Mid-Market M&A in Australia 2017

Dealmakers: Mid-market M&A in Australia 2017 Contents

Introduction: M&A in Australia 4

The mid-market: Resilience in turbulent times 8

State-by-state mid-market analysis 10

Sectors in focus 14 Leisure 16 Business services 18 Technology, media and telecommunications 20 Consumer 22 Financial services 24

Cross-border activity 26

Methodology All dollar figures unless otherwise stated are in Australian dollars (AUD). Data used in this report was compiled on 6 January 2017 from the Mergermarket intelligence database, the S&P Capital IQ database, and additional sources noted within this report. Percentages may not sum to 100% due to rounding. M&A figures may include deals that fall outside Mergermarket’s official inclusion criteria. Unless otherwise stated, all date references refer to calendar year and not financial year.

3 4

Introduction: M&A in Australia

2017 has started the way 2016 finished, signaling a strong year are expected to be up by 30%-40% when compared year for M&A in Australia. In spite of a 4% decline in global to the same period in the previous year. While this magnitude M&A volume in 2016, Australian dealmaking remained strong of increase may not transpire through to the end of the year, with a flourish of activity in the last quarter, resulting in total it is still anticipated that 2017 will finish well ahead of 2016, Australian M&A volume closing the year 12% higher. by more than 20%.

Despite the strong Australian market overall, Australia’s mid- Australia is still seen as a positive environment for domestic market saw a 17% decline in 2016 deal volume on the prior year. and offshore buyers who are being driven by different reasons That said, the year finished strongly with a flurry of activity and to deal, with Australia’s climate of low interest rates, solid pipelines heading into 2017. The upswing is expected to low inflation and a competitive currency (relative to other continue well into the year. Deal volumes in the first half of the global currencies).

Figure 1: M&A in Australia

250 $60,000

$50,000 200 Deal value (AU$m) $40,000 150 $30,000 100 Deal volume $20,000

50 $10,000

0 $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2015 2016

Deal volume Deal value 5

Introduction: M&A in Australia

Leisure, consumer and other services-based sectors are expected to continue to dominate Australia’s mid-market M&A landscape throughout 2017. This is on the back of 2016’s showing, which We are seeing a shift in people’s saw the services-based industries rank among the top target decision-making around exiting sectors by volume, with the leisure sector topping the charts. their businesses, to realising their At the other end of the scale, the pharma, medical and biotech investments. And while the world now sector is expected to rally and strengthen in 2017, following works in much shorter cycles, it is harder a lacklustre performance in 2016. to forecast with any certainty what the market will look like in 12 months. It is expected M&A across the globe will continue to be strong, with Asia-Pacific being the dominant player and Australia being However, we can say we would expect the strongest market in the region. to see a 20% increase in activity in terms of volume by the end of the year. Deal drivers Australia continues to hold its reputation for being a safe haven for long-term investments and as a reliable springboard into the rest of the Asia-Pacific region. 2016 M&A volumes at a glance With relatively low debt levels and its GDP growing at a stable rate of approximately 3% per annum, Australia attracts investors by its inherent economic maturity, rule of law, robust equity markets and wealth of quality resource assets.

For M&A in particular, Australia is one of the countries with the fewest corporate deal leaks (just 3% in 2015) of sensitive Australia's information, owing to strict enforcement by the Australian Global Australia mid-market Securities and Investments Commission (ASIC). down 4% up 12% down 17% 6 AU$24m dueto thesignificant volume of smallcapdeals. disclosed values into account, themediandecreased to Australia was AU$30m in2016. When takingalldealswith The mediandealvalue ofallmid-market M&Adealsacross cap deals, from 10%to 22%. a reduction inmid-market dealsandan increase insmall deal volume termsin2016,down from 17%in2015,with In Australia, large captransactions took upa12%share in needed inthetransformation ofitseconomy. continues to seekoutthetechnology, know-how andtalent in rejuvenating regional astheeconomic growth behemoth cadence ofa“new normal”, whichisexpected to play apart economic has begunsettlinginto growth themore tempered In theAsia-Pacific region, China’s continued braking on investment destination. investors to settheirsights onAustralia asamore stable are dampeninginvestor confidence, whichmay spur negotiations andthe resurgence oftheGreek debtdrama In theUnitedKingdom andEurope, theongoing Brexit Australian investors. which,activity inturn, may present for opportunities savvy of lower taxrates, there may bearesultant increase indeal that given Trump’s focus oninfrastructure spendingandtalk On apositive there note, issomespeculation by investors to jeopardise international trade. of President Donald Trump’s executive orders threatening economic climate more mercurial thanever, withsome the presidential are election now findingthepoliticaland who hadadoptedawait-and-see to stanceintherun-up appetites forIntheUnitedStates, dealmaking. dealmakers International events have alsoinfluencedinvestors’ to itsfederal inJuly2016. election a general inthecountry, moodofpoliticaluncertainty prior conservative compared to thesecond half, to dueinpart That inthefirsthalfof2016 beingsaid,dealactivity was in smallcap deals, from 10%to22%. with areduction inmid-market dealsandanincrease in dealvolume termsin2016,downfrom 17%in2015, In Australia, large captransactions tookupa12%share

Australian mid-market today. tracingreport, thechanges andcontinuity we are seeinginthe also revisit theobservations andpredictions madeinour2016 of thewidermarket showing themostactivity. insectors We at comparisons ofmid-market M&Aagainst theperformance influencing dealmakinginthe year ahead. This year, we look over thepastyear, andthat we expect willplay arole in and trading that have partners provided impetusto activity mid-market. We examine sectors, dealdrivers opportunity up withMergermarket to analyse M&Atrends inAustralia’s For thethird consecutive year, Pitcher Partners hasteamed our political standing. our to ournational leadership, stabilising and notbringaboutanotherchange works asateamtoadvance Australia wish for 2017 isthat thecoalition now notbeinguntil late 2019,ouronly constitutional needfor anotherelection as theEarth orbitsthesun. Sowithour prime ministersalmostasregularly Australia hashadapropensity tochange was noexception. Over thepast10years, always and2016 slowM&Aactivity

