Future of M&A in Australia

Clayton Utz is a leading legal adviser on M&A transactions in Australia. In the last 12 months, our team of 24 partners have advised on some of the most significant and complex M&A transactions with a total approximate value of over A$25 billion.

Our Corporate and M&A specialists across Australia have pooled their collective insights to look at trends and issues likely to impact our clients in 2022.

We are pleased to provide you with an overview of what we have seen across the Australian market and how we anticipate these issues will remain relevant for the rest of the year.

2021 was like no other year in Australia. The Australian market saw a record number of deals in all sectors and over the next few pages we take a deep dive into:

  • Deal-making in 2022;
  • Agribusiness and food;
  • Real estate;
  • Transport and infrastructure;
  • Energy and resources; and
  • Healthcare.

As 2022 unfolds, we see more uncertainty in relation to potential interest rate rises, supply chain security (exacerbated by geopolitical tensions), Environmental, Social and Governance (ESG) considerations, and a looming Federal Election. Continually changing economic and political landscapes will give rise to additional hurdles when engaging in new M&A deals which will require consideration from a commercial and legal perspective.

With a national presence, our team welcomes your inquiries on Australia's prevailing M&A conditions, the issues to watch out for in 2022 and the next steps for dealmakers.

Deal-making in 2022

Deal-making – looking back and looking forward

2021 saw an increasing number and value of M&A deals in Australia and globally as a result of a number factors such as pent-up demand from the pandemic in 2020, lots of cash in the market and low interest rates. The second half of 2021 was even stronger than the first. Consequently, buyer and seller confidence was also at an all-time high. We saw high levels of M&A activity across all sectors.

In Australia, a strong economic recovery contributed to strong corporate balance sheets, earnings outlooks and deal volumes. It was generally a sellers' market, with especially strong competition for certain sought-after assets in areas such as infrastructure, energy, technology and "green" commodities.

Profile of bidders

Who were they?

Bidders ranged from trade buyers to Australian and international superannuation/pension funds and private equity funds and private investors. Superannuation Funds were involved in many of the largest deals in 2021, such as Sydney Airport, Spark Infrastructure, and Vocus. Private equity played a large part in public M&A globally, but a smaller role in Australia despite involvement in some of 2021's largest deals such as the acquisition of Sydney Airport, AusNet Services and Spark Infrastructure. In terms of public M&A, 2021 saw the continuation of a trend of more Australian (and fewer foreign) bidders.

What was driving bidders?

Aside from the factors mentioned above, bidders in the Australian market were looking for growth, scale, relevance in the market and synergies. ESG considerations (mentioned below) were also a key factor.

How did ESG impact bidders?

Both Australian and international bidders need to consider ESG trends and regulations when looking at investments. Internationally, ESG reporting requirements are being enhanced, particularly in the West. For example:

  • sustainability reporting will become mandatory for large or listed EU businesses (including subsidiaries based outside the EU or based in the EU but with a non-EU parent);
  • on 6 April 2022 the UK became the first G20 country to make it mandatory for large businesses to disclose their climate-related risks and opportunities, in line with Taskforce on Climate-related Financial Disclosures (TCFD) recommendations; and
  • on 21 March 2022 the U.S. Securities and Exchange Commission announced a proposal to mandate climate-related disclosures for public companies.

Recent crises in Australia and globally are also keeping ESG issues front-of-mind. This has arguably resulted in trends such as depressed demand for coal and other carbon-intensive assets and ESG-focused investment mandates and funds. In Australia the decarbonisation trend has created particular demand for "battery minerals" assets and companies.

ESG appears to have been a key driver for notable transactions in 2021, particularly where a bidder or seller is looking to rebalance its portfolio or reduce risk (such as Woolworth's demerger of Endeavour Group, or, potentially, BHP's sale of its oil and gas assets to Woodside Petroleum).

