Dealmakers Mid-market M&A in Australia 2024 outlook
February 2024
Contents 03
05
07
08
12
14
16
18
Celebrating 10 years of Dealmakers
Section 2: Mid-market deals
20
Section 6: Focus: ESG
Foreword
Section 3: Deal drivers
Key findings
Section 4: Risk outlook
Methodology For this publication, Pitcher Partners commissioned Mergermarket to canvas the opinions of M&A dealmakers who have completed at least one deal in Australia in the past 12 months. 60% of the respondents were from Australian corporations, 30% were from foreign corporations with operations in Australia, 5% were from Australian private equity firms, and 5% were from foreign private equity firms.
Section 1: Australian M&A 2024
Section 5: Spotlight on sectors
All dollar figures, unless otherwise stated, are in Australian dollars (AUD). Value figures are approximations and have been rounded. Data used in this report was compiled on 2 January 2024 using Dealogic data and additional sources noted within this repaort. Percentages may not sum to 100% due to rounding. Unless otherwise stated, all date references refer to calendar year and not financial year.
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Celebrating 10 years
Trends: 2014-2024
“In 2014 it was hard to get any insights on deal activity outside of what could be read in the mainstream media, most of which concentrated on mega deals. This led to a skewed perception of what was happening across the entire market. As a firm focused on mid-market clients and recognising that around 70% of M&A activity was in the mid-market we thought it was crucial to our clients and the broader community that mid-market M&A was better understood. This led to our partnership with MergerMarket and the creation of Dealmakers – Mid-Market M&A in Australia.
Australian M&A and Australian mid-market M&A (AU$10m-AU$250m)
$300bn
1,500
$250bn
1,250
2018: Tensions between China and the US saw constriction on M&A deal activity
$200bn $150bn
1,000 750
$100bn
500
$50bn
250
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Deal volume (No.)
Deal value (AU$bn)
10 years on, it’s humbling to see the continued success of Dealmakers and its use as a strategic planning tool for many organisations.”
2021: The post COVID boom saw FOMO drive mega deals
0
2023: Australian mid-market M&A was consistent across the year
Michael Sonego Partner, Melbourne Deal value Australian M&A Australian mid-market M&A
Deal volume Australian M&A Australian mid-market M&A 3
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10 years of Australian M&A The sale of Australian department store chain David Jones for $2.8bn took out biggest deal of the year. Energy, Mining and Utilities sector led the way, accounting for 20% of deal values.
The leisure sector took out the top spot, contributing to 17% of total mid-market deal volume. A record 88% of deals were under $250m.
COVID-19 saw a 20% decline in transactions compared to 2019 and associated values slipped 4%.
M&A volumes increased 5% year on year, making this the fourth year of growth for acquisitions and takeovers. The mid-market accounted for nearly three in every four deals.
Middle market transactions accounted for 68% of all M&A.
The year closed with its biggest deal: the partial lease of Ausgrid by IFM Investors and AustralianSuper for over $16bn.
Infrastructure mega deals abounded, including the $22bn APA Group deal and $13bn Sydney Motorway Corporation deal.
2014
2016
2018
TMT led both respondent sentiments and yearly totals for mid-market M&A, accounting for 34% of mid-market deals.
Rising inflation and interest rates make a showing for the first time in more than a decade. For the first time, industrials and chemicals was tipped to see the highest increase in mid-market M&A (77% of respondents).
Q4 values bounced back with some big deals including Bain Capital’s $3.5bn restructuring of Virgin Australia.
Australian M&A closed out 2022 far from the lofty heights of 2021 with a 51% drop in deal values.
2020
2022
Mid-market deal volume Mid-market deal value
2024
2015
2017
2019
2021
2023
$124.2bn in deals completed in Australia, a 32.5% increase in value from $89.4bn in 2014.
For the first time, 40% of dealmakers recognised cyber security as a major risk factor.
Mid-market deals again took the lion’s share, accounting for 77% of total deal volumes.
Australian outbound M&A reached its highest level since 2010, with 138 deals grossing $30.4bn.
A surge in M&A activity, up 55% in deal volumes compared to 2016, and up 17% in deal values.
ESG comes into focus, jumping from 10% to 50% in the list of challenges facing future dealmaking.
The $29bn acquisition of Afterpay by Square was the largest M&A deal in Australian history.
Offshore buyers did $48bn in inbound deals, the highest half-year total over the past five years. Australian M&A deal volumes dropped 26% compared to same timeframe in 2022.
The China-Australia Free Trade Agreement (ChAFTA), comes into force.
The biggest takeover in Australia’s history to date – a $25bn purchase of shopping centre operator Westfield by Europe’s Unibail-Rodmaco.
