• 45 deals announced FY19 (up 25% on FY18)*
• 9 mega $1b+ deals representing 20% of deal volume (19% FY18)
• mid-market epicentre of activity
• private equity bidder deal flow 17.9% total value FY19 (17.5% FY18),
• foreign bidders continued to dominate - 58% of deals involved a foreign acquirer (78% FY18)
• tactics for succeeding in auctions for control becoming increasingly creative
• understanding and navigating the regulatory landscape remains key
• low organic growth, opportunism, superannuation investors and technological change to drive M&A activity going forward

MinterEllison’s review of the deals landscape for FY19 and Outlook FY20, Directions in Public M&A, launched today shows the continuation of the dynamic deals activity seen in FY18.

For FY19, MinterEllison identified seven key trends and themes in the Australian public M&A market:

1. Auctions for control remain prevalent – with more aggressive and creative tactics being employed to succeed in acquiring attractive ASX listed targets
2. Private equity continues to be a key driver of Australian public M&A activity – with increasing innovation in acquisition structures including co-investing with superannuation funds and target management.
3. Foreign bidders still dominate – strongly represented by U.S., Canadian and Japanese acquirers
4. Cash remains king – although foreign listed scrip is becoming increasingly acceptable
5. The mid-market (deals valued at between $50-$500m) continues to be the epicentre of M&A deal activity
6. Shareholder activism an embedded risk in the M&A deal landscape – acquirers and target boards are now well versed in activists' tactics
7. While vast majority of deals proceed on a friendly basis (with the scheme structure favoured) - hostile bids are by no means dead

These trends are largely consistent with FY18, demonstrating stability and continuity in the Australian market for corporate control. The Report suggests that this predictability should provide a level of comfort and assurance within which foreign and domestic companies feel confident transacting.

However, looking beneath the surface of the similarities between FY19 and FY18, some key deal developments are discernable over the last financial year. These include:

1. Creativity and flexibility are becoming the keys to success
   As auctions for control become more prevalent - and announced deals more susceptible to disruption by activist shareholders - dealmakers have responded to these challenges by becoming more creative. The Report notes that consistent with FY18, there were a number of vigorously contested auctions for control of ASX listed targets in FY19. Notable auctions included Gateway Lifestyle Group; Xenith IP Group, Healthscope, Eclipx Group and GBST Holdings Limited.
   As Mr Colla observed: “Highly motivated acquirers have appreciated the strategic value of potential targets and were prepared to bid aggressively and creatively in response to competition. Creativity includes not just acquiring a pre-bid stake as leverage for how the auction might unfold but also offering a flexible consideration structure that resonates with target boards and their shareholders”. 
2. An increased use of transaction and process deeds - as a prelude to entering into a formal implementation agreement for friendly deals – which accounted for 86% of FY19 deals in MinterEllison's market data sample.
   This is most likely in response to an elongation in the lead-time from an initial, non-binding indicative approach to a formally announced implementation agreement. Mr Colla observed that:
   "This longer period is often attributable to more extensive due diligence processes and more protracted negotiation over valuation and pricing. As a result, prospective acquirers and targets are now each investing more time in the pre-announcement period - with no certainty that a deal will get done. They are therefore each documenting protections into transaction and process deeds to allocate risk and sunk costs if no formal proposal ultimately emerges from the now invariably longer pre-announcement negotiation phase."

Key M&A Drivers

The recent trends and predictions for Australian public M&A activity profiled in MinterEllison's Report reflected a perennial reality: regardless of prevailing economic and geopolitical conditions, companies will continue to pursue M&A activity in some shape or form.

“The industry drivers of M&A activity are diverse and often transcend prevailing market conditions,” the Report notes. “Overlaying those industry drivers is the formidable presence of private equity and superannuation fund investors, both of whom are increasingly important players in Australian public M&A activity.”
“Following more than two decades of sustained economic growth, Australia continues to be an appealing destination for inbound foreign investment.”
The Report also notes that despite the shadows of a potential economic slowdown, the ongoing stability and continuity of the Australian market for corporate control showed underlying resilience and opportunity. Mr Colla said:

“MinterEllison is confident international and domestic companies will continue to pursue M&A transactions in the Australian market. Our market offers stability and continuity but dealmakers must be mindful of two things. First, they need to be nimble and creative with their deal structures to succeed, especially in the face of increased competition for attractive targets and increased shareholder activism. Second, our regulatory landscape – although very facilitative of M&A transactions, needs to be appropriately navigated from the outset. That means early engagement with regulators, especially with complex, bespoke or novel transaction structures.”

