20/11/2018 - 09:38

Foreign capital driving local takeover deals

20/11/2018 - 09:38

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ANNIVERSARY SPECIAL: WA companies have been on the receiving end of nearly every major takeover completed during the past two decades, with Wesfarmers a notable exception. This article is part of a special series to mark Business News' 25-year anniversary.

Foreign capital driving local takeover deals
Wesfarmers shareholders approved the demerger of Coles Group last week. Gabriel Oliveira

ANNIVERSARY SPECIAL: WA companies have been on the receiving end of nearly every major takeover completed during the past two decades, with Wesfarmers a notable exception. This article is part of a special series to mark Business News' 25-year anniversary.

Western Australian entrepreneurs and corporate leaders have built many successful businesses over the years.

But judging by the big takeover deals of the past 25 years, not many of those operations have remained in local hands.

This is one of the clear findings to emerge from an analysis of the takeovers, stock market floats and privatisation deals recorded in the BNiQ Search Engine.

A notable exception to this pattern is Wesfarmers, which has bought and sold numerous businesses over the years.

Its most notable acquisition was Coles Group, bought in 2007 for $20 billion.

This was Australia’s largest takeover at the time – and was actually the second time Wesfarmers has completed the largest acquisition in Australia’s history.

In 1977, when Wesfarmers was a small cooperative capitalised at $20 million, it launched an audacious bid for fertiliser producer CSBP & Farmers.

The bid price was $60 million – three times Wesfarmers’ value – and it took two years to close, but Wesfarmers eventually completed what became a company-making purchase.

The Coles acquisition also was audacious and was only completed after Wesfarmers persisted through the withdrawal of its private equity partners and the looming GFC.

Eleven years on, Wesfarmers is in the process of divesting Coles, making the Perth-based conglomerate a lot smaller but still one of Australia’s major listed companies.

The table shows that WA companies have been on the receiving end of nearly every major takeover completed during the past two decades.

These include Alinta, which features in all three tables.

The Barnett government privatised Alinta in 2000 through a combined trade sale (to US group Utilicorp) and an initial public offering.

As an ASX-listed company under the leadership of chief executive Bob Browning, it grew rapidly from a small Perth utility to a major national player in the energy sector.

Along the way, it raised $925 million through a spin-out Alinta Infrastructure in 2005.

Investment group Babcock & Brown paid $7.4 billion for Alinta in 2007 – one of the deals that signalled the high point of the pre-GFC boom, and also one of the deals that led to the collapse of the debt-laden Babcock.

Alinta Energy is now based in Sydney and owned by Chinese group Chow Tai Fook Enterprises, which paid about half the amount Babcock paid.

Other prominent WA businesses to have come under foreign ownership include construction company Multiplex and nickel miner Jubilee Mines.

Big national players own many others – Commonwealth Bank has bought Bankwest and TPG Telecom has bought iiNet.

 

The list of big takeovers includes several Perth-based companies that focused on international markets and therefore did not establish much profile in in WA.

Examples are US-focused Aurora Oil & Gas and Africa-focused Equinox Minerals and Extract Resources.

The values attached to these deals are often driven by trends in community prices.

Uranium explorer Extract Resources, for instance, attracted a bumper price of $2.1 billion from China’s Guandong Nuclear Power Group in 2011.

In hindsight, the price was all the more extraordinary because the deal closed in 2012, well after the Fukushima disaster in Japan that triggered a long-term crash in uranium prices.

Similarly, Chinese steelmaker Baosteel and Brisbane-based rail company Aurizon paid a bumper price of $1.4 billion when they bought iron ore play Aquila Resources in 2014.

Four years on, Aquila’s assets remain undeveloped.

IPOs

In a similar vein, the valuations attached to initial public offerings reflect the state of the market as much as the fundamentals of the business involved.

The largest IPO in the BNiQ Search Engine is the 2006 float of mining equipment supplier Emeco Holdings.

Emeco’s private equity owners raised $941 million when they sold a 77 per cent take into the IPO.

The company’s shareholders have been on a bumpy ride since then and, after several restructurings and acquisitions, the total business is now worth about $950 million.

The attached table shows about half the big IPOs in WA occurred in the two to three years leading up to the GFC.

It has been lean pickings for investment bank since then, with only two big IPOs completed over the past decade – livestock exporter Wellard raised $299 million and mortgage aggregator Australian Finance Group raised $121 million.

The table also shows that big international investment banks, along with Sydney-based Macquarie Capital, have taken lead roles on most of the big IPOs.

UBS is the standout performer, as lead manager on seven of the 12 IPOs listed.

The two notable exceptions were IPOs associated with privatisation deals.

When the Court government sold Bankwest and Alintagas, it was keen to maximise the number of local retail shareholders, hence the appointment of local firms such as Hartley Poynton (now Hartleys) and Porter Western (now part of Macquarie Capital).

Privatisation deals

One of the big lures for investment banks coming to WA is the possibility of working on privatisation deals for the state government.

The heyday for privatisation deals was the late 1990s and early 2000s, when the Court government completed five big asset sales, including Bankwest, Westrail freight, Alintagas and SGIO Insurance.

By far the biggest was the Dampier to Bunbury natural gas pipeline, bought by US group Epic Energy for $2.4 billion.

This created subsequent problems because Epic was unable to service its debt, after failing to get government approval to hike the tariffs it charged users of the pipeline.

The pipeline ended up in the hands of Sydney-based DUET Group, which was bought by China’s Cheung Kong Infrastructure Holdings for $7.5 billion in 2016.

The Barnett government pursued multiple privatisation deals, most notably Western Power, which was touted as being worth $11 billion.

Other options it considered included Fremantle Ports, the Utah Point bulk loading facility at Port Hedland and the Kwinana bulk terminal.

The most significant deal it completed was the $135 million sale of the Perth Market Authority to an industry consortium.

Ironically, the current Labor government may end up completing more substantial privatisation deals, even though Mark McGowan campaigned against the Western Power sale at the last election.

Landgate and TAB are the two businesses currently on the block.


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