Cheers to the biggest deal of the year, the sale of Carlton & United Breweries (CUB) to Japan’s Asahi Group for $16bn.
2021 came roaring back with a 225% increase in deal value for overall M&A in Australia compared to 2020. Pent up demand and FOMO reflected in 52% of deals being opportunistic rather than strategic.
EMU made an impact with the year’s biggest deal, the $30bn Newmont Mining purchase of Newcrest Mining.
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Foreword Australian M&A in 2024 Dealmaker sentiment toward the Australian Mergers & Acquisitions (M&A) market remains strong and the outlook looks very positive for 2024 as economic uncertainty declines. Australia continues to defy global trends and deliver value for dealmakers. In 2023, M&A deal values levelled off, ending the year at AU$114.57bn, a subtle yet still important increase on the AU$114.54bn recorded in 2022. Comparatively, global deal values dropped 12% in the same timeframe. In terms of the total number of deals, the story is a bit different. Overall M&A volume dropped 17% in 2023 from the year prior (in line with 17.4% seen globally) and 19% in the mid-market, as recent interest rate hikes and inflationary pressures impacted dealmakers’ investment strategies and operations. Likewise, recent turmoil in the Middle East has added to growing geopolitical concerns, although Australia stands broadly removed from these conflicts and has been consistently viewed as a safe haven among many dealmakers in our research. Regardless of deal trends and macro impacts, positive sentiment towards the Australian market remains relatively consistent. Overall, respondents give Australia a 77% confidence score when rating the current environment for M&A, based on the ease of doing deals, sourcing opportunities and other factors crucial to yielding value from these transactions. This barometer of the market is an improvement on the 75% score in 2023, although still lower than 80% seen in 2022. While dealmakers are optimistic, they are nonetheless cautious given the ongoing uncertainties and complexities in global and regional markets.
Confidence score Respondents give Australia a 77% confidence score when asked to rate the current environment for M&A in the country, based on factors such as ease of doing deals and sourcing opportunities.
77%
Negative
Positive
Deal definitions Undisclosed and small cap <AU$10m
Mid-market AU$10m-250m
Large cap >AU$250m
Our focus
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There are, however, clear signs that a positive year lies ahead, save for an unforseen event. Dealmakers think Australian M&A will quickly accelerate if inflation keeps declining, allowing interest rate rises to pause. Favourable labour and economic trends could also boost GDP against an uncertain global backdrop. Relatively stable commodity prices also bode well for resource-linked deals. International interest is another positive indicator for 2024. Cross-border dealmaking is likely to remain strong with the Australian dollar stabilising and the country boasting positive macro growth drivers like population increases, urbanisation, technology adoption and rising trade with Asia. In particular, the Australian mid-market (deals valued between AU$10m and AU$250m) will very likely see consistent and expanding activity. Mature mid-market companies in established industries offer stability and steady growth prospects, while those on the cutting edge of innovation (new tech and renewable energy), present opportunities for growth capital to scale their operations. Dealmakers can easily turn to the mid-market to make bolt-on acquisitions to enhance their capabilities. Likewise, mid-sized transactions offer promising alternatives for dealmakers who may be shying away from larger, riskier and sometimes unpredictable mega deals. This is particularly so at a time when external shocks can disproportionately impact companies valued in the billions – and when issues do emerge, they can be vastly harder to fix when dealing with slow-moving corporations. In that vein, the majority of dealmakers (83%) plan to increase their investments in the mid-market through 2024. An equal number say Australia’s mid-market opportunities are superior or at least equal to those in other regional and global markets. The bottom line is that Australian M&A activity appears primed for a significant uptick in dealmaking if favourable conditions increase. While risks exist as always, the underlying appetite for deals in Australia remains voracious.
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Key findings Mid-market -19% change in 2023 deal volume (281) for mid-market M&A in Australia compared to 2022 (347)
Australia -17% change in 2023 deal volume (897) for overall M&A in Australia compared to 2022 (1,081)
1.2% change in 2023 deal value (AU$19.59bn) for mid-market M&A in Australia compared to 2022 (AU$19.35bn)
0.03% change in deal values (AU$114.57bn) for overall M&A in Australia compared to 2022 (AU$114.54bn)
83% say Australia’s mid-market opportunities are superior or equal to those in other markets
95% are actively looking for M&A opportunities in Australia and will continue to source deals over the next year
83% plan to increase their mid-market investments over the next 12 months
85% say M&A conditions in Australia will get better in 2024
66% say rising macro challenges are driving their intentions to invest in Australia
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SECTION 1
Global dealmakers look ahead with confidence as the market once again proves its resilience Despite persistent headwinds, respondents show continued optimism toward Australian opportunities. A sense of stability seems to be returning to the Australian M&A market. For 2023, deal values totalled AU$114.57bn, a very modest but still notable increase from AU$114.54bn in 2022 (Figure 1).