Australian regulatory landscape

Australian regulators such as ASIC, FIRB and the ACCC continue to exert considerable influence over deals. ASIC remains vigilant in reviewing complex, novel or bespoke transaction structures. The ACCC is closely monitoring industry consolidation plays, as well as acquisitions by industry competitors of strategic minority stakes. FIRB continues to closely review transactions in sensitive sectors including healthcare and agribusiness to ensure that they are not contrary to Australia's national interest.

Navigating the Australian regulatory landscape continues to be key to successful deal execution. Although our regulators are facilitative of public M&A transactions, understanding their sensitivities and processes is critical.

Hot Sectors

Hot sectors in FY19 included:

• Metals & Mining - a standout in FY18 and as predicted last year, metals & mining led the way in FY19 with eight deals out of our sample of 45 falling within this industry. Companies in this sector pursued M&A activity as a direct pathway to acquire proven resources assets, rather than pursuing potentially riskier and more expensive exploration activity.
• Real Estate Investment Trusts (REITs) were strong in FY 18. For FY19 participants took advantage of changed industry conditions by buying growth and scaling up: e.g. Landmark’s acquisition of RuralCo by scheme of arrangement, and AP Eagers’ scrip acquisition of Automotive Holdings Group.
• Medical Adjacent industries (Health Care Equipment & Services, and Pharmaceuticals, Biotech and Life Sciences) - Activity in healthcare and adjacent industries was driven by private equity and institutional investors looking for strategic acquisitions of defensive assets for predictable cashflows. Adamantem Capital and Liverpool Partners’ acquisition of community healthcare provider Zenitas Healthcare is an example of private equity looking to acquire healthcare companies with predictable revenue that have been under-priced by the market.

Outlook 2020

Turning to the outlook and noting that organic growth in many mature industries was slowing, MinterEllison expects to see greater reliance on growth by acquisition.

“For that reason alone, M&A levels in Australia for the remainder of FY20 are likely to remain steady,” said Mr Colla. “Strategic acquirers will always be prepared to ‘look through’ short-term geopolitical headwinds such as the eventual outcome of Brexit and the oscillating economic tensions between the world’s two largest economies, China and the United States.”

Other predictions for the remainder of FY20:

• Opportunistic bidders will remain ready to pounce - Mr Colla observed that, "Acquirers will continue to move quickly to take advantage of quality targets whose share prices are depressed or languishing due to broader adverse industry sentiment rather than any fundamental problems with the underlying business. Out of favour and heavily sold sectors such energy and aged care may now be on the radar of opportunistic bidders. Hostile bids will remain a viable option for many opportunistic acquirers whose initial attempts at friendly engagement are rebuffed by target boards."
• Australian superannuation funds will become key players in M&A transactions - This will be either as co-investors with private equity or industry participants and/or as conduits to delivering a pre-bid stake. Mr Colla said that, "The sheer weight of Australian superannuation funds means they will no longer be passive in M&A deals, but will instead drive and shape M&A activity. Australian super funds may replicate the patterns seen overseas, such as in Canada, where pension funds are major direct investors in publicly listed companies, both locally and in overseas markets (such as Australia)."

The Report also notes that rapid technological change was a driver of Australian public M&A activity in FY19 and is likely to continue. Most industry sectors are subject to rapid change and disruption, mainly driven by unprecedented advances in technology and the relentless drive for innovation. Increased competition from innovative start-ups who have built new, disruptive technologies can quickly collapse barriers to entry and erode the market positions of established companies”.

Overarching Prediction

The Report notes that there is always an element of crystal ball gazing when it comes to identifying industry sectors to watch for future M&A activity. However, as an overarching prediction, MinterEllison expects technological disruption and innovation to drive M&A activity across most industry sectors, with established companies increasingly looking to acquire an emerging or disruptive challenger. Mr Colla observed that:

“In response to a rapidly changing technological and competitive landscape, established companies can either look to build internal technological innovation or buy it. However, in many cases, acquiring an emerging or disruptive challenger will often be a necessary defensive response. In many industries the speed with which companies need to respond to technological disruption cannot be done without M&A. The 'build versus buy' decision often leads to a conclusion that acquiring is the fastest path to respond to structural changes in an industry."

The Report suggests that to unlock the capital to fund these defensive acquisitions, companies will increasingly review their asset portfolio and divest non-core assets that are not part of their future growth strategy.

*Analysis of ASX market data for the financial year ended 30 June 2019. Consistent with our approach in the past two financial years, we set our market data compilation threshold as announced deals with a value of $A50 million or more.

The report is available via the MinterEllison website: