Merger and acquisition (M&A) activity in Australia is increasing, with offshore buyers targeting companies with defensive earnings and those producing critical commodities needed for the transition to renewable energy. The lower Australian dollar is also making ASX companies cheaper and helping to draw bids, according to the experts.

Mathew Hodge, director of equities research at Morningstar for Australia and New Zealand, says takeover activity in the mining sector has been particularly notable in recent months, with buyers targeting miners producing essential metals needed for decarbonisation such as copper and lithium.

More bids for Australian gold miners could also come following Newmont’s (NEM) successful bid for Newcrest (NCM).

“We have seen a few acquisitions of late, particularly in the mining sector, namely Oz Minerals and likely Newcrest. Currency could be a factor, but I suspect the outlook is of more importance – namely for copper and gold in those cases,” he says.

Hodge says many Australian stocks are well valued, adding to the appeal.

“We have nearly 40% of our stocks rated 4- and 5-star [by Morningstar]. That’s nearly double the 10-year average. So, there are a lot of stocks where we think there is value … It appears the market right now is still happy to pay up for robust defensive earnings,” Hodge says.

Jun Bei Liu, portfolio manager with Tribeca Investment Partners, also expects more takeover bids for Australian miners, and other well valued businesses, which could see investors reap a premium for their shares.

“Strategic resources such as lithium and rare earth commodities - we like Pilbara Minerals (PLS) and Lynas (LYC) - will see further activities in M&A with corporate buyers and private equities ready to deploy capital. We also see copper to be hotly contested too, particularly given there is lack of alternative in copper equities will see those stocks trade at a premium,” Liu says.

However, recent volatility in commodity prices could deter some mining bids from emerging, according to Morgans analyst Max Vickerson.

Many commodities have dropped in price this year, including lithium, as supply increases and as other commodities such as iron ore and oil price in a greater risk of global recession.

“Volatility in the [lithium] price may lead acquirers to defer aggressive moves in the hopes of getting better value from future bids,” he says, adding a successful takeover of recent target Liontown Resources may not succeed given a recent drop in lithium prices.

“With the time taken to resolve the Liontown Resources bid there is an increasing risk the deal may not proceed and the share price has been weakening after reaching an all-time high in mid-May,” he says.

But Vickerson says locally listed Allkem’s (AKE) merger with NYSE-listed Livent (LTHM), announced in May, is likely to go ahead with a low chance of another competing bid emerging. That merger will create a US$16 billion global force in lithium production, capitalise on soaring long-term demand for the essential metal.

There were 55 M&A deals announced in the first quarter of 2023 in the Australian mining sector.

In value terms, M&A activity in Australia increased by 43% in the first quarter of 2023 to US$21.1 billion ($30.8 billion), compared with the previous quarter’s total of US$14.7 billion and rose by 8,318% as compared to the first quarter of 2022, reflecting greater activity and rising asset prices, according to GlobalData’s Deals Database.

Other sectors hold appeal

Liu also expects greater M&A activity for listed property trusts, which are trading at especially attractive valuations.

"There are many sectors that represent significant valuation discount compared to their unlisted peers. Listed property trusts, for example, are trading at an average 20% discount to asset value, particularly office trusts such as Dexus (DXS)," she said.

"Private equity investors or corporate buyers are waiting for a bottoming in the office market and commercial property before pulling the trigger."

Liu said a number of other companies, such as The a2 Milk Company (A2M), Treasury Wine Estates (TWE) and Ramsay Health Care (RHC) were likely to be bid for in the next 12 months if share prices remain suppressed.

"These companies’ share prices have been impacted by short term earnings disruptions and have very strong balance sheets,” she said.

Across all sectors, in 2022, there were 1,699 M&A deals completed in Australia, down from 2,118 in 2021, while publicly disclosed deal values reached US$78 billion ($120 billion) down from US$195 billion in 2021, according to PwC’s The Australian M&A Outlook: 2023.

While activity slowed in 2022, M&A activity was still one of the strongest years ever, PwC said.

M&A activity

Low dollar could add to M&A momentum

Stephen Miller, an adviser with GSFM funds management, believes the lower Australian dollar could be helping to attract interest as it makes Australian companies cheaper for foreign buyers.

“All other things equal a lower Australian dollar should prompt a little more interest in investment opportunities in Australian financial assets," he says.

"That could encompass a potential increase in M&A activity as foreign companies eye opportunities in Australia."

Structural factors are also likely attracting interest, with Australia’s political and economic stability making it "an attractive destination for foreign investors in what looks to be an increasingly dysfunctional global political environment".

"A lower Australian dollar in this context should elicit increased interest in foreign direct investment but also portfolio equity flows,” Miller says.