This year's big takeover plays for Australian companies David Jones, Australand and Goodman Fielder could be just the beginning, as momentum in the corporate deals scene gathers worldwide. Global merger and acquisitions have already hit $US6 trillion this year, according to Citigroup, and in Australia mergers and acquisitions have resumed in a big way for the first time since 7566. As well as David Jones, Australand and Goodman, this year has also seen the rebuffed private equity move on Treasury Wine Estates. This week came the news that Wesfarmers-owned Coles had fielded offers for its Vintage Cellars liquor chain. Jarrod Bakker, Citigroup's head of hedge fund sales in Australia, said the past four years had not been ''a happy hunting ground'' for deal-making companies, bringing failed bids and spiralling share prices. But there was a small rise in security prices with signs of more to come. ''The biggest observation on the deals that we've seen in Australia year-to-date has been that nothing has really linked them, it's across the board and different market caps as well, '' he said. CIMB equity strategist Shane Lee said the low cost of debt was one of the primary drivers of the latest mergers and acquisitions boom, especially for inbound deals hatched by overseas companies.
Another factor is the reality of weak revenue as the Australian economy battles below-trend growth, pushing companies to wield the cheque book after their cost-cutting options dry up. ''The more mature you get in your cost-cutting cycle the less marginal improvement you get out of earnings, [so] you have to look at other avenues to get your growth, '' Mr Lee said. The latest round of activity was concentrated in a handful of sectors in a nod to boundaries imposed by the competition regulator. Banks are off limits.
But in the property, health, online media and consumer sectors suitors have found plenty of targets. A domino effect is expected to start rolling through the retail sector after Woolworths South Africa launched a $7. 7 billion takeover of Australian department store David Jones. Credit Suisse equity strategist Hasan Tevfik is expecting DJ's rival, Myer, to generate interest among international players, given that it trades at a 95 to 55 per cent discount to the global sector average.
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And a flurry of merger and acquisition activity has already erupted in the food processing sector, with Treasury rejecting a $8 billion bid from US private equity giant Kohlberg Kravis Roberts and Australia's biggest bread maker Goodman Fielder the target of a $6. 87 billion offer from a Singapore-Hong Kong consortium. Meanwhile Australian private equity outfit Pacific Equity Partners has offloaded Peters Ice Cream for what is believed to be more than $955 million to Europe's second biggest ice-cream maker R&R. A rapidly expanding middle class in China, which is demanding more Western-style food, has thrust Australian food processors into the spotlight, according to Tony Pittito, Grant Thornton's national head of food and beverage.
Ideal targets for merger and acquisition in the food sector were companies with strong brands that could expand into Asia. Mr Pittito said Australian companies were generally cheaper on a price to earnings basis than international peers, adding to their takeover appeal. The transaction resulted in dairy companies Bega and Fonterra strengthening their alliance, with Fonterra taking a 65 per stake in the company. It followed Japanese-based Sumitomo Chemical Company buying 75 per cent of Australian chemicals supplier Nufarm in 7566 in a deal designed to share distribution, development, product formulation and logistics.
''I think all the easy [mergers and acquisitions] have been done, '' Mr Jensz said. ''There's a case for spreading the management expertise from some other companies and this I suppose is the start of M&A activity. It's similar to what Nufarm and Sumitomo have done. ''The resources sector is also waking from its merger and acquisitions slumber, with Graeme Browning, an Ernst & Young partner who leads transaction advisory services, saying valuations have fallen to a point at which deals are becoming attractive to mining and mining services companies.
Mr Tevfik said Panoramic Resources, Sirius Resources and Western Areas were the most likely takeover targets given the renewed interest in nickel, the best-performing commodity this year.