Political and elections uncertainty

Figure 3:Australia M&Adealsize breakdown 2016(percentage total of volume)* Figure 2:Australia M&Adealsize breakdown 2015-2016(percentage total of volume)* 19% 17% 4% 5% 12% 12% 15% 44% 22% 50% *Out ofdealswithdisclosedvalues. *Out ofdealswithdisclosedvalues. Small cap Large cap Mid-market Large cap Mid-market Small cap

>AU$250m AU$151m-AU$250m AU$50m-AU$150m AU$10m-AU$49m AU$250m AU$151m-AU$250m AU$50m-AU$150m AU$10m-AU$49m

7 8

The mid-market: Resilience in turbulent times

As Australia’s economy continues to transition, mid-market In comparison to start-ups and small caps, mid-market acquisitions enable buyers to achieve inorganic growth firms tend to occupy a more observable market position where organic growth is slow to transpire. Australian from which the sustainability and stability of their business corporates target mid-market businesses to add value, models can be simulated and projected, while retaining particularly those that have established a favourable track enough flexibility and drive to execute game-changing record without having grown too large to handle. business moves like disruptive innovation. All in all, mid- market acquisitions offer a shorter route towards increasing In general, operationally-efficient mid-market businesses adaptability, agility and mobility in the vicissitudes of lend themselves well to bolt-on acquisitions that enable today’s corporate climate. the buyer to gain access to new markets and consumer bases without having to build them from scratch, as well as achieve economies of scale. In terms of size, be it by valuation or operational capacity, mid-market companies often represent value buys that are less susceptible to the valuation inflation that often dogs start-ups in hot sectors or bulge bracket companies, bringing synergies to the corporate’s own business.

The sale-readiness of a mid-market target has and will always be key to deal success, enabling target businesses to be able to sell at the time and price point at which they wish to sell, rather than being pushed into accepting cut-price offers owing to their own lack of preparation. 9

The mid-market: Resilience in turbulent times

Figure 4: Mid-market M&A in Australia

120 $7,000

$6,000 100

$5,000 80 Deal value (AU$m)

$4,000 60 $3,000 Deal volume

40 $2,000

20 $1,000

0 $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016

Deal volume Deal value

88% of M&A deals in Australia were under AU$250m in 2016. 10 as thehealthcare, consumer andfintech industries. transformationsto industry orrequiring innovation, such or emerge ashotcontenders in2017are thoseresponding industriesexpected to strengthenOther services-based Capital Territory. for sector, thebusinessservices alongwiththeAustralian and New South Wales. Victoria willcontinue to reign supreme along theEastern Seaboard states of Victoria, SouthAustralia increase inactivity, buildingontheirstrong performances In 2017,consumer are andbusiness services expected to Power, someofwhichtheLabourParty isopposedto. of state-owned entities like Western Power andHorizon investment, includingtransactions involving theprivatisation March 2017hascalledinto questionthefate ofinfrastructure In Western Australia, theresult ofthestate in election Australia andSouthAustralia. took top spotfor sector theNorthern Territory, Western Queensland, whiletheenergy, miningandutilities(EMU) M&A inthetourist heavy states ofNew South Wales and Unsurprisingly, leisure was for thetop sector mid-market foreign investors would perceive sovereign risk. and thefederal government andraised concerns asto how West Linkdebaclegave riseto tensionsbetween Victoria calling thedoubledissolutionelection. In Victoria, theEast to officewitha lower margin thanhehadhoped forwhen election, whichsaw Prime MinisterMalcolm Turnbull return somewhat speculative to theJulyfederal moodintherun-up for Australia. Politically, domesticinvestors hungonto a 2016 was ayear ofmoderate andturbulence uncertainty State-by-state mid-market analysis 33%

New South Wales.New Australianof mid-market deals in2016targeted for dealmaking. environmentcautionary is creating amuchmore were notinplace. This due diligenceprocedures last year becauseproper a numberofdealsfail Butwesaw the picking. market firmsare ripe for –andmid- M&A activity through opportunities is toidentify growth but asure-fire strategy shareholders expect, to deliver thereturns the larger corporates increasingly difficult for It isbecoming State-by-state mid-market analysis Figure 5:Medianmid-market dealsby state/territory 2016 date Announced 10-Nov 21-Jan 19-Jan 08-Apr 18-Nov 09-Aug 19-Oct 11-Oct shifting dynamicsoftheworldeconomies. prepare tomeetchallengesposed bypoliticalupheaval andthe dealmaking environment in2017. Butitwillbeimperative that dealmakers innovation to remain and technology competitive will underpin much of the We expect structural that changesinindustriesandsectors require territory Target state/ New South WalesNew Victoria Queensland Western Australia South Australia Territory Australian Capital Northern TerritoryNorthern Tasmania Target company Eco-Farms Ltd Pty Kloud Solutions Pty LtdKloud SolutionsPty Holden &HSV West-StarMotors; Toowoomba Mareterram Ltd (40.05%stake) Ltd Coonawarra Fresh Produce Pty Systems Ltd Pty Southern Cross Computer Northern TerritoryNorthern Reward Zinc-Lead Project inthe Vestal Target sector Services (other) Services Computer software Consumer: Retail Agriculture Agriculture Computer services Mining Consumer: Other Bidder company Funds Wattle HillRHC Ltd Telstra Corporation A.P. Eagers Ltd (Pty) Ltd(Pty) Corporation Sea Harvest MBA Family Ltd Pty and Matt McGuire by JohnHanna led A consortium Australia Ltd Pty Teck Cominco Zip Industries country Bidder Australia Australia Australia South Africa Australia Australia Australia Australia (AU$m) value Deal $31 $40 $30 $23 $17 $10 $21 $10

11 12 Figure 6:Mid-market M&Aacross Australia 2016 Top by volume 3sectors Heat map: Key:

AU$2bn AU$500m-AU$2bn Volume 50 deals

3. Agriculture 2. Industrialsand 1. Energy, mining Value 15% chemicals andutilities 3 deals

1% 2. Consumer 1. Energy, mining andutilities 11%

<1%

13 deals 13

3. Consumer 3.

2. Agriculture 2.

1. Energy, 1. mining

and utilities and 3% Australia Western 3 deals 1% 2. Energy, mining 1. Consumer andutilities Australia <1% Northern South Territory Queensland New South Wales Tasmania Victoria Australian Capital 85 deals 62 deals Territory 3. Technology, mediaand 2. Consumer 1. Businessservices telecommunications 3. Energy, mining 2. Businessservices 1. Leisure 26% andutilities 19% 32% 19% 5 deals 109 deals 2% 3. Technology, mediaand 2. Leisure 1. Businessservices 3. Consumer 2. Technology, mediaand 1. Leisure telecommunications telecommunications 33% 1% 33%

Top by volume 3sectors Heat map: Key:

AU$2bn AU$500m-AU$2bn Volume 50 deals

3. Agriculture 2. Industrialsand 1. Energy, mining Value 15% chemicals andutilities 3 deals

1% 2. Consumer 1. Energy, mining andutilities 11%

<1%

13 deals 13

3. Consumer 3.

2. Agriculture 2.

1. Energy, 1. mining

13 14 harnessing oftraditional energy. and technology-driven methodsintheexploration and clean andrenewable energy, whileusingmore innovative for innovation, ishoningitsfocus theEMU sector on environmental conservation efforts and Australia’s push in bothdealvolume andvalue. Intandemwithheightening foractivity 2016,coming inat lessthan1%behindleisure wasThe sector ranked aclosesecond inmid-market deal while undergoing transformation withinitsown sector. bolstering the country’s economic diversification in efforts a core driver ofAustralia’sremains sector economy, EMU the the country’s decade-longminingboom. Far from that, means beenrelinquished andrelegated to thepastof Nonetheless, Australia’s resource industrieshave by no mid-market volume. maintained itsstrong levels at ofdealactivity 12%oftotal (up 2%on2015).Businessservices,whichcameinthird, contributing to 17%oftotal mid-market dealvolume top mid-market target inthecountry sector for 2016, This trend isevidenced by theleisure beingthe sector one-fifth of Australian exports. make exports industries andservices upapproximately million (80%)ofemployed Australians work inservices (AU$900bn) to Australia’s AU$1.6tn economy. Roughly 9.5 Government, industriescontribute services more than56% economy. Today, according to the Treasury oftheAustralian in itsprogress towards becoming aservices-based Over thepastfew years, Australia hasmadelarge strides in focusSectors they needtospurthemaction. readily available,more willbetheimpetus low interest rates making debtcheapand consumer confidence transpiring, dueto dealmaking, weexpect theoptimismand to hittheirstridesintermsof yet healthcare andfintech. Whilebothhave which have beenontheperipheral, are Two emerging industriesfor 2017,

Technology, mediaand telecommunications Figure 7:Mid-market target 2016 sectors Financial services Business services Pharma, medical Industrials and Energy, mining Transportation Construction and utilities and biotech Agriculture Real estate Consumer chemicals Leisure 0%

Deal volume 2% 3% 3% 3% 3% 4% 5% 5% 5% 6% 7% 7% 8% 8% 10% 9% 9% 10% 10% 10% 12% 12%

15% Deal value 15% 15% 17% 17% 20% Sectors in focusSectors Figure 8:Mid-market M&AinAustralia (deal by sectors volume) 61 Deal volume 15% mid-market %of 2015 Leisure 9 Deal volume 2% mid-market %of 2015 26 Deal volume 7% mid-market %of 2015 Industrials andchemicals 43 Deal volume 11% mid-market %of 2015 Construction telecommunications Technology, mediaand % Year-over-year change involume -10% -21% 22% 0% 11 Deal volume 3% mid-market %of 2016 26 Deal volume 8% mid-market %of 2016 34 Deal volume 10% mid-market %of 2016 55 Deal volume 17% mid-market %of 2016 Pharma, medicalandbiotech 12 Deal volume 3% mid-market %of 2015 Agriculture 39 Deal volume 10% mid-market %of 2015 35 Deal volume 9% mid-market %of 2015 Consumer 74 Deal volume 19% mid-market %of 2015 Energy, miningandutilities -26% -59% -8% -3% 11 Deal volume 3% mid-market %of 2016 34 Deal volume % of mid-market %of 2016 16 Deal volume 5% mid-market %of 2016 10% 55 Deal volume 17% mid-market %of 2016 2015 27 Deal volume 7% mid-market %of Financial services Business services Real estate Transportation 49 Deal volume 12% mid-market %of 2015 8 Deal volume 2% mid-market %of 2015 14 Deal volume 4% mid-market %of 2015 -22% -14% 11% 0% 2016 30 Deal volume 9% mid-market %of % of mid-market %of 2016 % of mid-market %of 2016 mid-market %of 2016 38 Deal volume 12% 8 Deal volume 2% 12 Deal volume 4%

15 16 Figure 9:Leisure M&A2016 Japanese investors, whoare lookingto profit from Tourism expected to seecontinued interest from Chineseand a surge consolidation. ofindustry is The sub-sector accommodation isby far sub-sector themostactive in from acquisitions, hotelandresort thefragmented With more thanhalfthesector’s mid-market dealscoming and Queensland,whichare strong tourist inlets. the top mid-market by volume sector inNew South Wales of thesector’s 2016 M&Aactivity. Asexpected, leisure was market volumes (70%) makingupalmostthree-quarters market dealsare inthesector, drivingactivity withmid- towards economy. aservices-led More significantly, mid- This isaninitialmarker ofthecountry’s progress initsshift in thesector’s share oftotal mid-market deals. environment in2016,butnonethelessregisters anincrease 61 dealsinthecontext ofamore cautiousdealmaking (same asEMU). This represents a10%dipfrom 2015’s accounted for 17%ofthetotal volume ofmid-market deals sectors. With AU$2.6bn, 55announceddealsworth leisure mid-market asitsdecrease indealswas lessthanother EMU to become theyear’s top target inAustralia’s sector In 2016,theleisure edged pasttraditional sector favourite Leisure Mid-market Small cap Large cap 0% 55 deals 19 deals 6% 5 deals 10% 20% 24% 30% Percentage ofsector

