“It has been a busy year and it continues to be,” is how Simon Reed describes current market conditions in Western Australia.
A corporate partner at Perth’s top ranked law firm, Herbert Smith Freehills, Mr Reed is not alone in that assessment, with most of his peers having enjoyed continued strength in capital raisings, and mergers and acquisitions.
WA’s corporate finance market has also become increasingly competitive, with the latest entrant being Sydney-based Barrenjoey Capital Partners.
Macquarie Capital and Azure Capital continue to be the leading corporate advisers, according to Business News’ annual review of WA-related deals (see table).
Among the law firms, Herbert Smith Freehills and King & Wood Mallesons were big winners, as they worked on most of the big M&A deals.
Broking firm Canaccord Genuity continued to be the top lead manager for capital raisings, followed by Macquarie Capital and local firm Euroz Hartleys.
There was not a clear-cut leader among law firms working on equity capital markets (ECM) deals.
Gilbert + Tobin sat at the top of the Business News league table, based on value of deals, while Steinepreis Paganin was the busiest firm by number of deals.
That was a change from last year, when HWL Ebsworth Lawyers was the top-ranked law firm for ECM deals.
Also notable this year was the growing deal flow for law firm Thomson Geer after it poached the corporate finance team from competitor DLA Piper.
More generally, the distribution of corporate finance work in WA across multiple law firms reflects a highly competitive market, with the likes of Blackwall Legal and HopgoodGanim Lawyers also gaining market share.
Deal trends
The Business News database of WA-related deals includes 344 M&A deals worth $68.3 billion.
That’s a big increase from 245 M&A deals worth $21.2 billion in the prior year.
The increased deal value reflected a handful of very large transactions in 2021, most notably the $19 billion merger between Woodside Petroleum and BHP’s petroleum business.
That deal involved multiple firms and in most cases the work was jointly led by partners in Perth and Melbourne.
The Herbert Smith Freehills team, for instance, included Perth-based partner Stuart Barrymore, who has long undertaken work for BHP’s petroleum business, while at King & Wood Mallesons, Perth partner Heath Lewis took a lead role advising Woodside.
The $8.4 billion merger of Adelaide-based Santos and Sydney-based Oil Search was a similar story, with the work spread across multiple cities.
HSF also worked on this deal, with Perth-based partner Rob Merrick being the firm’s client relationship partner for Santos.
Conversely, some other large deals with a strong WA connection did not lead to any work for Perth lawyers or corporate advisers.
Most notably, Wesfarmers’ $770 million bid for Australian Pharmaceutical Industries was run from the east coast.
Similarly, Seven West Media’s acquisition of Prime Media was led from Sydney.
Regarding capital raisings, the Business News database has 615 ECM deals worth $13.85 billion for 2021.
That compared with 620 deals worth $11.75 billion in 2020, which was also a strong year.
The most notable trend last year was the big increase in the number and value of initial public offerings.
In all, 79 IPOs worth $1.92 billion were completed in WA during 2021.
That’s a massive increase from 32 IPOs worth $343 million in the previous year.
The big spike in deal value largely reflected the APM Human Services International IPO, which raised $985 million ahead of its listing on the ASX.
That was one of the largest IPOs ever completed by a Perth-based company and was helmed by four global investment banks: Goldman Sachs, UBS, Merrill Lynch and Credit Suisse.
The doubling in the number of IPOs was a better indication of the overall buoyancy in the market, as was the diversity among companies listing on the ASX.
They included mining services firms such as DDH1 and MLG Oz, biotechs such as Artrya and Argenica Therapeutics, and an array of miners and explorers.
Market outlook
KWM’s Perth office managing partner, Nigel Hunt, said 2021 was a busy year for his WA team.
“The year ended up being much stronger than anyone was predicting,” Mr Hunt told Business News.
“The fact it was such a strong year is still surprising given the COVID backdrop and global uncertainty.”
Mr Hunt said he saw the heightened activity driven around three major thematics.
One was exposure to fossil fuels, with BHP selling its oil and gas assets.
A second theme – perhaps less relevant to WA – was financial services and online businesses proving the robustness of their model in the COVID-19 world.
