Corporate Financing Analysis - Australia's Slow But Steady Dealmaking Return - 13 MAR 2017
After a slump in commodities prices that caused a subsequent slowdown in dealmaking last year, the outlook for both inbound and outbound M&A activity in Australia is looking up for 2017. Thanks to a combination of commodity prices trending higher once more and the economy of China, a key trading partner, stabilising - supported by stimulus efforts from Beijing - we believe Australian acquirers and targets will be back at the deal table again with increasing regularity this year. While we believe that the market has entered a 'risk-on' environment one more, we believe that any sizeable uptick in dealmaking is unrealistic. Instead we see activity increasingly at a slow but steady rate, predominantly supported by improved access to deal financing in 2017, rather than any shift resulting from a change in the strength of the local currency or economic growth (we are forecasting Australian real GDP growth to slow to 2.1% in 2017, a contraction from 2.5% in 2016), at least in the short term anyway. Indeed, as BMI's Australia analyst highlights, the Australian dollar has found support at USD0.7200/AUD since the start of 2017 and is heading towards resistance at around USD0.7700/AUD. The unit has been in a broad trading range over the past year and we remain neutral on the currency in the short term. However, a breakout of the range is likely to set the next-multi month trend.
The direction in which the currency moves over the coming weeks and months will determine whether it will be the inbound or outbound market for deals that receives a welcome boost this year. For inbound a weaker currency good news; conversely, for outbound a strengthening of the currency will lead to gains. On the one hand, rising commodity prices, particularly iron ore, are positive for Australia's terms of trade in the near term and will support the currency. From a technical perspective, in the event the currency breaks stronger this would open the door for a move to USD0.800/AUD and boost outbound M&A. On the other hand, our fundamental outlook is for weakness, particularly as we believe that the currency is still overvalued and exposed to capital outflows as the housing market is vulnerable to a big correction. Strategic acquirers, both within Australia and outside, will be keeping a close eye on developments.
Inbound M&A: Coming From A Low Base
|Set To Return To Growth|
|Australian Inbound & Outbound M&A By Deal Value, USDbn|
|Source: Zephyr, a Bureau van Dijk product|