The increase in foreign bidders is significant because it comes despite new Chinese State Administration of Foreign Exchange (SAFE) regulations issued in December 2016. These introduced tighter capital controls, making it harder for Chinese bidders to pursue large scale outbound M&A investment.
The reduced activity by Chinese bidders has been replaced by new inbound investment from other jurisdictions, such as Canada, the US and Japan.
In contrast to China, regulatory changes in Japan appear to have increased appetite for outbound investment. This could be driven by increasing pressure on Japanese companies from shareholders to achieve higher return on equity and growth following the introduction of the Corporate Governance Code in 2015 and, given that Japan’s economy is increasingly defined by low population growth and a declining market of consumers, corporates are seeking to diversify outside of Japan, to chase higher-growth opportunities in countries like Australia.
Notable recent examples of Japanese companies pursuing M&A transactions in Australia include:
- Hitachi Construction Machinery (our client) successfully acquiring Bradken.
- Nomura Research Institute’s recent acquisition in the Australian IT and software services industry of ASG Group - with ASG Group subsequently acquiring SMS Group (with ASG defeating an original offer for SMS Group from DWS).
- In July 2017, PERSOL (one of the largest staffing companies in Japan) announced a recommended takeover offer for Programmed Maintenance Services (by scheme of arrangement.
We expect Japanese bidders to continue their strong run in Australian public M&A deals in FY18. Japanese led deal flow will likely centre around transactions in the mid-market and in sectors where Japanese companies can add value through their unique strengths, such as robotics and IT.
We believe Chinese bidders will continue to consider Australian targets in FY18, particularly in the commodities space – both hard and soft – but also in more services oriented sectors. Despite capital controls, China has a list of “mandated” sectors, where China is aiming to expand its own expertise: it is much easier to get capital flow from China for an acquisition in one of these sectors.
China has identified health and aged care as strategically important sectors because of growing wealth and a growing middle class in China. Effectively, Chinese want to leverage the IP and the knowledge of their Australian targets and bring that model back home. We’re seeing interest from Chinese bidders across the
full spectrum of health and aged care assets.
For instance, our client Jangho Group, which acquired ASX-listed ophthalmology company Vision Eye Institute in December 2015, has been on the share register of Primary Health Care for just over a year now. There is much speculation about what Jangho’s next step will be.