Dealmakers 2022

Dealmakers: Mid-market M&A in Australia 2022 outlook

2022

Contents Executive summary

1

Key findings

2

Australian M&A 2022: Onward and upward 3 Above and beyond: Dealmakers achieve success against all odds

6

The mid-market opportunity

8

Spotlight on sectors

9

Methodology

11

About Pitcher Partners

12

About this survey Welcome to Dealmakers: Mid-market M&A in Australia 2022 outlook, produced in collaboration with Mergermarket, an Acuris company.

Pitcher Partners has commissioned Mergermarket to again canvass the opinions of 60 domestic and international M&A dealmakers active in Australia regarding their expectations for the year. Interviews were carried out from October to November 2021.

Contents Executive summary

Executive summary

Key findings Australian M&A 2022 Above and beyond The mid-market opportunity

Respondents give Australia an 80% 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

Sector spotlight

This indicator, however, proved to be spot on, providing valuable insight into perceptions of the deal environment and its challenges and abundant opportunities. That an equally large number of dealmakers remain confident once again augers well for another bumper year in Australian M&A in 2022.

The vast majority of respondents are looking to Australia rather than other markets in Asia Pacific, which speaks to the quality of the market. It goes without saying, then, that the Australian market, especially the mid-market, is very much open for business.

80%

CONFIDENCE SCORE

When we last conducted this survey, the confidence rating sat at 81%, which at the time was surprising given the outstanding levels of volatility and uncertainty in both the local and global markets. There was also skepticism about whether the rebound that had developed in the latter half of 2020 would continue in 2021.

Nevertheless, this research indicates that the strong performance of Australia’s M&A market can be sustained over the course of 2022. Dealmakers are hugely optimistic about the prospects for Australia’s economy and eager to pursue further transactions. Many are specifically looking to the mid-market (deals valued between AU$10m and AU$250m), a particular bright spot for dealmaking in Australia and one where 88% of respondents say they will increase their investments in 2022. This on the back of a year where mid-market deal values and volumes were relatively strong.

Methodology

This is not to deny there will be bumps along the road to recovery. There may yet be further problems related to the pandemic. Due diligence is proving challenging and anxieties about the valuation gap between buyers and sellers remain on the minds of investors, particularly in light of likely interest rate increases. Additionally, the impacts of scheduled government elections are unknown, especially given the increased powers at the state level. History shows there is always some level of slowdown in activity in the quarter leading up to a federal election.

1

About Pitcher Partners

While Australia is still dealing with the impacts of the COVID-19 pandemic and the Omicron outbreak, dealmakers are confident in their ability to yield value from the Australian M&A market. Indeed, positivity in this year’s research once again runs high: respondents give Australia an 80% 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.

POSITIVE

After a record year, Australia’s M&A boom shows no sign of stopping and the mid-market is set to continue playing a starring role in this uptrend.

Contents

say Australia’s mid-market M&A opportunities are superior to those in other markets

-4%

225%

97%

increase in 2021 deal value (AU$306bn) for overall M&A in Australia compared to 2020 (AU$94.2bn)

say they are actively looking for M&A opportunities in Australia and will continue to source deals over the next year

88%

85%

52%

plan to increase their mid-market investments over the next 12 months

say M&A completed since January 2020 met or exceeded expectations of success 2

Key findings Sector spotlight

change in 2021 deal volume (927) for overall M&A in Australia compared to 2020 (963)

Australian M&A 2022

increase in 2021 deal value (AU$20.4bn) for mid-market M&A in Australia compared to 2020 (AU$14.6bn)

Above and beyond

increase in 2021 deal volume (296) for mid-market M&A in Australia compared to 2020 (246)

The mid-market opportunity

83%

say their most recent deal in Australia was opportunistic rather than strategic

Methodology

39%

About Pitcher Partners

20%

Executive summary

Key findings

Contents

Economic prospects Part of Australia’s appeal is its economic strength. The latest projections from the International Monetary Fund (IMF) are for GDP growth of 3.5% in Australia in 2021, accelerating to 4.1% in 2022. Indeed, the IMF expects it to be the best performing advanced market in Asia over the next 12 months.

