Australia Lures Foreign Buyers Driving Deals: Real M&A

A buying spree in Australia by foreign acquirers may drive dealmaking this year to the highest level since 2007.

Overseas buyers struck a record $40 billion of deals for Australian businesses last quarter. They included David Jones Ltd., Australia’s oldest department store, and developer Australand Property Group. The wave is continuing into the second half, with Roc Oil Co. targeted by a Chinese acquirer, and the next targets may include retailer Myer Holdings Ltd. and beverage company Coca-Cola Amatil Ltd., according to Credit Suisse Group AG.

The buyers, from China to Singapore and South Africa, are betting a nation with one of the developed world’s fastest-growing populations will extend 23 consecutive years of economic expansion. The interest from offshore buyers is putting 2014 on course to be the biggest for merger activity in Australia in seven years.

“We’re seeing more transactions at the moment than we have over the past several years,” Gary Nicholson, a Melbourne-based partner and deals specialist at Ernst & Young Global Ltd., said by phone. “In Australia, the transaction cycle has turned. Foreign investors do see Australia as a safe place to invest.”

Foreign buyers targeted Australian companies in 149 deals in the second quarter of 2014. The $40 billion of announced transactions by overseas acquirers were the most on record for any three-month period, according to data compiled by Bloomberg.

Deal Confidence

This month, China’s Fosun International Ltd. agreed to buy Roc Oil for A$474 million ($442 million), ending the Sydney-based company’s plan to combine with domestic peer Horizon Oil Ltd. The next day, South Africa’s Woolworths Holdings Ltd. completed the A$2.15 billion purchase of David Jones it announced in April.

Last week, Singapore’s Frasers Centrepoint Ltd. took control of Australand and Cheung Kong Group won the contest for Australian gas company Envestra Ltd.

“When the home markets of these foreign companies are doing well, that is likely to give them added confidence to invest in other markets, including Australia,” said Anthony Sweetman, Sydney-based head of investment banking at UBS AG. “The U.S. is getting better all the time, and Asia has been traveling well for some time.”

U.S. gross domestic product rose at a 4 percent annualized rate in the second quarter, exceeding economists’ forecasts. Japan aside, Asia’s five largest economies all grew at least 3.5 percent in their most recent quarters while China recorded expansion of 7.5 percent, data compiled by Bloomberg show.

Growth, Stability

In Australia, the economy is poised to expand by as much as 3 percent in the year through June 2015, the central bank said last week.

The country is “highly attractive” to foreign acquirers, said Nigel Lake, joint chief executive officer of Sydney-based advisory firm Pottinger Co. “It is relatively high-growth and it is relatively stable.”

Myer, which last year proposed merging with David Jones before the chain was bought by Cape Town-based Woolworths, may itself be targeted by an international retailer, Credit Suisse analysts led by Hasan Tevfik in Sydney said in a report last month. Myer has a market value of about A$1.4 billion. A potential buyer for the A$7.3 billion Coca-Cola Amatil may be SABMiller Plc after it bought Australian brewer Foster’s Group Ltd. in 2011, Tevfik said.

A spokeswoman for Melbourne-based Myer declined to comment on any potential takeover. A spokeswoman for Coca-Cola Amatil didn’t return a call seeking comment, while a representative for London-based SABMiller declined to comment.

Not Cheap

Australia is luring buyers even if its assets are pricier than those in other markets, said David Wood, Sydney-based head of investment banking for Australia at Bank of America Corp.

Australia’s benchmark S&P/ASX 200 Index is at a seven-year high, when measured against the profits generated by its member companies, according to data compiled by Bloomberg. Those companies are fetching about 11 times their earnings before interest, taxes, depreciation and amortization in the previous 12 months, taking net debt or cash into account. On the MSCI Emerging Markets Index, the multiple is 7.9.

“I wouldn’t say Australian companies are cheap on a global basis, but it comes down to the rarity of quality,” Wood said by phone. Developed markets “are very attractive places for companies to spend.”

Wine Buyout

This week, Treasury Wine Estates Ltd., the Australian maker of Penfolds Grange, said a second buyout firm had matched a A$3.4 billion proposal from New York-based KKR & Co. and Rhone Capital LLC. A person familiar with the matter named TPG Capital as the suitor. Both firms have been given access to Treasury’s accounts.

Worldwide, private-equity firms sat on a record $1.16 trillion of capital as of July, according to London-based research firm Preqin Ltd.

It’s not just offshore entities fueling deal activity. Australian buyers are also targeting acquisitions, some overseas.

Australian hospital operator Ramsay Health Care Ltd. plans to use debt to fund a joint takeover of Paris-based rival Generale de Sante SA. The purchase will cost Ramsay 429 million euros ($5743million), it said in June.

Sydney-based Aristocrat Leisure Ltd. last month agreed to buy Franklin, Tennessee-based Video Gaming Technologies Inc. for about $1.3 billion in a debt-funded deal.

Whether Australian companies are the buyers or the targets, merger activity is likely to keep going strong, according to Nicholson at Ernst & Young.

“We’re at the front end of a significant period” for takeovers, he said.

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