Deal value (AU$bn)
Australian M&A 2024:
$300bn
1,800
$250bn
1,500
$200bn
1,200
$150bn
900
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600
$50bn
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This activity shows the resolve of international and domestic dealmakers to search for and complete M&A deals in Australia. There were several banner mega-deals in 2023, led by the AU$24.5bn acquisition of Newcrest Mining by Newmont Mining and AU$8.6bn sale of Chemist Warehouse Group to Sigma Healthcare via a backdoor listing. Perhaps more importantly, it shows recognition that there is still significant value and opportunity to be found in the Australian market. There is one caveat: declining total deals. Even as large sums of capital are put to work, M&A volume in Australia in 2023 dropped 17% from the year before, with only 897 deals. This makes it the lowest M&A volume year in the past decade and the sharpest year-on-year decline, even taking into account the drop off in activity during 2020 and the onset of the COVID-19 pandemic. This sits somewhat at odds with dealmaker sentiment regarding investment intentions over the past year: earlier in 2023, 87% said they were planning to invest and another 60% said they would be increasing investments (Figures 2 & 3). It seems, then, that a certain hesitation afflicted dealmakers through 2023, reflecting uncertainties arising in economic and geopolitical spheres. This dip aligns with global trends, where M&A volume has declined by 17.4% in worldwide markets. Rising interest rates around the world have seen hikes in deal financing costs and a disconnect between buyer and seller valuation expectations. Ongoing geopolitical challenges from the war in Ukraine and recent conflict in the Middle East have added to these complexities – and the year ahead may prove equally rife with uncertainties for unprepared or ill-advised dealmakers.
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
0
M&A volume dropped 17% from 2022 due to global economic and geopolitical uncertainties, making it the lowest volume year in the past decade.
Figure 2: Which of the following best describes your intentions with regard to investing/M&A into Australia in the year ahead? 50 40 30 20 10 0
Significant increase
2023 outlook
Moderate increase
No change
Moderate decrease
2024 outlook 8
Deal volume (No.)
Figure 1: Australian M&A
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Figure 3: Where will you be looking for M&A opportunities within the next 12 months? Which markets will have the strongest economy / economic growth in the year ahead?
Investment intentions: Global interest strengthens The steady performance of Australian M&A through a tumultuous year in global deal markets has put the country on a firm footing. Most dealmakers are sending clear signals that Australia will remain a priority market for their M&A strategies in the year ahead.
Australia
Singapore
Almost all respondents (95%) say they are searching for deal opportunities in Australia (Figure 3). And 70% of respondents say they will increase M&A in Australia over the next 12 months – the strongest sentiment recorded over the past three years (Figure 2).
Emerging Southeast Asia (excluding Singapore)
Elaborating on these intentions, the CFO of a Chinese corporation says: “Clients want to invest in stable markets… local and foreign investors are keen about investing in Australian markets in the year ahead.”
India
With China’s long run of GDP growth stalling, Australia is standing out as one of the most attractive alternative options for investors seeking exposure to the APAC region.
Japan
Hong Kong
China
85% of dealmakers see improving conditions for Australian M&A in 2024 compared to 2023 (56%) (Figure 4). As improvements take shape, domestic and overseas corporates and Private Equity (PE) firms will shift from the cautious approaches of the past year and look at M&A again as a strategic tool for driving earnings growth and expanding into new markets and locations. “The environment is improving steadily. There are more investors willing to take risks and also invest in long-term opportunities. The appetite for doing deals is greater as new opportunities emerge,” says the Finance Director of a Japanese corporation.
Figure 4: What is your view of Australian M&A conditions and sentiment for the year ahead?
Korea
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Strongest economy Planned M&A within next 12 months (2024 outlook) Planned M&A within next 12 months (2023 outlook)
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2023 outlook
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2024 outlook 9
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Figure 5: Which of the following best describes the rationale behind your most recent investment into Australia? (Select one)
Outlook 2024: A strategic focus Through this period of global macro-economic disruption, Australia has strengthened its strategic position as a key market. The survey findings show that M&A in Australia is increasingly driven by long-term strategic objectives. More than half of respondents’ most recent deals (55%) were strategic acquisitions that were in planning for 12-24 months, a stark increase from previous years and a noticeable shift away from reactive or Fear of Missing Out (FOMO) buying (Figure 5). Two thirds of respondents (66%) say they are increasing investments in Australia due to the market’s safety and predictability as macro challenges (economic, geopolitical, etc) continue to challenge deal processes (Figure 6). And all survey participants in Figure 3 picked the Australian economy as the strongest in the region, ranking Australia above other emerging and fast-growth markets in the Asia Pacific (APAC).
