Corporate activity starts to emerge as 2012 closes

With risk appetite starting to trickle back into the market, corporate activity around mergers and acquisitions is usually a good sign that companies have confidence in the business environment and are starting to reposition their businesses for growth. While a flood of M&A activity is still far off 2007 levels – particularly in Asia, several recent announcements in Australia are worth noting. In isolation each is not that significant, but when combined, a picture begins to emerge.

BHP Biliton (BHP): Continues to respond to market concerns by bunkering down and focusing on core business units. The market spoke in 2012 sending BHP shares to $30 per share before rebounding nicely. Gone are the days where BHP threw money at hefty acquisitions – a culture of conservatism around capital management now dominates. The announcement last week to divest BHP’s carrying interest in the Browse gas project in Northern Australia is part of this overall conservative tone. It freed up over US$1bn in cash. BHP is likely to continue selling off non-core assets, unlikely to engage in risky acquisitions and will probably focus on increasing its dividends as earnings stabilise.

Woodside Petroleum (WPL): Woodside Petroleum’s acquisition of the Leviathan gas field off the coast of Israel is something we have previously reported (see report here). Woodside could continue expanding its interests in 2013 through similar low risk deals, perhaps in places the market least expects. Success in Israel could see Woodside emerge as a European LNG player – a big IF, but one that may be within the new management’s sights.

Billabong (BBG): Currently in a trading halt pending an announcement regarding a potential takeover. After the failure of two private equity approaches to materialise into any deal in 2012, investors are waiting to see if an approach by a former US executive and his buyout team will yield results. It seems unlikely Billabong’s board will accept $1.10 per share even if it does materialise.

Insurance Australia Group (IAG): Has pulled the pin of its UK insurance business after ongoing losses. The initial loss relative to book value was a surprise to the market, but the decision means IAG’s international focus becomes Asia in the near term.  IAG is likely to continue investing in Asian businesses around Tiger economies in 2013, acquiring minority interests in businesses with exposure to rising insurance consumption per capita.

Fairfax (FXJ): Struggling Australian media behemoth which today has sold down the remaining 50% of online media business Trade Me. The deal was secured on very generous terms – perhaps a sign that brokers are comfortable taking on more risk when underwriting placements. Fairfax will emerge on an EV/EBTIDA multiple of around 3x, but this dependent on costs associated with restructuring and the level of earnings decline between the last report and February reporting period. The stock is slowly starting to move towards an earnings story.

The above shows reasonable activity across a vast range of industries – mining, energy, retail, financials and media. As central banks continue to flood the system with cash, corporates are starting to exploit cheap debt and pursue undervalued assets that can generate much higher returns, locking in healthy markets. More activity is likely amongst developed markets during the first quarter of 2013.