ESG now also features heavily in the due diligence phase of a transaction, covering issues from climate change to modern slavery and gender equality. The ESG landscape is rapidly changing and while it is often looked at purely through a risk assessment/management lens, that perspective too is evolving. Key questions that any Board needs to consider in assessing a transaction are:

  • How does the target compare to competitors on ESG measures?
  • What opportunities may ESG synergies bring?
  • How could ESG themes affect the target's strategy and culture?
  • What would happen if ESG risks eventuate?
  • What are the potential compliance costs involved with ESG-related issues?
  • How are ESG regulations and investor preferences likely to change in the future?

How are deals getting done?

The trend for most public M&A transactions to be on a "friendly" basis continued. Notable developments included a greater acceptance of dual scheme of arrangement/ takeover offer structures to counteract an initial bidder's pre-bid stake, and for two schemes of arrangement obtaining final court approval before all regulatory approval conditions were satisfied.

Although corporate balance sheets were strong and interest rates were at record lows during 2021, some of the largest equity capital markets deals in 2021 were undertaken to fund M&A activities. Australian regulators are also starting to develop their understanding of stub equity and Special Purpose Acquisition Companies, providing more alternatives for consideration and acquisition vehicles.

Despite the sellers' market and strong M&A activity levels, buyers are in many ways more disciplined now than they were 10-15 years ago. They have been trying to put themselves in the strongest possible position. One way of doing this is through exclusivity periods and carve-outs.

However, target Boards have been reminded by the Australian Takeovers Panel to run competitive processes. In a number of instances recently, such as Brookfield's bid for Ausnet and CapVest's bid for Virtus Health, exclusivity periods have been struck out. Nonetheless bidders continue to push for the strongest possible exclusivity because of the expense of and management focus required during due diligence processes.

While it is a deal-friendly market, Australian regulators, and in particular the FIRB and the ACCC continue to play an important role. The consideration offered is generally the primary differentiator between competing bids, however the approvals required by regulators are a secondary consideration that may also extend the acquisition process. A high-profile recent example is the (ongoing) delay to Aurizon's acquisition of One Rail caused by the ACCC suspending its decision timeline, which was originally scheduled to conclude on 10 March 2022.

Predictions for 2022

For now, the level of M&A activity has not yet significantly slowed from 2021's pace. However M&A activity levels in the remainder of 2022 are difficult to predict, particularly given increasing inflation and what this means for companies' financial position and interest rates, and the uncertainty created by the war in Ukraine and geopolitical tensions. In time, these factors could lead to distressed asset transactions, however for now the uncertainty is likely to be only a negative factor in terms of M&A activity. While uncertainty persists in the market, we expect that to introduce an element of caution and for bidders to be more patient. Nonetheless interest rates are likely to remain low by historical standards and there remain a large number of well-funded bidders in the market, from trade buyers to superannuation funds and private equity funds. Private equity funds are expected to play a larger role in Australian M&A in 2022 given recent successful fundraising.

With COVID-19 borders restrictions lifting, there may be an increase in certain kinds of cross-border deals where the bidder deal team wants to interact in-person to understand the target company or asset as well as meet with regulators and key stakeholders, especially in jurisdictions where they are not familiar.

ESG considerations are likely to continue to be important for bidders and targets alike. In relation to decarbonisation, the scale of investment required to achieve targets agreed at COP26 should see continued activity. However, geopolitical tensions could also see sectors which arguably contradict the decarbonisation trend, like oil and gas, come back into favour at the same time.

Agribusiness and food

1. Reflections on 2021

Looking at the deals that dominated the agribusiness and food sector, was any new ground broken? Did any features or deal innovations stand out?

During 2021, M&A activity in the Agribusiness & Food sector in Australia remained robust against the backdrop of disruption from the COVID-19 pandemic. Generally, increased innovation and productivity in the sector continued to create positive conditions for M&A activity, including interest from foreign investors.

