Mergers & Acquisitions - Annual Mid-Market Review

Mergers & Acquisitions Australian Mid-market 2014

Independent member of Nexia International

Not always headline grabbing, transactions under $200m form the life blood of corporate activity in Australia with transactions of this size representing over

90% of activity over the last two years.

Introduction It is with pleasure Nexia presents the first annual mid-market M&A review. In preparing this review we looked at transactions with an implied enterprise value of less than $200m over the last two years. In our analysis we considered the level of activity, target industries, foreign investment and private company EBITDA multiples. We have compiled the Nexia mid-market EBITDA multiple analysis (Nexia MM index) which provides an indication of private company pricing relative to ASX indices.

Overall, the volume of activity was flat between 2013 and 2014, although there was a decline in mid-market transactions in the last two quarters of 2014. This contrasts the perception in the media regarding increased M&A activity, which reflects a marked increase in the aggregate value of larger transactions (greater than $200m) in the last quarter of 2014.

Overseas acquirers have also stepped out of the market in 2014 with a 14% decline in the number of transactions, potentially due to the high Australian dollar. Interestingly, despite the perception of significant Chinese investment in Australia, China only represents 1% of acquisitions of Australian companies. Although in the last year China has moved into the top 5 of investors in Australian mid-market companies as Chinese investment increases.

The decline in mining activity is having an impact on mid-market M&A activity with an 18% reduction in the number of transactions in the materials sector.

Despite the above, there are promising signs for the near term.

Organic growth is difficult and therefore for those companies wanting to grow, an acquisition strategy has to be part of the picture. The overall market sentiment from increased IPO activity and larger transactions should also flow through to midmarket activity.

Valuations are improving with a 59% increase in private company EBITDA multiples in Q4 2014 over the prior year, as indicated by the Nexia MM index, providing an incentive for sellers.

Information technology is a growing sector with a significant growth in activity moving the sector to the third largest in Australia. Activity in the information technology sector is now higher than the materials sector which includes mining companies. US and UK Companies were significant investors in information technology companies, taking these companies global to service a larger market.

As competition increases and the global market shrinks, it is important that companies carefully plan and analyse all aspects of their overall strategy.

We hope you find our review informative, and we welcome the opportunity to discuss with you any challenges or opportunities your company may be facing.

Brent Goldman Partner Nexia Australia - Sydney

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Number of transactions and disclosed transaction values by quarter 350

$3.5bn

300

$3.0bn

250

$2.5bn

200

$2.0bn

150

$1.5bn

100

$1.0bn

50

$0.5bn

0

Q1

Q2

Q4

$0.0bn

Number of transactions 2013 (LHS)

Transactions value 2013 (RHS)

Number of transactions 2014 (LHS)

Transactions value 2014 (RHS)

Transaction volumes have been constant year on year with a sharp decline in the last two quarters of 2014 The overall number of transactions less than $200m was the same in both 2013 and 2014 at 825. However, there was a decline in the last two quarters of 2014 against the prior year and most noticeably in Q4. The decline was significant in the overall level of transaction values, which are generally only disclosed for the larger deals, highlighting that the majority of deals in the quarter were small.

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Q3

Mergers & Acquisitions

The trends, although consistent with the feeling on the ground for the first six-months of corporate activity being difficult, contrasts with sentiment in the media around a boom in M&A on the way. The media sentiment generally reflects larger transactions which are consistent in volume but show a 252% increase in the value of transactions to $6.2bn. This sentiment should work its way to the mid-market and reap benefits for the latter half of the calendar year.

What is telling is that the average period to complete a transaction from the date that it is announced has reduced significantly from around 81 days to 45 days in the last quarter of the year.

Number of transactions by industry sector Consumer Discretionary Industrials Information Technology Materials

2014

Financials

2013

Energy Consumer Staples Healthcare Utilities Telecommunication Services

50

Information technology is now the third most active sector overtaking materials Information technology and financials are the only sectors that have grown in the last year with a 34% and 68% growth respectively. Significant declines have been seen in the previous three top sectors; consumer discretionary, industrials and materials of 16% and in the materials sector 18%.

100

150

200

Information technology is now the third most active sector in the mid-market, up one position from the prior year overtaking the natural resources related sector of materials. The average enterprise value of information technology companies acquired has fallen from $28m to $19m suggesting that investors are getting into technology companies at an earlier stage of their life cycle.

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US and UK remain the top acquirers in Australia with China representing 1% of all transactions.

