An Appetite For Debt Has Returned To A Hungry Corporate Australia: EY

Lunch at the ‘Salon Prive’ luxury and supercar event held at the Hurlingham Club in the UK. Dan Kitwood/Getty Images

The essential ingredients for a lift in mergers and acquisition activity are back for Australasian corporates, according to EY’s latest six-monthly Australasian Capital Confidence Barometer .

The Barometer shows the appetite for debt is returning, confidence in corporate earnings is up and the number of companies confident about the economic outlook is at a five-year high.

The report is based on a global survey of more than 1,600 executives in 54 countries, including 136 in Australia and New Zealand.

EY Oceania Transaction Advisory Services Leader, Graeme Browning, says the findings show the essential ingredients for a lift in M&A activity are there and that buyers and sellers alike should be confident about being able to get deals done.

“Credit is available, corporate appetite for debt is returning and respondents expect the valuation gap to narrow – we haven’t seen all these ingredients come together in a long time,” he says.

The number of local corporates planning an acquisition in the next 12 months remains steady at 32%, compared to 34% six months ago and 24% a year ago.

At the same time, 57% are confident about the number of acquisition opportunities, almost double that of 12 months ago.

“Companies are now more likely to use debt to finance deals. The number of companies looking to use debt as their primary source for deal financing has more than doubled from 12 months ago,” he says.

“Gearing is expected to rise but to remain well within acceptable levels.”

However while confidence is back, companies locally and globally are retaining a focus on cost and operational efficiency.

“The prevailing attitude is one of disciplined optimism. M&A will be selective, strategic and disciplined. Companies will use M&A as a means to outperform their peers,” he says.

“For the first time since the GFC, the ingredients are there to support a robust transaction market. M&A activity has already started at the top end and this will progressively expand to mid-sized deals.”

Two thirds (66%) of Australasian executives see the local economy improving, a five-year high, up from a low of 41% in October 2012. Correspondingly, 70% believe the global economy is also improving.

The Barometer also shows more Australasian companies are confident across key financial indicators: corporate earnings (77% up from 46%); credit availability (71%, up from 46%); equity valuations (63% up from 25%) and short-term market stability (61%, up from 20%).

Deal metrics are also improving, meaning larger deals can be expected.

Confidence in specific deal metrics has grown strongly in the past six months with more confident in the number of acquisition opportunities (57% up from 31%); the quality of acquisition opportunities (37% up from 27%); and the likelihood of closing acquisitions (31% up from 20%).

Deals are also expected to get bigger. About a quarter (26%) now expect deal size in the next 12 months to be greater than US $500 million, more than twice as many as six months ago (12%) and three times as many as a year ago (8%).

The preferred overseas investment destinations for local companies are all close to home ,with China and India and their growing middle-income populations the top two, followed by near neighbours Malaysia, Singapore and Thailand.

For global companies, China and India also featured in the top five investment destinations, with the US, UK and Germany rounding out the list.

This chart shows responses by Australian and New Zealand companies:

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