Globally the 2021 M&A activity was strong and dominated by the USA, with a large number of deals in the packaged foods and meats segment. Some notable deals included:

  • Oreo cookie maker, Mondelez, International acquired vegan and paleo chocolate producer, Hu Chocolate (USD$361m);
  • Hershey acquired low sugar chocolate manufacturer, Lily's Sweets (USD$450m);
  • Private equity firm, L Catterton, acquired premium breakfast item company, Kodiak Cakes (USD$600m);
  • Coca-Cola acquired sports drink company, BodyArmour (USD$5.6bn);
  • Hershey acquired premium pretzel maker, Dot's Pretzels (USD$1.2bn);
  • Hommel Foods acquired the nuts business of Kraft Heinz (USD$3.45bn).

Domestically, Australia had one of the largest deals in 2021 with the sale of Coca-Cola Amatil to Coca-Cola Europacific Partners (AUD$9.65bn), and ranked fifth in the world by deal volume. For Australia (compared to globally) there are a higher proportion of pre-farm gate deals. Some notable deals included:

  • A consortium led by Guy Hands acquired Consolidated Pastoral Company (AUD$710m);
  • Bega Cheese acquired Lion-Dairy & Drinks (AUD$534m);
  • Mondelez International acquired Gourmet Foods Holdings (AUD$450);
  • Select Harvests acquired Piangil Almond Orchards (AUD$129m);
  • AIM Co/New Forests acquired Macquarie's Lawson Grains (AUD$600m);
  • JBS Australia acquired Huon Aquaculture (AUD$425m);
  • Costa Group Holdings acquired 2PH Farms (AUD$200m);
  • Americold acquired the Lago cold stores businesses (AUD$102m);
  • HelloFresh acquired Youfoodz Holdings (AUD$130m);
  • Lactalis’ acquired Jalna Yoghurt (>AUD$200m); and
  • a majority stake in Snack Brands Australia was sold by Universal Robina Corp to Intersnack Group.

Public vs private

What proportion of public vs private deals are we likely to see in 2022?

Given the nature of the players in the Australian agribusiness and food sector, private deals will likely continue to dominate in 2022 – with 75% of Australian deals in 2021 involving small to mid-sized businesses (less than $100m). Apart from the dairy industry, we expect to continue to see the aggregation of assets in particular segments of the agribusiness and food sector by those seeking to compete in international markets or, particularly in the food segment, seeking to grow to capture market penetration or share leading to either an IPO or trade sale by private equity.

Predictions for the balance of the year

In terms of M&A activity in the agribusiness and food sector for the remainder of this year, what's likely to drive – or dampen – deal-making? What impact if any are ESG considerations having on the type of assets / businesses being sought?

Analysts expect a rosy outlook for M&A across the Agribusiness & Food sector for the balance of 2022 and into 2023. Some of this is driven by the money being spent in the sector by government which has ambitious plans to beef up Australia's agriculture sector to a value of $100 billion by 2030, from the current value of $71.2 billion. As such, the agriculture industry is likely to experience significant growth to support this vision and increased regulatory activity is expected to follow.

Below are some thoughts on factors that will grow deal-making in Australia, and some of the hurdles or hindrances that may prevent deal-making in Australia, over the coming 12 months:

Opportunities for potential growth

  1. Removal or reduction of trade barriers between Australia and various countries to create new opportunities and realisation of these opportunities, with new FTAs or revised FTAs with UK, RCEP and Japan.
  2. New supply and distribution chains as a result of China's withdrawal from certain of Australia's export markets
  3. Agtech innovations should enable more precise application of agriculture and livestock management resulting in lower costs and improved yields and productivity:
    • indoor vertical farming;
    • automation, robotics & increased computerisation;
    • livestock technology;
    • better genetics;
    • modern greenhouse practices;
    • precision agriculture;
    • digitisation of processes providing better and more accurate flows of data.
  4. Gradual increased investment by institutions and HNW investors based on a combination of the following factors:
    • low interest rate environment with rising commodity prices;
    • strong returns for assets after pandemic compared to other asset classes;
    • Australia’s reputation for premium clean green produce;
    • low correlation to equities and other sectors; and
    • attraction to foreign investors as a long-term investment.
  5. Increased government support in the Agricultural sector – The government is funding projects and programs that aim to expand trade opportunities; further strengthen Australia's biosecurity systems; reward farmers for the stewardship of their land (eg. instant asset write-off); improve competitiveness, resilience and innovative capacity of the industry; or improve infrastructure for Australian farmers and rural businesses.
  6. Many foreign countries are looking to advance food security in their country leading to an increase in overseas investment in Australia.
  7. Agriculture's carbon footprint continues to be a driver of innovation and investment from governments, domestic and foreign investors and sustainably aligned businesses.
  8. Australia’s excellent track record in biosecurity.
  9. Family succession – transition of farm to the next generation.
  10. Lifting of 2020/2021 travel restrictions.
  11. ACCC changes to address unfair bargaining power aimed at increasing competition in Australia from traditional and new competitors.

