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Rebecca Archer
Welcome back to Beyond the Numbers with Grant Thornton – a podcast exploring marketplace and business trends.
I’m Rebecca Archer. Grant Thornton has just released the 10th Edition of Dealtracker reporting insights around the Australian deal market including volumes, the buyers and the prices paid. While there has been reduced activity due to external economic factors, there remains strong interest in Industrials and IT. So, what else has the latest report revealed?
We’re thrilled to have Jannaya James, Partner in Corporate Finance at Grant Thornton on the show to explain the current landscape and the view ahead for the deals landscape in Australia.
Welcome, Jannaya!
Jannaya James
Thanks Rebecca, and thanks for having me here.
Rebecca Archer
Now before we begin, I wonder if you could explain your role and how you help clients at Grant Thornton.
Jannaya James
As you mentioned, I am a partner of Grant Thornton's corporate finance practice. Our corporate finance team supports our clients through the full transaction cycle. So, between acting as a trusted advisor on a buy or sell side through to the deal facilitation, undertaking due diligence and also providing valuations.
I joined around six years ago, and I specialise in providing the more commercial and insightful valuations for a range of purposes, which includes to support transactions, but also independent expert reports, financial reporting and also tax reasons.
Rebecca Archer
Great. I can only imagine how busy you are by the sound of all of that.
Jannaya James
Always.
Rebecca Archer
Now you have just launched the 10th edition of Dealtracker. It covers transactions during the 18-month period from 1 July 2023 to 31 December 2024. Talk us through some of those findings.
Jannaya James
As you mentioned, it is our 10th Edition of the Dealtracker, and as a result, we've got over 15 years' worth of data on deals and M&A trends that we can draw upon when we look at the deals in the current period, but when we consider those deals that have actually occurred during that 18 month period, it is pretty helpful to remind ourselves of what was happening over that period. So, if you think about it, at the start of the period, so we were in 1 July 2023, the RBA was still increasing interest rates and they reached their peak in November 2023. That level of interest rates was sustained over that period, and you know, as we all know, over the last 18 months in particular, there's been constant discussion around the cost-of-living pressures and that's been a key focus of the economy. On a global scale, we've had those continued conflicts in Europe and the Middle East and there's been significant economic uncertainty across the globe, and as we all know, at the back half of last year we saw a new government in the US.
With that sort of context in mind, when we look to the deals in the Australian market, the number of deals was actually pretty stable. It was slightly down on the previous period, but overall, I'd call it a stable period in terms of the number of deals. The previous Dealtracker had ended, you know, with a low number of deals and then we saw basically a rebound in the back half of 2023. Then deals remained steady for the remainder of 2024, with a slight step down again at the end of 2024.
Overall, private equity buyers rebounded. In the prior period, they hadn't been particularly active, but they almost doubled in the number of deals that they did during that period. They have been sitting on a large amount of capital to deploy, which was also compounded by, you know, quite a few successful exits and therefore they had capital to deploy, and there was a good amount of quality investment opportunities, particularly in the IT sector, which was underpinned by things like enterprise software and AI.
So, in terms of sectors, the IT and the industrial sectors remain pretty strong and over the 15 years they've always been the key sectors that we see to be the most active. Obviously, trend towards innovation and digitisation continued and AI is becoming, you know, really the topic of the day from a tech point of view, but we can't ignore the fact that industrials still remain the biggest contributor to deal flow. When I talk about industrials, it is a pretty broad space, and it does include things like services, and what we saw is a lot of deals in particularly the engineering services, as we can see the investment that there has been in particular infrastructure around Australia.
The other area we saw was quite strong was – particularly from international buyers – industrial products, where industrial companies were looking to secure their supply chains. The only other thing that I probably want to mention is on the flip side, we did see a decline in the consumer discretionary deals that they've basically halved over the period, but I think, you know, as I mentioned earlier, there has been those cost-of-living pressures and I suspect that that's placed quite a dampener on.
Rebecca Archer
That sector and I believe the overall deal multiple was up on the prior Dealtracker. Are there any sectors that have driven the strong multiples in particular?
Jannaya James
Yeah, so just, just to give you a bit of context, when we talk about deal multiples, a transaction is often priced by a multiple of its earnings, and so what we've looked at as part of this report is the median deal multiples by sector, by size, et cetera, that we've seen, and as you rightly mentioned, the overall deal multiple was 8.3 times earnings, which was up on the prior multiple of 8 and above the longer term average, that's also 8.
Basically, this was driven by increases in multiples across a range of sectors, but they included consumer discretionary, despite the lower number of deals that there were more quality deals going on, consumer staples and materials, but they were also, which is a little bit counterintuitive, offset by declines in IT and industrial sector. So, whilst they were the highest number of deals, they were at lower multiples.
So if I go to IT in particular, it is down from the prior periods, but over the last probably three or four Dealtrackers we've seen those IT multiples really start to spike, and so, they are coming off, but the important thing to note with IT businesses is that often they aren't particularly profitable, and so, a lot of them are actually transacted on revenue multiples, and so therefore you are going to see some very high multiples in that sector.
I think the other thing to note when we talk about the multiples is that there is a number of factors, not just the industry that drives the multiples. So, for example, the size is a key determinant of the multiples, and what we typically see is the multiples increase by size as the transaction size increases, and there were quite a few mega deals in that period. So, particularly in the resources space where there was a couple of quite… quite large deals which were lifting that materials multiple up.
Rebecca Archer
Where does Australia sit on the global scale?
Jannaya James
So, what we've found is that Australia does remain really attractive to international buyers, and that's despite the headwinds that we've seen from those global geopolitical issues, that the global market, economic market volatility and also, you know, increased regulatory scrutiny locally. Cross border deals accounted for around…a bit…actually over a third of deals, which I guess continues to demonstrate our economic resilience.
