Offshore investors reign in private M&A ‘mega deals’ in 2016

Significantly more deals involved the US, the UK, and China as the general offshore investors group took more risk

Offshore investors reign in private M&A ‘mega deals’ in 2016
Offshore investors last year poured capital into private mergers and acquisitions’ biggest deals, which also accounted for a larger share of the market.

Of “mega deals,” or deals valued at more than $500m, 80% were cross-border deals, according to King & Wood Mallesons’s sixth annual DealTrends report, which looked at 78 private M&A deals in Australia in fiscal 2016.

Across the private M&A landscape, there was only a slight dip in cross-border activity at 53%, compared to 2015’s 54%. However, foreign investors were involved in bigger deals, as cross-border deals had a higher median value than domestic deals.

“Mega deals” accounted for 13% of the market, a marked increase from 5% the preceding year, which offset a decrease to 14% from 19% in deals valued from more than $200m to $500m.

Of all cross-border transactions, 68% involved the US, the UK, or China. US investors rained money onto Australian assets, with 34% cross-border deals involving the US, compared to 17% in 2015. The UK was involved in just as many deals, an increase from an even smaller 11%. Chinese investors were involved in 22% of deals, compared to 14% in 2015.

“2016 was another strong year for Chinese outbound investment with Chinese bidders diversifying their investment strategies and improving their deal execution capabilities. Equally, as Australian sellers and their advisors become more accustomed to dealing with Chinese bidders, funding and execution certainty is becoming less of a concern,” said Ros Anderson, KWM partner.

However, the report warns of possible headwinds for Chinese outbound investment as PRC regulators tighten control over outbound capital and more strictly scrutinise deals, which could lead to delayed clearances and additional requirements.

Investors are taking more risk though, with the report finding that other than an increase in required regulatory approvals, significantly fewer deals (40% in 2016 compared to 52% in 2015) included a material adverse change condition. Cross-border deals were more likely to include a MAC condition than domestic deals.

Private equity involvement also remained strong, with 37% of deals involving PE outfits -- an increase from 22% the previous year.

“Private equity sponsors remain very active in Australia’s M&A landscape, in terms of both new investments and exits. Health-related deals stood out as a growth area generally, including for private equity activity, and we expect this to continue in 2017,” said Matthew Coull, KWM partner.

The report also found an increase in locked box, or fixed-price deals. There was also a steady increase in the use of warranty and indemnity insurance, rising to 40% of deals in 2016 from 37% in 2015 and 11% in 2011.

Related stories:
Mid-market M&A hopes high for 2017 despite Australia’s slump last year
Top firm sees promising year for Australian M&A

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