2023 proved to be a year of ‘what ifs and maybes’ for Mergers & Acquisitions (M&A) in Australia. More than A$38 billion worth of deals were either cancelled or now seem very unlikely to complete because of regulatory concerns or shareholder pushback. Failed deals include Brookfield’s attempted acquisition of Origin Energy, Vocus’ bid for TPG’s fibre assets and Albermarle’s attempted acquisition of Liontown.

These failed high-profile deals were just a few of many as higher borrowing costs and an uncertain economic outlook meant deal makers found it tough to close deals that in other years would have likely been completed with little trouble.

Where deals did close it was harder work than deal makers had probably been used to in the last five years of falling interest rates and free money. An example of a hard fought but successful deal was the coming together of US based gold miner, Newmont, and Australian goldminer, Newcrest Mining for A$2 billion. This merger created the largest gold miner globally.

But even this deal would have had deal makers sweating, with Newcrest rebuffing Newmont’s initial advances and only accepting a higher offer after a three-month deliberation. This sort of standoff has become more common as buyers and sellers grapple with valuing assets given interest rate (and cost of capital) uncertainty.

Tough start, and middle…but it’s all about the finish

The first nine months of 2023 were tough for deal makers and investors alike. The ASX200 Index was flat for the year to 30 September, while the aggregate value of completed M&A was down 16% (or down 50% if you excluded the Newcrest / Newmont deal).

Thankfully there was a lot more to cheer about in the December quarter. The Santa rally pushed the ASX200 Index up 12.8% for the last two months. Not to be outdone, dealmakers would celebrate with several large M&A deals closing and several others announced in the quarter. The largest to close was the A$15 billion merger of lithium players Allkem and Livent. The December announcement that both sets of shareholders had approved the deal concluded their eight-month courtship.

Strategic trade buyers have trumped Private Equity suitors

The merger of Allkem and Livent will create the third largest lithium producer globally. In a year when strategic and trade led transactions were back in vogue, Private Equity acquirors often played second fiddle despite sitting on a much-vaunted war chest of funds to deploy.

Several factors have improved trade buyers’ relative bargaining power, including improved corporate balance sheets, a relatively more stable macroeconomic backdrop compared to the previous three years and a return to business as usual after three years of COVID disruptions. Higher interest rates also made M&A tougher for Private Equity acquirors given that compared to trade buyers, they often rely more on debt financing for acquisitions and don’t always benefit from synergies to the same extent.

We saw conglomerate Wesfarmers, owner of Bunnings, continue to build its health division. In 2023 it acquired SILK, an operator of skin treatment and laser clinics, and InstantScripts, the leading online medical clinic. These acquisitions follow the acquisition of Australia Pharmaceutical Industries in 2022 and mark Wesfarmers as a serious player in the Australian healthcare space.

Staying in healthcare, it feels as though retail pharmacy operator Chemist Warehouse might finally be making its way onto the ASX boards through a reverse takeover of Sigma Healthcare. The merger would bring together one of the largest retail pharmacies in Australia and New Zealand in Chemist Warehouse, and a leading wholesale and retail pharmacy operator in Sigma. The combined business will have increased scale that should bring with it better purchasing terms and bargaining power against one of Australia’s most influential industry groups, the Pharmacy Guild. It will be interesting to watch how the Chemist Warehouse / Sigma merger and Wesfarmers’ acquisitions challenge the status quo in what has been a historically stable pharmaceutical landscape in Australia.

However, the Chemist Warehouse transaction still must get the assent of the Australian Competition and Consumer Commission (“ACCC”), and in 2023 the ACCC scuppered several high-profile deals.

The first of these was Qantas’ attempted acquisition of Alliance Aviation. This was then followed by the ACCC blocking Transurban’s $2 billion acquisition of Horizon Roads in September, Australian Clinical Labs’ (ACL) acquisition of Healius in December, and ANZ’s A$4.9 billion acquisition of Suncorp’s banking arm in August. ANZ has appealed the ACCC decision, with a final decision from the Australian Competition Tribunal scheduled for February. Of course we could still see one or more of these deals being resurrected in 2024 in a different form to better appease the regulator. A case in point being Woolworths agreeing to divest 41 pet retail stores as part of the ACCC’s requirement to clear Woolworths acquisition of PetStock in December.

One week to Christmas – time to draw a line under (an underwhelming) year? Not quite

On the last Monday of the year the market opened to four deals with a potential combined value of more than A$5 billion.

Of the four deals, only the A$233 million acquisition of dental chain, Pacific Smiles by Genesis Capital was a private equity led acquisition. Link, the share registry administrator, may finally have found a way to end its tumultuous stay on the ASX with a A$1.2 billion takeover offer by Japan’s Mitsubishi UFJ Financial. Mitsubishi UFJ Financial is looking to scale its administration business through the acquisition of Link. Not to be outdone, Adbri (formerly Adelaide Brighton) received a non-binding indicative proposal from Ireland’s CRH and the Barro Group. The acquisition of Adbri will make CRH the second largest supplier of cement in Australia.

Stockland Group also announced it would be buying Lendlease’s master-planned communities division for A$1.3 billion. Stockland believe the Lendlease sites will complement its own master-planned communities.

Closer to home

Within our Australian portfolios we do not support acquisitions for growth’s sake, but are supportive of strategic, value creating acquisitions. In the Australian portfolio PWR Engineering acquired UK-based peer as part of its expansion into the UK. PWR have a large existing UK customer base, including Formula 1 teams McLaren and Merecedes, with a large pipeline of potential deals in battery cooling. Adding a manufacturing facility near their customers makes strategic sense. Other portfolio companies that completed strategic M&A deals during the year included Johns Lyng Group and Wisetech. We expect both businesses to continue acquiring small bolt-on businesses as they expand their market leading positions in insurance building and restoration and strata management, and global logistics.

What to look for in 2024

An upswing in M&A activity should be supported by interest rates being at or near peak levels, more certainty around the macro environment, and cashed up trade and Private Equity acquirors. Sectors to look out for in Australia will be the Healthcare, Energy and Resources sectors which saw a lot of activity in 2023, and 2024 could very likely be the same. Another area which could see increased activity is the Small Cap Index, which underperformed the ASX200 Index by 5.5% in 2023, and 9.2% annualised over the last three years. With Small Cap asset prices lagging, this could present fertile hunting ground for M&A.

A version of this article appeared in NBR on 23 January 2024 (paywalled).

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