70% 60% 50% 40% 30% 20% 10% 0
“We will be pursuing investment opportunities in Australia. It’s a stable economy, especially compared with the uncertain environment in other markets in Asia, Europe and the Middle East,” the Managing Partner of a US private equity firm said. With China’s long run of GDP growth stalling, Australia is standing out as one of the most attractive alternative options for investors seeking exposure to the APAC region. Australia’s legal system and financial markets have proven especially appealing to US and European dealmakers, where M&A frameworks are similar. Not all APAC markets offer the same degree of familiarity and transparency. Digital transformation continues to be a significant deal driver, a key area of focus for 30% of respondents, with customer demand (27%) also ranking highly (Figure 7). The findings show inflation is taking a toll on demand and customer spending, with investment in digital transformation offering the means to both reduce costs and connect with customers more effectively. Almost all dealmakers say they have made at least some changes to their acquisition strategies in response to current macro challenges, reaffirming the need to remain agile and adaptive to persistent changes in regional and global markets.
Strategic acquisition
Opportunistic
(in planning for at least 12-24 months)
(based on market conditions and developing events)
2022 outlook
2023 outlook
Reacting to market competitors
(fear of falling behind/want to remain competitive)
2024 outlook
Figure 6: How much of an impact have current macro challenges (economic, geopolitical, etc) had on your decision to seek out or increase investments/M&A in Australia? 40% 35% 30% 25% 20% 15% 10% 5% 0
Significant impact
2023 outlook
Moderate impact
Neutral
No impact
2024 outlook
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Figure 7: How have current macro challenges changed your acquisition strategy for Australia? Focus on digital transformation
Focus on customer demand
Focus on supply chain optimisation
Focus on ESG factors generally
No changes
0
5%
2023 outlook
10%
15%
20%
25%
30%
2024 outlook
Inflation and cost of living has taken a toll on customer demand and spending, and businesses are looking to invest in digital transformation to reduce costs and better connect with their customers.
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SECTION 2
Mid-market deals:
Mid-market M&A trended in line with the broader market in 2023. While mid-market deals declined by 19% compared with 2022, the 281 deals completed are still within the long-term averages seen in the past 10 years (2023 was the third lowest in the past 10 years). Total investment remained robust with deal values of AU$19.6bn. It showed a small but still significant increase of 1.2% on the AU$19.3bn secured in 2022 and a hopeful sign of buoyant markets in the year ahead (Figure 8).
$25bn
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$15bn
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$10bn
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0
Mid-market deals are expected to remain a key part of dealmaker strategies in 2024. Most respondents (83%) say mid-market opportunities in Australia are better compared to global markets, with the remaining 17% saying they are at least equal (Figure 9). 83% also say they are planning to increase their investments into the mid-market in 2024 (Figure 10). “Our intention is to solidify the supply chain structure within Australia and we’ve planned to pursue mid-market opportunities mostly. We can calculate the risks and the opportunities associated with mid-market targets more favourably,” says the CFO of an Australian corporate.
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Deal volume (No.)
Australia’s mid-market has remained a hub for investment – and dealmakers highlight the many advantages of mid-sized deals.
Deal value (AU$bn)
Superior opportunities and resilient businesses
Figure 8: Australian mid-market M&A
0
Total investment remained robust in 2023 with a small but significant increase of 1.2% in deal values from 2022 and a hopeful sign of strong dealmaking in 2024.
Figure 9: Generally, do you feel Australia offers better or worse M&A opportunities compared to other global markets? 23%
17%
Better
Overall M&A
Mid-market
83%
No difference
77% 12
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Figure 10: Which of the following best describes your intentions with regard to investing/M&A into Australia in the year ahead?
Key advantages
Mid-market
In an uncertain period for pursuing M&A, the Australian mid-market is marked by a combination of positive factors that many dealmakers find more enticing over small-cap transactions or mega deals (Figure 11).
