Market update – Australia March 2014
Transcription
Market update – Australia March 2014
Market update – Australia March 2014 Overview The Australian economy has been in a relatively subdued state over the past 12 months, with little M&A activity occurring at one end, and little distress at the other. Most people sat in the middle, walking on eggshells until a definitive economic direction could be determined. More recently we have started to see some signs of activity in the M&A space, IPOs and an increasing preparedness by clients to restructure. After surviving the post-Lehman era predominantly off the back of a buoyant resources sector, parts of the Australian economy are emerging as still requiring repair. Some are now asking whether a failure to take our medicine with the rest of the world will ultimately cause us more harm than good. Industrial relations issues have come to the fore with the exit from automotive manufacturing in Australia by Ford, General Motors and Toyota and more recently job cuts at Qantas. There are sure to be movements in this space from legislators. It would be wrong though to compare Australian industrial relations to our Asian neighbours, albeit they remain an important influence in the transformation of the Australian economy. What is of concern is our current inability to effectively compete with other developed markets in certain sectors because of our industrial relations environment, in particular wage rates. Regulatory risk Large corporates and investors have delayed investment decisions due to uncertainty in government policy. The election of the Coalition Government in late 2013 is expected to lead to the withdrawal of the mining and carbon taxes and provide more stability in decision making. Unemployment With comparatively high labour costs, we are seeing many Australian businesses unable to generate sufficient returns to attract capital. Herein lies the real predicament for Australia. Unlike many other developed countries, Australia is a net importer of foreign capital, to the tune of $0.83 trillion. As a consequence, our economy is unable to replicate the injection of government and corporate capital support achieved in other countries such as Japan. Consequently, unless a restructure in certain sectors take place, we are likely to hit a capital wall. With Australia’s unemployment rate at 6% we have benefited from the resources sector which absorbed losses from other ailing industries. As issues in the resources sector have emerged, large numbers of employees have been retrenched. When combined with ongoing employee reductions in the manufacturing sector, we expect the unemployment rate to break the 35 year average of 6.93% in the coming 12 months. Of course, with shortages of capital in an already capital deficient local market, investors are expected to become more prudent in how they deploy that capital. With combined higher unemployment and interest rates, we predict a period of distress, and corresponding opportunities for smarter operators, in the next 12 to 18 months. Australian dollar PPB Advisory’s depth of capability, unparalleled network and access to deal flow make us well-placed to help clients navigate these challenges and capitalise on the opportunities that may be presented. The Australian dollar at circa USD0.89 has remained resilient despite pressures from a weakening commodity lead boom, and a gradual recovery in global economic conditions. Whilst there remains downside risk to the Australian dollar, this has not come quickly enough to attract sufficient capital to the agricultural and ailing manufacturing sectors. Agribusiness Resources With a positive global and local outlook for Australasian agribusiness, alternative sources of equity capital are needed to inject liquidity into the domestic market and enable industry participants to capitalise on opportunities presented by growing demand in global markets. Australia has potential to exceed current capacity to feed an extra 40 million people and be a surplus food producer beyond the 2050 peak population forecasts. Superior returns in agriculture are characterised by yield and commodity sale price. Scale, technology, low overheads and input prices also result in more attractive returns. Current structural challenges in agribusiness include over-leveraging, poor succession planning and lagging productivity. A lack of secondary investment in agriculture will continue to pose difficulties for exit strategies or traditional restructuring, not just for investors but also for financiers and agribusinesses. The Government’s decision at the end of November 2013 to not allow Archer Daniels Midland’s proposed acquisition of Graincorp poses further liquidity challenges for agricultural assets if ultimately the discretionary ‘public interest’ rationale is given precedence and weight. Increasingly we are called on to optimise agribusiness assets through recapitalisation from alternative sources, both domestic and foreign. PPB Advisory has an agribusiness team of 25 specialists who currently directly manage more than $300 million of agricultural assets around Australia (covering more than one million hectares) and also advise financiers, investors and agribusinesses on another $400 million of assets. Debt and equity markets for mining and mining services companies have largely been closed for a protracted period of 18-24 months, and remain so. Companies with significant exploration phase exposure are most at risk. These companies include: • surface drilling manufacturers and operators • analytical laboratories • remote survey operators. Mining companies are cutting costs by suspending new development projects and bringing mining contracts ‘in house’. This has led to an oversupply of mining contractors and overly-competitive pricing on tenders. A significant number of these mining contractors are poorly diversified with respect to commodity type and location. This is a major risk given the immediate impact a ‘termination for convenience’ can have on a company’s cash flow. The outlook for iron ore remains positive, with the long term outlook of $100-120/t (Free On Board) Australia being sufficient to cover all Australian iron ore producers’ costs. The outlook for thermal coal and coking coal is not so good. Significant expansion over the past 5 years has seen an increase in export volumes not only from Australia, but also from the US and Indonesia. This increase has been at historically low prices and there is no expectation that prices will increase as production continues at record levels. PPB Advisory’s resources and infrastructure team is well placed to help companies navigate these challenges, having been involved as project managers, bid managers, independent experts, investment advisors and dispute consultants on numerous resources and infrastructure projects over the past 20 years. Breadth of recent experience Advised on a scheme arrangement for the Board to ensure the AUD3.4b debt was successfully converted to equity very quickly. Independent experts to the scheme, with a substantial report filed and accepted by the Court, including the provision of valuation advice to the Board. Receivership of BrisConnections Group, owner and operator of AirportlinkM7, a major toll road in Brisbane. Working with a global syndicate of banks (holding debt of approx. $3.3b) to develop monetisation options and maintaining role of