Markets: Deal maker mutterings

Merger activity, particularly in mining and construction, could pick up once the election is over, says Deutsche Bank.

Australia’s anaemic mergers and acquisitions market may be set for a revival, Deutsche Bank managing director Scott Mailer says.

While admitting he may be more hopeful than confident, Mailer detects mutterings about deals from corporate boardrooms, especially among mining, mining services and building construction companies.

M&A volumes have dropped off a cliff this year. Having been in decline since a sizable $53.14 billion worth of deals in the fourth quarter of 2010, M&A activity slumped to $7.1 billion in the first quarter this year and is a little better at $19.18 billion to date in the third quarter, according to Bloomberg data.

Boards are under pressure to generate wealth for shareholders, says Mailer. If a clear and strategic acquisition opportunity arises, especially with the likelihood of a new business-friendly government, deals may start to get done, he says.

“The ingredients are there,” says Mailer. “It comes down to the merits of the deal.”

Stocks are up. The S&P/ASX200 Index has sustained a gain of 17 per cent over the last 12 months. That may make some companies more optimistic about using stock as the basis of a takeover. Adding to a potential M&A pick up are lower corporate debt levels. Net debt to equity levels are 35 per cent, under the two-decade average of 45 per cent. That may mean some companies have scope to borrow for acquisitions, or at least use a combination of cash and debt to push for a takeover. Some chief executives may be contemplating a merger as a way of getting larger as they lament a dearth of organic growth opportunities.

Companies in the mining space may be under a different kind of merger pressure. Their balance sheets may be groaning under the weight of increasing financing costs as the value of assets slump, forcing some companies into a reluctant embrace.

Mailer's colleague, Mark Wilson, co-head of research at Deutsche Bank in Australia, observes companies are not rushing into transactions just yet.

“I don’t anticipate a change in their very cautious thought process,” says Wilson. 

CEOs and chief financial officers will want to see how a coalition government, if elected, manages the reigns of power before committing to a transformative deal. And companies are looking for signs of a pick up in the domestic and international economy to justify a takeover with bankable earnings prospects.

As for initial public offerings, Wilson sees little prospects of more activity. In 2013 there have been 27 Australian IPOs announced, 23 priced and three withdrawn, according to Bloomberg data. In 2012 there were 56 IPOs announced, 47 priced and nine withdrawn. 

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