50% 40%
Deal sourcing
30% 20% 10% 0
Significant increase
Moderate increase
2023 outlook
No change
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Abundant deals top the list of features capturing dealmaker attention – and 65% say the mid-market is ripe with investment opportunities. This is partly due to Australia’s diverse economy and numerous growth-oriented businesses. Mature mid-market companies often have established market positions and consistent revenue streams, making them attractive targets for investors seeking stable returns. Moreover, the Australian government’s support for small and medium enterprises through various incentives further enhances the deal sourcing landscape. Legal certainty
2024 outlook
Figure 11: What makes Australia an attractive market for M&A? (Select all that apply for each column) Deal sourcing opportunities
Most respondents (63%) say legal certainty is a key positive feature of the market. Australia’s regulatory environment is generally regarded as investorfriendly and, given that mid-market deals are often less reliant on banking markets for financing, they do not have to clear the same anti-trust and national security hurdles encountered in larger deals. Tech
Valuations / returns
Investment in digital infrastructure, e-commerce platforms and data analytics is growing in the mid-market, and many businesses in this space continue to lead in the uptake of new technologies to support customer demand. More than half (57%) of dealmakers note this trend as a positive for both target companies and potential investors.
New / advanced technology Legal certainty
Valuations and returns Mid-market M&A in Australia also typically offers favourable valuations and returns (according to 62% of dealmakers) and often better than those in the broader market. These investments often hit the sweet spot: less competitive and costly than large-cap deals and more stable and with higher growth potential than small cap investments. And the mid-market offers a balance of risk and reward, leading to healthy returns on investment.
Favourable tax regime Competitive environment (relatively new buyers / competitors)
0
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20%
Mid-market M&A
30%
40%
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70%
Overall M&A 13
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SECTION 3
Deal drivers:
Figure 12: Do you expect to see increasing competition for assets in Australia in the next 12 months? 68%
Rising competition: and what to expect from valuations in 2024
15%
2023 outlook
Respondents predict a heated market in the year ahead and expect dealmakers will find alignment on valuations. After a challenging year for M&A, survey respondents are preparing for a rebound in activity in 2024. The vast majority (85%) see increasing competition for assets as a dominant theme for the Australian market, a jump of 53% from 2022, as interest from global and domestic dealmakers grows significantly stronger (Figure 12). The marked increase in expected competition bodes well for transaction timelines and also multiples.
No
85%
32%
Figure 13: What will be the main drivers of M&A activity in 2024?
Private equity and international investors
Amount of capital to be deployed by Private Equity
PE firms and foreign dealmakers are expected to drive both overall M&A and mid-market activity in 2024 (Figure 13).
Foreign Dealmakers into Australia
Australian Investment Council research shows that there is AU$21.6bn of undeployed cash available to PE, venture capital and private credit funds for investment in Australia. With these large pools of capital at the ready, there is a structural imperative for private capital managers to do deals. Managers can only hold out for so long after adopting a ‘wait-and-see‘ approach in 2023. Firms will have to adjust to new market dynamics and get back to transacting.
Valuation alignment between sellers and buyers
Listed companies seeking growth via M&A in light of low organic environment
“Overall, PE firms have adequate funds to deploy in Australia and other markets. They have the backing of strong high net worth individuals and institutional investors, who are willing to support the long-term agenda,” says the Head of Finance at an Australian corporation. Foreign corporate interest in Australia is also building, as seen in US-based Newmont’s purchase of Newcrest and in deals such as London-listed veterinary services company CVS Group entering the Australian veterinary market with the acquisition of four veterinary practices in Sydney and Brisbane. CVS has set up a senior management team in Australia to support acquired practices and build a pipeline of further acquisitions.
Yes
2024 outlook
More realistic value expectations of sellers
Succession planning
0
10%
20%
Mid-market M&A
30%
40%
50%
60%
70%
Overall M&A
“Foreign dealmakers find Australian markets quite attractive for dealmaking. They are increasing the allocations steadily,” says the Vice President of Operations at a Swedish corporation. 14
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80% Figure 14: What have been your observations in relation to valuation multiples over the last 12 months? 70%
60% 50% 40% 30%
Deal activity is also likely to be boosted by domestic-focused transactions, as companies listed on the Australian Securities Exchange (ASX) have an advantage in scrip bids, using shares as a way of paying for deals. Scrip bids have already proven an effective tool for financing deals through the last 12 months. The merger between Australian asset management companies Pendal and Perpetual, for example, included a scrip financing component, and other listed corporates (both domestic and international) are expected to look at similar deal structures in the 2024. Scrip bids have enabled corporates to proceed with large strategic deals without having to seek financing from choppy debt markets. “Listed companies are seeing more growth via M&A. The organic growth plans will only help to derive profits over the long-term,” a CFO of an Australian company said.
20% 10% 0
Domestic M&A
They have remained broadly steady
2023 outlook
Multiples have declined
Multiples have increased
2024 outlook
Intense competition is expected to build in 2024 for a select group of high performing companies that will continue to trade for high multiples.
