Breakfast Deals: Moment of truth

Hopes for a wave of new deals have been hung on the incoming government, while Telstra and Graincorp face decisive moments.

Prime Minister-elect Tony Abbott has declared that Australia is open for business, and investment bankers are anticipating a government-led resurgence of deal activity. However, the business-friendly vow will be put to the test early as the Coalition considers Archer Daniels Midland's proposed GrainCorp buyout and Telstra's valuable broadband contract. Elsewhere, Perpetual will reveal if it'll continue to fight for control of The Trust Company and Aristocrat Leisure goes hunting for big game in the US.

Australian M&A

After the Coalition's win this weekend, Joe Hockey suggested the return of confidence under a new government means consumers and business will now “unleash their balance sheets”. Investment bankers tend to agree.

Some of Australia's most senior deal-makers tell The Australian a change of government and the end of election uncertainty will boost moribund capital markets and the appetite for takeovers.

Christian Johnston, head of investment banking at Goldman Sachs, expects a new wave of deals under the changed leadership – although he says it won't happen overnight.

"A number of the building blocks for mergers and acquisitions have been good for some time – strong balance sheets, excess cash, cheap and available funding – but a general lack of confidence has curtailed activity," he says.

"We're starting to see bits of evidence to suggest some clients are getting more confident and the election will be another catalyst, but I wouldn't want to suggest that all of a sudden we're going to see massive deal flow."

The value of M&A deals involving Australian companies fell to $US32.1 billion ($34.9 billion) in the first half of 2013, down 28.5 per cent against the same period in 2012, according to a Thomson Reuters analysis.

Another report by PricewaterhouseCoopers showed Australia accounted for a mere 3 per cent of global mining deals in the first half of the year, after dominating the rankings for years.

"In recent times the view of Australia, including our sovereign risk and the relative cost of doing business here, has deteriorated," Johnston says.

There are plenty of notable deals in the pipeline, including the expected floats of Nine Entertainment and Pacific Equity. Managers will be watching Tony Abbott for early signs about how open he is to business.

Archers Daniels Midland, Graincorp

The incoming government's first business test will come when Archers Daniels Midland resubmits its $3 billion bid to buy Graincorp to the Foreign Investment Review Board, after having withdrawn it during the election campaign.

While Abbott has vowed to be a business-friendly leader, during the campaign he touted plans to lower the threshold for the FIRB to review acquisitions of agricultural land and agribusiness.

He will also face pressure from the Nationals. Party leader Warren Truss, who is soon to be deputy prime minister, has said the deal "challenges out national interest".

It's not all bad news for ADM, though. Senior Liberal MP Andrew Robb is expected to be named the new trade and investment minister, possibly with a Nationals MP supporting him as a junior minister or parliamentary secretary, according to The Australian Financial Review.

The newspaper notes Robb has in the past championed foreign investment and free trade, including as an adviser to Chevron on the sale of $50 billion worth of gas from the North-West Shelf to the China National Offshore Oil Corporation.

The ADM documents are expected to hit Hockey's desk soon, with the incoming treasurer empowered to block the takeover if he chooses. He has until November 16 to decide.

Also awaiting FIRB approval are applications by Yanzhou Coal, which wants to delist its Yancoal business, and State Grid of China, which plans to buy a stake in energy distribution businesses SP AusNet and Jemena from Temasek.

Telstra Corporation

Telstra will also be waiting to find out what form its new national broadband deal will take.

The Coalition wants to scrap Labor's ambitious fibre-to-the-home plan in favour of a fibre-to-the-node setup, which means Telstra's last-mile copper network would be kept to connect homes to nodes on street corners.

This could mean a fundamental reworking of the $11 billion deal that Telstra's 1.4 million shareholders approved in October 2011 to lease the telco giant's infrastructure and migrate its traffic on to the NBN, according to The Australian.

Citi analyst Justin Diddams tells the newspaper there probably won't be much of an upside for the telco's shareholders.

"Malcolm [Turnbull] has been pretty clear that the Coalition is committed to the $11 billion net present value figure. So if there's not a material difference in the NPV, there shouldn't be a material difference to shareholders," he says.

Industry speculation suggests the Coalition could give Telstra a greater role in building its network.

Equity Trustees, IOOF, Perpetual, The Trust Company

Politics aside, takeover target The Trust Company will know today whether Perpetual will match or better IOOF's bid for the company.

The board of Trust Co imposed a deadline at 1700 AEST Monday for Perpetual to respond to a superior $232 million offer from wealth company IOOF last week.

The latest bid, which Nomura is advising on, includes 0.74 IOOF shares for each Trust Co share, and cash consideration of up to $100 million.

Perpetual and its advisers at Goldman Sachs were bunkered down over the weekend assessing whether to stay in the race for the Sydney-based trustee services and wealth company, according to The Australian Financial Review.

A third contender, Equity Trustees, is also conducting due diligence on Trust Co. 

Aristocrat LeisureBally TechnologiesMultimedia Games

Poker machine maker Aristocrat Leisure has considered two big-ticket purchases in the US in recent months, and is still on the lookout for opportunities.

Aristocrat recently participated in the sales process of Nasdaq-listed Multimedia Games, valued at $US1.09 billion ($1.18 billion), according to The Australian Financial Review. The Sydney company was also said to have received information that could have allowed it to make a potential bid for the world’s second-largest poker machine manufacturer, US-based Bally Technologies.

“We are very much aware of the consolidation that is happening in the industry and we look very closely at all opportunities,” Aristocrat chief executive Jamie Odell told the newspaper.

With companies this big on Aristocrat's radar, don't be surprised if it makes a big splash this year.

Wrapping Up

Thiess has inked a $1.8 billion deal to construct six compressor stations and one processing plant at QGC's Queensland Curtis LNG project, in an encouraging deal for the coal seam gas sector.

The Leighton Holdings subsidiary says the contract will significantly expand its role on Surat Basin project, replacing an old $325 million agreement from February last year.

There were also positive signs in the long-dormant childcare sector, as private equity firm Navis Capital pounces on Guardian Childcare Alliance.

Navis bought 92 per cent of the equity in the business from Wolseley Private Equity for about $120 million, in what is believed to be one of few major deals in the space since the buyout of ABC Learning, according to The Australian.

The newspaper expects Navis to hold and grow Guardian for about five years, with the potential for listing it on the Australian Securities Exchange.

Guardian was advised by Fort Street Advisors, while Navis tapped Oaktower Partnership. Expect an announcement today.

Finally, Macquarie Group has chipped in to help Western Desert finish its Roper Bar project in the Northern Territory, in what appears to be a nod to resurgent iron ore prices.

Western Desert says it secured the remaining debt funding needed for the $200 million Rober Bar project from Macquarie, taking the iron ore miner a step closer to its goal of beginning shipments from the mine within three months.

While the details of the debt funding were not disclosed, The Australian understands the latest facility was for about $100 million.

Western Desert managing director Norm Gardner tells the newspaper he attributes the funding breakthrough to the recent improvement in iron ore prices, which have climbed close to 60 per cent in the past 12 months to about $US137 a tonne.

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