The United States and UK remain the biggest investors in Australia, although there was a decrease in the number of US acquirers in the last financial year.

Information technology was a major sector for international acquirers. It was most significant for US acquirers and second most significant for UK acquirers. The growth in New Zealand acquirers was also driven by acquisitions in the information technology space.

Other significant sectors for overseas acquirers are consumer discretionary and industrials. Materials were a significant sector in 2013 for overseas acquirers; however, activity in these sectors decreased significantly (52%) in 2014.

Although growing, Chinese acquirers only represent 1% of the total acquisitions in Australia. Growth sectors for their investment included energy (which was 33% of all Chinese acquisitions), utilities, consumer staples and materials.

60

2014 2013 50

Valuations are improving for mid-market transactions.

18.0x 16.0x

14.4x 13.1x

14.0x 12.0x 10.0x

11.9x 12.4x 11.2x

13.2x

14.8x

15.8x

15.8x

13.1x

13.9x

14.0x

13.2x 12.1x

13.1x

13.0x

11.3x

10.9x

10.4x

8.0x

8.8x 7.6x

6.0x

6.4x

4.0x

7.0x

7.4x

2.0x 0.0x Q1

Q2

Q3

Q4

Q1

2013

Nexia MM index

Q2

Q3

Q4

2014

ASX All Ordinaries

ASX Small Industries

The Nexia MM index analysis above is a simple analysis of EBITDA for acquisitions of unlisted mid-market companies where the data is reported. It represents an indicative trend in the overall market rather than implying the multiple that should be considered for a particular company.

The Nexia MM index is limited by a number of factors including, that there are a small number of transactions in Australia where the data is available. As a result, the average EBITDA multiple can be significantly influenced by an individual transaction where the specific characteristics of the transaction may have resulted in a higher or lower multiple than would otherwise be achieved and is also affected by the actual valuation methodology applied by an acquirer. To minimise the impact we have calculated the index using a rolling annual EBITDA multiple.

40

30

In considering the data against the listed company comparatives, the Nexia MM index is based on acquisitions and therefore implicitly reflects a control premium whereas the multiple for the listed companies reflects a portfolio interest.

20

The range in identified EBITDA multiples was significant at 0.5x to 20.7x in 2013 and 1.8x to 64.0x in 2014.

There has been an increase across the board in respect of EBITDA multiples. Although ASX All Ordinaries companies have remained relatively constant, there has been a pronounced improvement in ASX Small Companies with the average EBITDA multiple now higher than the ASX All Ordinaries.

10

In line with this, there has been a significant improvement in the Nexia MM index multiple. The improvement in the multiple partially reflects the growth in information technology acquisitions which in the mid-market will generally have higher growth rate expectations and therefore related multiples.

As an overall observation, the growth in the Nexia MM index highlights an improvement in potential valuations for midmarket companies.

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Mergers & Acquisitions

Methodology

About Nexia

The analysis was prepared based on data sourced from S&P Capital IQ. Data analysed is for completed transactions, with a primary geographic location in Australia and an implied enterprise value of less than $200 million from 1 July 2012 to 30 June 2014. Transactions where no value was disclosed have been included in the volume data with the implicit assumption that these would relate to smaller transactions and therefore meet the criteria.

Nexia Australia represents a network of solutions focused accountancy and consultancy firms in Australia which is supported by global links to Nexia International. We offer a full service accounting solution with experienced partners and an enthusiastic team.

Overall 1,650 transactions are included within the data analysed. Transaction values were disclosed for 820 (50%) of these transactions with an aggregated transaction value of $20.8 billion. 68 transactions (4%) had sufficient data disclosed to calculate the EBITDA multiples.

In respect of our methodology we note that this is a simple analysis to give an overview of the market and potential movements. It should in no way be seen as a substitute for a rigorous review of any potential opportunity that you may be considering and you should seek appropriate professional advice for your circumstances.

We note that the source data is limited by the amount of information that is made public and captured in the S&P Capital IQ database. In particular, due to the limited number of data points in respect of EBITDA multiples, the analysis can be heavily influenced by a single transaction which reflects that transaction’s particular circumstances rather than be a reflection of the market as a whole.

Analysis of all transactions, including sector and buyer location, is based on S&P Capital IQ classifications.

Nexia Australia services clients from small to medium enterprises, large private company groups, not-for-profit entities, subsidiaries of international companies, publicly listed companies and high net worth individuals and includes market leaders in many sectors of Australian business.

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The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Australia. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Representative.

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