40% a 49%stake inIgnite Travel Group inSeptember 2016. Flightheadquartered Centre Travel Group Limitedacquired LtdHoldings Pty inDecember 2016.Likewise, Brisbane- travelBrisbane-headquartered consultancy Mobile Travel completed theAU$14m acquisitionofa50%stake in listedtravelheadquartered businessHelloworld Limited and enablethecross-promotion ofproducts, Sydney- To expand itsnetwork, achieve economies ofscale Australia isalsoexpected to riseinthemonths ahead. sectors, businesstravel andfinancialservices services to Statistics. Asthecountry continues developing itsbusiness November 2016,according to theAustralian Bureau of arrivals increasing 15%over atwelve-month periodending Australia” continued onanupward trajectory, withleisure In thetourism industry, leisure travel to “Destination for approximately AU$10m inApril2016. development land,aconference centre andagolf course, South Wales comprising basedresort a55-room hotel, the acquisitionof The Retreat at Wisemans, aNew of Chineseinterest, aChina-basedbiddercompleted doubling to two millionby 2024-25.Inanillustration Research Australia’s forecast ofChinesevisitor arrivals 50% 60% 70% 70% 80% 79 dealsworth Sector totals: Sector AU$19.6bn

Figure 10:Leisure mid-market M&A tours.winery layer ofvalue to agriculture businessesviafarm-stays and fresh whileaddinganother appealto thetourism industry notions ofauthenticity, originsandroots, potentially adding for Itputsasellingpoint cross-sector partnerships. onthe tourism). Agritourism, inparticular, opensopportunities trend to watch may beecotourism andagritourism (orfood with theParis Agreement for climate onenascent change, As awareness for environmental conservation heightens Australia-based Webjet Limitedfor AU$56m. to acquire Zuji businessesinHongKong andSingapore from HongKong-basedMeanwhile, investment firmshave agreed compete against onlinebookingplatform provider Airbnb. of Travel Keys, inamove offerings to beefupitsservice and had begunexclusive negotiations for the100%acquisition technology. InFebruary 2017,AccorHotels announcedit In general, theleisure continues sector to bedisruptedwith Deal volume 10 20 30 40 50 60 70 80 0

Deal volume $3,026 2014

Deal value 68 $2,712 2015 61 consider thewellbeingindustry. lead isalsolikely toprompt othersto inthesub-sector.opportunities Their continuing tolookfor expansion further Life. Quadrant Meanwhile, isreportedly acquisition ofFitness First, JetsandGood were popular, asevidenced byQuadrant’s sector, the fitnessandwellbeingindustries resort industries. Elsewhere intheleisure continuing inthehoteland dealactivity tourism industry, whichwillresult in to capitaliseonAustralia’s burgeoning interest from offshore investors eager We expect toseecontinued $2,648 2016 55

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 Deal value (AU$m) value Deal

17 18 Figure M&A2016 11:Businessservices Ltd, provider ofe-commerce payment gateway services. its acquisitionofAustralia-based Web Active Corporation Pty presence inAustralia, US-basedGlobalPayments Inccompleted of Iron Mountain Incorporated. InApril2016,to enhanceits a majoritystake intheAustralian records management business Housatonic Partners announceditsAU$70m acquisitionof In reflection of foreign interest, US-basedprivate equityfirm to deliver acomprehensive value proposition to themarket. complementing itscloud,mobileandsecuritycapabilities aim to transform into aleadingprovider ofdigitalsolutions, government markets. This was motivated by MelbourneIT’s Ltd,Pty provider adata andanalytics for theenterprise and an AU$15m InfoReady acquisitionofMelbourne-headquartered name registrations andonlinebusinesssolutions, completed In April2016,MelbourneITLimited,inthebusinessofdomain driven solutionsthat enableclients to stay ontop oftheirgame. One developing trend istheincreasing needfor technology- mid-market volumes stillmake up64%ofthesector’s activity. This marks a22%drop from 2015’s 49deals. Nonetheless, contributing to 12%ofmid-market volume and12%ofvalue. was in2016,with38announceddeals, businessservices The third most-targeted inAustralia’s sector mid-market Business services Mid-market Small cap Large cap 0% 6 deals 15 deals 38 deals 10% 10% 20% 25% 30% Percentage ofsector

40% changes start to makechanges animpact. start to strengthen in2017asaffordability concerns and regulatory The healthcare mid-market M&Aenvironment isalsoexpected Mark Attorneys inMay 2016. its AU$43m announcedacquisitionofCullensPatent and Trade Mark Attorneys Ltd, Pty continued itsexpansionary trail with forour 2016report theiracquisition ofPizzeys Patent and Trade Likewise, Sydney-headquartered Limited,highlighted in IPH firm specialisinginpatents, trademarksIP. and GriffithHack,acquisition ofMelbourne-headquartered a law In February 2017, wentXenith onto complete IP anAU$172m valuationIP andcompetitive businessintelligence analytics. litigation anddispute resolution services, R&Dtaxincentives, New Zealand, offeringsIP aswell asitsservice commercial, in help Xenith extend itsgeographical reach across Australia and providerservices inAsia-Pacific, theacquisitionisintended to With anaimofbecoming (IP) aleadingintellectual property Watermark Intellectual AssetManagement inAugust 2016. its AU$19.5m acquisitionofMelbourne-headquartered Sydney-headquartered Group Xenith Limitedannounced IP to growing demandfor services. nicheorspecialisedadvisory isalsoseeingincreased due M&Aactivity The legal sub-sector 50% 60% 64% 70% 59 deals worth 59 dealsworth Sector totals: Sector AU$6.0bn 80%

Figure mid-market 12:Businessservices M&A Deal volume a strategy they have publiclystated they are actively pursuing. individual offices into a corporate structure sothat they are inapositiontoacquire – companies Property is anotheractive area For forices dealmaking. example, businessserv Opteonmerged its for andexpansion growth opportunities. become amajorplayer incoming up, dry years asdomesticopportunities forcing themtolookoffshore We alsoexpect toseeongoinginterest fromes sector, Japaninthebusinessservic andEurope will prices beingpaidfor thesebusinesses. customer bases, centralised andshared cost centres andthelike, whichistranspiring into healthy Consolidation hasbeendriven sector bysynergies ofthebusinessservices brought aboutbyshared • • • • • We continue toseesignificant inthechildcare activity andbefore-and-after care including: space, only acouple from ofdealsreportedin2016andanoticeableabsenceactivity themajorgroups. 10 20 30 40 50 60 70 0 The IPO of Mayfield Childcare ofMayfield The IPO Sparrow Early whichwas Learning, bought withAsianfunds Guardian Early whichwas Learning, acquired byPartners Group Only AboutChildren, whichwas bought outbyBainCapital alongwithCamp Australia G8 Education, whichisraising more thanAU$200m tofunditsacquisitions

