HSF’s mergers and acquisitions experts Tony Damian and Andrew Rich have revealed their top 10 predictions for the Australian M&A market in 2021.

The first, the pair said, will see the consolidation of “strong” deals carried out in the second half of 2020. 

“The second half of 2020 saw strong M&A activity with a number of important deal milestones, from the announcement of significant deals like the CCEP / Coca-Cola Amatil scheme and the various approaches to Link Group, through to the shareholder approval of the recut BGH-Village Roadshow deal,” Mr Damian and Mr Rich said.

“These deal tailwinds will continue into next year, making for a strong start to 2021. We also expect activity to remain strong throughout the year as global economic conditions improve relative to this year. However, geo-political concerns do provide a risk to that result.”

The second trend the pair predicted revolves around private equity being a key player in M&A transactions in 2021.

“The PE prediction has been a staple of our recent ‘Top 10’s’, and it has rarely failed to deliver,” they said.

“The combination of dry powder and deal appetite will see PE remain a highly engaged player in the Australian M&A market, with local houses and the global players all being a part of the mix (and sometimes in tandem, as in the PEP / Carlyle approach to Link Group). It’s interesting to think that it doesn’t feel like that many years ago that take-privates involving PE had some degree of novelty in our market.”

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Mr Damian and Mr Rich also expect the “relative novelty of super funds moving along the spectrum from deal participants to deal doers will be short lived”.

“This development was only a matter of time (refer to our 2019 Top 10 M&A predictions),” they explained.

“The First State Super entry into the Opticomm fray, as well as the AustralianSuper approach to Infratil, show that along with PE, super funds will also be active regulars on the deal scene.”

Fourth, Mr Damian and Mr Rich forecast issues surrounding the Foreign Investment Review Board (FIRB) will “be a feature” of the deal landscape in 2021.

“It has been an interesting few years for FIRB. It is fair to say that this regulator has become far more important to M&A deals,” they said.

“The combination of increased powers under new legislation, a greater policy scrutiny on specific issues such as tax and data, as well as the general national security overlay, means that much thoughtfulness is required, even on applications that deal participants previously wouldn’t have thought twice about. There is also the potential for delay in getting approval.”

The HSF experts anticipate cross-boarder M&A transactions will remain a significant feature of Australian M&A activity this year, despite current trade tensions between the nation and China. 

“2020 saw its share in significant cross border activity, even as the COVID-19 pandemic was in full swing. As the global situation improves over the course of next year, we expect global interest to increase, first from Asia and North America, with a greater European component in the second half of the year,” Mr Damian and Mr Rich said.

The sixth trend the pair predicted comes back to warranty and indemnity insurance, something they note has “steadily increased” in both presence and relevance in the Australian M&A market over the past few years.

“It continues to play a role on deals, and increasingly on a greater portion of deals. Traditionally the preserve of PE sell–sides, we now see it in non-PE deals, as well as public M&A deals. We expect this trend to continue in 2021,” they explained.

Next, Mr Damian and Mr Rich predict the “eternal struggle” between willing bidders and the target boards will continue into the new year.

“Trends in the balance between the two often change. At the moment, a number of bidders will be considering ways to put further pressure on target boards, beyond the traditional leaks, bear hugs and shareholder pressure,” they said.

“In public M&A deals, we expect to see a slight rise in tactics such as the acquisition of outright stakes and hostile bids.”

The eighth trend Mr Damian and Mr Rich expect to see relates to ESG issues and data issues.

“Two areas of increasing relevance to due diligence on M&A deals are Environment, Social and Governance (or ‘ESG’) issues and data issues,” they said.

“The scope, relevance and consequences of ESG diligence is a work in progress. We expect to see thinking in this area continue to develop in 2021 and beyond.

“Data issues have always been important, but have become more important. They touch on potentially significant issues such as overall reputation and privacy as well as potentially national security issues.”

In terms of the sectors to watch, Mr Damian and Mr Rich highlighted property, financial services and resources as those forecasting the highest level of activity.

“Property is of course a broad description that has a number of components. While views are still emerging as to the effects of COVID-19 on property, we think that there be will consolidation in the space,” they explained.

“Financial services feels like a safe bet given the continuing divestment programs of a number of our major financial institutions. We also think that there will be green shoots on acquisitions as well, unrelated to those divestment programs. Resources, like property, is also a broad sector.

“There are many different drivers for different parts of the sector at the moment. Some of those drivers will point to consolidation while others will see potentially significant global deals based on an improving global outlook.”

The tenth and final M&A trend predicted by Mr Damian and Mr Rich is major consolidation and recapitalisation as key players in certain sectors struggle to cope with the flow-on effects of the pandemic. 

“A number of sectors were adversely affected by the COVID-19 pandemic in 2020 – the travel, leisure and hospitality sectors being particularly badly affected,” they said.

“Despite the hope that the worst will soon to be behind us in terms of the effects of the virus, many key players in these sectors remain stressed and even quite distressed.

“We expect this to result in a number of major consolidation and recapitalisation opportunities in 2021, particularly as sector participants seek to sure up their balance sheets in order to protect themselves against similar shocks occurring in the future.”