Yesterday on Inside Business, analyst and former AFR Chanticleer columnist Ivor Ries was interviewed by Business Spectator commentator and former AFR Chanticleer columnist Alan Kohler on the impending takeover “orgy” set to engulf corporate Australia.
Ries claimed that record capital raisings and “lazy” balance sheets provided the impetus for some of our biggest corporates to snaffle their rivals, leading to big fees for investment banks and a much needed confidence boost for the GFC-decimated financial sector, not to mention the lawyers and hangers-on anxious to get their mitts on boom-era fees.
Ivor Ries: Well you know, the money’s just laying around. The financial crisis has gone. There is no financial crisis. It’s gone. It’s finished.
Alan Kohler: So an orgy of takeovers Ivor?
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Ries: One or two of your competitors, take them now. The long run historical average for the Australian market is 15.1 times and there’s a lot of industrial companies out there at the moment trading on 10 or less so, you know, it’s a smorgasbord.
This morning, as if on cue, WA engineering contractor GRD recommended a 55 cents per share cash offer from UK conglomerate AMEC. The deal was a quarter of what GRD was offered two years back when it rejected a $2.75 bid.
Still, Ries’ call is a big one, especially given the skittishness that continues to haunt global credit markets, despite last week’s record stockmarket surge.
So, is talk of a pending M&A boom on the money, or is Ries about to have his credibility shredded as the economy falls of a cliff? Crikey asked three leading analysts whether his bullish crystal ball gazing stacks up.
Michael Heffernan, Austock Group: With the market momentum solidly in the upward direction, certainly the worst is behind us. There’s going to be opportunities for companies which are very well placed to have a look at cheap companies that are scattered all over the 2000-odd stocks on the market. So, as a general proposition you’d have to yes say that’s certainly possible.
Quite a few companies have been scurrying around to boost their balance sheets in the last six months. Actually, rather than talking about lazy balance sheets, you’d almost say the reverse, that sheets have been bereft of capital. That’s why we’ve had this surge of placements, rights issues and share purchase plans. There’s no doubt that companies that have raised a lot of money are starting to have a look around.
But we’re still in a cautious environment and we shouldn’t get too far ahead of ourselves. The market has been going OK but we’re not in boom time yet — I don’t think an orgy is on the agenda right now.
Tom Elliot, MM&E Capital: Last year, things were falling apart. The dollar value of deals collapsing was much greater than the dollar value of the deals that went ahead. I think that will change this year, because any new takeovers are coloured by the financial crisis, funding difficulties and volatile stockmarkets. Secondly, valuations have been crunched. Even though markets have recovered the reality is everything is cheaper than it was 18 months ago. The smart money, and there’s still plenty of it around, will be looking at purchases in the next 12 to 18 months.
What you have is plenty of money being raised to get over short-term funding issues. But eventually you have to do something with it. Most takeovers in Australian usually have a cash and scrip component and right now you’ve got lower share prices and lots of cash sloshing around on balance sheets. Around $90 billion has been raised and eventually you’ll see that re-invested, either in organic growth or takeovers of other companies.
There’s going to be more debt but not quite as much. Banks are still lending, but you won’t say a massive private equity deal, something like a Qantas, for awhile.
[Last week in Eureka Report, Elliot named Fosters, Consolidated Media, AWB, Eastern Star Gas, Origin/Santos, Asciano, Axa Asia Pacific, Seek, Rio Tinto and Caltex as the country’s top 10 takeover targets].
Gavin Wendt, Fat Prophets: I think there’s every chance that’s going to happen. You’ve basically got two types of companies — on the one hand you have firms with overstretched balance sheets and companies and have been raising cash to pay down debt. On the other you’ve got cashed up companies sitting back during the GFC, looking to get their hands on cheap assets. A lot of those companies that have kept their power dry are in a good position now to start making a move. Certainly in the small to mid-cap section of the local mining sector there’s some great opportunities for consolidation. There’s 800 firms listed and several of those have $1 million or less in their accounts. They’re really just trying to keep their heads above water. There are a lot of opportunities and cashed-up companies sitting back and assessing the situation. The oil sector is also ripe for acquisitions, especially with the oil price dipping to $60 dollar a barrel.