Valuations There is also growing optimism that dealmaking in 2024 will grow as vendors and buyers agree on the value of assets. More than half of dealmakers think valuation alignment between sellers and buyers will drive deals in both the broader and mid-market space. Peaking interest rates will go a long way towards bringing buyers and sellers closer together. The RBA held rates steady in December as signs emerged that inflation may have peaked. This clearer picture on rates will provide dealmakers with a much firmer foundation in 2024. Deal financing costs will stabilise and investors will be able to assess risk more accurately, which will provide clearer deal valuations and should narrow the gap between buyer and seller expectations. Alignment on valuations, however, does not mean that sellers will accept bargain prices for assets. The quality bar for deals is expected to remain high, with intense competition building for a select group of high performing companies that will continue to trade for high multiples. Indeed, 70% of respondents say valuation multiples have increased over the past 12 months – and they may go higher if competition increases (Figure 14).
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SECTION 4
Risk outlook:
Financing challenges lead concerns, inflation and interest rates fears persist
Figure 15: What are the top challenges facing mid-market dealmakers in Australia in the next 12 months? Please choose three. Access to capital or financing
Rising interest rates
New risks arise and old ones remain as dealmakers assess the various challenges that stand in the way of a successful deal in 2024.
Uncertainty around economic recovery
Improving deal activity sentiment and M&A prospects for 2024 does not mean that dealmakers are out of the woods yet. Interest rates and inflation may be peaking, but the encouraging signs of a market rebound are still emerging and there is still uncertainty for dealmakers to navigate.
Rising inflation
Difficulties with the due diligence process
Top challenge: Financing the deal Deal financing remains the main concern for M&A investors, with more than half (52%) saying that securing financing will be one of their primary challenges, compared to 40% in 2023 (Figure 15). Almost half (48%) also point to rising interest rates as a key obstacle – although noticeably less than the 55% who said likewise last year. “Access to capital in Australia will be limited. I do not think the financial system is strong enough to support the need for capital. As deals increase, dealmakers will have to find alternative ways to finance their deals,” the CEO of an Australian corporate said. Even if interest rates do flatten out, borrowing costs will remain significantly higher than two years ago. With rates expected to remain higher for longer, dealmakers are still adjusting their deal models to account for how higher debt payments will affect their debt ratios and payment capabilities.
0
10%
2023 outlook
20%
30%
40%
50%
60%
2024 outlook
Borrowing costs remain significantly higher than two years ago and dealmakers are still adjusting their deal models to factor in higher debt payments will affect debt ratios and payment capabilities.
The high cost of borrowing has affected debt issuance in Australia. Debtwire figures show that issuance of high yield bonds, leveraged loans and non-leveraged loans in Australasia fell 46% year-on-year over the first nine months of 2023 to US$51.68 billion as borrowers stayed away from debt markets unless they had no other choice. Debt markets are expected to be more accessible in 2024, but financing conditions will remain more challenging than in the bull market of 2021. 16
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Figure 16: Thinking about your last deal in Australia, how long did it take to complete in comparison to prior years?
Deals are becoming quicker likely due to the increasing use of vendor due diligence in sales processes and insurance to reduce deal friction. 50%
Almost half of dealmakers (48%) say that their recent transactions took less time than in previous years (Figure 16). Similarly, nearly half (47%) of respondents say that key parts of the deal process – especially due diligence – have become somewhat easier than in previous years. As the worst of the COVID-19 pandemic drifts further into the rear-view mirror, it is easier to assess the sustainability of earnings compared with prior years. This is likely being driven by the increasing use of vendor due diligence in sales processes and increasing use of Warranty & Indemnity insurance to reduce deal friction. However, wariness remains over deal assessments and investigations. Some 43% of respondents are finding due diligence in the current environment harder compared to 12 months ago. The challenge is finding evidence of how resilient certain businesses are amid inflationary pressures and various post-pandemic macroeconomic uncertainties.
40%
30%
“The complexity of the due diligence process still continues to impact deals. The difficulty level has not changed. We still have to be certain that the due diligence teams are flexible and capable of reviewing all metrics systematically, despite unpredictable market pressures,” says the Head of Acquisitions and Integration at an Australian company.
20%
Conducting due diligence on a deal target is a complex process that requires dealmakers to have a firm strategy in place. Potential buyers must take all possible steps to mitigate downside risk, which leads to more thorough, detailed due diligence across a wider range of topics.
10%
0
Deal timelines: Shorter but still challenging
Significantly Moderately quicker quicker
2023 outlook
Neutral
Moderately Significantly longer longer
“Due diligence will be tougher going ahead – tracking the sustainability progress is difficult.” says the CFO of an Australian corporation.