Potential hindrances/hurdles

  1. Natural barriers – drought, flood, fire, cyclone, plague in Australia.
  2. Disruption to supply and distribution chains, such as China withdrawing from certain Australian export markets (for example, beef, wine).
  3. Increased regulation – some of the increased regulation relevant to the sector includes:
  4. Cybersecurity for the sector is not where it should be – the sector is undergoing a period of rapid change due to increasing adoption of technology by primary producers and within supply chains, bringing a higher cybersecurity risk.
  5. Growth in prices rather than volume – Australian farmers enjoy price premiums due to our reputation as a producer of high-quality produce.
  6. Rising debt in the agricultural industry – this will create a hurdle for some and an opportunity for others, particularly as inflation causes interest rates to rise.
  7. Continued tension between mining and farming in Australia.

Impact of uncertainties on deal volumes in Agribusiness & Food sector

How is the agribusiness and food sector responding to uncertainties in the market such as COVID-19, the upcoming Federal Elections, and global inflationary pressures? What does this mean for the number/size of deals?

The COVID-19 pandemic and associated travel restrictions and supply chain disruptions created challenges for most sectors with the effects and timing varying greatly between sectors. A particular negative impact included Chinese Government restrictions on some high-value goods such as wine, lobster, beef, lamb, barley, cotton and timber.

Other negative impacts are likely to include:

  • disruption and slow down of air transport affected the export of some perishable commodities;
  • panic buying by consumers together with production and supply chain rigidity caused some temporary shortages in some goods;
  • there is ongoing fallout from the COVID-19 pandemic and other factors which have driven up food prices. Poor harvests in South America, strong global demand, and supply chain disruption issues have reduced grain and oilseed inventories and driven prices to their highest levels since 2011-2013;
  • vegetable oil prices have also been at record levels, reflecting the short South American soybean crop, reduced palm oil supplies due to harvest problems in Malaysia, and sharply increased use of palm and soybean oil for biodiesel production. Prices of key energy-intensive inputs like fuel, fertilizer and pesticides are at record or near-record levels; and
  • shocks to regular transport routes caused by the COVID pandemic also continue to impact inputs for agribusinesses such as chemicals and fertilizers.

Russia’s invasion of Ukraine will further disrupt global markets and have negative consequences for global grain supplies, disrupt natural gas and fertilizer markets, and have negative impacts for agricultural producers. This is starting to push up already high food price inflation and have serious consequences for low-income net-food importing countries. Fertilizer prices are around 40% higher than before the Ukraine invasion, and Russia and Belarus are key exporters of several critical fertilizing compounds including urea and potash. With global shipping companies largely suspending their activities in Russia and Belarus, this has brought global trade in these fertilizing compounds to a standstill, resulting in supply chain disruption, reduced agricultural production and an aggravated a global food crisis.

Nevertheless, after a reduction in deal flow for this sector in 2020, M&A deal flow during 2021 and into 2022 is approaching its 10-year averages and fortunately some form of normality.

Real estate

1. Reflections on 2021

Looking at the deals that dominated the real estate sector, was any new ground broken? Did any features or deal innovations stand out?

