the ACCC of arguments put forward in support of clearance.

In its recent ex post review of the competitive effects of completed transactions, the ACCC emphasised that it will more closely scrutinise merger parties’ submissions as to counterfactuals and post-merger predictions, as well as the veracity of information provided to the ACCC. This includes analysing market share data with increasing caution, as well as the effects of transactions on narrow customer segments, market dynamics relating to entry and expansion, and countervailing buyer power.

Question 3: What is the current timing on the ACCC clearance process?

There are three potential phases of the ACCC’s informal merger clearance process:

  • Pre-assessment: the ACCC pre-assesses the merger without conducting market inquiries;
  • Phase 1 Public Review: the ACCC conducts market inquiries before announcing a decision or statement of issues; and
  • Phase 2 Statement of Issues: a statement of issues is published, and there is further public consultation before a final decision is reached by the ACCC.

The total time for merger parties to obtain informal ACCC clearance could take anywhere between 4 weeks to 6 months. The graphic below sets out the average duration of ACCC merger clearance in the first half of 2022.

Question 4: Questions you need to consider asking your legal adviser

Merger parties undertaking a transaction in Australia should consider the following questions:

  • Should I consider seeking informal ACCC clearance for the transaction?
  • Is the transaction notifiable to FIRB? If yes, the FIRB will consult with the ACCC in the ordinary course as part of FIRB’s public interest assessment. Parties should consider how best to engage with the ACCC as part of this process.
  • Should I consider seeking formal merger clearance (authorisation)?
  • Should the relevant sale agreement be conditional upon obtaining ACCC clearance?
  • Is the ACCC likely to engage with regulators in other jurisdictions about the transaction? Will the parties need to give waivers to allow the exchange of information between different jurisdictions?
  • What are the potential consequences if the parties do not seek (or ultimately obtain) ACCC clearance?