2024 outlook
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SECTION 5
Spotlight on sectors: Respondents reflect on which sectors will be hotspots for mid-market M&A, and which may experience distress in 2024. TMT: Exciting and ever-evolving After a pullback in tech investments and sentiment in early 2023, dealmakers are showing renewed interest in the sector. Most (87%) think Technology, Media and Telecommunications (TMT) deals will dominate mid-market M&A trends through 2024 as dealmakers turn to tech acquisitions to bolster business transformations and digital capabilities (Figure 17). It also means dealmakers are willing to accept the sometimes greater risks associated with volatility and overly heady valuations in the sector. Regardless, Australia’s tech landscape is one of the most dynamic in APAC, with the mid-market playing a crucial role in driving innovation and growth. Highlighting the increasing appetite for Australian tech deals, the Finance Director of an Australian company says, “Digital transformation requirements are considered more often today. Even if there is room for the slightest development, it has to be considered because of the changing trends and change in customer demands.” While AI has dominated headlines recently for its revolutionary power across industries, the growing focus on sustainable tech has been equally important. In response to global environmental concerns, Australian tech companies are increasingly prioritising sustainability. In particular, mid-market businesses are adopting green tech to reduce their carbon footprints and meet consumer demands for eco-friendly products.
Consumer: E-commerce, everywhere, all at once Australia’s consumer industry has seen a surge in e-commerce, driven by changing consumer behaviours and technological advancements. This digital shift has led to increased competitiveness, pushing companies to innovate and diversify their offerings. M&A has become more attractive for businesses that want to strengthen their digital abilities, improve their supply chain reliability, and reach new market segments. This trend is likely to continue, reshaping the consumer industry’s structure and driving strategic mergers – and close to half of respondents (45%) see it as a hotspot for mid-market deals.
Figure 17: Which of the following sectors will see increases in mid-market M&A in the next 12 months? (Select all that apply)
Increasing mid-market M&A Consumer: A surge in e-commerce has led to increased competition, with strategic mergers and a reshaping of the industry’s structure likely in 2024 and beyond.
100%
80%
60%
40%
20%
0
TMT
Pharma, medical and biotech
Consumer
Financial services
Business services
TMT: Australia’s tech landscape is one of the most dynamic in APAC, and the mid-market plays a crucial role in driving growth.
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Figure 18: Which of the following sectors will see possible increasing distressed M&A in the next 12 months? (Select all that apply for each column)
Increasing distressed M&A
Australia’s financial services industry is undergoing a profound transformation. Tech-driven solutions and changing consumer demand for digital banking are driving this shift. The market is also influenced by the emergence of new fintech companies that offer innovative solutions. These trends are setting the stage for a surge in M&A activity as established institutions look to acquire fintech companies to enhance their digital capabilities. And fintech startups themselves are looking at M&A as a pathway for growth. As a result, the sector is likely to see consolidation as larger financial institutions aim to secure their market positions while smaller, nimble startups merge with each other to form stronger entities to challenge traditional market leaders. For these reasons, 42% of dealmakers say mid-market M&A will increase in the year ahead.
100%
80%
60%
Energy and mining: Unique opportunities The shift towards renewable energy projects that are smaller in scale but greater in number is a developing trend in this industry. This, and the ability of mid-market businesses to adopt green technologies, will drive M&A in the year ahead, as larger companies look to expand their renewables portfolios through acquisitions.
40%
20%
0
Financial services: Innovation and consolidation
Construction Real estate
Transport
Defence
Government
Distress watch: Transportation, real estate and construction As industries transition and digitalise, the capital investment required can put companies under financial pressure. According to survey respondents, the transportation, real estate and construction sectors have seen increasing levels of distress as companies in these industries struggle to source the capital required to make their operations greener and more sustainable, in line with growing customer expectations, whilst also feeling the burden of ever-increasing raw material costs (Figure 18).
Mid-market miners are increasingly focusing on niche opportunities, particularly regarding critical minerals like lithium, nickel and cobalt. These miners, often more specialised and less burdened by the complexities facing larger mining conglomerates, are primary targets for M&A. This is especially the case for international companies aiming to secure their supply chains against global uncertainties.
Businesses in these sectors are often highly leveraged and have been negatively impacted by rising rates or operate on very thin margins which can be materially impacted by small changes in their cost base. “Distressed M&A in transportation will increase. There are many transportation companies who’ve not been able to switch to an ecofriendly fleet. It involves a huge investment, no doubt. But the planning and implementation of strategies have been quite slow till now,” the Head of Corporate Development and Strategy at an Australian company said.