Despite uncertainties caused by prolonged lockdowns in Australia and globally in 2021, Australia's commercial real estate markets remained remarkably buoyant with complex, record-breaking deals. The real estate M&A team in Sydney has acted on three of Australia's top five property deals of 2021 as reported in the Australian Financial Review:

  • Blackstone's dual track disposal of the A$3.8 billion "Milestone" industrial logistics platform to ESR Milestone Partnership;
  • the A$315 million sale by Frasers of the iconic Sofitel Sydney Wentworth to a consortium of buyers led by KKR; and
  • Blackstone's acquisition of a 50% interest from Dexus/CIC in Grosvenor Place, a premium Sydney office tower.

Other notable deals include:

  • UniSuper and Cbus Property partnering with AMP Capital to buy stakes in Pacific Fair and Macquarie Centre for A$2.2 billion; and
  • The AMP Capital Shopping Centre Fund acquiring the outstanding 25% of Macquarie Centre for A$422.5 million, while its Retail Trust acquired the remaining 20% of Pacific Fair in partnership with UniSuper and Cbus for A$336.4 million.

Common elements of deals in the top end of the market included:

  • Nimble buyers winning: With many sellers looking to realise value in investments whilst interest rates remain low and yields are compressed, we have seen an increase in the use of multi-stage auctions to drive sale prices. These auctions may have shorter or longer timeframes for bidder engagement, but a consistent theme is that bidders who are willing to move more quickly and prove their interest in closing the assets have a significant advantage. Bidders should be willing to conduct diligence, mark-up sale documents and organise debt and credit comfort letters extremely early in the auction process, even if this is not within the guidance/rules set by the seller for the process.
  • Early FIRB engagement: Now that the FIRB lodgement fee regime has been overhauled, it has become much less expensive for many buyers of small to medium size assets to make FIRB notifications. This has led to a surge in bidders making notifications early in competitive processes and gaining a meaningful advantage over other foreign bidders. The new passive Foreign Government Investor Exemption Certificate is also assisting many fund managers which were previously deemed to be foreign government investors streamline their investments, especially small to medium size assets without requiring FIRB approval.
  • Due diligence: Due to current market demand for blue chip assets, sellers have typically been able to force extremely limited warranty packages on buyers, emphasising the need for buyers to rely on their own due diligence.

2. Public vs private

What proportion of public vs private deals are we likely to see in 2022?

The past 12 months has seen higher levels of activity in the sector with a number of large portfolio transactions been driven by real estate private equity firms who have been active in acquiring and disposing of a range of real estate assets. The recent uptick in take-private transactions is likely to continue, with many investors searching for management discounts which may be priced into REITs or REIT equivalent corporates. We expect this to continue into 2022.

3. Predictions for the balance of the year

In terms of M&A activity in the real estate sector for the remainder of this year, what's likely to drive – or dampen – deal-making? What impact (if any) are ESG considerations having on the type of assets / businesses being sought?

Top trends to look out for the remainder of 2022:

  • The pool of commercial investors will grow: After a 30 year pause, we're seeing the return of Japanese capital investors into Australia. At the same time, investment managers with foreign government participation in their funds are taking greater advantage of new FIRB Passive FGI Exemption Certificate to compete with domestic managers in auctions for in-demand assets.
  • Industrial and alternative assets will remain in demand: 2021 saw an increase in transactions in the life sciences, data centres, hotels and logistics sectors. Based on deals in the pipeline for 2022, we expect to see increased demand for healthcare, data centre assets and residential build-to-rent assets.
  • Competitive processes will speed up: 2021 saw a new blueprint for real asset auction processes emerge. Deals will reach contractual close extremely quickly (within days) once shortlisted bidders are selected. Buyers with the ability to conduct speedy due diligence on seller contractual positions will have a significant advantage.
  • ESG considerations: The trend in Australia and also globally is that investors are embedding ESG considerations into the property lifecycle from due diligence to acquisitions to asset management. Transactions that involve hard assets already have ESG considerations built into the investment mandates and taxation rates (eg. tax breaks for green assets).

On the buy-side, sovereign wealth funds and super funds are looking for buildings and infrastructure that have the highest level of green credentials as they become more accountable to their own investors.