Respondents agree with these upbeat assessments: 97% regard Australia as offering some of the strongest prospects for economic growth over the next 12 months. Only India and emerging Southeast Asia (67%) come close to matching these sentiments.

50%

17% 16% Emerging Southeast Asia (excluding Singapore)

67%

58% 56% Singapore

Japan 18%

27%

Hong Kong

52%

20%

11% Korea

42%

15% 16% India 13%

27%

Quickest economic recovery Planned M&A within next 12 months (2022 survey) Planned M&A within next 12 months (2021 survey)

3

Key findings The mid-market opportunity

13%

13%

62%

28%

Australian M&A 2022

China

97% 97%

Above and beyond

84%

Sector spotlight

As figure 1 shows, this level of optimism is unparalleled across Asia Pacific. While other markets have also seen increases in the number of dealmakers focused on M&A opportunities since last year, none come close to matching enthusiasm for Australia. Even in emerging Southeast Asia, the next most appealing market for dealmakers, only 58% are focusing on M&A opportunities.

Australia

67%

Methodology

While the pandemic has caused some challenges for dealmakers over the past two years, respondents are overwhelmingly positive about Australia’s M&A prospects in 2022. Almost all (97%) say they are looking at deal opportunities here in the imminent future, an increase from 84% who were likewise prioritising Australia in our 2021 outlook.

Figure 1: 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? (Select all that apply)

About Pitcher Partners

Dealmakers are sending strong and clear signals that they will invest and raise allocations in Australia amid increasing economic confidence and a vibrant M&A deal space.

Executive summary

Australian M&A 2022: Onward and upward

Contents Executive summary

1,800 1,600

$300,000

600 $100,000 400 $50,000 $0

200

2012

Deal value (AUD$m)

2013

2014

2015

2016

2017

2018

2019

2020

2021

0

Deal volume

Figure 3: Which of the following best describes your intentions with regard to investing/M&A in Australia in the year ahead?

2% Moderately decrease

22% Significantly increase

927 deals 4%

Deal volume in 2021 declined from 2020 totals (963 deals)

AU$306bn 225%

45% No change

32% Moderately increase

4

Deal value increased from 2020 (AU$94.2bn)

Australian M&A 2022

800

Above and beyond

$150,000

The mid-market opportunity

1,000

Sector spotlight

$200,000

Methodology

1,200

Key findings

1,400 $250,000

About Pitcher Partners

More than half of respondents (54%) say they will increase investments into Australia in the year ahead (figure 3).

Another 45% say their dealmaking will remain unchanged from current levels.

$350,000

Deal volume

Pent-up demand for M&A and the low cost of debt has fuelled dealmaking over the past year. Deal values reached unprecedented and historical highs of AU$306bn, a 225% increase over 2020 (AU$94.2bn). The skewed deal value result shown in figure 2 can be partly explained by the mega deals involving Afterpay and Sydney Airport, which alone contributed +AU$60bn to deal values. While volumes saw a slight dip in 2021, sinking to 927 deals against 963 in 2020, a 4% decline across years, super funds, mid-market dealmakers and private equity investors, as well as strategic buyers, are nonetheless continuing their hunt for fresh opportunities now that Australia has reopened its borders – and activity is set to ramp up through 2022.

Figure 2: Australian M&A

Deal value (AU$m)

Outlook 2022: Let the good times roll

Key findings

Executive summary

Contents

Many point to accelerated digitalisation and the need for digital transformation, increasing globalisation and an

Yet despite ongoing enthusiasm among dealmakers, the year ahead will not be without challenges. Uncertainty caused by the ongoing pandemic, surging inflation, rising interest rates and geopolitical tensions may increase the valuation expectation gap between buyers and sellers. On the political front, both federal and state elections are due to occur in 2022, with those at the state level expected to be more important than ever given the increased power afforded officials during the pandemic.

