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Better times bring return of the deal

It took a while, but the market’s appetite for acquisitions has returned with gusto.

THE markets didn’t need the Goldman Sachs deal with Facebook this week, valuing the social network at about $US50 billion, to confirm that last year’s late binge of deal doing would continue well into the new year, but it helped keep the champagne corks popping.

After the drought of 2008 and a quiet start to 2009, normal services have resumed.

”When the GFC hit, most people swapped into a short-term survival mode,” says Allens Arthur Robinson corporate partner Richard Kriedemann. ”The second half of last year saw things return to a more normal, longer-term trend.”

And the party isn’t confined to the latest crop of Silicon Valley dotcoms either. After all, the sliver of money actually being handed over to Facebook by Goldmans and other friends – $US450 million – pales into insignificance beside the $US40 billion that BHP Billiton offered in a failed bid for Canada’s Potash Corp last year.

The setback is not expected to stop the miner from attempting another one or more  multibillion-dollar acquisitions this year.
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Also it’s not like all the deal-making in the resource sector has been confined to BHP, as shown by Newcrest’s $24.5 billion merger with fellow gold producer Lihir.

The resource sector wasn’t the only dealer in the mix, with AMP playing its part in the $13.3 billion mop-up of AXA Asia Pacific – the biggest Australian-based transaction of the year and the third-biggest Asian-based takeover.

It helped mergers and acquisitions activity in Australia more than double last year to $US164.4 billion, according to figures from Thomson Reuters, giving the lucky country a significant chunk of the $US474.6 billion in activity in Asia, excluding Japan.

There are no prizes for guessing the resource sector is expected to continue to lead activity this year.

Rio Tinto’s recent $3.5 billion bid for coal producer Riversdale Mining is a taste of things to come, with Chinese interests also continuing to scour the country for strategic stakes in other commodity suppliers.
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And after BHP’s recent failed attempts to expand with a Rio tie-up and Potash – the world’s regulators appear to be of the view that BHP is getting a little too big – energy may prove to be the only viable expansion option.

BHP is expected to devote a chunk of its growing pile of cash to an acquisition in the oil and gas sector, with more than 20 independent exploration and production (E&P) companies in the US market on its watch list.

It was against that background last week that London’s Daily Mail tipped BHP was considering making a $US90-a- share, or $US45 billion, bid for Anadarko Petroleum. BHP watchers say Anadarko is not the only potential multibillion-dollar deal in the company’s sights.

BHP may look to take out Noble Energy, a $US15 billion company and operator of the big Leviathan gas discovery off Israel, or Cobalt International Energy, valued at $US4.3 billion.
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A more tantalising prospect is BHP as a potential suitor for Woodside Petroleum, which went into play last year after Shell sold a 10 per cent stake for $3.3 billion. This implicitly put its remaining 24 per cent stake in play for the right buyer.

The resource sector’s appetite for acquisitions, locally and overseas, is to be expected given the strength of company cash flows, their stock, and the Australian dollar, but it is not expected to stop overseas interest in Australian companies across the board.

Kriedemann says a return of private equity this year will see a surge in deal making in Australia.

”There have already been a number of privately negotiated deals occurring and I don’t think you can point to any one area of the economy and say it will be immune from M&A activity in the next 12 months,” Kriedemann says.

Freehills’ merger specialists, Tony Damian and Neil Pathak, agree.

”The conservatism of the last three years has resulted in many large and mid-market companies with low gearing and stable cash flow . . a nice combination for a private equity pursuer,” they wrote before Christmas.

”The time to strike would seem to be now, particularly, before the general economy improves and asset prices increase.”

Private equiteers TPG and the Carlyle Group certainly don’t need any prompting on this point, they joined forces last year to acquire Healthscope for $2.7 billion.

Another strong theme Damian and Pathak expect to continue this year is strong overseas interest in Australia’s agriculture sector, which saw takeovers last year of AWB by Canada’s Agrium, CSR’s sugar business, Sucrogen, by Singapore’s Wilmar International, and Ricegrowers by Spain’s Ebro Foods.
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But it won’t be plain sailing as the Singapore Stock Exchange is finding with its $8.4 billion bid for Australian Securities Exchange and BHP did with Potash.

Intervention by the Australian Competition and Consumer Commission killed several deals last year, like NAB’s tilt for the AXA assets, although not the ASX bid, which is being lost in the corridors of Canberra.

Freehills also expects the Foreign Investment Review Board to be more vigilant this year, especially in relation

to the resource and agribusiness sectors, which are expected to be the main areas of activity.

The law firms says FIRB vigilance reflects a global trend for increased scrutiny of foreign investments.
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”In Australia, this will manifest itself in FIRB probing and seeking additional information and an increased incidence of approvals being granted subject to conditions and undertakings relating to maintenance of Australian head office, industry impacts, pricing of export of product and maintenance of employment. Also expect some outright rejections (which will perhaps be presented as withdrawals of applications),” Freehills says.

Events last year are expected to pave the way for potential M&A candidates this year outside the red-hot resource sector.

A split of Foster’s wine and beer divisions is expected to attract attention, as is Tabcorp’s decision to divide its casino division from its wagering and gaming operations.

Asahi Breweries, Japan’s second-largest brewer and the acquirer of Cadbury’s Australian drinks unit in 2009, reportedly hired advisers to look at Foster’s beer business last year and its president, Naoki Izumiya, said recently it will “aggressively seek acquisitions and alliances” this year., Advertising for everyOne!

The brewer said in April that it may buy food and alcohol companies in the Asia-Pacific region, and has also said it may spend as much as ¥400 billion on acquisitions.

There is more certainty around Tabcorp’s split, although no one is punting on either operation surviving as a stand-alone operation for long, with potential predators already lining up for both divisions.

James Packer’s gambling operation, Crown, has been cited as a likely buyer of Tabcorp’s casinos while Tattersall’s chief executive, Dick McIlwain, has expressed interest in the wagering and gaming business, which would put all Australia’s traditional wagering pools under one roof for the first time.


The most intriguing transaction of the year is likely to be one of the earliest, with the receivers appointed in controversial circumstances to one of the world’s biggest ammonia producers, Burrup Fertilisers, expected to appoint advisers and fast-track the sale of a 65 per cent stake in the company owned by its founder, Indian entrepreneur, Pankaj Oswal, and his wife.

The entire company was valued at more than $3 billion in 2008 when it first attempted to go public before the GFC.

The receivers report that more than 10 parties are interested. The front runner is expected to be Burrup’s other shareholder, Norwegian fertiliser company Yara International, which also has a long-term agreement with Burrup to buy all its ammonia.


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