As seen with the devastating floods on the East Coast of Australia, many significant risks facing buildings are climate related. Investors and owners need to consider property insurance premiums to ensure their real estate portfolios can sustain the costs involved with physical damage from natural disasters.

4. Impact of uncertainties on deal volumes in real estate

How is the real estate sector responding to uncertainties in the market such as COVID-19, the upcoming Federal Election and global inflationary pressures? What does this mean for the number/size of deals?

No doubt investors will need to consider macroeconomic influences throughout the rest of 2022 including rising interest rates, increasing geopolitical uncertainty and its effect on supply chains, along with changes to government policy arising from the Federal Election in Australia. Each of these will challenge the commercial real estate market’s capacity to maintain the heightened activity levels of 2021.

Energy and resources

1. Reflections on 2021

Looking at the deals that dominated the energy & resources sector, was any new ground broken? Did any features or deal innovations stand out?

Energy Transition and ESG has played a major part in the Australian M&A market, the $41 billion BHP Petroleum and Woodside merger and then the sale by BHP of the BMC Coal assets in Queensland to Stanmore are examples of BHP changing its focus.

We have seen companies such as Korea Zinc through its subsidiary Arc Energy acquire Epuron Energy which has 4.2 GW of early-stage development projects and is looking to develop an integrated hydrogen production value chain. We have also had POSCO’s takeover of Senex Energy which will give POSCO a strategic operating asset to further develop in areas such as hydrogen. Origin Energy has also disposed of a 10% interest in the APLNG Gas project in Queensland for $2.1 billion dollars and is looking to reinvest its net proceeds into the renewables sector.

Given the very strong coal and gas prices, we expect to see strong M&A in these sectors along with strong demand for battery metals and non-ferrous metals such as nickel. Key battery mineral lithium has seen extraordinary gains, with lithium carbonate prices more than quadrupling in a year and substantial M&A and ECM activity in that sector expected to continue.

2. Public vs private

What proportion of public vs private deals are we likely to see in 2022?

Given the sector we tend to see more private deals than public deals.

However for those commodities in high demand (battery metals, critical minerals, perhaps now gas), increased competition for projects and securing offtake we expect will drive greater public deal activity, via listed company takeovers and equity placements.

3. Predictions for the balance of the year

In terms of M&A activity in the energy & resources sector for the remainder of this year, what's likely to drive – or dampen – deal-making? What impact if any are ESG considerations having on the type of assets / businesses being sought?

High commodity price are driving strong M&A activity in this sector. Fear of missing out and first mover advantage are driving renewable energy sector M&A and future hydrogen project development.

The increased focus that the Foreign Investment Review Board has in relation to energy transactions and critical infrastructure is causing delays in transactions. For carbon intensive industries insurance and traditional finance is a growing issue however alternative financing arrangements are popular given the strong coal price.

Geopolitical issues such as the war in the Ukraine and rising interest rates is something that may create investor market volatility in the next 12 months and may slow down some deal flow. We are seeing some transactions wavering due to the uncertain outlook in prices for some commodities – for example for those commodities enjoying substantial gains due to the war in Ukraine (eg. gas/LNG, gold, aluminium), are the changes in prices structural or temporary? Uncertainty is no friend of M&A – uncertainty of commodity price creates difficulties in pricing and completing deals. If high prices persist however, fear of missing out will continue to drive deal activity.

4. Impact of uncertainties on deal volumes in energy and resources

How is the energy & resources sector responding to uncertainties in the market such as COVID-19, the upcoming Federal Election and global inflationary pressures? What does this mean for the number/size of deals?

The Australian energy & resources sector has generally managed COVID-19 well – upon close contact rules being phased out (expected over the next few months) COVID-19's impact on the sector should be minimal. The upcoming Australian Federal election will dampen the M&A market for the next six weeks. However, we are seeing a very strong pipeline of transactions for the remainder of 2022 – with record high commodity and gas prices and large cash reserves in mining and gas majors, funds and battery producers / car manufacturers we are expecting both deal numbers and deal value to grow.