We have industry, intheITservices typicallyseenalotofactivity butthat isdecreasing with Deal volume $2,687 2014

Deal value 59 $2,175 2015 49 $2,074 2016 38 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

Deal value (AU$m) value Deal

19 20 Figure 13: Technology, mediaandtelecommunications M&A 2016 based V SInternational Venture Ltd Pte agreed to acquire a12% a possibleearlysignofthistrend inMarch 2016, Singapore- learning appearlikely to catch onasthenext megatrend. As Mobile applications for intelligence (AI)andmachine artificial joining theranks ofFoodora, MenuLog andDeliveroo. establishments. InJuly2016,UberEATS launchedinSydney, ofcustomers awaya portion from brick-and-mortar restaurant delivery appsrevolutionise dininghabitsandculture, drawing the operational logisticsoftheindustry. At food thesametime, expanding thecustomer baseofrestaurants andchanging with themto bringtheirproducts to thecustomer’s doorstep, competition with, food delivery appbusinesses, which partner Restaurant businessesare bothbenefittingfrom, andin in theproliferation ofmobileappsinthe restaurant industry. The trendsetting influenceofemerging technologies is evident volumes contributing to 71%ofthesector’s activity. one ofthemostmid-market dominant, withmid-market deal drop from 2015’s 43deals. More significantly, is thesector of Australia’s total mid-market volume. This marks a21% closed theyear with34announceddeals, accounting for 10% the technology, mediaandtelecommunications (TMT) sector While makingwaves inthemarket, inmostothersectors Technology, mediaandtelecommunications Mid-market Small cap Large cap 0% 5 deals 9 deals 34 deals 10% 10% 20% 19% 30% Percentage ofsector 40%

(NGMI) architecture. solutions viaitsNext Generation MobileIntelligence ofMotorola’sas part publicsafety visionto deliver smart public safety agencies, governments andenterprises, a mobileappcompany developing mobilitysolutionsfor AU$23m acquisitionofAustralia-based Ltd, Gridstone Pty sector, US-basedMotorola SolutionsInccompleted its In November 2016,illustrative offoreign interest inthe trends, having already completed three to four deals. their telecommunications businessto capitaliseone-health health-related technologiesthat demonstrate synergies with cloud computing services. Telstra hassaiditwillalsoseek Ltd,Solutions Pty aprovider ofprofessional andmanaged Telstra Corporation Limitedacquired Australia-based Kloud telecommunications andinformation provider services (SaaS.)as-a-service InFebruary 2016,Australia-based mainstreaming ofcloudapplications andsoftware- developmentsOther technology includethecontinued moving objects. which allow machinesto seeandtrack humanfaces and company developing computer visionprocessing technologies stake inSeeingMachinesLimited,aCanberra-headquartered 50% 60% 70% 71% 80% 48 deals worth 48 dealsworth Sector totals: Sector AU$4.5bn

Figure 14: Technology, mediaandtelecommunications mid-market M&A sparse continentNBN rollout. anddifficultieswiththe prove lucrative for thecommunications giant, given itsvast and with new 5Gandabove streaming technologies. Australia will its rare metalsfocus. mid-market Nokiaisalsoimpacting M&A its telecommunications andflow-on effects into Asiathrough Other TMT developments includequantum with computing, country’s AU$1.1bn National ScienceandInnovation Agenda. 20 to facilitate developments incybersecurity, ofthe aspart Centre,Security Growth pledgingAU$30m through to 2019- December 2016,theAustralian government launchedaCyber attractive to private equityfundsinvesting intheindustry. In solutions are likely to behottargets for acquisition, especially applications. Companies offering state-of-the-art cybersecurity risk by investing incybersecuritytechnologies, knowledge and become imperative to navigate waters theuncharted ofcyber- of high-profile information leaks andhacking events, ithas (DDoS)attacks.such asDistributedDenialofService Inthewake entering uppingthepotential adolescence, for securitybreaches, room for cyber-crime. For theInternet instance, of Things is breakneck speed,they continuously bringinto existence new As new andemerging technologiesfindapplications at Deal volume 10 20 30 40 50 0

Deal volume $2,179 2014

43 Deal value $1,516 2015 43 drive dealmakinginthe TMT sector. seeking toimprove efficiencieswill QMS companies andoOh!Inessence, from signagemediasuchasAPNMedia, We are alsoseeingalotmore activity and delivery systems. access revolutionary platforms, models as aquickandmore viablemeansto increasingly active asthey looktoM&A a competitive advantage are becoming can leverage digitalinnovation togain Non-technology companies that Non-technology $1,631 2016 34

$0 $500 $1,000 $1,500 $2,000 $2,500 Deal value (AU$m) value Deal

21 22 Figure 15:Consumer M&A2016 Australian enterprises. for outboundforays ofsmallandmedium onthepart market andonlineconsumers, furnishingaspringboard open emerging markets to theAustralian e-commerce its plansto forge astrategic to e-commerce partnership logistics andtransportation company of Aramex, aspart poured almostAU$100m into a4.5%stake inDubai-based In recognition ofthee-commerce boom, Australia Post and TmallGlobal. and 400New Zealand brands listedonAlibaba’s Tmall Alibaba, there are more than1,300Australian brands high cost ofrent ofphysical storefronts. According to can alsohelpsomeAustralian retailers circumvent the between Australian businessesandChina.Goingonline Melbourne inFebruary. This isexpected to facilitate trade opening itsAustralia andNew Zealand in headquarters with Chineseonlinegiant AlibabaGroup HoldingLimited E-commerce istakingAustralia’s consumer retail by storm, volumes total 63%ofthesector. volume andonedealdown on2015volume. Mid-market AU$1.5bn in2016,contributing to 10%oftotal mid-market Australia’s consumer announced34dealsworth sector Consumer Mid-market Small cap Large cap 0% 8 deals 12 deals 34 deals 10% 15% 20% 22% 30% Percentage ofsector