Australian M&A 2022

Deal drivers and challenges

increasing focus on environmental, social and governance (ESG) factors as key drivers of this trend. Another theme that is emerging is the war for talent. As many industries face talent shortages, business leaders are turning to M&A to fill gaps and expand their expertise into new fields.

Above and beyond

Equally, almost half (48%) think that current record M&A levels and positive market conditions will last another 12-24 months before reaching a peak (figure 4). Another 28% say the peak won’t be reached for another two years. This predicted ongoing boom is underpinned by a ‘fear of missing out’ (FOMO) mentality where dealmakers feel the need to capitalise on market conditions and consumer sentiment to achieve their corporate objectives. In short, the consensus among dealmakers is that 2022 will be a great year for M&A, followed by a potentially equally great year in 2023 and possibly beyond.

Figure 4: How long will current record M&A levels and positive market conditions last before reaching a peak?

The mid-market opportunity

50%

40%

20% 28%

23% 10%

0%

0% Less than 6 months

0% 6–12 months

12–24 months

Longer than 24 months

5

Unsure

About Pitcher Partners

48%

Methodology

Sector spotlight

30%

Contents 20%

25%

When opportunity knocks: It pays to be agile and nimble

65% Strategic acquisition (in planning for at least 12–24 months) Opportunistic (based on market conditions and developing events) Reacting to market competitors (fear of falling behind/want to remain competitive) Other, please specify

Yes, and exceeded expectations Yes, and exactly met expectations Results were neutral No, did not meet expectations No, fell very short of expectations

6

Key findings Sector spotlight

52%

The mid-market opportunity

Above and beyond

10%

Despite the near-constant challenges and uncertainties of the pandemic, almost two-thirds of respondents (65%) say that deals completed since January 2020 have delivered the expected value – and 20% say the results have exceeded expectations (figure 5). The key message here is that not only are deals getting done, but they are being done successfully, creating value and delivering desired returns.

The landscape for M&A over the past two years has, to put it mildly, been unconventional and the uncertainties of COVID-19 have created both challenges and opportunities.

That backdrop is reflected in the fact that more than half of dealmakers (52%) described their most recent deal as opportunistic, with a further 25% saying they were reacting to moves made by competitors (figure 6). Only 23% described their acquisition as a strategic deal planned at least 12 months in advance.

23%

Australian M&A 2022

5%

Figure 6: Which of the following best describes the rationale behind your most recent investment into Australia? (Select one)

Methodology

While deal values and volumes tell one side of the M&A story, the more important question is whether dealmakers are yielding value from their transactions. Overwhelmingly, the answer to this is: Yes.

Figure 5: For M&A completed since January 2020, did deals meet expectations of success measures (revenue, business expectations, etc)? (Select one)

About Pitcher Partners

Respondents say deals completed during the pandemic have met or surpassed expectations – and the majority of deals were opportunistic plays rather than strategic investments.

Executive summary

Above and beyond: Dealmakers achieve success against all odds

Contents Executive summary Key findings

Next 12 months 100% 97% 88%

External advisors/consultants Internal deal teams Online deal sourcing networks

Australian M&A 2022

57%

Above and beyond

97%

The mid-market opportunity

When internal resources are stretched or unavailable/ inaccessible, trusted advisors play a pivotal role in the execution of deals. “External advisors have extensive information about markets and can also help in analysing the best options for the company,” says the director of finance at a Chinese corporate.

88%

Sector spotlight

Indeed, every single dealmaker in this report expects to make use of external advisors and consultants to source deals over the next 12 months (figure 7). Many others note that advisors have come in handy beyond just finding deals, providing critical support throughout the deal process including negotiations and even integration. One reason for this is practical. “We have had to use external advisors over the past year because it was not possible for our teams to travel,” says the CFO of an Australian corporate.