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SECTION 6
Focus: ESG The weight that Environmental, Social and Governance (ESG) factors hold in the M&A process has increased compared to a year ago – but mandatory reporting of emissions will raise the bar further. ESG has become established as a key fixture for mid-market M&A in Australia and most respondents (52%) say it now factors into every deal, up from 48% last year. Another 45% say it features in most deals, with just 3% saying they rarely see ESG feature in deals (Figure 19).
Figure 19: How often have ESG considerations factored into the deal-making process regarding your investments into the Australian mid-market within the past year? 13%
3%
48%
52% Every deal
2023 outlook
2024 outlook
Most deals Few deals
38%
45%
The increasing priority given to ESG in M&A has benefitted Australia. The market is known for being an M&A environment where ESG is taken seriously and keeps showing advantages over global markets in this regard. Only 10% of respondents said they had to walk away from a deal in Australia due to ESG concerns over the past 12-24 months, compared to 35% who said the same regarding investing in other global markets.
ESG due diligence challenges Mandatory reporting of emissions for large entities and large emitters begins from July 2024, and for businesses with as few as 100 employees, $25m in assets or $50m in revenue this will be required by 2027-28. Factor in Scope 3 emissions reporting in the second year of the mandatory reporting scheme, and clearly the focus will firmly be on ESG due diligence in the M&A space for the foreseeable future. However, immediate commercial pressures and doubts about rates may have become the focus of senior management time and business resources at the expense of mandatory reporting planning. This comes through in the survey, where only 10% in Figure 7 say ESG factors are driving strategy, a noticeable drop off from 15% in 2023, and raises concerns about how sale ready businesses are if they are planning to head to market. In line with global trends, survey respondents have felt confused and unclear about ESG benchmarks – and many report that the challenges are only increasing (Figure 20). Echoing the challenge faced by many respondents, the Head of M&A for a UK-based company says, “There was confusion about the ESG metrics provided by the company. There is a significant problem that arises due to the lack of data standardisation in different markets. We have to seek the advice of external consultants to review the information comprehensively.” Overall, however, the quality and comprehensiveness of ESG data in Australia seems to be improving. Almost half (48%) of respondents this year praise the data they acquired and analysed in their most recent deals – a modest but important improvement from 43% the year before. Indeed, ESG standardisation and reporting may still be evolving, but dealmakers are adapting and moving fast.
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Figure 20: What was the most significant challenge you faced when conducting ESG due diligence of Australian mid-market assets in your most recent deal? (Select one)
Figure 21: How would you rate the quality/ comprehensiveness of ESG due diligence data available to you in your last mid-market deal?
Confusion/lack of clarity on standards
With mandatory reporting for large entities and emitters starting from July 2024, the focus on ESG due diligence in the M&A space is here for the foreseeable future.
Obtaining required information Measuring future risk
50%
Benchmarking information against the sector Integrating information with financial data
40%
Shortage of knowledge/expertise
0
5%
2023 outlook
10%
15%
30% 20%
2024 outlook
25%
30%
20%
10%
According to the Head of M&A for a UK-based company, “There is a significant problem that arises due to the lack of data standardisation in different markets. We have to seek the advice of external consultants to review the information comprehensively.”
0
Very good
Good
2023 outlook
2024 outlook
Neutral / acceptable
Poor
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Five ESG due diligence considerations With mandatory climate reporting soon to become a legal requirement, mid-market businesses should consider the following to be prepared for ESG due diligence: and understand your business’s material ESG issues. 1 Assess Conduct a materiality assessment with a broad range of stakeholders to understand which ESG issues are most material to your business (impact your financial performance). Business’s should also consider their own external impact – e.g. a business’s operational environmental footprint. This can help to inform the key actions within your ESG strategy.
a business risk and opportunity analysis. This will help 2 Conduct inform your strategic priorities in the ESG space. your businesses ESG value drivers, and how these can 3 Identify build into your broader strategy. With change comes new value
creation opportunities and a business should identify these when building out an ESG strategy. ESG value drivers can include things like social and community investment, products adapted to address environmental impact, or policies and governance changes that build customer goodwill and engagement.
a clear and monitorable ESG strategy aligned to your 4 Build identified material issues, risks, opportunities and value drivers. Using the identified priorities and value drivers as a strategic foundation, articulate the key ESG focus areas you are working to deliver impact on. Critically, these must be easily trackable, so that data can be used to validate outcomes during the due diligence process.
and record outcomes against targets. A business needs 5 Monitor to show performance through setting and monitoring ESG targets
– these can be 12, 24 months or 3-5-year targets, but should reflect a business’s ESG focus areas and help demonstrate delivery of the business strategy.
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Making business personal James Beaumont
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