WITH some experienced campaigners suggesting the current mergers and acquisitions market is the worst they have ever seen, there is plenty of finger pointing to overly exuberant deals of the past few years as
the reason for reluctance in the current environment.
Barrick Gold’s $7.3 billion takeover of Equinox Minerals last year is a case in point.
To many who have invested in the North American mining giant, buying copper-focused Equinox was viewed as an expensive departure from the company’s core business in gold. Barrick shares have performed poorly this year and last month its CEO, Aaron Regent, was dumped.
It is a strong warning to any CEO and his board that it is a big mistake to buy anything today that might prove cheaper tomorrow.
Similarly, though not as well documented, are the ramifications of the spending spree by Chinese companies over the past few years.
There is much acknowledgement in the industry talk that Beijing has reacted badly to a number of poor investment outcomes, even though it is harder to see that reflected in share price movements or executive culls due to the opaque nature of the organisations involved, especially those that are state-owned.
An interesting example is the ongoing legal proceedings between Cape Lambert Resources and Chinese giant MCC over the 2008 sale of a magnetite project.
Cape Lambert, chaired by Tony Sage, is chasing the final $80 million instalment from the $400 million deal – a transaction that was seen as a high point in deal making at the time.
There has been little news about the project since.
With Europe, the US and even China lurching with varying degrees of economic issues, these legacies might not be the biggest issues overhanging the market, but it was the ambitions of such companies that kept the markets buoyant for the past few years.
Take out the most bullish Chinese buyers, held back by their government, and aggressive resources CEOs, restrained by the market, and there is very little to keep things ticking over.
Miro Advisers managing director Tim Woodall has recently established a presence in China and spoke to WA Business News fresh from visiting there.
Mr Woodall is a firm believer that China will be a place for deals in the future but right now those investors are circumspect.
“Yes they need energy but it is not ‘let’s get it tomorrow’ or ‘let’s get that the day after’,” he said.
Competitive market
Investment bankers have confirmed that the increasingly competitive market has made life tougher.
For now, the Perth-based corporate advisers have avoided the wholesale cutbacks that have started occurring over east.
In fact, global firms Deutsche Bank and Credit Suisse have recently opened offices here, although they are lightly staffed and lack the star power they were seeking
(see Deutsche, Credit Suisse head west).
As a fly-in, fly-out group, Credit Suisse has mainly been active in arranging debt funding for clients such as Fortescue Metals Group and Aurora Oil & Gas, but it has acted in several locally linked takeovers during the past 12 months – something that will help the company as it seeks to expand its beachhead in WA corporate finance.
It is not just the increased presence of major players in WA; the lack of work is pushing them to chase smaller deals and charge more competitive rates to do so.
“It is probably a bit more competitive, we see the big guys coming into a space that you would not previously see them play in,” one local adviser told WA Business News.
“An asset divestment of $100 million would not normally be picked up by large investment banks; that makes the market more challenging.”
The results can be seen in the accompanying list of Perth-based advisers’ main deals. Not only is the number of transactions small; the number of relatively big deals is low as well.
This includes deals such as Panoramic Resources’ takeover of Magma Metals and Galaxy Resources’ acquisition of Lithium One, which were announced in the previous quarter and completed in the past three months.
“Companies that have money have the upper hand,” Azure Capital director Simon Price said. “Those that are willing to invest will do very well in the longer term out of that.”
Notable deals
The biggest M&A deal that clearly had a local advisory presence was the friendly takeover of Little World Beverages by Japanese brewing giant Kirin’s subsidiary, Lion, for more than $380 million.
While it is early days in terms of detail around the history of the surprise announcement, Little World’s corporate adviser, Justin Mannolini from Gresham, had a long-term connection with the Fremantle-based beer company.
Mr Mannolini was the brewer’s lawyer at Freehills when it floated on the ASX in 2005.
Listed group Euroz was relatively busy across both M&A and equity capital markets. It advised on two takeovers, including unconventional gas player Aurora Oil & Gas’s $107 million bid for Eureka Energy, which is being advised by Azure Capital.
It also advised Cooper Energy on its $31.5 million bid for Somerton Energy, which was advised by GMP Securities. Euroz was also one of the more active corporate advisers in equity capital markets.
Panoramic Resources also made a series of asset acquisitions plus a takeover, although the market appears to have been less than enthusiastic about those moves (see Panoramic eyes big picture as opportunities emerge).
Other deals included Aquila Resources’ sale of a 50 per cent stake in one of its coal assets to Sumitomo Corporation Group, and Zijin Mining Group’s takeover bid for Norton Gold Fields, which has significant assets in WA.
While there was not a great deal of advisory work for local companies – Macquarie acted for Sumitomo and Cannings Purple represented both Aquila and Norton in the public relations area – most players will be buoyed by any continued buying coming out of North Asia.
Media-resources
One unusual theme to emerge in the past six to eight months is the investment flowing between the resources sector and media assets, which have slumped as retail advertising has dived.
The most notable headline hitter was Hancock Prospecting buying into Fairfax. In the past month, Hancock pumped in $86 million to top up its investment to nearly 19 per cent. Hancock chairman Gina Rinehart is demanding up to three board seats.
Another recent deal was the $385 million purchase by Seven Group Holdings of the Australian operations of mining services group Bucyrus from Caterpillar. Seven Group, which holds a controlling interest in Seven West Media, also has several Caterpillar franchises in its Westrac business.
Former Woodside Petroleum CEO Don Voelte now heads Seven West Media, which owns Channel Seven and The West Australian newspaper.
There was also the purchase in February of a 49 per cent stake in West Perth-based Purple Communications by east coast investor relations group Cannings, which is controlled by listed east coast group STW Communications.
STW also has a big stake in WA-based national advertising group The Brand Agency, which in February acquired the Western Australian office of specialist digital agency Market United, formerly part of the ASX-listed company Q Ltd.
Purple is one of the most active investor and public relations groups in the resources sector and founder Warrick Hazeldine said the attractions of joining forces with Cannings was the east coast network, the training and support offered by STW, and the digital expertise The Brand Agency provided.