40% decentralised preventive healthcare. With instantaneous heightening globalinterest inpersonalfitnessand possible by advancements intechnology, paired with phenomenon, recent developments have beenmade consumerisation ofhealthcare. Bynomeansanew trendOne industry to keep tabsonisthecontinuing purchases at thestore withouthaving to queuefor payment. and pay for andthenpickuptheir theirproducts online, grocery store concept that allows itscustomers to choose and comfort. In2016,itintroduced Amazon Go, adata-driven tradition, offering itsclientele unprecedented convenience withthebrick-and-mortar digitaltechnology marrying e-commerce giant Amazon iscovering allthebasesby UnitedStatesBeing anumberofstepsaheadinthegame, have shutdown operations, aspredicted inour2016report. into Australia’s retail market, whileseveral localretailers for example, isoneofthenewest international entrants making forays into theAustralian market. Rag and Bone, e-commerce platforms, aswell asfrom international brands of growing competition, bothfrom e-retailers and have to re-examine theirmarketing strategies intheface Brick-and-mortar retail stores inthecountry, however, may 50% 60% 63% 70% 54 deals worth 54 dealsworth Sector totals: Sector AU$8.3bn 80%

company patented sellingnutritionallydense, wholegrains. 39% stake in The Healthy Grain Ltd, Pty anAustralia-based In December2016,Japan-based Teijin Limitedacquired a locally-sourced, paleo, vegan, raw, sugar-free andsoon. subscribing to lifestyles anddiet choicesthat are organic, interest innatural andhealthy optionsfrom consumers Consumer food trends are alsoseeinganenduring apparel, andfitnessnutrition. aswell assports include wearable fitnessandhealthtrackers, fitness that give themmore autonomy inpersonalfitness. These in theconsumption ofhealthcare intheform ofproducts knowledge era, consumers savvy are takingarisinginterest access to ever-increasing volumes ofinformation intoday’s Figure 16:Consumer mid-market M&A Deal volume 10 20 30 40 50 60 0

Deal volume $2,610 2014

49 Deal value $1,987 2015 35 paleo dietsornatural products. mid-market M&A–bethey vegan or also continue theirupward trajectory for health-related consumer products will with theirclothingranges. Beneficial which give peopleasenseofbelonging brands like Lorna JaneandLululemon maintain momentum, suchassporting a connection withconsumers, will activity last year. However, where there ismore of a large numberofgroups, aswepredicted challenges, evidenced bythecollapse of The retail isfacing industry $1,514 2016 34

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Deal value (AU$m) value Deal

23 24 Figure 17:Financial M&A2016 services with success likely to follow thosewhoenhanceand and challenge theoligopoly ofAustralia’s bankingindustry, issues facing theindustry, whichendeavours to disrupt Market adoptionandregulation are two ofthelarger and investment inAsiaby 2017”. making Australia leadingmarket “the for fintech innovation country hotbedwiththeview of asafinancialservices government hasafintech programme whichmarkets the fintech industry. oftheindustry, Insupport the Australian The sector’s was theup-and-coming hottestsub-industry deal volume. mid-market in2016,whichaccounted for nearly80%oftotal mid-market deals. wasThe sector mostlydominated by the together witha2%increase inthesector’s oftotal portion saw an11%risefromfinancial services 2015’s 27deals Counter to thediminishedvolumes inmostothersectors, contributing to 9%oftotal mid-market volume. market lastyear, AU$1.3bn, with30announceddeals worth in financial services was alsoabusy sector Australia’s mid- seeinganincreaseAs oneofonlytwo sectors indealvolumes, Financial services Mid-market Small cap Large cap 0% 5 deals 3 deals 30 deals 10% 8% 13% 20% 30% Percentage ofsector 40% equity market. asaviablepost-tradetechnology solutionfor thedomestic Exchange (ASX) hasannouncedthat itisexploring blockchain the needfor verification. third-party The Australian Stock and settlement system, blockchain eliminates technology In itsapplication asaninternet-based transaction processing fintech rivals or to enter into blockchain cooperation deals. scrutinise any plansfor Australia’s majorbanks to acquire Commission’s 2016announcement October that itplansto balanced against theAustralian Competition andConsumer with thelarger bankingincumbents. This needsto be partner 50% 60% 70% 80% 79% 38 deals worth 38 dealsworth Sector totals: Sector AU$3.6bn

Figure 18:Financial mid-market services M&A Deal volume world-leading fundsmanagement sector. We expect toseecontinued interest inAustralia’s firms. and advisory financial services their focus away from brokerage firmsandtowards the aggregators JGallagher&Co andwithArthur redirecting withvery fewhalt, insurance brokerage dealsbythe of years intheinsurance hascome industry toagrinding 10 20 30 40 0 The consolidation that wesawover thepastcouple

Deal volume $2,023 2014

Deal value 29 $1,753 2015 27 $1,342 2016 30

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Deal value (AU$m) value Deal

25 26 senior management. that donotalready have aglobalfootprint andregional distance willalways poseachallenge for European buyers shift away from theUnitedKingdom andEurope, although the country asapositive destination for thefunds they Australia, withoffshore buyers andinvestors turningto Brexit andGrexit may result inpossiblenetbenefitsto crisis have continued to unfold. Inthelonger term, both Europe, theGreek debtdrama andthewiderEurozone wear off asthepost-Brexit dustsettles. Elsewhere in a cautiouswait-and-see butthisisexpected to stance, sentiment have appeared reserved asinvestors take on in 2016,globalinvestor andconsumer confidence and In thewake ofBritain’s vote to leave theEuropean Union third with10deals. place, China with17deals, andthe UnitedKingdom ina distant in 2016was theUnitedStates with24deals, followed by The top biddercountry for mid-market inboundM&A which saw 12deals. volume and16%ofinboundvalue), andthenleisure, services, whichaccounted for 17deals(15%ofinbound 14% ofinboundvalue). This was followed by business EMU, whichsaw 24deals(22%ofinboundvolume and Foreign acquirer interest was mainlychannelledtowards located inthecountry in2016,upfrom 33%in2015. with inboundmid-market M&Aoccupying 35%ofdeals from foreign investors over thepastfew years, Nonetheless, Australia hassustainedsteadyinterest respectively involume on2015. downinbound and$3.4bnoutbound), 21%and23% AU$9.6bn worth (111 inboundand60outbound), ($6.2bn Overall, Australia’s mid-market saw 171cross-border deals Cross-border activity 35% of Australianof mid-market dealsin2016were inbound deals.

