The growth of Australian and New Zealand companies on the global stage through mergers and acquisitions (“M&A”) has been a journey filled with both remarkable successes and significant challenges. Leading Australian properly platform provider REA Group recently made an – ultimately unsuccessful – takeover bid for its UK counterpart Rightmove (both are Fisher Funds portfolio companies). Was this a missed opportunity, or a disaster avoided?

CSL’s global expansion: from industry leader to challenging acquisitions

The story of Australian company CSL’s path from a government body focused on antivenoms, to the largest plasma provider globally is renowned. CSL made a series of transformative acquisitions in the early-2000s, first Swiss-based ZLB for U$740m and then US-based Aventis Behring for U$925m, each business was several times larger than CSL at the time. This took CSL from a local provider of blood products and healthcare with ~$450m of revenues, to a global leader with more than US$10b+ in its core biotherapies business today. The acquisition of Novartis’ failing influenza vaccine business in 2015 for US$275m proved to be another resounding success as CSL turned the flailing business around to become a leader in the global influenza market.

It was this success that saw the market give CSL the credit when it completed the US$11.7b acquisition of global leader in blood therapies, Vifor. However, it seems like CSL might have picked a bad apple this time. Since first announcing the acquisition in December 2021, Vifor has been hit with a series of setbacks, from delays in receiving regulatory approvals to the entry of generic competitors into the European market earlier than expected. Generic competitors will also enter the US market in 2025/26. It seems like CSL will have a tough time replicating its previous successes by turning Vifor around.

A flurry of recent Australian M&A activity

Why is this history lesson relevant? Well, across the ditch, there has recently been a flurry of merger and acquisition activity involving Australian companies buying or selling international businesses. And while the opportunity for these deals to unlock shareholder value initially looks attractive, the journey is often anything but smooth.

The Spring M&A frenzy kicked off with glass and cans maker Orora selling its US business for A$1.8b. This was in a bid to repair its stretched Balance Sheet after acquiring French based bottle manufacturer Saverglass last year. The Saverglass acquisition hasn’t gone exactly to plan as volumes fell 11% in the first six months of ownership. Orora itself also rejected a bid to be acquired in August.

Following this, data center provider Airtrunk was acquired by Blackstone for A$24b, Rio Tinto acquired Arcadium Lithium for A$9.6b, and REA made a, ultimately unsuccessful, takeover bid for Rightmove. REA is the leading property platform for buying and selling property in Australia, and Rightmove enjoys a similar position in the UK property market. Fisher Funds are investors in both REA and Rightmove.

The REA / Rightmove deal was an interesting proposition. Rightmove is the clear leader in the UK property market, with ~90% market share. It has grown earnings per share +13.7% pa over a 10-year period, and has consistently generated ~100% free cash flow (not too dissimilar to REA’s Australian business). Despite this, REA was trading at ~2.5x Rightmove’s Price-to-Earnings ratio (51x vs. 20x) immediately before the news around the bid was leaked. It’s because of this discrepancy in Price-to-Earnings ratios that it could be argued the deal made sense from a multiple arbitrage and an earnings accretion perspective. REA itself called out “a transformational opportunity to apply its globally leading capabilities and expertise to enhance customer and consumer value across the combined portfolio”.

While there could be logic to this, history is littered with companies that looked to expand globally from a position of strength in the antipodes but ultimately destroyed shareholder value.

When Australasian giants struggle to expand overseas

You only have to look as far as market darling, and garden and hardware giant Bunnings. In 2016, Bunnings (owned by Wesfarmers) acquired UK retailer Homebase for A$660m. The rationale was to build a UK based Bunnings-branded business while also improving Homebase’s performance in the short-term. It did anything but, with Wesfarmers taking losses and write-downs of ~A$1.7b over the next two years before selling the business for A$1.35 (not a typo). While time (and decades of excellent performance in its core market) has healed some wounds, Wesfarmer’s shareholders have the scars to show for that brief but tumultuous excursion into the UK.

Another (former) market darling, and Australia’s leading private hospital provider Ramsay Healthcare has similarly had a tough time replicating domestic success offshore. Ramsay acquired a controlling stake in French hospital operator Generale de Sante for €16 / share in 2014. The French business remains listed on the Euronext Paris and trades at €15 / share today. The French hospital space is heavily regulated and Ramsay has struggled to earn a satisfactory return on its assets despite investing heavily in its network of French hospitals.

Slater and Gordon offers another case study into how expanding offshore can go wrong. Slater and Gordon acquired UK-based Quindell for A$1.3b in 2015. Two years and a Financial Conduct Authority investigation later, close to the entire value of the UK business was written off.

Another example closer to home is New Zealand founded multi-channel retailer, Ezibuy – which was acquired by Woolworths in 2013 for A$318m to bolster its online presence. Three years later Woolworths wrote down the value of Ezibuy to A$30m, accompanied by the following statement; "following the recognition that the expected synergies between these two businesses have not been realised, and, in many cases, have resulted in dis-synergies for both businesses." This was further evidence that integrating businesses and recognising synergies is difficult, even in markets as similar as Australia and New Zealand.

And can we forget the complex journey Fonterra has walked to expand its Chinese-based business. It initially sought to do this by investing in local Chinese farms but in 2021 it abandoned this strategy in favour of focussing on New Zealand farmed milk. But this change in strategy was not before recognising ~NZ$880m of losses.

Lastly, REA itself has a chequered history in expanding offshore. It spent A$700m in acquiring iProperty in Asia in 2016. It finally sold the asset in 2024 but not before having to write down the value of the business by ~A$485m.

Navigating the risks and rewards of international expansion

While there have also been many successful international acquisitions (CSL’s early history being a case in point), hometown dominance doesn’t always translate into success offshore.

Investing in businesses internationally often offers New Zealand and Australian companies an opportunity to access larger markets that could turbo charge their growth. But these deals are not without risks, including, amongst others, the integrating of disparate cultures, unfavourable regulatory changes, and lack of brand recognition. Some get this wrong, like Bunnings, who made the mistake of pushing its brand and culture onto the UK-based Homebase.

Others get it right, such as ANZ plumbing wholesaler Reece, which expanded into the US market with the acquisition of MORSCO. In the years following the acquisition, it has methodically and deliberately injected its culture and brand into the US operations. It is reaping the success of this hard work in the US today.

REA’s potential Rightmove acquisition – a transformative deal or a value trap?

While REA and Rightmove were ultimately unable to complete the deal, it did occupy the headlines for the month of September. Investors on both sides of the fence struggled to agree if it was a good deal or not.

Both businesses are well run and leaders in their own markets, with wide economic moats and strong growth profiles. Details were scant on how these two businesses could be brought together in order to create meaningful shareholder value in excess of the sum of the two individual parts.

If the transaction was successfully completed, it would have been interesting to hear management’s pitch to investors on how they expected to create additional value for investors in both companies. And it would have been really interesting, with the passage of time to see which side of the ledger the acquisition would ultimately have fallen on: the scrapheap of value destructive M&A, or on the pinnacle of value creating, transformative M&A?

I guess we won’t know…for now at least.

This article originally appeared in the NBR on 24 September 2024 (paywalled).

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