Riding the Wave of M&A Activity: Strategic Insights for Navigating the Evolving Australian and New Zealand Markets in 2024/2025

The insights from these seasoned dealmakers underscore the importance of adaptability, innovation, and thorough preparation in navigating the complexities of dealmaking in Australia & New Zealand. By leveraging creative deal structures, conducting rigorous due diligence, understanding macroeconomic and regulatory dynamics, and focusing on resilient sectors, dealmakers can successfully navigate challenges and seize opportunities in this dynamic market.

M&A activity looks to have lifted lately, do you see that continuing?

Colliers anticipates an increase in activity due to the innovative ways capital is being placed via private markets, pension & endowment funds which are actively pursuing trade sales and delisting of target vertical businesses across APAC. This trend is further reinforced by the multi-decade consolidation of ownership within agriculture, forestry and primary and secondary processing and logistics businesses. However, headwinds can arise from anticipated interest rate cuts as margins are still not expanding and I do not see this occurring for at least 12 months if they do. The RBA has shown discipline in not cutting rates until later in 2024 with the head winds of massive government spending at all levels and housing demand still very high and conversely most of the G20 economies except Japan are easing interest rates. Clearly, the top 20% market or category leaders are tradable now with a low volume of offerings in market now and significant dry powder seeking these, as we know high-quality businesses continue to find buyers, regardless of the preceding or prevailing capital market conditions. 

Currently, Colliers’ most robust market segment is Natural Capital funds or direct investors. The Albanese government mandated 2030 emission targets for our top 215 polluters has sparked considerable investor interest in the Natural Capital sector, particularly in direct environmental outcomes. This interest could transform some of our non-core regional assets into environmental planting or forestry Clean Energy Regulator (CER) approved projects. We anticipate hundreds of millions of dollars will be spent on conversion and development of these greenfield sites for conversion to CER approved projects with significant environmental co-benefits of the 25 – 30 - 100 year permeance period. Such investments are poised to create liquidity events and environmental co-benefits not witnessed in multiple decades.

These groups seek ACCU Carbon offsetting with the best example in market funds offering significant tangible co-benefits underpinned by strong governance practices like the recently announced ROC Partners & c6 Investments JV fund Silva Capital backed by Rio Tinto, Qantas & BHP. 

How are interest rates and international players affecting dealmaking?
In the sectors of Agribusiness and Natural Capital, international purchasers are likely to be offered extended timelines to finalise due diligence on acquisition as the domestic bidders are at a disadvantage presently until the previously mentioned debt market conditions materially change. As market conditions change, we still see various challenges across different economies at a regional level with some state based indirect taxes on foreign transactions and ownership (Land tax in QLD) having a material effect on deal flow. This could potentially divert capital away for Australia completely as sovereign risk changes at buyers Investment Committee (IC) level, impacting the earning model in our sector that is known for single digit cash on cash EBITDA results recurring. Most IC models we see now are assuming compounding year on year valuation uplift on fixed assets but only 4-6% of this combined with the earnings when assessing an offering of an Agribusiness and Natural Capital change of use asset will generate a healthy terminal value because of limited depression of fixed structures also.

Where do you see cross-border M&A flow going over the next 12 months?
We see a significant uptick occurring after a 50-basis point cut in Australia as debt markets happen. This will light up the capital markets and combined with US Presidential election results, will see a busy Q4 and run into Christmas. North American’s will continue to be the dominant force in mergers and acquisitions (M&A), with a particular focus on infrastructure and fixed assets. Investors often employ single account or club investment structures, especially within the realms of Natural Capital and Infrastructure in Australia. One example is the Canadian Pension Plan ‘CDPQ’, based in Quebec, which holds significant co-mingled club investments like Brisbane Sea Port. Their interests span globally across infrastructure and natural capital sectors, including a recent acquisition of a significant stake in Gunn Agri Partners, Australia. Canadian groups stand out as the most active direct investor in Australia’s Agribusiness and have a long track record in Forestry sector also, adopting a long-term perspective that often leads them to a deeper understanding of the local market compared to other participants. North American investors typically have local teams well-versed in the geography, culture, and business nuances, including legal, accounting, tax, ESG, and property advisory services. In contrast, demand from Asia is notably weaker, with most APAC investors focusing on supply chain investments rather than the financial or long-term thematic investments more common sort by North American groups seeking exposure to the India or ASEAN growing middle class consumer demand changes.

Geopolitical tensions have flared lately, and close to 50% of the global population going to the polls this year – how might this uncertainty affect dealmaking?
The primary geopolitical factors currently influencing global dynamics include the Middle East, Ukraine, and the South China Sea. These are further compounded by the recent elections in India, the world’s largest democracy, which are likely to result in a coalition government. In the United States, the race for the white house is on, the possible return of Trump to power in 2025 raises plausible policy shifts, including the dismantling of the Biden/Harris led IRA Act could have a ripple affect on Natural Capital allocations. Conversely a Kamala Harris small target populist route by the democrats could capital flows also. Observations from our recent time in New York and Boston indicate that US Investors are prioritising financial performance & governance over environmental, social, and governance (ESG) outcomes, unlike other jurisdictions.

There’s been some proposed changes to the ACCC and the FIRB. Do you see that affecting deal flow materially?
Political associations aside, politicians of all sides have an insatiable desire to amend or change goal posts with the FIRB approval processes, and now we see policy makers adding another level of sovereign risk on deal flow with the ACCC referral nearly automatic. Perhaps the federal government will adopt a refund policy on FIRB application fees if the ACCC go on to decline an M&A post FIRB approval milestone. It’s frustrating, as this policy change and previously mentioned state taxes in combination with the new ACCC default referral ruling will affect timelines to close significantly and forces foreign direct investors to re-evaluate buy side sovereign risks, especially when we’re dealing with application fees in the millions of dollars with no recourse to recover these. Despite some recent positive updates to FIRB’s assessment and guidance notes, there is a constant state of change which is disconcerting.

Given where the market is at right now, are you expecting to see a shift in monetary policy in the next 12 months?
I do see 50 basis points down in the next 12 months yes, but inflation is nowhere near back to the target range for the Reserve Bank of Australia or for business owners either, so I do not see this changing in the medium term. We all need to keep our eyes open on our assumptions going forward.

What ESG trends do you see playing out in markets in the next 12 months?
Since establishing our partnership with Ansarada in 2018, we have seen a significant shift in the structure of our revenue streams. Initially, from 2018 to 2020, a modest 1-2% of our revenue was attributed to environmental consideration or specific transaction advisory services, including terrestrial offsets for substantial initiatives within the gas, oil, and extractive sectors, as well as High-Intensity Regime (HIR) and Savanna Fire Management projects. Remarkably, by 2021, this figure rose to 10% and further surged to 22% in 2022. We anticipate maintaining a rate exceeding 20% in 2024, indicating a sustained and substantial increase in our transactional share and business volume around Natural Capital drivers. Looking ahead, we do not foresee a decline in the medium term.
However, if we’re talking carbon, it is imperative to possess a deep understanding of the field and to select partners with a long track record and not the new group offering an outside of normal performance model. A lack of expertise or a misguided alliance could result in a carbon liability, particularly with entities lacking the financial robustness to endure an audit by the Clean Energy Regulator and the balance sheet to cover the sold positions is your partner in the project.