CORPORATE finance has been a lucrative market during the past couple of years, with that trajectory continuing for most advisers in the six months to June 2022.
The Business News database recorded 109 Western Australia-focused mergers and acquisitions (M&A) worth a total of $4.99 billion in the half year.
Data & Insights has also recorded 229 WA-focused equity capital markets (ECM) deals worth $4.72 billion.
Both sets of numbers are down from the June 2021 half year but illustrate the healthy deal flow for corporate advisers in WA.
Perth-based Azure Capital was one beneficiary, with the firm completing 20 transactions in the past financial year.
Newly appointed managing partner Richie Baston said this was equivalent to FY20 and FY21 combined.
Argonaut chairman Eddie Rigg said the latest half year was one of the best six months in the firm’s 20-year history.
Argonaut completed 18 ECM transactions worth more than $400 million and advised on a handful of M&A deals.
Mr Rigg said the firm was somewhat fortunate with its deal flow, as the sharp stock market correction meant capital raisings had suddenly become much harder to complete.
“Luckily enough most were closed out by the end of May,” he said.
“The ECM pipeline at end of May was as bare as it has been for a number of years.
“As it’s turned out, that could be good as the equity raising window is shut.”
Macquarie Capital director Stuart Owen said his firm had continued to enjoy a good run.
“Notwithstanding the recent volatility of commodity and equity markets, our clients have had a successful half of deal activity across both M&A and ECM,” Mr Owen told Business News.
Macquarie’s notable deals have included IGO’s acquisition of Western Areas, the demerger of Leo Lithium from Firefinch and equity raisings for Chalice Mining and Boss Energy.
Broking firm Euroz Hartleys has already seen the impact of the stock market correction.
Executive chairman Andrew McKenzie described FY22 as a solid, average year for the firm after its record results in FY21.
He said the correction was not unexpected.
“Fundamentally, nearly every asset class was seriously overvalued, so you had to eventually have a value realignment and we’ve had it,” Mr McKenzie said.
“It has been rather brutal depending on what sector you are in but there is some value out there.
“You can stop worrying about the macro forces and focus on the companies themselves.”
He said investors had become very cautious.
“We’ve gone from really buoyant capital markets for a couple of years to a really risk-off point,” Mr McKenzie said.
Reset
This market correction has come at a time when corporate advisory firms face new competition.
Barrenjoey Capital Partners was a new entrant to the market last year and has bolstered its ranks by recruiting Peter Watson from Goldman Sachs.
Jarden is planning to open a Perth office this year, while local firm Poynton Stavrianou has recruited a third partner.
Mr Rigg believes Argonaut is well placed after its merger nearly one year ago with Liam Twigger’s advisory firm PCF Capital.
“The addition has been unreal, it’s exceeded everyone’s expectations,” Mr Rigg told Business News.
He said PCF had often been engaged by large mining companies for non-core asset sales and those relationships had opened new doors for Argonaut.
Euroz Hartleys is well established as the largest stockbroking firm in Perth after the 2020 merger of Euroz and Hartleys.
Mr McKenzie frankly acknowledged the merger was hard work.
“I always knew it would be complex, but it’s probably been twice as hard as I envisaged in terms of spending time on the people, the culture, the integration,” Mr McKenzie said.
“I have a much better appreciation for the small stuff that needs to happen to make mergers successful.”
While it was hard work, he believes the execution of the merger was very successful, with the firm losing only a handful of people.
The firm has refreshed its leadership this year, with Tim Bunney promoted to managing director of the ASX company’s main operating subsidiary and Gavin Allen appointed head of research.
It has recruited Amanda Boyce from JBWere as its new head of advice, with a focus on building its private wealth advisory role.
In addition, Ben Crossing is set to become head of corporate finance from the start of October.
Azure has also made some notable changes, with Mr Baston succeeding Adrian Arundell and Simon Price, who had been joint managing partners.
Mr Baston said it was business as usual, with his predecessors remaining as senior leaders.
In fact, Mr Price will be leading the firm for the next three month while Mr Baston takes a sabbatical.
Mr Baston believes Azure’s strength comes from its size–it has 14 partners and directors across its Perth and Sydney offices–and the diversity of practice areas, most notably mining, technology and infrastructure.
“That sectorisation of our business has been a big theme and a big part of us being able to grow our revenue so rapidly,” Mr Baston said.