Past year

Methodology

Opportunism and an agile deal team, it would seem, are being rewarded in the current market, but only for those that go the extra mile. While due diligence has been more difficult in the context of the COVID-19 pandemic, many acquirers have been keen to conduct even more rigorous diligence work than usual, given the potential for pandemic impacts, and have turned to different tools to do so. In many cases, this involves enlisting support from consultants and external advisors to reinforce M&A efforts.

Figure 7: How have you sourced deals in the past year? How will you source deals in the year ahead?

(Select all that apply)

7

About Pitcher Partners

Fast and furious: Act quickly but seek support

Australian M&A 2022

Figure 10: Which of the following best describes your intentions with regard to investing/M&A into the Australian mid-market in the year ahead?

12% No change

Figure 8. Australian mid-market M&A $30,000

350

250

$15,000

200 150

$10,000 $5,000 $0

2012

Deal value (AUD$m)

2013

2014

2015

2016

2017

2018

2019

2020

Deal volume

8

2021

Deal volume

Deal value (AU$m)

300 $20,000

58% Significantly increase

Sector spotlight

400

$25,000

Executive summary

Contents

“We are planning to increase mid-market acquisitions significantly because the number of tech-enabled businesses has increased during the pandemic,” says another PE firm leader.

83% Better

Above and beyond

Australia’s mid-market is poised to continue being a hotspot of M&A, particularly in the private space, as tired founders look for exits and buyers have access to cheap debt and available equity. Equally, dealmakers see a whole variety of reasons to pursue targets in the mid-market, including: burgeoning tech capabilities and the emergence of innovative business practices; attractive pricing; and deal sourcing opportunities.

The mid-market opportunity

The preference for Australian mid-market deal opportunities cannot be overstated. Most respondents (83%) believe Australia’s mid-market now offers better M&A opportunities than other markets (figure 9). Equally, almost nine in 10 respondents (88%) plan to increase their investments in mid-market Australian targets – and that includes more than half (58%) that plan significant increases (figure 10) – compared to the 54% who said likewise in figure 3.

“When it comes to mid-market opportunities, Australia is far better,” says the managing director of one Australian PE firm.

“Companies in the mid-market have a good client base and have established trust with their customers.”

100

30%

50

Moderately increase

0 About Pitcher Partners

Australian mid-market M&A (deals valued between AU$10m and AU$250m) experienced a revival following a down year in 2020 (figure 8). Volumes increased 20% (296 deals) while value rose almost 40% (AU$20.3bn) in 2021 as dealmakers once again look to this segment of the market for value. This upward trajectory for mid-market should continue, in line with overall M&A market expectations which could see activity return to 2016 peaks within two years.

Key findings

17% Worse

Abundant opportunities and resilient businesses continue to capture investor interest in the mid-cap space.

Methodology

The mid-market opportunity

Figure 9. Generally, do you feel Australia offers better or worse mid-market M&A opportunities compared to other global markets?

Contents

Technology, media and telecommunications 98% 92%

Business services 52%

Industrials and chemicals

80%

Leisure

43%

10%

75%

Construction

27%

2%

67%

27% 22%

Defence

88%

17% 35% 17% 17%

12%

0%

85%

88% Transportation 3%

2022 outlook

7%

88%

Spotlight on sectors

8%

88%

88%

33%

2021 outlook

43%

Methodology

Real estate

88%

88% 33%

Government 88%

88%

47%

18%

88% 88%

58%

Agriculture

0%

70% 55%

52%

28%

Pharma

83%

Australian M&A 2022

80%

67%

88%

Above and beyond

67%

Consumer

Energy, mining and utilities

The sector has been front and centre in the response to COVID-19, and Australia is home to a thriving life sciences community – the country is one of the world’s top five markets for biotech innovation – with many smaller biotech businesses that are potentially attractive targets. Larger businesses, such as Australian biotech giant CSL – which was producing AstraZeneca’s COVID-19 vaccine in Australia – have proved acquisitive in recent months.