The ‘buy now pay later’ sector was a prime example, evidenced by US company Square buying market leader Afterpay.
Third was the growing support for the battery metals sector and futurefacing commodities such as lithium, nickel and copper.
This was reflected in some of the year’s biggest M&A deals, including Sandfire Resources spending $2.5 billion buying a copper project in Spain, and South32 spending $2.1 billion buying a 45 per cent interest in a copper mine in Chile.
Other notable deals in the sector included the merger of lithium miners Orocobre and Galaxy Resources, and Andrew Forrest’s Wyloo Metals outbidding BHP for control of Canadian nickel miner Noront Resources.
Another battery metals deal on which KWM advised involved Chinese group Huayou Cobalt’s acquisition of Prospect Resources’ Arcadia lithium project in Zimbabwe for $528 million.
Mr Hunt believes there is plenty of life in the market.
“We see the M&A market staying buoyant for at least the first half of CY 2022 and we think there is still plenty of activity to come,” he said.
Ashurst partner Roger Davies also sees a strong appetite for M&A deals across a range of sectors, including in energy and resources.
He said clients were enjoying mergers of equals, with the Galaxy-Orocobre deal being a prime example.
“Uncertainty around COVID and economic conditions seems to have, counterintuitively, created a strong climate for initiating and seeing through deals,” Mr Davies said.
He said the ECM market was still strong, both in secondary raisings and acquisition funding, as well as IPOs and new listings.
HSF’s Mr Reed said transaction activity had been at unprecedented levels.
“We’ve seen this lead to some pressures and constraints on the arrangements that support transactional activity,” he said.
One example was the limited availability of warranty and indemnity insurance.
“These bandwidth constraints on deal activity mean there remains strong pent-up appetite to do deals that could not be executed in 2021.”
Mr Reed said he had also seen a slight fall in foreign bidder activity, in part due to the curtailment of physical site visits and other due diligence access, arising from COVID-19 travel restrictions.
“To the extent these restrictions ease in 2022, we expect that we will see offshore investors return with a vengeance, as the hunt for reserves and security of offtake continues across commodities,” he said.
Azure capital managing partner Adrian Arundell was more cautious in his assessment.
“We’re still busy and I’m quietly confident, but a little bit of caution is warranted,” Mr Arundell said.
His main concern was that the valuation pendulum had swung too far, with some investors assuming the very low cost of capital would continue over the long term.
Mr Arundell said he had been surprised how much investors were prepared to pay for some assets that had changed hands over the past year.
He does not believe COVID-19 travel restrictions had a big impact.
“Some international parties want to ‘touch and feel’ before they will close a deal but generally, as time has gone on, most people got over that,” Mr Arundell told Business News.
Video communication and virtual tours had replaced physical site visits, he added.
Mr Arundell said being part-owned by French banking group Natixis had helped Azure win more work.
“We brought some of their network to bear, to enhance our capability,” he said.
Azure’s Sydney office also helped the firm win more work, especially working for international clients on infrastructure projects.
One trend that all advisers agree on is the increasing role played by superannuation funds, which have become more active in the M&A market.
“It seems that grandma’s sleepy old superannuation fund is now more likely to be a wolf dressed in grandma’s clothing,” Mr Reed said.
“Based on the deals they are cutting for themselves and their investors in M&A transactions, they certainly have the teeth for it.”
Mr Reed added that deal protection mechanisms, such as exclusivity and break fees, had been strongly tested throughout 2021 as competition for targets heated up.
“We expect this will be a continued area of focus for the Takeovers Panel and other regulators in 2022,” Mr Reed said.
Paul Early, who heads Barrenjoey’s recently opened Perth office, shares the positive outlook of other corporate advisers.
“We’re optimistic,” he said.
“Equity markets are holding up.
“Debt markets and commodity markets are strong.”
Barrenjoey’s first WA deal came late in the year, when it was jointly mandated with Bell Potter Securities and Macquarie Capital to lead a $450 million placement for lithium company Liontown Resources.
That was a neat fit with the firm’s positive view on future-facing metals,” Mr Early said.