Its mining practice, for instance, is led by Matt Weaver. With support from other partners and directors, Mr Weaver said Azure had a team of up to seven people focused on mining.
“We are certainly right up there in terms of the size of the mining team,” he said.
The entry of new firms to the Perth market has added to the competition for talent but Mr Baston said that was starting to change.
“Last year was a war for talent in investment banking and very difficult to hire anyone,” he said.
“That is changing quickly now; there are some big firms with hiring freezes on now.”
Macquarie Capital has a team of 15 people in Perth.
Director John Stanning emphasised Macquarie was Australia’s largest and most experienced investment bank, with a global network with strong research capability.
Unlike other global investment banks, Macquarie has maintained a large presence in Perth for more than 30 years.
“Bringing global perspectives to our clients is increasingly important,” Mr Stanning said.
Outlook
In terms of the market outlook, Macquarie’s Mr Owen–who jointly heads the Perth office with Mr Stanning–sees opportunities despite the sharp correction.
“While some commodities and equity valuations have declined, we continue to have a positive outlook,” he said.
Mr Owen said the underlying thematic of electrification and decarbonisation would require growth in the supply of clean energy metals, such as lithium and nickel.
“There is no doubt some investors have become more risk averse, however, we believe equity funding will continue to be available for quality projects and companies,” he said.
Mr Owen said Macquarie also expected continued M&A activity as companies sought opportunities to consolidate and to take advantage of cheaper equity valuations or companies that may have funding challenges.
“Cost inflation and labour availability will make certain projects more challenging and may mean that single development asset companies are better off being part of a larger entity with better access to both development expertise and capital,” he said.
Mr Rigg agrees the tighter equity markets will stimulate M&A activity, particularly for companies planning to develop projects.
“Two months ago, people would have just gone to the equity markets,” Mr Rigg said.
Now, he said, companies needed to evaluate alternatives.
Similarly, Mr McKenzie thinks there will be more opportunities around M&A, as bigger companies with strong balance sheets pursue opportunities.
“When public markets aren’t recognising value, the corporates tend to find it,” he said.
M&A flow
Macquarie Capital is already working on one of the biggest private M&A deals in WA for some years.
It has been mandated to sell the Buckeridge family’s building products company, BGC Group, which boasts annual revenue of about $1 billion.
“Opportunities to buy businesses such as BGC do not come up often,” Mr Owen said.
“As such, we have received strong interest from a range of strategic and private equity bidders.”
He said Macquarie expected to complete a transaction within the next six to nine months.
The rumoured bidders include private equity firm Oaktree Capital and trade players AdBri, Cement Australia (jointly owned by Holcim and Hanson) and Irish group CRH.
Another high-profile sale process under way is the state government’s TAB gaming business.
The sale process is led by east coast advisory firm Ad Astra, and the bidders are understood to include Tabcorp, Entain and a new venture established by gaming executive Matt Tripp and News Ltd.
Mr Baston said Azure continued to have a strong pipeline of work.
He agreed market conditions had become more challenging, with rising inflation and interest rates, volatile commodity prices and equity markets.
“Clearly any deal that needs an equity raising has just got a lot tougher,” he said.
Mr Baston believes Azure’s pure advisory model should serve it well, compared to brokers that are more reliant on completing capital raisings.
One of the big opportunities he sees is increased investment by private capital groups, which have struggled to complete deals because public equity markets have been so buoyant.
“They will be looking at this situation very opportunistically and we will be keen to help those sponsors deploy capital, where finally they are able to compete with the public markets,” Mr Baston said.
Mr Weaver said the relative lack of equity capital could be a driver of M&A activity. “There continues to be obvious combinations of assets and companies in the gold sector,” he said.
Like most other advisers, Mr Weaver highlighted the battery metals sector as the main growth opportunity.
He said the big win for Azure was the sale of Prospect Resources’ Arcadia lithium project in Zimbabwe.
Mr Weaver said Azure started working with Prospect in April last year before the lithium price took off.
“There was a bit of trepidation, with the jurisdictional risk and exactly what we were going to do with that asset,” he said.
It started as a funding engagement for Prospect, which was valued at just $50 million at the outset, but turned into an M&A engagement.
“As the year progressed, and the lithium price went on a run and more parties started worrying about lithium supply, we were inundated with inquiries, mainly from China,” Mr Weaver said.
In a deal announced last December, Prospect sold the project for $528 million.
(The December announcement means it is counted as a 2021 deal in the BN database.)
