Lean pickings as market takes hit after hit

IF mergers and acquisitions specialists wanted to chart their difficult year, they could find a very suitable proxy in the polls that destroyed the prime ministership of Kevin Rudd.

From late last year, the sector’s rebound from the global financial crisis – and all the activity that came with it – ended abruptly. The timing and the sudden market drop-off occurred just as voter infatuation with Mr Rudd similarly collapsed after the failure of international climate change talks.

In the early months of 2010, the market performed poorly until, around late March, some momentum returned. Mr Rudd found a similar spark to his fortunes around that time when federal Labor launched its health policy. That brief revival, though, was short lived, killed off by the announcement of the resource super profits tax.

While the poor polling fuelled by the RSPT was a major contributor to Mr Rudd losing his job, investment bankers in Western Australia simply have to live with the uncertainty surrounding the marketplace until the tax question is resolved by the new leader, Julia Gillard.

There is now a belief that Ms Gillard’s elevation provides for changes in the RSPT that industry can accept, but for the time being uncertainty is high and those with an appetite for mergers and acquisitions remain wary.

“The RSPT has made it very tough,” KPMG corporate finance executive director Adrian Arundell said.

“Now there is a new prime minister, so we’ll have to wait for the election.”

Not much to crow about

The result of this volatile year was that M&A transactions were smaller than usual and, generally, seen in the first half of the financial year, before the market’s momentum was lost.

Last financial year, 2008-09, WA advisers worked on several deals over $1 billion and numerous others from $400 million.

This financial year, as the accompanying graphic shows, is much leaner pickings.

Deals like Baosteel’s $286 million purchase of a 15 per cent strategic stake in Aquila occurred very early in the financial year and BHP Billiton announced its $204 million purchase of United Minerals Corporation well before Christmas.

“There wasn’t a lot of big-ticket M&A this past year, although the mid-market was reasonably active, with the first half noticeably stronger than the second,” Gresham Perth chief Justin Mannolini said.

The smaller scale of the deals involved is obvious across the spread of deals by leading investment bankers and corporate finance groups with a Perth office, which is shown overleaf on pages 14 and 15.

In 2008-09, the smallest deal listed by Azure Capital was $62 million, one of just two transactions below $200 million. This year’s list has only one deal that cracks that latter mark.

“Azure is the bellweather for where the market is at,” said one M&A specialist.

“They have quite a few (transactions) that are quite small, that is indicative of the market.”

The story is similar across the leading players. Many in the market agree they have been prompted by the poor market conditions to seek out work they might have previously felt was beneath them. At the very least they are reporting transactions that just one year ago were deemed unworthy of mention.

One standout running contrary to that trend is Hartleys, which has clearly picked up sizeable mandates in the middle market, despite the increased competition from the typical leaders in the investment banking space.

The Pilbara

While the M&A activity of 2008-09 was dominated by action in the emerging Mid West province, this financial year it has all been about the Pilbara.

Four of the five deals highlighted with this story – Baosteel/Aquila Resources, BHP/UMC, Mineral Resources/Polaris Metals and Atlas Iron /Aurox Resources – have a strong if not exclusive focus on Pilbara iron ore.

In part this reflects the growth in the region in the past decade, with numerous players emerging to populate an area that had, by and large, consolidated over the previous decade into the hands of two players – BHP and Rio Tinto.

With Fortescue Metals Group’s success many newcomers followed this lead. Inevitably, some consolidation was needed as the reality of the cost of transport and the GFC’s effect on financing forced smaller players to reconsider their plans.

This year, Atlas Iron has been one of the most active of those, merging initially with Warwick Resources and more recently with Aurox.

In the latter case, Atlas offered a premium to gain Aurox’s space at the Utah Point berth under construction at Port Hedland, which Atlas will use instead of FMG’s facilities in the same town.

Corporate lawyer Ian Cochrane, of Cochrane Lishman Carson Luscombe, said the rise in project-related deals had required a retooling of the skills in the sector.

Mr Cochrane also believes that M&A focus will return to the Mid West when players involved have further progressed their projects.

“They want to negotiate from a position of strength but it makes sense to rationalise some of those ownership structures,” he said.

China

Chinese investment remains one of the enduring themes in the post-GFC markets, with the fast-growing nation continuing to make acquisitions that provide certainty of supply.

“To me an interesting theme was the trend we saw of juniors entering into small positions and off-take agreements with Chinese steel mills,” one leading investment banker said.

“It was desperate times but it limits the future of those companies. Ten to 15 per cent doesn’t get a controlling stake, but it does complicate your life.”

Many of those sorts of deals were done by the Chinese who, having paid over the odds the previous year of so to secure supply, found themselves virtually the only player in the market after the GFC.

Purple Communications director Warrick Hazeldine has seen much of the M&A work that he is involved in from a public relation point of view coming out of China, especially Hong Kong where increasing numbers of bankers and advisers are forming links.

“What we have noticed is interest over the horizon, not over the border,” Mr Hazeldine said, reflecting on the offshore focus.

RSPT

Many in the market believe the RSPT did not end M&A activity but simply put it on pause. The primary cause was the uncertainty surrounding not just whether the tax would be introduced but also the parameters, which, if altered, would affect companies and individual projects differently, creating havoc with valuations.

Azure managing director Geoff Rasmussen said the RSPT had put a lot of deals on hold but after the refinancing that occurred last year.

Mr Rasmussen noted that this had, in turn, pushed up prices again.

“There has been a growing appetite for M&A with people wanting to grow their assets,” he said.

“That has been made more difficult because equity markets have valued things to perfection again.

“Then the RSPT has made anything in Australia very hard.

“Scrip deals are impossible. The sell side is saying the tax will go away and the buy side is saying I believe you but I can’t take the risk until it does.”