04/07/2012 - 10:36

All rather quiet on western M&A front

04/07/2012 - 10:36

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The corporate advisory market is in the doldrums as global forces restrain players.

All rather quiet on western M&A front

The corporate advisory market is in the doldrums as global forces restrain players.

TENTATIVE investors have pushed dealmakers into the background, with the level of activity in equity capital markets and mergers and acquisitions restricted to a fraction of what took place just a few years ago.

The contagion from Europe has spread markedly this calendar year as debt markets have tightened again and equity investors have put their hands in their pockets, making funding for all but the most enterprising dealmakers very difficult to come by.

Figures supplied by UBS show that just $6 billion in ECM deals have taken place nationally in the past six months, about a quarter of the total for 2011. The resources sector has been more resilient, representing a bigger proportion of that activity as the overall market has slowed. 

According to research by WA Business News, $1.02 billion worth of Western Australian-focused ECM deals have taken place in the past three months, which was a slowdown from $1.33 billion in the first quarter of 2012. 

The WA-centred activity would largely represent resources-based transactions, supporting the UBS data showing 40 per cent of total ECM activity is from the resources sector. 

Nevertheless, it is a mere trifle compared to just a year ago and, in particular, the flurry of deals that took place in late 2011 as dealmakers became convinced that confidence was being restored in the market.

That sentiment has reversed. Without the backing of investors, and fearful of moving too early amid so much uncertainty, company boards and management have largely decided to wait it out.

Just to underline how dire the past six months have been for the smaller end of the market, two weeks ago Minotaur Exploration managing director Andrew Woskett called for a levy on profitable mining operations – to create a national resources development fund to finance cash-starved juniors searching for new discoveries. 

After the furore around the mining tax, such a heretical call amplifies how tight it has become at the small end of town.

Most advisers predict that any hoped-for comeback this calendar year will be muted at best.

Hartleys corporate adviser Grey Egerton-Warburton, a deal maker who won the WA Business News 40under40 First Amongst Equals award this year, is one who has witnessed the slowdown after a flurry of deals brought him attention last year.

“There is definitely an aspect that we advise people to go to market when the market is strong so that they are not exposed to the market when it’s tougher,” Mr Egerton-
Warburton said.

“Right now that is looking like good advice.’’

Despite that, he said WA brokers and investment bankers were doing better than those in the rest of the country, where there had been significant layoffs.

UBS Perth-based adviser Tim Day said the market uncertainty and depressed valuations meant companies were delaying raising equity or seeking lower-cost financing, including high-yield and convertible instruments.

“Global uncertainty and volatility has also discouraged boards from pushing the button on M&A,” Mr Day told WA Business News.

“We expect ECM to pick up towards the end of the year by which time we believe the markets will have turned.

“Saying this, the market will be far more discriminatory in terms of projects it will back and will focus a lot more on cash costs, path to market and capital expenditure profiles.”

Mr Day’s view was that Chinese and Indian investor appetite had waned after some expensive mistakes. They were now more focused on strategic stakes that leave Australian management intact.

In terms of sectors, he said gold remained very fragmented, providing room for transactions; unconventional oil and gas was also attracting a lot of attention, and mining services companies were providing attractive entry points for overseas companies wanting to build an Australian footprint.

The activity by Panoramic Resources, Aurora Oil & Gas, and the proposed merger of St Barbara and Allied Gold to create an international gold producer and explorer with a market capitalisation of more than $1 billion, partly support that proposition.

In the legal field there were mixed reports on the drop-off in activity, with lawyers less reliant on deal-making success for their fees and some bigger energy transactions to sustain the sector.

A beneficiary of this was Allen & Overy, the first major UK player to open a Perth office.

Allen & Overy has worked on two of the biggest deals announced in the past quarter, representing Japanese parties in transactions that involved taking strategic stakes in two major proposed gas projects – Browse and Wheastone.

The revival of the Japanese as an investment force is one of the few intriguing trends of the past six months. Not only has their strategic focus on energy shifted back to gas due to the earthquake-led withdrawal from nuclear power, Mitsubishi has also fully taken over the Jack Hills magnetite project and associated Oakajee port development.

Allen & Overy partner Geoff Simpson said the resources sector was running at two speeds, with iron ore, coal and LNG remaining buoyant while other commodities languished.

Clifford Chance partner Ian Cochrane said he could not recall a less active period in M&A than the recent past.

“It is probably the quietest time in M&A that I have seen in my career to date, and that is 30 years,” Mr Cochrane said.

Despite the quiet times, the veteran corporate lawyer was at the centre of some rare M&A action last month, albeit outside his usual legal role. Mr Cochrane is chair of Little Word Beverages, which is the subject of a friendly takeover by Lion, a subsidiary of Japanese brewer Kirin.

 

For the comprehensive database of ECM and M&A transactions, visit www.wabusinessnews.com.au/Corporate-Finance

 

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