Bigger deals, fewer of them: experts on mid-market M&As
Thanks to a handful of billion-dollar-plus transactions, the average value of mid-market M&A deals this year is markedly higher than last year – though the number of deals is down.
Compared with the same period in 2023, fewer M&A deals were closed in the first three months – though the average value had increased substantially.
In the third quarter of the 2024 financial year, 178 deals were successfully closed, compared with 239 in Q3 FY2023. Over the same period, however, the average deal size increased from $101.64 million to $152.49 million.
According to Nicholas Guest and Simon James, assurance and advisory partners at HLB Mann Judd, the spike in merger value resulted from four standout transactions worth over $1 billion in the quarter just lapsed, compared with only one such deal in Q3 FY2023.
Their analysis focused on mid-market transactions, excluding those with a gross value of more than $5 billion.
By transaction value, the most valuable M&A deal recorded in Q3 2024 occurred in the utilities sector. It was MidOcean Energy’s acquisition of Tokyo Gas Australia. MidOcean Energy acquired a 100 per cent stake in its target for $3,361.3 million.
Paine Schwartz Partners, in conjunction with other investors’, acquisition of Costa Group Holdings Limited was the second most valuable deal with a value of $2,470.2 million.
Information technology, materials, consumer discretionary sectors, and industrials recorded the highest number of transactions, each over 20 across the quarter.
Three of the top five deals were in the consumer discretionary or consumer staples sectors, with a combined value of nearly $5 billion, with Woolworths’ purchase of 55 per cent of PETstock coming in fourth overall, with a value of $1,108 million.
In terms of deal size, consumer discretionary sectors tripled the average value of transactions in the next highest average value sector, utilities.
The average transaction size in the financial sector was substantially deflated in the first few months of this year, having fallen from approximately $680 million to well below $50 million.
In Q3 2024, consumer discretionary transactions had an average value of more than triple the value recorded in Q3 2023.
Across the board, M&A activity slowed significantly over the past two years off the back of persistently high inflation, stubborn interest rates, market uncertainty, and geopolitical unknowns.
Last month, the government announced a suite of merger law reforms in the hopes that a more robust regulatory environment would undermine undue market concentration, thereby boosting economic dynamism and competition.
The changes, including pre-merger ACCC notifications and a mandatory suspensory system, were key recommendations made by the economics committee’s competition review.
On the other hand, it also made an effort to cut back on unnecessary red tape, including more targeted ACCC reviews, streamlined and fast-tracked approvals, and more transparent regulatory expectations.
Some are not convinced the reforms will move the needle on the country’s productivity, noting that dwindling productivity is a feature of economies whose merger frameworks are even more robust than Australia’s.
“When it comes to improving productivity there are many policy levers to pull. In 2023, the Productivity Commission made 79 recommendations to boost productivity, spanning areas including education, tax, skilled migration, land and planning and cybersecurity policies. Notably, while merger law reform was considered by the Productivity Commission, it was not listed among the final recommendations,” said White & Case LLP antitrust partner Stefanie Benson.
“Putting aside the administrative costs of an additional regulatory approval and the not insignificant filing fee, there are invisible costs such as the loss of efficiency-producing transactions which are either abandoned or never contemplated for fear of a protracted, uncertain and expensive review.”
Benson also warned that the smallest players could feel the effects of the reforms most acutely, start-ups included.
Business Council of Australia CEO, Bran Black, said the reforms “achieve a balance between economic and regulatory needs,” though close consultation was needed to avoid unintended consequences for businesses.
“There is still a lot of detail that is to be determined and further consultation will be required with business on many important elements in this package,” Black said.
“When implementing this reform, we need to ensure Australia’s merger regime doesn’t add further red tape to businesses. For example, the BCA expects to see reasonable and practical thresholds for merger notification.”