85%

65%

45%

TMT Once again, most respondents (97%) expect a surge in tech deals in the year ahead (figure 11). COVID-19 has only accelerated the adoption of new tools and technologies, with many businesses pulling forward digital transformation in order to cope with the challenges of the pandemic. That has increased demand for TMT businesses with the tools to support transformation; or corporates have acquired businesses in their own sectors with digital knowhow.

The focus on TMT plays into the strength of Australia’s mid-market, which offers an abundance of technology opportunities. Targets offering skills and competencies in every sphere of digital transformation will remain attractive.

88%

Financial services

The mid-market opportunity

65%

Key findings

97%

85%

Pharma, medical and biotech

Shifting sentiment highlights respondent views on which sectors will be hotspots for mid-market M&A.

Executive summary

Figure 11: Which of the following sectors will see increases in mid-market M&A in the next 12 months?

2020 outlook

9

About Pitcher Partners

Spotlight on sectors

Contents Executive summary

Financial services

Key findings

Digital transformation and the fintech movement continue to promise increased productivity and profitability in this sector, with the latter likely to be a nexus of M&A. One recently published report identified a total of 718 currently active fintechs in Australia, and last year’s acquisition of Afterpay by US payments giant Square – the largest M&A deal in Australian history – underlines the appetite for such businesses.

Australian M&A 2022

Consumer

Above and beyond

Drivers of consumer M&A include the economic recovery – and the release of pent-up demand as lockdown restrictions are eased – as well as rapid growth in ecommerce. Indeed, in December, the Australian government said it would raise its economic growth projections for 2022, such has been the strength of retail sales and the jobs market in recent months.

Clearly, however, this needs to be reconsidered in light of the Omicron outbreak and it is yet to be seen the impacts and length of this outbreak for 2022.

Energy, mining and utilities

10

About Pitcher Partners

Methodology

Spotlight on sectors

The mid-market opportunity

Despite Australia’s natural resources strengths, the outlook is challenging, particularly as the country begins to work towards reducing its greenhouse gas emissions.

That may set the stage for divestments and restructuring transactions. Some energy and resources businesses have already begun a review of their business strategies, with some planning to sell assets that do not align with environmental criteria. European energy majors with a presence in Australia are already restructuring their portfolios to target new priorities, including the path to net zero.

Contents Executive summary

Methodology

Australian M&A 2022

Key findings

For this publication, Pitcher Partners commissioned Mergermarket to canvass the opinions of 60 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.

Above and beyond

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 10 January 2022 using Dealogic data and additional sources noted within this report.

11

About Pitcher Partners

Methodology

Spotlight on sectors

The mid-market opportunity

Percentages may not sum to 100% due to rounding. Unless otherwise stated, all date references refer to calendar year and not financial year.

6 independent member firms Our commercial services to businesses Financial essentials

Planning and growth

Industry specialisations

Accounting and Business Advisory Services

Business Consulting and Commercial Advice

Agriculture

Audit, Risk Management and Assurance

Business Performance Improvement

Food and beverage

Internal Audit

Business Structuring

Government and the public sector

Recovery, Turnarounds and Insolvency

Corporate Finance

Health and aged care

Tax Advice and Compliance

Corporate Governance

Hospitality

International Business Advisory

Manufacturing

Estate Planning

Investment Advisory Services

Not-for-profit

Family Office Management

Succession Planning

Professional services

Investment Advisory Services

Superannuation Services

Property and construction

Philanthropy Services

Tax Advisory

Retail

Succession Planning

Technology and IT Consulting

TMT

Superannuation Strategies

Valuations

Private wealth services

Tax Advice and Compliance

12

Trends and survey highlights

Executive summary

Contents

Each Pitcher Partners firm is also an independent member of Baker Tilly International, one of the world’s leading networks of independently owned and managed accountancy and business advisory firms. Our strong relationship with other Baker Tilly International member firms has allowed us to open many doors across borders for our clients.

