Australia set for strong M&A year though foreign investor limits dampen sentiment | Reuters


* Privatisation drive set to boost M&A activity in 2017

* Smaller deals likely to fend off startup threat -corporate

* EY says 65 pct of local clients eyeing over 5 targets

* Foreign investment limits could hit valuations -advisers

By Jamie Freed

SYDNEY, Dec 21 Australia’s privatisation drive
is set to draw billions of dollars of acquisition funds in 2017
adding to what corporate advisers expect to be a strong year for
dealmaking, albeit one tempered by potential restrictions on
foreign suitors.

A flurry of smaller deals involving firms battling to stay
competitive in an era of disruptive startups is likely to add to
an infrastructure privatisation push aimed in part at narrowing
public budget deficits, four corporate advisers told Reuters.

“There aren’t enough deals to satisfy the appetite of
infrastructure investors right now,” said David Larocca, Oceania
managing partner of transaction advisory services at EY.
“Australia is a relatively stable economy and relative to other
countries around the world the outlook remains good.”

The state of Western Australia could be next in line for a
windfall – as much as A$2 billion ($1.5 billion) from selling
the Port of Freemantle if its government is reelected in March.
That would follow Victoria’s A$9.7 billion sale of the Port of
Melbourne in September, and New South Wales’ A$16.2 billion sale
of Ausgrid a month later.

But Ausgrid’s sale to local pension funds instead of
higher-bidding Chinese and Hong Kong investors on national
security grounds was behind Western Australia pursuing a A$15
billion stock market flotation of Western Power
rather than a direct sale.

After Ausgrid, the federal government imposed limits on
foreign investment for next year’s A$4 billion sale of New South
Wales power grid Endeavour Energy. Such developments could limit
participation in merger and acquisition (M&A) deals, bringing
down valuations, the corporate advisers said.

“There is some more nervousness around (foreign investors)
participating in processes where there is likely to be an
issue,” said Aidan Allen, head of investment banking for
Australia and New Zealand at Citi.

“Our sense is that the government is making efforts,
however, to be more transparent,” he said in reference to


Power, infrastructure and transportation made up about 30
percent of the US$120 billion of Australian M&A deals announced
to date in 2016, Thomson Reuters data showed. The country’s
overall M&A total was down just 1.2 percent from a year earlier.

For next year, EY said a survey of its Australian and New
Zealand clients showed 96 percent expected the total to be
stable or improve. Moreover, 65 percent of respondents said they
had identified five or more potential M&A targets.

At annual general meetings over the last six months, firms
which told shareholders they were examining M&A opportunities
included wealth manager IOOF Holdings Ltd and miner
South32 Ltd.

Flight Centre Travel Group Ltd told stakeholders it
aimed to expand in China through acquisitions or partnerships.
Agricultural chemicals maker Nufarm Ltd said a wave of
M&As in its industry meant assets might come up for sale.

“Most law firms and banks right now are busy” with potential
M&A deals, said David Holland, head of Australian capital
markets at law firm Baker & McKenzie. “A lot of these M&A deals
will drive secondary capital raisings to fund them.”


Deals that may attract inbound investment include Wesfarmers
Ltd’s possible sale of two coal mines that sources said
could fetch over A$2 billion – a prospect some market watchers
took as a sign that rising commodities prices could fuel a
return of Australian mining deals after a three-year slump.

But the Ausgrid decision spooked foreign investors beyond
China and Hong Kong. Large Canadian pension funds now consider
Australia to be a riskier market, said an investment banker
specialising in infrastructure deals, who was not authorised to
speak publicly on the matter and so declined to be identified.

Caisse de depot et placement du Quebec did not respond to a
request for comment while Canada Pension Plan Investment Board
declined. Ontario Teachers’ Pension Plan said it continued to
view Australia as an “excellent and attractive” target market.

($1 = 1.3723 Australian dollars)

(Reporting by Jamie Freed; Editing by Christopher Cushing)