We have said it before and we will say it again: reports of the demise of Australian M&A are premature. In ALB's September issue we explore just how hot M&A is in the land downunder.

Australia could very well be the best market for M&A legal work, according to new figures released by Thomson Reuters.

The findings state that from January to August this year Australian companies have been the most favoured M&A targets, with 1,146 deals worth US$84bn. By comparison China had 1,690 deals but lagged behind with its total value of US$64bn.

The Australian energy & power sector managed to capture 27.3% of overall M&A activity, with deals worth a total of US$27.7bn. Financial companies were the second most sought-after takeover targets with the sector raking in US$21.9bn (21.5%), while resources came in third with US$18.6bn (18.3%), pushed by the BG Group-Origin Energy and St.George acquisitions.

When asked about the findings, Cameron Price, a partner at Allens Arthur Robinson, pointed out that the recent deal value statistics were substantially driven by the top three announced deals involving Origin Energy, St.George and Asciano.

"What this shows is while debt might be more expensive these days than 12-18 months ago, debt and equity funding is still available for major M&A transactions where the fundamentals of the deal are strong," said Price.

"This is demonstrated by the recently announced CSL deal, where I have been assisting CSL raise the necessary equity and debt funding. In recent times industry buyers have also been more competitive in terms of IPOs and PE, due to higher debt funding costs, weaker equity markets and in some cases greater synergy potential," he added.

M&A co-practice leader Ewen Crouch at Allens Arthur Robinson agrees that the global economic slowdown has resulted in only a minor drop in M&A transactions.

Crouch pointed to a Connect 4 survey that revealed there was a 20% drop in Australian M&A activity during the first six months of 2008 compared to the same period last year. He said this was encouraging because many law firms expected a bigger drop.

"This reflects a steady M&A market," said Crouch. "At the start of 2007 the economy was in full swing and M&A activity was at record highs. It's not surprising then that in a vastly different climate for capital markets, only 40 deals were carried out."

In New Zealand, on the other hand, the M&A market has not been so lucky. Simon Vodanovich, a partner at Buddle Findlay, said there has been a greater drop in activity. "We are seeing deals that are half the value of deals we saw last year," said Vodanovich. "The Vector Wellington Network sale, I suspect, has been the biggest deal so far this year. It was worth about NZ$780m. By comparison, in the first half of last year there were much more significant deals such as Yellow Pages, which went for about NZ$2.2bn."

Private equity heating up

The Australian private equity market performed well (up 16.4%) despite an overall decrease in the Asia-Pacific region (down 12.7%). Australia's PE volume peaked at US$10.2bn, of which US$7.2bn represented the acquisition of Asciano Group by TPG Capital and Global Infrastructure Partners.

Crouch believes that Texas Pacific Group's (TPG) recent bid for the Asciano Group could be considered a sign that private equity activity would rebound, but believed M&A work was unlikely to increase dramatically for several months at this stage. "We're not expecting a booming M&A sector in the next 12 months, but nor do we expect a significant slump in work," said Crouch.

Price believes that there is real potential for an upturn in PE: "Many PE firms are quite cashed up and looking for the right opportunities."

Vodanovich believes that PE could also take a turn for the better in New Zealand, since new mandates are appearing and there has been a revival of potential deals. "There are opportunities showing in industrials, the primary sector and infrastructure," he said. "Private equity is certainly starting to rebound, with some private equity players looking for assets."

Because debt is expensive, PE transactions have been confined to about NZ$100m and may not increase for about 12 months, Vodanovich said."I expect that M&A activity will increase slowly over the next 12 to 18 months, returning to what it was last year. This is because vendors will have more realistic pricing expectations and there will inevitably be demand from private equity buyers; and there will always be trade buyers looking for opportunities," he said. ALB

Some recent deals