Introduction: M&A in Australia

1,300+ people

We specialise in working with middle market businesses in Australia, including privately owned, foreign controlled, government owned and not-for-profits. Our clients require high technical standards, matched with a personal understanding and involvement in their affairs.

Deal drivers and challenges

Pitcher Partners is an association of accounting and business advisory firms located in Adelaide, Brisbane, Melbourne, Newcastle, Perth and Sydney. We have a strong reputation for providing personal service and quality commercial advice to our clients across a broad range of industries.

Cross-border deal flows

130+ partners

Spotlight on sectors

Pitcher Partners has the resources and depth of expertise of a major firm, but with a boutique firm feel.

We give our clients the highest level of personal service and attention. That’s the difference.

Methodology

Australian statistics

About Pitcher Partners

About Pitcher Partners

Contents

Every day, 37,000+ people in 148 territories share experiences and expertise to help privately held businesses and public interest entities meet challenges and proactively respond to opportunities. International capability and global consistency of service are central to the way we work.

Key Baker Tilly Pitcher Partners

Middle East and African firms

37,000+ experienced professionals

6

Australian firms

13

$4.0bn Worldwide revenue 2020 (USD) Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities.

Cross-border deal flows

Global statistics

Spotlight on sectors

Latin American firms

24

Asia Pacific firms

Pitcher Partners is an independent member of Baker Tilly International.Pitcher Partners’ strong relationship with other Baker Tilly International member firms, particularly in Asia Pacific, provides clients with access to international networks, opportunities and expertise to expand globally.

Deal drivers and challenges

Pitcher Partners

European firms

20

28

Sharing knowledge and resources, our business approach brings together the power of the global network to deliver exceptional results to clients globally.

Methodology

North American firms

41

Experts across a wide range of industry and business sectors, each Baker Tilly International member firm combines high quality services and in-depth local knowledge.

About Pitcher Partners

10

Baker Tilly International

Introduction: M&A in Australia

Baker Tilly International is one of the world’s leading networks of independently owned and managed accountancy and business advisory firms united by a commitment to provide exceptional client service.

Trends and survey highlights

Executive summary

Our global reach

Making business personal James Beaumont

Warwick Face

Andrew Faulkner

Partner Melbourne p. +61 3 8610 5568 e. james.beaumont@pitcher.com.au

Partner Brisbane p. +61 7 3222 8302 e. wface@pitcherpartners.com.au

Principal Adelaide p. +61 8 8179 2800 e. andrew.faulkner@pitcher-sa.com.au

Michael Sonego

Kieran Wallis

Chris Hanna

Partner Melbourne p. +61 3 8610 5485 e. michael.sonego@pitcher.com.au

Partner Brisbane p. +61 7 3222 8383 e. kwallis@pitcherpartners.com.au

Principal Adelaide p. +61 8 8179 2800 e. chris.hanna@pitcher-sa.com.au

Andy Hough

Chris Pattinson

Shaun Mahony

Partner Sydney p. +61 2 9228 2244 e. andy.hough@pitcher.com.au

Director Perth p. +61 8 9322 2022 e. pattinsonc@pitcher-wa.com.au

Managing Partner Newcastle p. +61 2 4923 4000 e. shaun.mahony@pitchernewcastle.com.au

Pitcher Partners is an independent member of Baker Tilly International. Baker Tilly International Limited is an English company. Baker Tilly International provides no professional services to clients. Each member firm is a separate and independent legal entity, and each describes itself as such. Pitcher Partners is not Baker Tilly International’s agent and does not have the authority to bind Baker Tilly International or act on Baker Tilly’s behalf. None of Baker Tilly International, Pitcher Partners, nor any of the other member firms of Baker Tilly International have any liability for each other’s acts or omissions. The name Baker Tilly and its associated logo is used under license from Baker Tilly International Limited.

Adelaide

Brisbane

Melbourne

Newcastle

Perth

Sydney

Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities.

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