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Australia’s Evolving Deals Landscape

June 2017

KPMG.com/au/dealslandscape

Corporate Australia’s attitudes and perspectives on deal activity.

http://KPMG.com/au/dealslandscape

2 Australia’s Evolving Deals Landscape

© 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. © 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

3Australia’s Evolving Deals Landscape

© 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ForewordWelcome to our 2017 Evolving Deals Landscape survey, representing the most comprehensive examination of corporate Australia’s attitudes and perspectives on deal activity over the next 3 years.

With more than 300 respondents, it captures the wide-ranging opinions of business owners, boards, chief executive officers (CEOs), chief financial officers (CFOs) and other senior executives.

Over 100 large companies took part in our survey, as did 50 mid-sized companies and 150 small and medium sized enterprises (SMEs). Together, they give important insights into the thinking and planning going on behind this country’s ever-changing deal landscape – from buying, selling, fixing, funding and partnering perspectives.

The survey findings point to a continuing buoyant market over the next 3 years. This is echoed in KPMG’s new and expanded 2017 M&A Predictor, which reviews and analyses deal performance over the past year.

However, they also reveal that companies are more likely to seek a JV or other alliance than pursue traditional M&A.

In many instances, a preference for bolt-on alliances may be driven by the need to respond to technological advances. An increase in disruptive technology is one of the key concerns for respondents over the next 12 months, as is an increase in competition.

However, it may also reflect the attitude that alliances are easier than braving the inherent risks of a formal acquisition if a company wishes to gain a competitive advantage. Indeed, the large majority of respondents view cultural alignment and human resource (HR) issues as the biggest integration headaches in M&A – yet, conversely, show little interest in overcoming these challenges through a more holistic approach to due diligence.

The survey also provides telling insights into Australia’s various sectors. In Consumer & Retail, for instance, there are evident signs of a struggling sector. These respondents are notably more intent on renegotiating supplier contracts while the majority of those planning to raise funds intend to use them to refinance maturing debt.

The Energy & Natural Resources sector is also worth noting. The capital structures of these businesses are looking a lot healthier as we see a recovery in commodity prices combined with a corresponding increase in appetite for JVs and alliances with partners that have access to capital. This is set to continue with a large majority of respondents in this sector revealing plans to join forces with other companies and nearly half keen to sell or divest businesses or assets.

In fact, more than a third of the respondents have plans to undertake specific performance improvements, restructuring or company turnaround initiatives over the next 3 years. This is particularly pronounced among larger companies.

Yet M&A also remains crucial for companies seeking growth. In today’s environment, businesses need to transform more radically and much faster than is possible organically.

Whatever path companies choose in achieving growth, however, it is how they go about it and what value they realise that is critical in achieving a successful outcome. In many instances, due to a lack of in-house expertise, Australian businesses fail to appreciate the full extent of what is possible (or not) in diligently assessing or valuing the potential upside in an evolving deal landscape.

This is where we think like an investor and act like an owner, working shoulder to shoulder with our clients and delivering deep insights and expertise to drive value in an environment facing rapid technological change.

We look forward to receiving your feedback on the survey. Your opinions and outlooks are always important to us.

David HeathcoteHead of Deal AdvisoryKPMG Australia


https://home.kpmg.com/au/en/home/insights/2017/05/ma-predictor-au-perspective.html



This year is set for another solid round of M&A activity. But what are the plans of corporate Australia beyond the next 12 months? KPMG’s 2017 Evolving Deals Landscape survey provides far-reaching insights into the perspectives and plans of Australian businesses, now and over the next 3 years.




2017 has continued the strong M&A activity witnessed over the past 2 years. Standout transactions include the sale of Endeavour Energy (AU$7.6bn), the acquisition of Alinta Energy by Hong Kong’s Chow Tai Fook Enterprises (AU$4bn) and Downer EDI’s bid for Spotless Group (AU$1.3bn). (See KPMG’s M&A Predictor for further details.)

Yet a rundown of the latest, largest deals only covers one aspect of Australia’s M&A market. It doesn’t encapsulate the sheer range of companies undertaking deal activity. Nor does it reveal corporate Australia’s views and aspirations around M&A – how they perceive the market, what their plans are for the next few years, what is driving them to acquire or partner and where they are looking for potential targets.

KPMG carried out its 2017 Evolving Deals Landscape survey to gain this deeper understanding of the M&A market. Canvassing the views of more than 300 corporate respondents, the survey offers genuine and far-reaching insights into the attitudes and perspectives of business owners, boards, CEOs, CFOs and other senior executives.






What are some of the survey’s more significant findings? In terms of the deal outlook, the overwhelming majority of companies (84 percent) are confident the current strong M&A levels will remain steady or rise. This is in line with KPMG’s M&A Predictor which forecasts continued growth throughout 2017.

Nevertheless, despite such high expectations, the survey shows that only 34 percent of companies are actually considering a merger or acquisition over the next 3 years, while still fewer (21 percent) are planning to undertake a sale or divestment.

Plans vary between the different sectors. In Technology, Media, and Telecommunications (TMT), 42 percent of companies are considering M&A, compared to Energy and Natural Resources (ENR) where 45 percent are planning to sell or divest instead.

It may be that partnerships have more appeal just now. The survey reveals that over the next 3 years 42 percent of companies are angling for a partner – whether through a joint venture (JV) or other means. It may make good financial sense. As Peter Turner, Partner in KPMG Australia’s Mergers and Acquisitions team, points out: “An attractive feature of alliances is that they don’t cost as much as acquisitions.”

The deal landscape


Over the next 3 years 42 percent of companies are angling for a partner – whether through a joint venture or other means.

