Norton Rose Fulbright plots the course for a rebound in M&A activity in Australia

Australia | Press release | February 2023

Private equity will play a key role in shaping the future of Australian public M&A
A rise in opportunistic M&A targeting distressed and undervalued companies is expected
More shareholder activism in public M&A is predicted, with ESG front of mind
Foreign investment is needed to deploy capital from the US, Canada, UK and potentially China

Global law firm Norton Rose Fulbright expects the second half of 2023 to be a market ripe with public M&A opportunities after a challenging year in Australia for dealmakers.

A pick-up in the volume of deals will depend heavily on the Australian economy successfully navigating further interest rates rises, putting a lid on inflation and avoiding recession. Deal activity across the coming year is expected to feature opportunistic M&A targeting distressed and undervalued companies, increased shareholder activism driven by ESG priorities and cashed up private equity players looking to invest.

These findings and reflections were released today in Norton Rose Fulbright’s Australian Public M&A Deal Trends Report for 2023. The report found turbulence in Australia’s recent public M&A activity, with a dip in the number of public M&A deals over $50 million from 58 in 2021 to 37 in 2022 as the challenges of COVID-19 disruption, energy and supply chain issues due to the conflict in Ukraine and rising inflation supressed dealmakers’ appetites.

Norton Rose Fulbright corporate team leader Bryan Pointon said:

“The 2023 year may turn out to be the tale of two halves. We expect relatively subdued deal volumes to persist in the first half of the year, given ongoing uncertainty on whether the Australian economy can reduce inflation while avoiding recession. But if inflation is tamed in Australia without significant economic contraction, we expect more buoyant market conditions in the second half of the year to be accompanied by higher deal volumes.”

The report predicts that in a volatile 2023, particular drivers will create new opportunities for those willing to navigate the economic headwinds. Chief among those is the adaptability of dealmakers, who have spent 2022 analysing and preparing in a challenging market.

Norton Rose Fulbright corporate M&A partner Jeremy Wickens, who co-authored the report, said:

“Dealmakers have had time to adapt and learn from the challenges set by rising inflation, higher interest rates, a volatile share market and the potential for a general economic downturn in Australia. Some strategies that may be deployed by bidders to achieve greater deal certainty include offering strong control premiums, limiting the number of defeating conditions, seeking regulatory approvals (such as Foreign Investment Review Board clearance) upfront, and ensuring funding arrangements are well advanced before launching an acquisition proposal.”

Other major drivers include:

Private equity: PE funds are actively looking for opportunities to deploy their unprecedented levels of capital to be invested. Private equity used to be known for only using schemes, involving a strong target recommendation and all or nothing outcomes. Evidence of their enthusiasm to play in the market includes private equity bidders now venturing into unchartered territory, building pre-bid stakes and deploying concurrent takeover/scheme deal structures as novel tactics to secure success.

Opportunistic M&A: Opportunistic bidders will target distressed and undervalued companies. Boards expecting to become targets, whether welcome or not, would be well served by having robust takeover response strategies in place that are ready to be deployed when an approach is made. Long term defensive strategies, such as tactical share allotments and periodic buy-backs, can also help ward off the sharks.

Strong competition: There will be fiercer competition for valuable targets in 2023. Bidders who plan carefully and develop clear takeover strategies by reference to the target’s sector will have better odds of fending off rival bidders. Our report shows, for example, that target shareholders have been particularly compelled by all-cash propositions in all sectors except precious metals & mining, where all-scrip or partial-scrip deals are preferred.

Shareholder activism: This is a powerful and evolving tool to influence the strategic direction of public companies. While we don’t expect acquisition bids by wealthy ‘lone wolf’ individuals to become common occurrences in the Australian market, we do expect a continuation of the trend toward increased use of public M&A processes as part of broader shareholder activism campaigns, particularly relating to ESG matters.

Foreign investment: US interest in Australian tech companies will continue to be strong. Canada will continue to account for an outsize share of Australian metals and mining deals in 2023, with continued emphasis on battery metals and other inputs for de-carbonisation technologies. And while no foreign bidder deals came from China in 2022 for a second consecutive year, it will be interesting to see whether the recent improvement in the Australia-China political relationship will flow through to renewed investment from China in the coming year.

Click here to read the full analysis in Norton Rose Fulbright’s Australian Public M&A Deal Trends Report for 2023. Norton Rose Fulbright would like to acknowledge the work of corporate M&A associate Ellen Laughton in co-authoring this report.