Tight Market Drives Australian Companies into Deals Abroad
With the Aussie dollar at a 28-year high, now would be a good time to scout abroad for acquisitions. But Australian companies have had patchy success with big foreign deals, and boards and shareholders will be wary of pushing into unknown territory.
Companies which hoarded capital during the global financial crisis, such as Australian blood products maker CSL Ltd and top retailer Woolworths, may instead look to return capital to shareholders.
The issue has come to a head as several deals have been blocked by the Australian Competition and Consumer Commission (ACCC) this year, including National Australia Bank’s $12 billion bid for wealth manager AXA Asia Pacific.
“Because industry has consolidated there may be limited opportunities in Australia for some companies,” said Simon Mordant, joint chief executive of advisory firm Greenhill Caliburn.
“You will also see boards and management questioning whether they are better off returning proceeds to shareholders.”
The commission dodged having to hand down the biggest deal rejection of all, as BHP Billiton and Rio Tinto abandoned their proposal to form an iron ore joint venture valued at about $116 billion on Monday. Rio Tinto said the Australian regulator was one of several that were poised to block the deal.
There could be another rejection on the way, with the commission due to rule on Nov. 11 on an A$215 million (US$213 million) bid by Metcash for the Franklins supermarkets chain owned by South African retailer Pick ‘n Pay.
The commission is wary of any further loss of competition in the supermarkets sector, where heavyweights Woolworths and Wesfarmers-owned Coles control 80 percent of sales.
SHRINKING OPPORTUNITIES
The watchdog is under pressure not to look weak after letting Commonwealth Bank of Australia buy BankWest and Westpac Banking Corp swallow St George in the past two years.
Some lawyers and bankers are critical of the commission, and say it has become more intrusive in its investigations into deals, but others say it is inevitable because previous deals have resulted in tightly consolidated sectors.
“It means more deals…raise competition issues, rather than the ACCC getting tougher per se,” said Caroline Coops, a partner at law firm Mallesons Stephen Jaques.
ACCC Chairman Graeme Samuel has defended the watchdog’s decisions, saying critics arguing the commission was being too tough were using the same figures as those who last year said it was being too lax.
As in supermarkets, most industries have two to four dominant players, whether financial services, mining, airlines, beverages or pathology. As a result, many companies in those markets are looking to Asia and further afield to expand.
Woolworths, whose expansion into home hardware in Australia raised competition concerns, and Wesfarmers are both eyeing India for growth opportunities.
Qantas Airways, which dominates Australia’s domestic skies, is using its low-cost offshoot, Jetstar, to expand in Asia through joint ventures.
Pathology group Sonic Healthcare is looking at more acquisitions in the United States and Europe.
Insurer QBE, a serial acquirer, has said it is looking at assets in Europe, the United States and Latin America.
Engineering services group WorleyParsons is said to be eyeing Europe after a string of successful oil and gas-related deals in the United States.
Transport giant Toll Holdings says it has an A$3 billion war chest to buy freight-forwarding businesses in Asia.
Grain handler GrainCorp and retailer Billabong International are potentially looking at Canada and Woolworths could be interested in Canada’s largest grocery chain, Loblaw Cos, Credit Suisse analysts said in a recent note.
Among the banks, Australia and New Zealand Banking Group looked at raising its stake in Indonesia’s PT Bank Panin and is now running due diligence to buy a stake in South Korea’s Korea Exchange Bank.
PITFALLS OFFSHORE
However the banks and other Australian companies have had a mixed record with offshore acquisitions.
National Australia Bank’s (NAB) UK banks have yielded unimpressive returns for years and its U.S. HomeSide mortgage business racked up A$3.6 billion in write downs before NAB sold the business in 2001.
NAB Chairman Michael Chaney, who publicly said the bank was very disappointed with the competition watchdog’s ruling, made clear he was wary of further growth offshore.
“We have felt we ought to be able to generate a better shareholder return by focusing on what we do well with here,” he said recently at a Sydney business forum.
Pitfalls offshore include lack of local market knowledge, union battles in places like Europe and Canada, and nationalistic regulators.
BHP Billiton has tried to head off national interest worries in Canada with promises to protect jobs and tax revenue as part of its $39 billion bid for top global fertilizer maker Potash Corp. However it could still be blocked by Ottawa if the deal is seen not to benefit to Canada.
A new hurdle for Australia’s biggest companies is China, which can review takeovers anywhere in the world involving companies that have more than 400 million yuan ($60 million) in sales in China and global sales of more than 10 billion yuan.
With few options for acquisitions at home and the risks to buying businesses offshore, companies may look to boost earnings per share by handing capital back to shareholders.
“I’m a fan of stock repurchases. They certainly add value. They’ve added more value than most acquisitions we’ve seen in the last umpteen years,” said George Clapham, managing partner at Arnhem Investment Management.
In listing companies that could return capital over the next few years instead of chasing acquisitions, he cited retailers David Jones and JB Hi-Fi, building materials group CSR, Computershare, and possibly even Telstra Corp if the phone company gets A$11 billion from the Australian government for its landline customers.
(Editing by Mark Bendeich and Lincoln Feast)