Opportunity knocks for M&A bargains

It was a deal five years in the making.

Towards the end of August, private equity group Quadrant was putting the finishing touches on the $93 million acquisition of a significant stake in pet products supplier City Farmers.

The deal was the culmination of a process that started in 2008, when City Farmers chief executive Clayton Hollingsworth and major shareholders Chris Kent and Bob Bunning bought into the company, which holds a portfolio of 31 stores across the Perth metropolitan area.

The investors implemented a five-year plan, including a review of operations, which identified the need for an injection of fresh equity to embark on an ambitious east coast expansion.

The City Farmers-Quadrant deal is reflective of the state of Western Australia’s mergers and acquisitions sector, with an increasing number of firms looking to M&A for an equity injection rather than going to a historically tight investment market.

Mr Hollingsworth told Business News City Farmers planned to roll out at least 20 new stores per year over the next five years, with the Quadrant transaction fully funding that proposal.

But the selection of Quadrant as suitor did not come lightly, Mr Hollingsworth said.

“We had a number of other suitors or interested parties approach us, and we’re certainly too small to do an initial public offering, so that wasn’t a possibility,” he said.

“So it was variants of private investment, and the question was whether that would be other retailers, private equity, or high net worth investors.

“Certainly, the private equity groups and the Quadrant guys gave us a clearer strategy over the next five years.”

Mr Hollingsworth said Quadrant’s local knowledge, borne from its relationships with Quick Service Restaurant Holdings, gave it the confidence that it could maintain its Western Australian roots despite a comprehensive east coast expansion.

“They know that everyone doesn’t have to be based in Sydney or Melbourne, so that was a positive, but really the big thing they bring is their track record with players like Kathmandu and Pumpkin Patch, you just can’t beat that kind of knowledge,” he said.

“We were pretty excited, particularly in this economy while everyone is waxing about minerals and how bad it is in WA, a little business goes and does quite a material deal and is really set for five years to take a substantial position in the market.

“It’s a pretty good deal.”

Steinepreis Paganin partner Jonathan Murray said his firm had been reasonably active and busy on the M&A front in the 2013 calendar year, a contrast to the general quiet experienced in equity capital markets.

“Indirectly, the M&A transaction can be used as a form of capital raising,” Mr Murray said.

“While I think activity in a general sense has been somewhat subdued comparing this financial year to times gone by, it’s certainly not as if we are sitting here idle.

“We are seeing some friendly discussions for some of those tie-up transactions, the marrying and merging of assets in a consolidation sense.”

Argonaut Securities managing director Eddie Rigg said M&A work was generally countercyclical when compared to equity capital markets (ECM), but expected an increase in companies looking to offload assets over the next 12 months.

Mr Rigg pointed to Barrick Gold selling off its Yilgarn South gold mines to South African mining giant Gold Fields in August for $US300 million as a prelude to what can be expected over the next year.

“Some of the M&A will be forced on them, for example Barrick getting rid of assets,” Mr Rigg said.

“So you expect there are in companies in good shape that will want to take advantage and buy assets on the cheap.

“That in itself creates problems, because people don’t like selling things on the cheap, but people like buying things on the cheap.

“There are going to be some challenges with meeting expectations around size, but I think that will happen.

“And I think if we get some M&A and some decent cash bids, that will liberate a bit of money and cause a bit of money to turnover in the marketplace.”

The Barrick Gold deal was brokered by UBS, which also had its hands on Metals X’s $40 million acquisition of Alacer Gold’s Australian operations, including the Higginsville and South Kalgoorlie mines in the Goldfields.

UBS executive director of investment banking Tim Day said it was not easy selling WA gold assets in the current commodity price environment, but both deals had been mutually beneficial for the parties.

“Assets are a lot smaller just because values have come off a lot," he told Business News.

The reduced asset values, however, are logically starting to produce opportunities for firms seeking to snap up bargains.

Euroz chairman Andrew McKenzie said there were a lot of cheap projects up for grabs, with experienced chief executives seeing value in the marketplace.

“The older hands, and the people that understand the cycles, will definitely buy projects at the right price,” Mr McKenzie said.

“There is some value out there. Those experienced managers are interested in that space like they haven’t been for some time.

“I think you will see a cleaning up of some of those assets from some of the bigger companies. A lot of the big gold companies have got assets for sale, but who wants to buy them is another question.”

Mr McKenzie said a highlight of the quarter was the $462 million tie-up between home-grown engineering and construction group Clough, with South Africa’s Murray & Roberts.

At the time the transaction was announced in July, Clough chairman Keith Spence said the bid was an opportunity for shareholders to realise a premium value for their investment.

“We’ve been following Clough for 12 years, we’ve advised Clough and done multiple placements for them,” Mr McKenzie said.

“It’s been a great deal for shareholders and it’s a great deal for Murray & Roberts as well.

“It’s probably something that has always been on Murray & Roberts’ desk since the day they first invested in it.

“It’s a great business, Clough, and it gives Murray & Roberts a great deal of optionality.”

Hartleys head of corporate finance Grey Egerton-Warburton said recent economic instability had left companies tentative with respect to M&A, but the “better quality” transactions were still going ahead.

Mr Egerton-Warburton also predicted a rise in M&A activity as the market appeared to have bottomed out.

That notion was prevalent among delegates at the annual Diggers & Dealers mining forum held in Kalgoorlie-Boulder in early August.

A survey of attendees conducted by MinesOnline showed 48 per cent of respondents expect M&A activity and asset sales to increase significantly over the next year, with 42 per cent tipping junior company mergers to lead the way.

About 32 per cent of respondents said asset divestments by major companies would be the most common form of M&A activity to occur in the sector.

 “With valuations compelling, now is the ideal time to take a more aggressive approach to acquisitions,” Mr Egerton-Warburton said.