Each year the Corrs M&A team analyses every takeover and scheme of arrangement over $25 million involving an Australian listed target. As we pass the first half of the calendar year, we have taken a temperature check of the public M&A market and here is what we have found1:
BE GREEDY WHEN OTHERS ARE FEARFUL?
- Deal making can be contagious, but so too can caution. The first half of 2013 has been subdued - deal volume is down and deal value has decreased substantially.
- Deal volume has almost halved from this time last year. Only 33 deals had been announced by mid-July this year, and just 18 of those deals have a value over $25 million. At the same point last year 49 deals had been announced, 34 of which had a deal value over $25 million.
- The average value of deals over $25 million is down significantly from $360 million in 2012 to $284 million to date this year. And even this figure is inflated given the largest deal, ADM’s takeover bid for GrainCorp (at $3.4 billion) comprises around 60% of the total deal value. Without this significant outlier, average deal value from our sample is only $124 million.
- Understandably, in a tough market, boards are considering M&A activity carefully. The “fear factors” that we noted in our 2012 M&A review2 continue –both bidders and targets are unsure as to whether it is a good time to do a favourable deal.
- However, after a slow start we have seen a pick up in activity in the last month, with 30% of the deals in our (albeit small) sample being announced in July alone.
- As we wait for confidence to return to the M&A market, perhaps we should consider the wise words of Warren Buffet “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”3
STICKING CLOSE TO HOME
- Domestic deals dominate our deal sample so far this year, with over 60% of deals involving Australian bidders.
- In a significant change from previous years, there has only been one deal above $25 million involving a Chinese bidder. In the private M&A space China Molybdenum was successful in its acquisition of Rio’s 80% stake in North Parkes. Following the trend from 2012, the bid comprised both State capital and private enterprise (notably Cathay Fortune which was involved in the bid for Discovery Metals which was later withdrawn).
WORD ON THE STREET IN KALGOORLIE...
- M&A activity in the resources sector (consisting of metals, mining and energy) has slowed. In 2012, this sector made up 57% of deals over $25 million. In 2013, resources make up a much smaller slice of the M&A pie, with deals from this sector so far comprising just 33% of our deal sample.
- However, this portion changes at the smaller end of the market with 93% of deals below $25 million coming from the resource sector.
- This trend in relatively small scale public M&A seems set to continue. While the major and mid-cap mining companies are bunkering down in a tough market and focusing on fund raising and cost cutting, word on the street at the recent Diggers and Dealers conference was that further consolidation amongst junior mining companies was expected.
- In our 2012 M&A Review we suggested that gold companies may seek to reduce costs with economies of scale – particularly if the gold price fell and that we expected M&A interest in the gold sector to continue. Cost cutting has been a focus across the resource sector in 2013, the gold price has fallen and interest in the gold sector remains strong.
return of the friendly takeover
- After 2 years of dead heats between preferred deal structure, 2013 has seen takeovers marginally move ahead, representing 55% of the deals over $25 million.
- The theme of deal certainty continues with recommendations by the target in 83% of all deals from our sample.
- In keeping with this theme, 2013 has seen a marked increase of implementation agreements in takeover bids – all but the 2 “hostile” takeovers4 have involved some form of agreement between bidder and target before the takeover bid has been launched.
- As we mentioned, the “fear factors” from 2012 have continued – Bidders continue to fear overpaying in an uncertain economic environment, fear deal uncertainty and fear a potentially bad acquisition. In light of these concerns, we expect the trend for implementation agreements in takeovers to continue as bidders require a recommendation and due diligence before proceeding with a deal.