Australia M&A boom to pick up in 2010

SYDNEY/MELBOURNE Mon Jan 4, 2010 11:21pm EST

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SYDNEY/MELBOURNE (Reuters) - Deal making in Australia is expected to accelerate in 2010, with activity seen dominated by financials, resources and consumer-driven sectors, and the Aussie dollar's strength likely to play a role, bankers say.

Last year, Australian companies raised about A$100 billion ($91 billion) primarily to cut debt and bankers say many firms can now leverage up their balance sheets to make acquisitions as the economy recovers from last year's slump.

Armed with a strong Aussie dollar, those cashed up buyers might be willing to chase deals offshore, while foreign owners of Australian assets might look to take advantage of the currency's strength to take profits on the sale of assets Down Under.

As debt markets gradually open up, this year should also mark the return of deal making among private equity funds.

"Last year was all about equity and recapitalizing balance sheets. This year will be much more balanced in terms of the mix of transactions you'll see," said Rob Stewart, co-head investment banking at Credit Suisse, who expects more deals in 2010.

The optimistic outlook for mergers and acquisitions is underpinned by the strong recovery in equity markets and confidence the worst of the global financial crisis is over.

Australia was the crown jewel for Asia-Pacific deal making last year, with a record $155 billion worth of transactions announced in 2009 -- up a third from a year ago and almost half the region's $338 billion total, according to Thomson Reuters data.

Australian deals were led by the proposed $58 billion iron ore joint venture between BHP Billiton Ltd (BHP.AX) and Rio Tinto Ltd (RIO.AX).

"The most buoyant of the investment banking markets right now has to be our time zone, the Asia-Pacific time zone. Certainly for our business that has been the busiest time zone," said Michael Carapiet, head of Macquarie Capital.

Macquarie (MQG.AX) ranked second behind Goldman Sachs (GS.N) in advising on $87 billion in announced and $15 billion in completed deals involving Australia last year, Thomson Reuters league tables show.

While bankers said buyers' bidding ideas are now approaching sellers' expectations, which could help fuel deals in 2010, one broker said the share market rally could put a lid on takeovers.

"There may not be as much as you think. Valuations are not as compelling as they used to be. Companies might also be more averse to taking on debt," said David Spry, research manager at broker FW Holst.

Australia's benchmark S&P/ASX 200 index .AXJO rose some 31 percent in 2009, lagging the 68 percent rise in MSCI's Asia-Pacific ex-Japan index .MSCIAPJ, while the Australian dollar surged more than 27 percent - the biggest rise among major developed market currencies.

HOT FINANCIAL SERVICES

The takeover tussle for AXA Asia Pacific Holding Ltd AXA.AX will set the scene for deal making this year.

If National Australia Bank Ltd (NAB) (NAB.AX) wins the battle, analysts and bankers expect rival bidder AMP Ltd (AMP.AX) to turn its sights to smaller fund managers such as IOOF Holdings Ltd (IFL.AX) and Perpetual Ltd (PPT.AX).

A loss would also make AMP vulnerable to a takeover, with speculation rife that Australia and New Zealand Banking Group Ltd (ANZ.AX) might pounce as it looks to bulk up its underweight wealth management business.

"There's lots and lots of deals in the financial institutions space and I think there's a bit of restructuring to come," Carapiet said. Macquarie is defense adviser to AXA Asia Pacific.

ANZ's ambitious Asian strategy will keep the lender on the lookout for any regional opportunities.

Also offshore, NAB has said it is reviewing opportunities to put together its Clydesdale and Yorkshire banks with UK assets put up for sale following government bailouts of Northern Rock (NRKx.L), Royal Bank of Scotland (RBS.L) and Lloyds (LLOY.L).

Other likely deals in the financial space include the sale of a banking business by Suncorp Metway Ltd (SUN.AX).

BHP CASHED UP

Eyes are also on what BHP Billiton will do with its $10 billion-plus cash pile once it has a clear idea about the fate of the iron ore joint venture with Rio Tinto.

While the company, which has a net gearing of just 12 percent, says it has plenty of projects it could invest in internally, investors and bankers say it could easily chase a big acquisition, with expansion in petroleum or potash seen as potential targets.

"BHP is more than likely to do a big deal. Hopefully they will not buy their shares back, which is a waste of money," said Robert Hook, a fund manager with S.G. Hiscock & Co, which manages about A$1.6 billion in Australian shares.

Australia's Woodside Petroleum (WPL.AX) is seen as an obvious target for BHP, but Woodside's 34 percent owner, Royal Dutch Shell (RDSa.L), does not look like a seller after investing A$862 million in the company's equity raising in December.

So BHP might have to look offshore for a petroleum acquisition.

Infrastructure is another area poised to generate deals, with bankers betting on more privatizations by governments.

"In the Australian market, clearly infrastructure will be quite important, and actually it will be around the world as governments seek to maintain crumbling infrastructure as well as manage budget deficits," Carapiet said.

"So I think infrastructure's going to be active."

In Australia, the Queensland state government plans to float the A$7 billion Queensland Rail coal transport business, but miners and rival rail group Asciano (AIO.AX) are pressing for separate sales of the trains and tracks.

The New South Wales state government is slated to sell off power assets worth up to A$6 billion with a formal due diligence and sale process expected to start next month. ($1=1.096 Australian Dollar) (Editing by Lincoln Feast)

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