Barrenjoey has quickly had a big impact on the Australian corporate finance market since its 2020 launch, growing to have 300 staff.
Mr Early previously worked for global banking group Barclays, one of Barrenjoey’s institutional backers.
Barclays holds a 9.9 per cent stake in Barrenjoey and offers access to its global banking and research capability.
This came to the fore when Barrenjoey advised Seven Group Holdings on its takeover offer for Boral; it was Barclays that provided a $5.5 billion funding facility.
Barrenjoey’s second institutional backer is Sydney-based funds manager Magellan Financial Group, which holds a 40 per cent stake.
Magellan chair Hamish Douglas recently said Barrenjoey was already profitable, when asked about pressure on his business after the loss of its single largest investment mandate.
Mr Early has built a four-person corporate finance team in Perth, putting Barrenjoey on par with the likes of Goldman Sachs and UBS.
His team includes Scott Cook, whose experience includes time with Credit Suisse in Sydney and JP Morgan in New York.
The Perth office also includes experienced banking executive Sharon Hills, who is a founding principal and head of client KYC (Know Your Client).
“We will look to expand in Perth as the business grows,” Mr Early said.
“We see more growth and momentum in the WA market.”
Steinepreis Paganin partner Mark Foster said 2021 was a particularly busy year for his firm.
“Consistent with market conditions, we have been involved in many initial public offerings, backdoor listings and secondary raisings,” Mr Foster told Business News.
“We’ve also seen a significant increase in M&A activity involving our clients in the second half of the year, which is consistent with the broader market as we enter the M&A stage of the current commodities cycle.
“We think we’re getting our share of M&A activity, advising on public company transactions with a combined value of over $500 million in the second half of the year alone.”
This included acting for the likes of Bardoc Gold, Apollo Consolidated and Creso Pharma.
“We expect this activity to continue into 2021, with a solid pipeline of M&A and ECM work expected to flow in the first half of CY2022,” Mr Foster said.
Valuation trends
The strong M&A market has led to a pick-up in business valuations in the mining services sector, research by BDO has found.
Covering the past three years, the research shows that mining services businesses have typically changed hands for a price that is equivalent to 4.3 times annual profit.
This average covers wide variations within the sector and over time.
The average valuation multiple peaked at close to seven times in late 2019 before falling to about 3.5 times in early 2020 after the onset of COVID-19.
It is currently averaging around five times annual earnings.
BDO has a deep insight into the sector, having sold a range of privately-owned mining services businesses over recent years.
“The public markets do not support mining services very well,” corporate finance partner Justin Boyce Cam said.
“It’s not a very big sector and it’s not covered by many analysts.
“There is also always that fear of cyclicality.”
Recent sales advised by BDO include McKay Drilling and Go West Tours, (the latter) which provides bus transport to mining companies.
Mr Boyce Cam said both businesses sold for multiples in excess of five times.
One of the keys to achieving a high multiple was to demonstrate sustainable earnings.
Fellow BDO partner Todd Grover said earn-out provisions – where the final sale price is tied to future earnings – provided a mechanism to address valuation gaps between buyers and sellers.
“The purpose is when there is a misalignment on what the future looks like,” Mr Grover told Business News.
“It’s a great way of unlocking that misalignment, particularly for a growth business.
“It also allows you to transact now based on historic earnings, while capturing some of the future value.”
Mr Boyce Cam said a key issue was making earn-outs realistic.
“When we have an earn-out component in our transactions, we always try to make sure its achievable,” he said.
“There’s a difference between an earn-out that is completely fanciful and one that is a shoo-in.”
BDO has grown to have 12 full-time lead advisory professionals in its M&A practice, making it the second largest in Perth behind home-grown investment bank Azure Capital.
Mr Boyce Cam said recruits were attracted by the opportunity of working closely with business founders and their families.
“A lot of the team enjoying working directly with the entrepreneurs, compared to the public markets where it’s almost faceless,” he said.
Mr Boyce Cam is positive about future deal flow.
“It’s fair to say we’ve still got plenty on,” he said.
“We are getting more engagements; it’s a strong market.”