The US and Canada in particular dominated the inbound buyers, and the theme continues that they've been looking to the IT and industrials sector. IT in particular, there's scalability opportunities, you know, through the large US markets. European buyers also focused on industrial products in the effort to capture – basically secure supply chain – and capture opportunities in areas like resources, renewable energy and manufacturing.
The other thing to note around those inbound buyers, they do have deeper pockets and what they've looked at is scale targets – where compared to domestic buyers, which were more dominated by the mid-market. So, the median deal multiple, sorry – median deal value – for international buyers was about half a billion dollars, where it's just under $100m for domestic buyers.
Rebecca Archer
And Jannaya, why has the IPO market been at its lowest in years and which sectors have shown any kind of resilience?
Jannaya James
Obviously, the continued theme around geopolitical events and that general global economic market uncertainty made the public markets a pretty challenging environment to raise capital, with the capital raising activity in the equity markets about 60 per cent below the already subdued levels of the prior period, but what was interesting – what we did see – was whilst there was a fewer number of IPOs over that period, they were all at a more substantial size.
So, it was a case of quality over quantity. To a certain extent, there was the Guzman and Gomez IPO, which raised about $335m. That was a highly successful IPO where share price returns in its first three months got as high as 90 per cent, and so, what that did, is that there was a little bit of a buzz in confidence towards the back end of 2024. I don't expect that to continue given the current market environment.
Rebecca Archer
That's interesting that they did so well, given we're in a market where cost-of-living pressures are occurring and you wouldn't think necessarily there'd be a lot of buy in there…
Jannaya James
Yeah, it was an interesting transaction. I think what it does go to show is a really strong business model and a strong brand does have a lot of appetite, and so, I think that's what really led that success, but also got to remember there was a shortage of IPOs, so there wasn't many opportunities for both, you know, institutional buyers as well as sort of the mum and dad investors to be able to actually invest in new listings.
Rebecca Archer
Yeah, it's good to have that context, definitely. Look, I'd love to know what your overall thoughts are on the current market and these findings that we're seeing, and if you've got sort of any sense of where things will go, perhaps from here?
Jannaya James
It is a tough question to answer.
When we started the year, there was a fair bit of optimism around the deal markets, but the last few weeks have kind of put the brakes on that. It's probably too early to say whether the, you know, things like the impacts of the tariffs in the US and the associated market volatility will continue, but that is creating some pretty significant headwinds, but we believe there's still quite a lot of capital to deploy and what I think will happen is that the current market volatility may slow deals down in the short term, but the Australian market – particularly the mid-market – is quite resilient and on the plus, the FX rates make Australia a little bit more attractive for investment.
As I mentioned before, the IPO market might struggle, particularly in the short term with the talk of bear markets and the current market volume volatility, but, but it is actually really hard to predict what the next year or two will look like until, until the markets really settle down.
Rebecca Archer
Are there any trends that you're seeing or that you've seen in the last 18 months or so that you expect are here to stay for a little while? Or again, is it just so difficult when you've got global share market volatility and geopolitical issues that are going on to sort of be able to, to sort of pin something down and say, yeah, look, that's going to be a longer-term occurrence than we were maybe predicting.
Jannaya James
What we found in this Dealtracker compared to the prior deal tracker, it was very much a steady state, but it wasn't, it was by no means a boom, and so, I think where we'll sit is this sort of normalised level for maybe another the next 18 months or to two years. There will be peaks and troughs within that. I suspect it will still continue to remain really strong. It's always been known that Australia is a great source of innovation and there are huge opportunities for really strong technology business to get deployed in international markets. So, I think those sectors will continue to be strong. Obviously, reliance on global trade may change the dynamics within it and it may be a shuffle around, but I think industrials will continue to remain a key part of our growth.
Rebecca Archer
The current situation with the tariffs that have been announced by the US administration… I'm wondering if that will potentially have any impact on the deals that happen within different regions that Australia will start to be able to tap into certain markets or regions that haven't really existed or haven't been very prominent up until this point, like perhaps that that will force change to occur in areas that we haven't really sort of had a spotlight on prior to now.
Jannaya James
I think it will. What we will see is a movement. I don't think there'll be increases in volume or otherwise. Europe has always been a strong investor in the in the local market and I suspect that will continue. Asia is surprisingly not as high as the US and Europe, but I suspect moving forward we will see that that continue to grow as a proportion of total deals.
Again, too hard to say you know what the impacts of those tariffs will be and ultimately where it lands, but I suspect we will start to see investment coming into Australia from companies that may have previously looked to the US.
Rebecca Archer
I'm wondering what impact the upcoming federal election could have on activity or confidence. Usually, we do see with periods of uncertainty when we're going to the polls that businesses tend to hit the brakes a little bit on any sort of big decisions. Does that usually bear out when we're looking at the results?
Jannaya James
Look, it only it tends to appear in really short-term chunks unless that a change of government results in a lot of regulatory change. We don't tend to see that or a lot of economic change as well. We don't tend to see that having a big impact on deals. Companies that are more exposed to government, defence and things like that, they do tend to pause.
Obviously, there's that block for companies to be able to, you know, to start new work with government departments do tend to be put on hold during the election period, but overall, it tends to be only a short term hesitation, but depending on if there's, you know, key policies in particular industries that will be affected, then you know, certain industries may be impacted.
Rebecca Archer
Well, Janaya, thank you so much for being part of today's episode. For those people listening who might want to connect and delve deeper into your work and maybe even explore potential ways that you could assist them. What's the best way for them to reach out and find you?
Jannaya James
I can be reached on LinkedIn or through the Grant Thornton Australia website.
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