The dramatic turbulence in global financial markets has all but put Australian M&A activity on hold for the time being, particularly deals that depend on debt funding, according to financial advisers and private equity dealmakers. The situation in the credit markets is developing so rapidly, though, that it is difficult to provide a view on what will happen next, they said.
The dramatic turbulence in global financial markets has all but put Australian M&A activity on hold for the time being, particularly deals that depend on debt funding, according to financial advisers and private equity dealmakers.
The situation in the credit markets is developing so rapidly, though, that it is difficult to provide a view on what will happen next, they said.
The sources were talking specifically about non-definitive deals that are still at the negotiation stage or haven’t even been announced yet. For deals that are caught mid-way, a re-pricing can be expected, one of the financial advisers argued.
The S&P/ASX 200 index tumbled 10.89% this week, despite today’s 4.4% recovery. The widely followed benchmark finished Friday’s session at 5,539.30, having lost 22.7% since its year-to-date peak of 7,162.50 on 20 February.
“The bank market is now completely dead. There will be zero private equity deals done with debt until the market improves,” a second adviser said.
Noting that the pace of the coronavirus-induced downturn in global equity markets is quicker than at the time of the Global Financial Crisis, a third adviser added there is “no confidence to do deals and no funding”. Initially, this applied to high-yield debt and now it appears to be effectively closing the interbank market as well, this adviser said.
A fourth adviser was less pessimistic on the functioning of acquisition finance, believing that investment-grade funding is still available but with limited leverage.
A PE dealmaker, however, viewed the bond market as essentially shut for the time being. “Any deal that requires a large debt component is impossible to get done, or will have to be done at terms that are less attractive,” he said. Those needing to raise capital will find it very difficult as no one is willing to commit, he added.
Beyond financing, the PE dealmaker highlighted the difficulty in dealing with rapidly declining share prices. “No one wants to look stupid. The buyer does not want to pay yesterday’s price and the seller does not want to sell at a lower price,” he said.
Most private equity players will wait, even those with equity capital, the PE dealmaker continued.
Some deals are still being agreed, however. Earlier this week, Zenith Energy and Pacific Equity Partners (PEP) surprised the market by announcing a recommended AUD 250m (enterprise value) scheme agreement. Sources familiar with the situation said the deal was agreed on the back of the independent power producer’s (IPP) desire for capital and the low risk nature of its portfolio of remote and contracted power stations, as previously reported.
Zenith is also rolling existing debt so the deal will be alright even in the current market, one of those sources explained. Speaking for this story, that same source doubted that Zenith can be used as a template for other deals though, because most companies have numerous debt providers and getting all of them to agree is too hard, particularly if there are a lot of bond holders.
Zenith’s share price reached AUD 99c after the AUD 1.01-per-share deal was announced on 9 March. It closed at AUD 92.5c on Friday, reflecting a 9.2% spread.
Substantial spread widening
For deals that are still under negotiation or subject to due diligence, chances of a revision of terms are pretty high, the first adviser said, pointing to the likelihood of a new price, lower leverage and lower gearing. Public to private deals, such as Village Roadshow that currently has two separate suitors conducting due diligence, will have a big revision on price if they happen at all, he said.
This adviser also doubted that a company like online travel business Webjet, which has exposure to transport and tourism, will be able to pursue a sale in the current market environment.
Webjet, which isn’t subject to any acquisition proposals, has fallen 31.9% this week.
Village Roadshow, a mass media and entertainment company, has taken an even bigger beating, losing 36.1% in the past week – including a 15% drop on Thursday and another 17.2% decline to AUD 2.16 today. The company is subject to an indicative AUD 4 per share offer from BGH Capital as well as an indicative AUD 3.90 per share offer from Pacific Equity Partners. The implied spreads against those two offers is currently at more than 80%.
A fifth M&A adviser argued that it is not clear right now whether the pricing on financing will come back next week, given that it has spiked in the past 48 hours. He did not think there is really an opportunity for most bidders to re-price deals at the moment though.
“There may be delays to deals, but I don’t think (there will be) significant re-pricing unless the business is going to see a substantial issue for a sustained period, such as travel businesses,” he noted.
The PE dealmaker still believed there will be windows for deals, especially involving businesses that are in breach of covenants and are cut off from bank lending. Such companies may attract private equity that have the capacity to tap that window and are seeking an entry point to buy cheap, enjoy a quick recovery and then quickly exit, he said.
In comparison with entering into a totally new investment, bolt-on acquisitions will appear to be less risky at this time, he also noted. And with businesses entering a downturn, there will be restructuring and turnaround work for M&A advisors and PE investors too, he added.
The M&A adviser argued that there are still substantial sums of capital looking for a home and suggested that private credit is an attractive place for this capital.