Australia Takes Centre Stage in Global Deals Spree
It’s boom time as local M&A’s soar.
It’s boom time as local M&A’s soar.
Australia’s biggest airport is resisting a takeover. An American private equity firm wants to buy one of the country’s main casino operators. And last week, Square Inc. agreed to buy Afterpay Ltd., the largest locally listed tech company, for $39 billion.
A deals frenzy is underway in Australia.
The volume of mergers and acquisitions in Australia is already at its highest annual level on record with nearly five months of the year to go. More than US$134 billion in pending and completed deals have been announced this year, according to data provider Dealogic. That already outpaces 2011, Australia’s previous busiest year on record, when just under $134 billion was announced for the entire year.
“We’re firing on all cylinders,” said Zac Fletcher, the co-head of investment banking in Australia for Goldman Sachs, which is advising Afterpay in the Square transaction. “It’s hard to really point to a time that’s been busier.”
The boom is driven in part by low interest rates, which make it cheaper to finance acquisitions and generally push investors into higher-risk assets for better returns. The low rates have helped send equity prices to record highs, making it more financially viable for companies to use stock to pay for deals. And corporations, many of which raised cash and sold off assets during the coronavirus pandemic, are now flush with money and looking to buy as the global economy recovers.
Those trends are at play in other markets, including the U.S., where deal making has also risen. But Australia has other factors turbocharging deal volumes: Large pension funds that bankers say are becoming more active in acquisitions; infrastructure assets with revenues offering stable long-term growth; and startups, particularly in the tech space, that are expanding globally and attracting attention from overseas acquirers. Meanwhile, concerns about environmental and social factors are also prompting some companies to review their business models and consider spin offs or acquisitions.
Australia is “suddenly on the radar again,” said Aidan Allen, head of Australia investment banking at Jarden. Aside from working on mergers and buyouts, Mr. Allen said bankers at Jarden, an investment and advisory firm, are spending half their time advising companies concerned by the prospect of hostile takeovers or unsolicited proposals given the heated environment for deals.
Australia also has a strong consumer economy that is underpinned by resource exports and went nearly three decades without a recession until the coronavirus pandemic hit. That combined with strong corporate governance and accounting practices at local businesses and a sophisticated legal system makes overseas companies comfortable investing in Australia, bankers said.
Many bankers expect deal volumes in Australia to remain elevated in the near future, although there are some longer-term risks. Concerns about global inflation could prompt central banks to raise interest rates sooner than expected and the highly contagious Delta strain of the coronavirus could derail the global economic recovery and reduce corporate appetite for large transactions.
“Things can and do change rapidly,” said Julian Longstaff, managing director of global capital markets at Commonwealth Bank of Australia, the nation’s largest bank, which arranges financing for many deals.
“If you have a big deal at valuations that work, it’s best to bring it to the market and get it done while demand is strong,” he said.
Previous deal-making booms haven’t been sustained. Cross-border investment from China drove a wave of deals in past years, but Australia’s tightening of foreign investment rules and a diplomatic spat has cooled Chinese interest recently. Even some U.S. business leaders have worried the rules make it difficult for American companies to invest, though bankers say the current boom is driven by a combination of Australian, U.S. and European acquirers.
What would be Australia’s two biggest-ever deals were unveiled in just in the past few weeks. Square’s $29 billion all-stock offer for Afterpay would be Australia’s largest on record and given the strategic rationale analysts expect it to be completed. That deal came weeks after a consortium of infrastructure investors, including Australian pension fund managers, made a nearly $17 billion dollar bid for Sydney Airport. The airport rejected the initial offer saying it was too low, though the consortium could increase its bid.
A survey released last month from accounting giant Deloitte, which has been polling Australian executives annually in recent years, found that 95% expected the number of deals their companies would pursue to increase or remain stable over the next 12 months.
“We’ve never seen that level of enthusiasm,” said Ian Turner, national head of mergers and acquisitions for Deloitte Australia.
Other big deals this year include the roughly $8 billion bid from private-equity firm Blackstone Group Inc. for Australian casino operator Crown Resorts Ltd. A Canadian pension fund, the Ontario Teachers’ Pension Plan Board, and private-equity firm KKR & Co. want to buy Spark Infrastructure Group, which owns electricity assets, for about $5.1 billion. And Oil Search Ltd., the biggest oil producer in Papua New Guinea, recently said it intends to recommend an all-stock takeover from Santos Ltd. to create an energy company worth $21.7 billion.
“It’s an incredible moment in time,” said Joe Fayyad, country head and co-head of investment banking for Bank of America in Australia. “Australia is becoming more recogn=ised for the opportunities it can provide.”
