Fertile ground for M&A but bidders are still circling for carrion

Takeovers are being delayed and companies are preserving their cash until after markets settle down before committing to new acquisitions.

This week oil producer Bass Oil (ASX:BAS) said it would jump on acquisitions but only after oil prices had settled down

Competitive bids for Village Roadshow (ASX:VRL) and Caltex (ASX:CTX) appear to have stalled.

The prospective buyer of Oliver’s Real Food (ASX:OLI) “has been considering, and is continuing to consider, its position” although the takeover is still on, while proposed takeovers of Australian Unity Office Fund and Abano Healthcare by funds and private equity have been cancelled due to changes caused by COVID-19 shutdowns.

Ready, set…

But most Australian companies are not heavily in debt and have healthy balance sheets, unlike in the global financial crisis, and private equity and super funds can access billions in cash, and market conditions make bargain hunting attractive, say Gilbert & Tobin lawyers Neil Pathak and Lisa d’Oliveyra.

“That said, the economic and social uncertainty and the likely prospect of a recession make proceeding with acquisition and investment opportunities a tough call. However, fortune often favours the brave,” they wrote in a note.

Lessons from the global financial crisis may also play on potential acquirers’ minds, as some might consider — like many retail investors — that they didn’t jump as deeply or as quickly into opportunities as they should have.

Cashed up companies will be able to reject opportunistic bids, as Healius (ASX:HLS) did of Partners Group’s $2.1bn offer and Warrego Energy (ASX:WGO) did of its West Erregulla partner Strike’s (ASX:STX) all-scrip offer.

But shareholders may not be as patient with companies that have short-term cash needs.

Rules tilted to local deals

ASIC and the ASX have relaxed capital raising rules to enable companies in urgent need of cash to fundraise quickly and creatively, but the federal government has also tightened rules around foreign investments.

The government said last Sunday the threshold for approval for foreign investments had fallen to zero, in order to protect normally viable Australian businesses from opportunistic foreign bids without state oversight.

Pathak and d’Oliveyra say this will benefit cashed up, fast moving Australian acquirers if the Foreign Investment Review Board (FIRB) becomes bogged down in applications.

“We’re starting to see some smaller deals fall over as the cost and time of going through the FIRB process makes the transaction too difficult at these times,” they said.