would create oneoftheworld’s biggest free-trade zones. (RCEP), to move ahead. The RCEP alsoinvolves Australia and trade deal,theRegional Comprehensive Economic Partnership With the roomTPP hanginginthe balance, may openfor arival States Free Trade Agreement. has expressed intentions to renegotiate theAustralia-United take placeat ameetinginChileMarch 2017and Trump areDiscussions amongstthepotential scheduledto parties amendments beingmadeto reflect thechange in parties. in spiteoftheUnitedStates’ withdrawal, withthenecessary the country’s intentions to pushfor the TPP to beimplemented In response to this, Australia hastaken thereins, announcing being madeinfavour ofbilateral trade dealsinstead. multilateral trade agreements ingeneral, witharguments the attention ofcommentators towards thecomplexities of Pacific region, are in for aseismicshift. Ithasalsodrawn towards international trade relations, especiallyinthe Asia- strong indicator that theUnitedStates’ stanceandoutlook havePartnership (TPP) yet to transpire. Itis, nonetheless, a withdraw theUnitedStates from the12-member Trans-Pacific The effects of President Trump’s executive order to formally States: TheTrans-PacificUnited Partnership the leisure andEMU sectors. Malaysia, Singapore and Thailand, andprimarilytargeted for mid-market Australian assetsin2016were mainlyfrom (AU$3.4tn) andmore ASEAN than622millionpeople. bidders regionally andgloballyasanintegrated market ofUS$2.6tn Community in2015,withanaimofcompeting both Asian Nations (ASEAN) establishedtheASEAN Economic value in2016. The 10-memberAssociation ofSoutheast of thecountry’s inboundmid-market volume and9%of interest from SoutheastAsia,whichcontributed to 10% In termsofbidderregions, Australia alsosaw substantial Cross-border activity Figure 20:Mid-marketdealflowsinAustralia(byvolume)* Figure 19:Inboundmid-market M&AinAustralia 2014 2015 2016 Deal volume 10 20 30 40 50 60 0 Domestic

Deal volume Q1 Q2 2014 Inbound Q3

Deal value Q4 65% 64% 67% Q1 Q2 2015 Q3 Q4 Q1 *Out ofdealswithdisclosedbidders. 35% 36% Q2 33% 2016 Q3 Q4

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Deal value (AU$m) value Deal

27 28 Figure 21:Bidderregions for Australia inboundmid-market M&A2016 North America North South America Volume Volume 31% 1% Value Value 35% <1% Europe Africa Volume Volume 22% 4% Value Value 17% 2% Asia-Pacic Middle East Volume Volume 41% 2% Value Value 44% 1%

accommodation, food andbeverages, healthcare andretail. industries,services-based suchasleisure travel, tourism and have been, andare expected to continue, boostingAustralia’s place apremium onlifestyle quality. consumersThese savvy and discerningconsumers withthetimeandwherewithal to and risinghouseholdincome create increasingly educated along Australia’s own, asChina’s burgeoning middle class More significantly, China’s is likelyrebalancing act to help in citiesby 2020. urbanisation planof having 60%ofitspopulation dwelling Infrastructure Investment Bank, aswell asChina’s abiding This would cater to China’s BeltandRoad Initiative, theAsian a lower level inthelong-terminsteadofdiminishing entirely. assets,energy thisdemandisexpected to besustainedat translated into weaker demandfor Australia’s miningand While China’s contracted appetitefor resources may have know-how, brands orIP. value-add offering output, the requisite advanced technology, give themaleguponbecoming globallycompetitive inhigh interestedparticularly inbolt-on acquisitiontargets that can added production. Given this, Chineseacquirers have been andupthevaluemanufacturing, chaintowards highervalue- endeavours to move away from low-cost and low-skill reform amidstrisinglabourandoperational costs, China on low-value ofitsstructural Aspart manufacturing. has reached point aninflection withaheavy emphasis In themeantime, thecountry’s ongoing industrialisation driven economy to becoming aconsumer-led one. in 26years, asthecountry transitions from beinganexport- second-largest economy decelerated to itsslowest growth “new normal”ofmore tempered growth. In2016,theworld’s this inandsettlinginto what President Xi Jinpingtermsa economicunbridled double-digit growth, Chinaisnow reining construction andurbanisation ambitionsinitsheyday of While resource-focused acquisitionsfed thecountry’s fervent on government mandate, onthehunt for natural resources. from atunnel-visionfocus, ledby state-owned enterprises This meansthat Chineseacquisitive ismoving away activity sectors, according to from areport Moody’s Investors Service. developing akeen palate for highvalue-add targets and As Chinacontinues itsoverseas buyingspree, acquirers are China: The search for value

mid-market M&AinAustralia 2016 Figure 22: Top biddergeographies for inbound Value (AU$m): 17 Deal volume: China 1,415 Value (AU$m): 24 Deal volume: United States 336 Value (AU$m): 10 Deal volume: United Kingdom 1,181 670 Value (AU$m): 9 Deal volume: Canada 394 Value (AU$m): 6 Deal volume: Japan

% of total:% of 15% total:% of 23% total:% of 22% total:% of 5% total:% of 9% total:% of 19% 11% total:% of 8% total:% of 6% total:% of 5% total:% of