Transport and infrastructure

1. Reflections on 2021

Looking at the deals that dominated the transport and infrastructure sector, was any new ground broken? Did any features or deal innovations stand out?

Despite the extended pandemic induced lockdowns, 2021 saw the M&A boom continuing in Australia, particularly in the infrastructure and transport sectors.

Notably, Sydney Aviation Alliance's acquisition of Sydney Airport was the largest all-cash and infrastructure takeover in Australian history. The deal completed in March 2022 and was valued at approximately A$32 billion. This deal highlights the increasing prevalence of consortium bids in the sector and the growing importance of superannuation funds direct investing in infrastructure assets, including through public company M&A.

2021 also saw the infrastructure sector focus on "decarbonisation" with many key industry participants publishing net zero strategies. Macquarie Group restructured its Real Assets division and bulked up its renewables arm to help rebalance portfolios and support a net zero push. Queensland Investment Corporation's Global Infrastructure arm also formalised its net zero emissions commitment for its two pooled funds – QIC Global Infrastructure Fund and the QIC Infrastructure Portfolio, which represent over $5bn of managed capital. This focus of net zero strategies is not expected to dwindle and will grow into 2022.

2. Public vs private

What proportion of public vs private deals are we likely to see in 2022?

This is notoriously difficult to predict, but we have seen, as noted above, some significant public infrastructure and transport transactions – that trend will likely continue particularly given the capital being committed to the sector and the competitiveness of private deals.

3. Predictions for the balance of the year

In terms of M&A activity in the transport and infrastructure sector for the remainder of this year, what's likely to drive – or dampen – deal-making? What impact if any are ESG considerations having on the type of assets / businesses being sought?

2022 is a year of continued opportunity for the infrastructure and transport sectors as the market continues to adapt to COVID, and works to rebuild with greater sustainability and innovation. The market's appetite in the transport sector is likely to continue as participants work towards finding a solution to ongoing supply chain constraints across the globe. In parallel, pandemic-related factors such as population redistribution, pressures on health and education systems, as well as ageing populations, have accelerated the demand for social infrastructure assets, with investment in Australian social infrastructure reaching record levels in 2021, surpassing roads as the top preference for the first time. Social infrastructure assets are also largely shielded from the negative effects of COVID-19 and meet critical ESG objectives.

The focus on ESG within the sectors is more serious and committed than ever with ESG considerations expected to be front of mind for infrastructure and transport leaders as an opportunity to fundamentally change Australia's collective path on the ESG agenda. In recent years it has become obvious that a business' ESG performance plays a significant part in M&A deals, especially in the infrastructure sector. From a buyer's perspective, an asset's future ESG potential will now be a consideration in addition to its past and current performance and due diligence will be intensified to test the legitimacy of any ESG claims that arise during deals. For sellers, ESG targets and performance will need to be transparent. 2022 is shaping up to see the private sector redouble its investment and activity on the climate agenda and leaders who have a clear path to net zero will succeed and those who don’t are expected to fall short.

4. Impact of uncertainties on deal volumes in transport and infrastructure

How is the transport and infrastructure sector responding to uncertainties in the market such as COVID-19, the upcoming Federal Election and global inflationary pressures? What does this mean for the number/size of deals?

While the M&A boom of 2021 is expected to continue into 2022, the year will also bring a degree of uncertainty as new challenges are expected to emerge as the market adapts to a world with (not after) COVID. Macroeconomic impacts due to rising interest rates, increasing geopolitical tension affecting supply chains, increased overseas regulation and the upcoming Australian Federal Election, are expected to challenge the Australian M&A market’s ability to sustain the boom of 2021. The Federal Government's significant regulatory reforms to the Security of Critical Infrastructure (SOCI) Act 2018 are also likely to affect M&A activity in the infrastructure sector as transactions involving critical infrastructure will now require mandatory review and approval from the Foreign Investment Review Board.

