Investment Matters

M&A activity on the rise

Merger and acquisition (M&A) activity ground to a halt this year, as heightened political and economic uncertainty caused investors to put down their chequebooks.

However, with a solution to the health crisis on the horizon and renewed confidence, we are seeing signs of life in the M&A market.

This, combined with share prices that are still recovering and a lower interest rate environment, could prove to be a potent combination.

There is potential that several companies will receive takeover offers over the coming period.

We look at some of the recent activity we have seen and how it may impact First Samuel clients’ portfolios.

 

Deal nirvana

Over the past year, we have seen a precipitous fall in merger and acquisition deals.

This has been a result of the global pandemic and resulting uncertainty. 

As indicated by the chart below, significantly fewer deals have been announced, and a much lower percentage of these deals have completed.

The result has been the lowest level of activity we have seen since 1997.

121120WM

However, the charts above also illustrate that we have begun to see some signs of life in the M&A market.

Deal activity has been supported by several factors:

1. Cheap funding - interest rates are now at the lowest seen in history. Acquirers can borrow funds to purchase companies, use less of their own capital and enhance their returns.

2. Cheap prices - the share prices of several companies remaining “cheap”, given a solution to the health crisis is on the horizon. In particular, companies that have lagged during the recovery, those in sectors that are out of favour or where there is still some uncertainty have been of interest.

3. Strong balance sheets – with a focus on liquidity as economic activity ground to a halt earlier this year, several companies have paid down debt and now have much healthier balance sheets. This is attractive to bidders, particularly those in private equity, as it allows them to take on more debt when purchasing these companies to enhance their returns.

4. Structural change – the pandemic has weakened several companies and accelerated several trends that were already in place. A more permanent structural change may see a growing impetus for consolidation within these industries.

5. A renewed ability to “kick the tyres” – anecdotally, we have heard from several companies that travel restrictions have reduced the ability for suitors to “kick the tyres”. This has caused several deals to be shelved. As border restrictions ease, we are likely to see many of these deals back on the agenda and renewed interest from international investors.

Recent examples

Within the past few months, we have seen bids lobbed for several large companies, some as recently as this week. These include:

Asaleo Care (ASX: AHY) - share price -8.4% post-pandemic. An unsolicited proposal at a 26% premium to the previously traded share price.

Infratil (ASX: IFT) – share price +6.7% post-pandemic. An unsolicited proposal by Australian Super at a 25% premium to the previously traded share price.

Link Group (ASX: LNK) – share price -18.8% post-pandemic. A non-binding, indicative proposal received at 14% premium to the previously traded share price.

Coca-Cola Amatil (ASX: CCL) - share price -7.8% post-pandemic. A proposal received from Coca Cola European partners at an 18.6% premium to the previously traded share price.

E&P Financial Group (ASX: EP1) – share price -30.7% post-pandemic. Takeover offer at an 8% premium to the previously traded share price.

Think Childcare (ASX: TNK) – share price +4.6% post-pandemic. Takeover offer at a 33.6% premium to the previously traded share price.

First Samuel clients’ portfolios and M&A

An ebullient M&A environment does increase the probability that companies within First Samuel portfolios may receive takeover offers.

This is particularly relevant for companies who have lagged in the recovery.

Over the past month, we have begun to see this unfold.

In late November, Regis Healthcare received a non-binding, indicative proposal at a 25.4% premium to its previously traded share price.

Furthermore, it is rumoured that United Malt Group has attracted interest from several private equity suitors including The Carlyle Group and we have seen interest in Boral’s assets.

In general, the recognition of the value we see in companies through a takeover bid is positive for their share prices, as we have seen with Regis.

However, we are also wary of opportunistic bids that may not fully reflect the value we see in these companies. In such instances, the integrity of the board of these companies as well as the patience and resolve of shareholders are key to ensure an appropriate amount value is realised.

We also see that this is a time where several of your companies may create value through opportunistic acquisitions.

This has been demonstrated by Lovisa, who were able to opportunistically acquired more than 80 retail stores in Europe from a struggling retailer for a nominal amount, as well as EarlyPay (formerly CML Group) who acquired a transformational technology platform for well below its previous valuation.

Conclusion

After many months in the doldrums, M&A activity is once again on the rise.

The unique impact of the global pandemic has created an environment in which we may see renewed M&A activity.

We have already seen signs the beginnings of this in November and December, including increased activity relating to clients’ portfolios.

In the current environment, we would not be surprised if more companies within the portfolio were subject to takeover offers or pursued opportunistic acquisitions of their own.