29 30 high-value manufacturing. as robotics andautomation, or precision andefficiency-driven competitiveparticularly arenas, intechnology-based such As acquisitiontargets, Japanesecompanies are themselves in 2015. company withitsAU$6.5bn takeover of Toll Holdings Limited the biggest acquisition ofanAustralian firm by aJapanese ofitsplansforas part expansion across Asia,having made Similarly, JapanPost HoldingsCo islookinginto more M&A Things, bigdata, AIand robotics. analytics, on leveraging digitaltechnologiessuchastheInternet of security andagriculture businesseswith asharpenedfocus the development railway ofitsmining, system, healthcare, Australia would reach AU$3.75bn by FY2020 by focusing on in December2016,predicting that itstotal revenue in AU$1.25bn inits“Australian SocialInnovation business” jurisdiction, Hitachimade known itsplansto invest Exemplifying Japaneseinterest inAustralia asatarget technologically sophisticated targets. Japanese interest isbecoming increasingly geared towards on Mergermarket record. Intermsoftarget industries, US$92.1bn (AU$122.1bn), thesecond-highest annualvalue In 2016,Japanmade309announceddealsworth itself withanintensified appetite for outboundacquisitions. along withcashrichbalancesheets, andthecountry finds the mixnegative interest rates that lower borrowing costs, along withaweak andcrowded domesticmarket. Addinto Japan isfaced withanageing andshrinking population, Japan: Outward bound resources, andmanufactured energy toChina. exports in commitments toeliminate tariffs across awide range ofagriculture, sensitive from sectors AU$252m toAU$1.094bn. ChaFTA hasalsolocked raising thescreening threshold for private Chineseinvestors innon- Foreign Investment Review imposesoninboundinvestment, Board (FIRB) things, theChAFTA liberalises theregulatory procedures whichAustralia’s of Chinesecapitalasfuelfor thedomesticeconomy. Amongstother 2015, reflects the Australian government’s recognition ofthe importance The China-Australia Free Trade Agreement (ChAFTA), signedon17June The China-Australia Free Trade Agreement

business practices. idiosyncrasies, and and itslaws, cultural a target jurisdiction ground knowledgeof as welllocal,on-the- politics surrounding it, developments and and theregulations, of atarget industry a clearunderstanding this involves gaining diligence onatarget, pre-transactional due conducting thorough be prepared. Ontopof success istoalways cardinal ruleofdeal completion, the themselves for deal sellers tobestposition For buyers and

dealmaking creeps beyond the AU$250m cap. for aggregators where thecumulative value oftheir approvalFIRB will alsocontinue tobeproblematic ownership isdeemedtobenotinthenation’s interests. scrutiny oftheselarger where deals, particularly foreign- tocontinueLooking itsclose ahead,weexpect theFIRB much more attractive. for themid-market (except for agribusinessproperties) for thetopendofM&Amarket, itmakes dealmaking valued over AU$250m. While thismay present challenges Ultimately, however, approval FIRB isonlyanissuefor deals espionageandcoercion.sabotage, assets, soastodefend key national infrastructure from national securityriskassessments andregistering critical set upaCriticalInfrastructure Centre aimedat designing The Australian government hasalsoannouncedplansto raise concerns over national interest. more guidanceonthekindsoftransactions that may theregulations,of ambiguityandclarifying providing policy reforms withanaimofdispellingthepenumbra reported tobemakingplansfor foreign investment This year, Australian Treasurer Scott Morrisonhasbeen bidders’ competitiveness.hurting reviews, have alsoaffected thespeedofdeal completion, review periodsingeneral, combined withabacklogin oftheirfundsfrom offshorequarters investors. Longer process, given that many players raise more thanthree- auctions, for have instance, metwithcomplications inthe Australia-based private equityfundsbiddinginassetsale having occupiedthelimelight timeandagainin2016. politicised, withmixed reviews toshowonitsreport card, Review involvement Board (FIRB) hasappeared increasingly Since December2015,Australia’s Foreign Investment The Foreign Investment Review Board (FIRB)

31 32

Figure 24:Australia outboundM&A(by value) Figure 25: Top outboundtarget by volume sectors 2016 Figure 23:Australia outboundM&A(by volume) telecommunications Technology, mediaand 1,277 Value (AU$m): 22 Deal volume: Deal value (AU$bn) Deal Volume 100 120 140 160 $10 $15 $20 $25 $30 $35 $40 20 40 60 80 $0 $5 0

Total outboundM&A Mid-market M&A Total: 2010 86 43 43 2010 4% total:% of 21% total:% of 2011 87 41 46 2011

Non-mid-market M&A 2012

97 38 59 Mid-market outbound M&A 2012 Energy, miningandutilities 24,288 Value (AU$m): 21 Deal volume: 2013 48 48 96 2013 104 2014 72% total:% of 20% total:% of 47 57 2014 2015 138 77 61 2015 4,849 Value (AU$m): 17 Deal volume: Industrials andchemicals 2016 107 60 47 2016 14% total:% of 16% total:% of

(16% oftotal). AU$525mand chemicalswith11deals(18%oftotal) worth AU$583m (17%oftotal). This was followed by industrials deals was EMU with11transactions (18%oftotal) worth The second most-targeted for sector outboundmid-market company developing businesssoftware products. of Greentree International Limited,aNew Zealand-based MYOB Technology Ltd Pty completed itsAU$27m acquisition sub-sector. InAugust 2016,for Australia-based instance, Most ofthisinterest went towards thecomputer software AU$891mof total) worth (26%oftotal) inthemid-market. in the TMT sector, whichsaw 16announceddeals(27% Australian acquirers were mostinterested inacquisitions AU$409m, AU$557m. andChinawith6dealsworth AU$950m, neighbouringNew Zealand with8dealsworth geographies were theUnitedStates with15dealsworth were mid-market deals. Australia’s top mid-market target 2010, registering 107dealsin2016,outofwhichasolid60 2015’s volume butachieved thesecond-highest volume since AustraliaIn termsofoutboundM&A, saw a23%drop from Outbound M&A geographies by volume 2016 Figure 26: Top mid-market outboundtarget 8 Deal volume: New Zealand 950 Value (AU$m): 15 Deal volume: United States 85 Value (AU$m): 4 Deal volume: Israel 234 Value (AU$m): 4 Deal volume: United Kingdom 557 Value (AU$m): 6 Deal volume: China 409 Value (AU$m):

13% total:% of 28% total:% of 25% total:% of 3% total:% of 7% total:% of 7% total:% of 7% total:% of 17% total:% of 10% total:% of 12% total:% of

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