receivers and managers to ensure the business is strengthened by efficient and cost-effective operations. Adviser to Ludowici in relation to its takeover defence against competing offers from FLSmidth and Weir Group. Ludowici is a leading mining consumables business. Adviser to Energy Industries Superannuation Scheme on the sale of FuturePlus, a superannuation administration services business, to Link Market Services. Engaged to wind down the Australian arm of this US investment bank with assets of more than $430m. The matter involved significant cross border insolvency issues, including disputes in foreign jurisdictions, as well as management of complex financial securities, CDOs and credit default swaps. Real estate Auto In the distressed markets, we have seen the establishment of a secondary funding market taking prominence in the buyout of distressed assets from traditional banks across Australia. These financiers have recapitalised the distressed market particularly in Queensland. Australia’s automotive industry is set for a period of atrophy following the announcements from Ford, General Motors and Toyota that they will be withdrawing manufacturing operations permanently from Australia between 2016 and 2017. In the premium office space across Australia’s capital cities, 2013 was the most active year in the commercial CBD market since 2008. Sales activity and prices for A-grade assets (particularly in Sydney and Melbourne) were driven by strong competition between local and offshore institutional investors (predominantly from Asia). We anticipate a softening in 2014 due to contractions in tenancy demand. Nationally, vacancy rates are at their highest levels and are expected to have reached their peak. In contrast, the December quarter 2013 saw more than $8 billion injected into the office market from domestic and foreign investors, spread across Sydney, Brisbane, Melbourne and Perth. Up to 200 tier 1 suppliers to the automotive industry will be directly affected by these announcements. As a consequence, there will be many restructuring opportunities in the industry over the next two to three years as local suppliers look to diversify or invest in the Asian economy. We are seeing a strong resurgence in the residential market, particularly across New South Wales, Victoria and Queensland. For example, the Victorian Government has just fast-tracked planning approvals on five apartment towers (2,000+ apartments) in inner city Melbourne and surrounds. After five challenging years, the Australian real estate sector is poised for strong growth and investment activity, predominantly focused in Sydney in the short to medium term. PPB Advisory’s trans-Tasman team of advisers provides specialised services for clients in the real estate and construction sector including strategic real estate advice, restructuring, transaction management and structured real estate finance. Recent experience includes managing the completion of works on a $600 million residential and marina development, acting as the lead project adviser to the lender on a $100 million mixed use commercial, residential and marina development, advising a banking syndicate in relation to project monitoring, marketing, sales and retail leasing for a prominent residential tower on the Gold Coast in Australia, and developing and driving the divestment strategy of the property portfolio of a major Australian not-for-profit organisation. Structured development project Receivership of RMWAH and a number of its subsidiaries including cattle farming stations and a farm supplying 80% of the domestic organic free-range poultry market. Applying its hands-on agribusiness expertise PPB Advisory increased production and improved margins and profitability prior to sale of the assets to optimise returns. Advising the lenders of a consortium-managed $400m public-private partnership, following concerns regarding construction delays and solvency issues with the builder. We continue to lead negotiations with the consortium members to assist in assessing the project’s ongoing viability. The Federation of Automotive Products Manufacturers predicts a total of 50,000 direct jobs will be affected or at risk from the withdrawal. As a consequence, State and Federal Government are looking at options to assist businesses to diversify and transition. PPB Advisory is the only professional services firm at the Premier’s Automotive Industry Roundtable which has been formed to discuss how best to address the issues facing the industry. The Roundtable consists of representatives from the manufacturers, unions, component suppliers, industry bodies and government (South Australia, Victoria and Commonwealth). PPB Advisory is working with various stakeholders to determine what funding may be available to assist businesses to meet these challenging times. Given our role in many of the discussions currently taking place, we are well placed to assist businesses address the challenges presented by these changes and access any assistance and transition programs as they are established. Project Rail Appointed by NSW Government to advise on the restructuring of a major infrastructure initiative with assets > $2b. Middle Eastern oil exploration Engaged to provide an independent assessment of the fair value of an oil and gas exploration and development project in the Middle East with an estimated annual production of 7.2m bbls, following the acquisition by an Australian registered company of a controlling interest in a Middle Eastern company operating in the oil and gas industry. Global pharma business valuation Reviewing a valuation report produced by a Big 4 accounting firm in New York which was used to allocate value to the global generics business of a German based pharmaceutical company, following a US$7.0b takeover by a US based pharmaceutical giant. PPB Advisory is one of Australasia’s leading professional advisory firms. We have been providing strategic, operational and financial advice to companies, government bodies and financial institutions for 30 years. From complex business problems, involving multiple stakeholders and jurisdictions, to individual business challenges, PPB Advisory is trusted by clients to deliver successful outcomes, skillfully and sensitively. Contacts at INSOL Hong Kong 2014 Ian Carson Insol 2014 Conference Co-Chair t: +61 3 9269 4207 m: +61 417 009 925 e: [email protected] Mark Robinson Vice President and Treasurer of INSOL International t: +61 2 8116 3020 m: +61 419 217 732 e: [email protected] Our services David McEvoy Partner • Restructuring and turnarounds t: +61 3 9269 4135 m: +61 408 016 517 e: [email protected] • Corporate advisory • Forensic services • Insolvency services Industry specialisation • • • • • • • • • • • Agribusiness Automotive Education Financial services Health and aged care Hospitality, tourism and leisure Manufacturing Resources Infrastructure Real estate and construction Retail Stephen Longley Partner t: +61 3 9269 4136 m: +61 414 921 241 e: [email protected] Marcus Ayres Partner t: +61 2 8116 3295 m: +61 414 226 224 e: [email protected] www.ppbadvisory.com Important: This information is not advice. Readers should not act solely on the basis of information contained in this document. We recommend that formal or independent advice be sought before acting in the areas covered herein. 00665PPB. March 2014. Sydney I Melbourne I Brisbane I Perth I Auckland