Mr Weaver said that was just the beginning, with multiple approvals needed.
“Ironically almost more work went into the transaction after the deal was signed,” he said.
Mr Weaver said Azure, which is part owned by French banking group Natixis, benefited from its capacity to work with other firms in the Natixis network; in this case, China-focused advisory firm Vermillion Partners.
“They helped with a lot of the engagement with Chinese groups knocking on the door and other stakeholders,” he said.
“It was a really good example of the benefit of the combined Natixis, Azure, Vermillion capability.”
Azure has also been active in the technology sector.
It advised Family Zone Cyber Safety on the $73 million purchase of Spanish company Qustodio, after advising Family Zone last year on its $142 million purchase of UK company Smoothwall.
“That is a very rare example of a WA-based company becoming a global business,” Azure director Olivia Boyne said.
Azure is also advising takeover target ResApp Health, which recently extracted a higher bid from Pfizer.
ECM deal flow
Mr McKenzie has characterised the shift in equity markets as moving to a more rational, normal period.
“Equity has been so easy for so long,” he said.
“It’s inevitable that tap is turned off, to a degree.”
He suspected some companies would have little choice but to batten down the hatches and reduce short-term expenditure.
However, he emphasised that quality deals could still get done.
Mr McKenzie cited Cooper Energy’s recent $244 million capital raising, to gain full ownership of the Orbost gas plant in Victoria, as a prime example.
“That’s the biggest deal I’ve seen in the past couple of months,” he said.
“It’s a high-quality, accretive earnings story in a defensive infrastructure play.
“If it’s a good deal, if it makes sense, if its quality you can still get them away.”
The Cooper Energy deal had three joint lead managers: Euroz Hartleys plus Canaccord Genuity and RBC Capital Markets.
This was a common theme, with companies signing up multiple broking firms to ensure the success of their capital raisings.
Boss Energy, for instance, had a particularly big team working on its $125 million placement.
Macquarie Capital, Aitken Murray Capital Partners and Canaccord were joint lead managers.
Bell Potter was co-lead manager, while Euroz Hartleys and Sprott were co-managers.
Sternship Advisers was financial adviser and Thomson Geer was legal adviser.
The biggest IPO for the half year– Leo Lithium’s $100 million deal–also had three JLMs: Canaccord, Macquarie and Euroz Hartleys.
Argonaut’s main ECM deals included being a joint lead manager with Sprott on a $75 million placement for Brazil-focused Centaurus, which Mr Rigg said was the largest capital raising in the firm’s 20-year history.
He added that the Centaurus deal wasn’t just about raising the money; the company has also been focused on building the quality of its share register to help it secure more funds for mine development in future.
Argonaut also completed a $55 million placement for Predictive Discovery at the end of May, with Mr Rigg saying this was its “last meaty gold raise before the market fell off a cliff”.
Another notable deal was a $65 million block trade in Berkeley Energia, which represented 41 per cent of the company’s issued capital.
Mr Rigg said Argonaut had a debt advisory business that until recent weeks had not been very active.
“It’s been easy to raise equity at a good price, so people haven’t needed to use anywhere as much debt,” he said. Its debt business included arranging short-term bridge loans.
“We haven’t activated a bridge loan in over a year, but that business is coming back to life,” Mr Rigg said.
“There is a lot of debt available in the market, so we are really positive about that space.”
He said one client was planning an IPO but had held that back and instead would issue an $18 million convertible note.
He also noted that PCF specialised in asset sales.
“That is another way to raise money,” Mr Rigg told Business News.
“Their best market is when the equity markets are shut.”
EY director, mergers & acquisitions Peter Panatsos said he expected businesses to seek alternative means of accessing capital, such as strategic partnerships or joint ventures, private equity investments and other capital structures.
“While the pricing of capital becomes challenging with volatile equity markets and rising interest rates, we have found that, working closely with business owners, we have been able to still achieve favourable outcomes for them and their businesses,” Mr Panatsos said.
He also expects to see a lot more deals from private equity, which has a lot of “dry powder”.
“With volatile equity markets we also see an opportunity for listed public companies to be privatised,” Mr Panatsos said.
“Over the past 12 months we have seen transactions of this nature, with ASX-listed companies Empired and Valmec being purchased by private businesses.
“Discussions with interstate private equity firms have also revealed an interest in investing in WA companies to expand the geographic footprint of existing platforms.
