Deloitte's Australian operation is optimistic about an uptick in M&A activity in the country and is expanding to reflect this. We spoke to James Riddell, partner and national leader of corporate finance at Deloitte Australia, about the momentum in corporate activity, despite gloomy expectations of the contrary, and the employment prospects around it.
Deloitte Australia says that it is expecting an uplift in mergers and acquisitions activity. When will it manifest?
Right now. We are seeing some good signs of increased activity across a number of sectors in the market ,which is a far cry from the pessimism shown by corporate Australia in the recent past. This activity should offer exciting opportunities for experienced M&A professionals.
What are the primary motivators behind the uplift?
We are experiencing a sudden shift, and our activity levels and pipeline of opportunities is at its highest level for some time.
Capital optimisation is now starting to drive business decisions, much more so than saving for a rainy day. Businesses are under increasing pressure to act, to do something strategically with their available capital given the influx of foreign capital. A lot of Asian and European investors are looking to deploy capital in Australia and that is driving activity, combined with the fact that corporate Australia has significant, available cash reserves and many of our largest companies are currently under-levered at the current time.
Which sectors are most likely to benefit?
All sectors are starting to see increased activity levels, including retail, manufacturing, mining and resources, infrastructure, and government.
Businesses in these sectors are really starting to question themselves in terms of their capital deployment. Do they need to own certain non-core assets? Are there better owners with capital to deploy, better skills or cheaper capital to run assets/businesses more efficiently? And vice versa, are there strategic acquisitions businesses can make with their available capital reserves?
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Will the M&A activity be largely domestic?
The sources of capital are a combination of foreign capital and local reserves, but the transactions themselves will largely be domestic. There has been a massive influx of foreign capital from Asia and Europe, as well as some direct investors such as pension and sovereign wealth funds, and trade buyers looking at strategic assets in Australia. There is real competition now in this market between foreign and domestic capital and how it is deployed.
If you are expecting some cross-border activity, which countries are likely to see the most action – and why?
If we look at the infrastructure space, most of that capital is coming from Europe and Canada, and they are aggressively competing with Australian superannuation investors and fund managers for new investment opportunities. In terms of privately held business and more traditional sectors like retail, manufacturing and property, the primary source is Asia.
Where are valuations at the moment? Has there been a decline in valuations, making potential targets more attractive?
This is a difficult question in terms of generalisations. From an Australian dollar perspective, businesses that have a large proportion of their revenues derived in foreign currencies have seen an uptick in value. Recent interest rate cuts have clearly had some impact on risk free rates and valuation discount rates that have also been generally positive. However, there will be businesses in all sectors, for a range of reasons, which have experienced market value increases or decreases.
Do you think there will be an uptick in hiring related to the increase in M&A activity?
Yes there will. While not all the transactions in our pipeline will come off – some will be delayed and some won’t proceed – we are finding ourselves increasingly stretched (in a good way, of course) and there will be opportunities. I'd anticipate that we will be a net hirer based on recent activity levels.