13/08/2009 - 00:00

M&A advisers wait for rebound

13/08/2009 - 00:00


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Limited access to debt continues to hamper the M&A sector, as corporate advisers forecast a subdued year ahead.

REBOUNDING stocks and successful capital raisings have brought a certain level of optimism back to St Georges Terrace.

But with credit markets still frozen, the mood is a little cooler for those involved in mergers and acquisitions.

"In the top end of the market I think the outlook for the next 12 months is quite subdued," Michael Ashforth, Perth practice chief at Gresham Advisory Partners, said.

"Big cash deals will be harder to get away. Long-term financing remains a challenge and boards will be cautious about taking on refinancing risk."

Gresham was one of the most active local M&A players during 2008-09, according to data compiled by WA Business News.

The problem is large cash deals may involve refinancing, which is difficult under current conditions where stringent loan covenants are forced upon borrowers.

A scrip deal isn't as an attractive option for shareholders seeking earnings-per-share growth, although that's usually less of a concern for smaller companies.

There is also a fear that assets or companies put up for sale in the current market are somewhat distressed, regardless of their true position.

Michael Anghie, who heads local M&A transactions for Ernst & Young, said there weren't a lot of quality assets on the market.

"Sellers are very cautious about the current market where there is a strategic rather than financial imperative to sell as there is a perception they cannot achieve fair value for their assets," Mr Anghie said.

With big transactions negotiated last financial year - such as Australian Bulk Minerals' reverse takeover of Grange Resources and the battle between Perilya and CBH Resources - fast becoming a distant memory, there has been little action in the past few months.

The battle between gold miners Avoca Resources (advised by RBC Capital Markets) and Ramelius Resources (Adelaide Equity Partners) for Dioro Exploration (Pendulum Partners) is one of the few public takeovers in progress.

Ramelius has put a two-for-one scrip offer on the table in what was a surprise takeover bid launched late last month.

M&A practitioners are reporting some positive developments, with foreign interest still strong, especially for key commodities.

In a report released last week, KPMG said the key players in the coming year would be those with cash war chests, such as sovereign wealth funds and cashed-up private investors.

"Any further recovery in equity markets, particularly if accompanied by positive economic news, should stimulate renewed M&A activity," the report said.

"Undervalued strategic assets and distressed opportunities will be the principal targets."

KPMG estimates there to be more than $10 billion of committed private equity funding available for investment in Australia.

"This money and more realistic price expectations on the part of vendors should drive increased deal volumes in [fiscal 2010]," KPMG said. "Transactions consummated in the coming year are expected to involve far less leverage than those typical of the previous private equity boom."

Local market watchers expect a lot of distressed assets to come out of the commercial property sector, where owners struggling to refinance will be forced to put properties on the market.

Despite the common view there is an oversupply of commercial property, stakeholders are unsure whether banks will impose an orderly sell-down of assets on those who've broken their covenants, or if they'll hold tight.

UBS recently said there was nearly $50 billion of equity raised by Australian companies in the last financial year, which eliminated much of the balance sheet pressure potential acquirers faced earlier during the crunch. This has allowed them to actively revisit their consolidation targets, according to the investment bank.

The capital raisings have offset some of the greatly reduced fees generated from mergers and acquisitions for corporate advisers, but has done little for M&A practitioners in Perth.


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