The prospects of mid-market merger and acquisition activity in the defence and government sectors in the next 12 months have collapsed, with the expectations of many dealmakers reversed by a combination of new regulatory changes and COVID-19. The Dealmakers Mid-Market M&A in Australia 1H20 update from Pitcher Partners, produced in conjunction with Mergermarket, has found a drastic decline in enthusiasm for defence sector deals with not one dealmaker believing there would be an increase in the near term, while the prospects for deals in the government services sector were only marginally more favourable.
It is a striking change from Pitcher Partners’ annual report released in February, where an increase in defence deals was anticipated by 43 percent of respondents, while one in three had expected a boost for deals in businesses servicing government. The collapse in sentiment comes on the back of changes to the Foreign Investment Review Board framework, which set to zero the threshold for FIRB review from late March, and the proposed new changes that are due to start from January 2021. Under the revamped FIRB conditions, the federal government will be able to impose conditions or block investment by a foreign person on national security grounds regardless of the value of investment and introduce mandatory notification of any proposed investment by a foreign person in a “sensitive national security” business. The definition of a national security business has not been finalised but could include a broad range of defence-related, government-related and data-holding businesses.
Pitcher Partners Corporate Finance partner Michael Sonego said confidence in completing mid-market deals had been sapped in many sectors during the first half of 2020 but it had vanished completely in the defence sector. “We had anticipated the regulatory changes could have a chilling impact on business investment in areas like defence and government services but the fall in confidence for these sectors is still remarkable,” he said. “Other areas where there has been a sharp decline are government services and energy, mining and utilities. Each were thought to offer opportunities for deals by about a third of the respondents in the last survey, but that confidence has disappeared. Only 3 percent of respondents think either of those sectors will grow.”
Sonego said M&A activity has slowed in the first half of the year, as it has around the world, with only 42 percent anticipating completing deals in Australia during the year ahead, down from 65 percent in January 2020. “With 78 percent of dealmakers having postponed or cancelled investments into Australia in the wake of the COVID-19 crisis, there’s no doubt investment confidence has been badly shaken,” he said. “However, there is an expectation that the uncertainty created by COVID-19 will be a brief stumbling block and most dealmakers will consider returning to the market within the next 12 months, depending on how the pandemic continues to play out.
Most dealmakers expect private equity capital to be a big driver of mid-market deals, while accessing finance will be one of the most pressing issues. While dealmakers are likely to take a wait-and-see approach in the short term, the overall picture reinforces that Australia is a robust place to invest when confidence return to the market.
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