Despite these uncertainties, while traditional government privatisation (or ‘capital recycling’) deals remain limited, with low interest rates and capital to deploy, investors are likely to explore the new territory of "core-plus assets" (ie. emerging asset types that have shorter contracts, higher volatility and potential earnings – including data centres, social housing, land title registries and car parks) which are likely to be prominent in the M&A market in 2022.

Healthcare

1. Reflections on 2021

Looking at the deals that dominated the healthcare sector, was any new ground broken? Did any features or deal innovations stand out?

2021 was a significant year for M&A activity in the healthcare sector. Excluding the number of deals which did not disclose details, a majority of the deal values were between AUD $100 to $500 million.[1]

Globally, private equity funds were very active in this sector, accounting for approximately 49% of deal volume and 54% of deal value in 2021. This was an increase compared with the average over the previous five years. This trend was also evident in Australia.

The past 12 months also saw ongoing consolidation in the aged care sector undertaken by not-for-profit entities such as St Vincent's Care Services, Little Company of Mary Health Care Ltd (trading as Calvary) and most recently, RSL Care RDNS Ltd (trading as Bolton Clark).[2] Not-for-profit entities have been able to compete effectively in this space due to their various tax advantages over the private sector. This trend is likely to continue, particularly given the Federal Government's renewed interest in aged care reform and funding following the Royal Commission into Aged Care Quality and Safety (2018 – 2021).

In addition to aged care, there was ongoing consolidation in the dental and allied health subsectors. One example is our client, Healthia Limited, which is an integrated allied healthcare organisation that has been acquiring smaller healthcare service providers and adding these to its network of optometry and audiology, podiatry and orthotics, and physiotherapy clinics. In September 2021, Healthia acquired the Back In Motion Health Group and its 64 physiotherapy clinics for $88.4 million.

There were also a large number of deals in the medical technology space evidencing the sector's accelerated digital transformation and shift in service delivery model.

2. Public vs private

What proportion of public vs private deals are we likely to see in 2022?

In 2021, over 90% of the M&A deals were private deals. This would in part, in some of the sub-sectors, reflect the disaggregated nature of these sectors. This, coupled with ongoing volatility in the listed stock markets across the world, makes it likely that this trend will continue in 2022.

We saw a number of private and not for profit buyers take advantage of volatility in the ASX market and make strategic bids for publicly listed healthcare businesses such as 1300 Smiles Limited (dental) and Japara Healthcare Ltd (aged care), resulting in their delisting. We expect if the listed markets remain suppressed that there may be further privatisation in the healthcare sector.

3. Predictions for the balance of the year

In terms of M&A activity in the Healthcare sector for the remainder of this year, what's likely to drive – or dampen – deal-making? What impact if any are ESG considerations having on the type of assets / businesses being sought?

The factors that will drive and dampen M&A activity in the healthcare sector are set out in the below table.

Unlike other sectors, the healthcare sector is less likely to be impacted by ESG considerations that could be expected to lead to divestment or spin-offs of assets that do not meet investor scrutiny. Nevertheless, as more businesses embed ESG frameworks into their business practices and long-term growth strategies, ESG considerations will play a greater role in the due diligence and M&A decision making process. We expect to see greater scrutiny over target entities' performance on key ESG issues and careful integration plans which consider issues such as supply chain management and patient data and privacy protection.

4. Impact of uncertainties on deal volumes in healthcare

How is the healthcare sector responding to uncertainties in the market such as COVID-19, the upcoming Federal Election and global inflationary pressures? What does this mean for the number/size of deals?

Over the past two years, COVID-19 has driven deals in the healthcare sector, particularly in subsectors such as pathology and diagnostic testing and medical technology, including telehealth. However, the sector is now grappling with labour shortage issues and employee burnout. Paired with the uncertainty created by the upcoming Federal Election, there may be a downtrend of deals over the next few months.

Nevertheless, the sector remains resilient and foreign investors have shown a keen interest in the Australian healthcare sector, particularly its technology and innovation. Given the fragmented nature of the industry, it is also likely that we will continue to see consolidation in subsectors such as allied health and aged care.