Conditions are ripe for an M&A rebound

A leading corporate law firm says takeover activity is about to hot up, especially in mining.

Merger and acquisition bankers can breath a sigh of relief. Takeovers look set to pick up, especially among Australian mining stocks, according to one of the country’s leading corporate law firms, Herbert Smith Freehills.

“We have started to see increased signs of confidence returning to the market over the past few months,” says Herbert Smith Freehills partner Simon Reed. "There are strong signs for a rebound in activity for the current financial year."

Some local companies may be made more attractive by a softer local currency, making their income from foreign currency more attractive to a potential buyer. The hard rock resources sector may expect more M&A activity as commodity prices remain constrained and the continuing limited availability of capital may force owners to recover value through a deal, says Reed. 

"We have seen it does not take long for the Australian market to rebound to high deal volumes following previous periods of low deal activity," he says

This will be welcome news to bankers after the total value of announced M&A deals fell to $11.6 billion in the 12 months to end June, compared with about $63 billion a year earlier, according to Freehills.  

For M&A bankers, reliant on fees that are usually based on transaction size, income shrank. Deals of less than $100 million in market value accounted for 61 per cent of all transactions in 2013, up from 46 per cent the year before, according to Freehills.

The gold sector accounted for 44 per cent of all energy and resources deals in 2013. Deal value in the gold sector more than tripled from half a billion dollars in the 2012 financial year to $1.7 billion in the 2013, according to the law firm.

“Tough market conditions meant that success rates were noticeably impacted by the deal mechanics and transaction structure of each proposed deal,” says Freehills’ Reed.

For the first time in several years, Freehills says there was a rebound in the use of shares for takeovers. It has not overtaken cash as the preferred takeover currency but the use of stock rose to 43 per cent of total M&A deals in 2013 from 23 per cent in the 2012.

Bidders who offered control premiums of 40 per cent or more from day one of their bids were invariably successful, according to Freehills. Nearly every scheme that reached the point of lodgement of a scheme booklet last year went on to close successfully, it says.

The trend in recent years of debt funding of cash proposals changed notably, with the vast majority of cash bids funded out of existing cash reserves.

There were decreases in the use of certain conditions, with a number of off-market takeover bids launched without minimum acceptance conditions. The use of bear hugs, where the bidder announces that a deal is conditional on target board approval, declined. Only three transactions in the 2013 used bear hugs, two of which failed.