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Food prices continue to rise at a rapid pace, surprising central banks and pressuring debt-laden governments
LONDON—Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts—literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
New data on Wednesday showed inflation in the U.K. fell sharply in April as energy prices cooled, following a similar pattern around Europe and in the U.S. But food prices were 19.3% higher than a year earlier.
The continued surge in food prices has caught central bankers off guard and pressured governments that are still reeling from the cost of last year’s emergency support to come to the rescue. And it is pressuring household budgets that are also under strain from rising borrowing costs.
In France, households have cut their food purchases by more than 10% since the invasion of Ukraine, while their purchases of energy have fallen by 4.8%.
In Germany, sales of food fell 1.1% in March from the previous month, and were down 10.3% from a year earlier, the largest drop since records began in 1994. According to the Federal Information Centre for Agriculture, meat consumption was lower in 2022 than at any time since records began in 1989, although it said that might partly reflect a continuing shift toward more plant-based diets.
Food retailers’ profit margins have contracted because they can’t pass on the entire price increases from their suppliers to their customers. Markus Mosa, chief executive of the Edeka supermarket chain, told German media that the company had stopped ordering products from several large suppliers because of rocketing prices.
A survey by the U.K.’s statistics agency earlier this month found that almost three-fifths of the poorest 20% of households were cutting back on food purchases.
“This is an access problem,” said Ludovic Subran, chief economist at insurer Allianz, who previously worked at the United Nations World Food Program. “Total food production has not plummeted. This is an entitlement crisis.”
Food accounts for a much larger share of consumer spending than energy, so a smaller rise in prices has a greater impact on budgets. The U.K.’s Resolution Foundation estimates that by the summer, the cumulative rise in food bills since 2020 will have amounted to 28 billion pounds, equivalent to $34.76 billion, outstripping the rise in energy bills, estimated at £25 billion.
“The cost of living crisis isn’t ending, it is just entering a new phase,” Torsten Bell, the research group’s chief executive, wrote in a recent report.
Food isn’t the only driver of inflation. In the U.K., the core rate of inflation—which excludes food and energy—rose to 6.8% in April from 6.2% in March, its highest level since 1992. Core inflation was close to its record high in the eurozone during the same month.
Still, Bank of England Gov. Andrew Bailey told lawmakers Tuesday that food prices now constitute a “fourth shock” to inflation after the bottlenecks that jammed supply chains during the Covid-19 pandemic, the rise in energy prices that accompanied Russia’s invasion of Ukraine, and surprisingly tight labor markets.
Europe’s governments spent heavily on supporting households as energy prices soared. Now they have less room to borrow given the surge in debt since the pandemic struck in 2020.
Some governments—including those of Italy, Spain and Portugal—have cut sales taxes on food products to ease the burden on consumers. Others are leaning on food retailers to keep their prices in check. In March, the French government negotiated an agreement with leading retailers to refrain from price rises if it is possible to do so.
Retailers have also come under scrutiny in Ireland and a number of other European countries. In the U.K., lawmakers have launched an investigation into the entire food supply chain “from farm to fork.”
“Yesterday I had the food producers into Downing Street, and we’ve also been talking to the supermarkets, to the farmers, looking at every element of the supply chain and what we can do to pass on some of the reduction in costs that are coming through to consumers as fast as possible,” U.K. Treasury Chief Jeremy Hunt said during The Wall Street Journal’s CEO Council Summit in London.
The government’s Competition and Markets Authority last week said it would take a closer look at retailers.
“Given ongoing concerns about high prices, we are stepping up our work in the grocery sector to help ensure competition is working well,” said Sarah Cardell, who heads the CMA.
Some economists expect that added scrutiny to yield concrete results, assuming retailers won’t want to tarnish their image and will lean on their suppliers to keep prices down.
“With supermarkets now more heavily under the political spotlight, we think it more likely that price momentum in the food basket slows,” said Sanjay Raja, an economist at Deutsche Bank.
It isn’t entirely clear why food prices have risen so fast for so long. In world commodity markets, which set the prices received by farmers, food prices have been falling since April 2022. But raw commodity costs are just one part of the final price. Consumers are also paying for processing, packaging, transport and distribution, and the size of the gap between the farm and the dining table is unusually wide.
The BOE’s Bailey thinks one reason for the bank having misjudged food prices is that food producers entered into longer-term but relatively expensive contracts with fertilizer, energy and other suppliers around the time of Russia’s invasion of Ukraine in their eagerness to guarantee availability at a time of uncertainty.
But as the pressures being placed on retailers suggest, some policy makers suspect that an increase in profit margins may also have played a role. Speaking to lawmakers, Bailey was wary of placing any blame on food suppliers.
“It’s a story about rebuilding margins that were squeezed in the early part of last year,” he said.
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