98 Australia’s Evolving Deals LandscapeAustralia’s Evolving Deals Landscape



34% will be undertaking M&A in the next three years.

21%

would look to sell or divest a business.

42% will enter into a joint venture or alliance

over the next three years.

Partnering more popular*

Key findingsDEAL DRIVERS AND BARRIERS*

M&A Drivers M&A Barriers

consolidating market share 41% finding a target where

both organisations are strategically aligned

40%

expanding customer base 40% board and management

appetite for risk 39%

seizing targets opportunistically as they become available 32%

assets being too expensive 36%


*Respondents selected all that applied / Respondents selected top three**Of those that indicated they would be undertaking M&A in next 3 years and selected top 3

84%expect the current strong M&A levels

to remain steady or increase.

55% feel market valuations are fair or undervalued and

54% feel they are likely to decrease or stay the same.

61% consider banks to have a moderate or strong appetite

to finance M&A, though

58% think the cost of debt will increase.

Positive deal outlook

CULTURAL FIT NOT SEEN AS A KEY FACTOR IN REALISING DEAL VALUE*

Most important to realise deal value Least important to realise deal value

19%42% a well-executed integration plan

positive economic conditions

26%37%a clear strategy for value creation post-deal growth potential

13%effective due diligence cultural fit 54%

BUT MANAGEMENT ISSUES AND LACK OF FIT IS THE KEY REASON WHY DEALS FAIL**

47% operational issues revealed during due diligence

46% financial issues revealed during due diligence

management issues or lack of fit 57%

91% Australia or New Zealand

29% Asia (excluding China & India)

24% China

Target close to home**

Most common geographies for M&A



A force for changeWhat will drive activity? According to the survey, the top three drivers for M&A are consolidating market share (41 percent), expanding the customer base (40 percent) and seizing targets as they became available (32 percent).

Again, this varies between sectors. Market share consolidation is higher on the agenda among those in Financial Services (55 percent) while favourable asset prices are the number one driver for companies in ENR, also at 55 percent.

In the survey there was little difference between the top three perceived barriers to M&A: finding a target where both organisations are strategically aligned (40 percent), board and management appetite for risk (39 percent) and overpriced assets (36 percent).

While there is evident concern regarding excessive prices, only 32 percent of companies consider that market valuations are overvalued, compared to 41 percent who view them as fair. Nevertheless, more than half the CFOs and Treasurers (53 percent) are convinced they are elevated.

Joanne Lupton, Partner in KPMG Australia’s Valuation Services, agrees. Whether this continues remains to be seen. “The high pricing is driven by the low supply of quality assets available in the market. The question is whether pricing continues to hold, given the uncertainty in the global markets.”

If the majority of the survey’s respondents are correct, prices are set to decline. A little over half (54 percent) expect market valuations to stay the same or decrease.

The high pricing is driven by the low supply of quality assets available in the market. The question is whether pricing continues to hold, given the uncertainty in the global markets.





0% 50% 100% 150% 200% 250% 300% 350% 400%

TransportHospitality and tourismReal estate and constructionTech, media and telecoms

Energy and natural resourcesHealth

Manufacturing

Consumer markets and retail Financial Services

Other

Opportunistic targetbecomes available

Acquiring additional elementsof the supply chain

Expand geographic reach

Expand customer base

Enter into new linesof business

Enhance intellectual property oracquire new technologies

Better economic conditions/lowinterest rate environment

Market share consolidation

Surplus credit/cashflow available

Favourable assetprices

Main factors driving M&A in Australia by industry (select up to three)

Main factors driving M&A in Australia (select up to three)

0% 30% 60% 90% 120% 150%

Other

Surplus credit/cashflow available

Favourable asset prices


Enter into new lines of business









On target What are Australian companies setting their sights on? There is little evidence to suggest grand overseas ambitions for the most part. Of those engaging in M&A over the next 3 years, the overwhelming majority are looking close to home – 91 percent of these respondents plan to invest in Australia or New Zealand. Meanwhile, only 24 percent are interested in China and just 29 percent in Asia (excluding China and India).

There may be good reason for this. Australia has low interest rates, a stable regulatory and political environment and a landscape that is conducive to M&A. At the same time, however, it is a small market. Asia’s growing middle class, in contrast, offers a wealth of opportunities.

A couple of sectors do seem intent on grabbing these opportunities however. In Health, 37 percent of companies are setting their sights on China, while half of companies in TMT have plans to invest in Asia.

When it comes to joint ventures and alliances, more than half of the companies planning to enter partnership arrangements (52 percent) are keen to access new markets. A significant portion (48 percent) wish to increase or improve their competitive advantage.

In terms of selling or divesting, other reasons emerge. Just under half the companies planning to sell (45 percent) are intent on offloading a non-core asset or business. However, another 41 percent are planning to retire or reprioritise personal time. This is particularly marked among business owners where 83 percent are intending to sell for this reason.

Breaking it down by sector, the survey shows that ENR is the most likely to be contemplating a sale (45 percent), with 79 percent of these companies driven by the need to sell a non-core business or asset. In contrast, only 27 percent of the TMT sector is considering a sale, followed closely by Manufacturing at 26 percent.

The survey shows that ENR is the most likely to be contemplating a sale (45 percent), with 79 percent of these companies driven by the need to sell a non-core business or asset.





On target

0% 20% 40% 60% 80% 100%

Middle East

Other

Canada

Africa

UK

Central and South America

Europe

India

USA

China

Asia ex China and India

Australia and New Zealand

Regions/countries primarily investing in over the next 3 years (select all that apply)

Primary reasons for contemplating an alliance or joint venture (select up to three)

0% 10% 20% 30% 40% 50% 60%

Overcoming legal/regulatory boundaries

Capacity utilisation

Capital partnering

Diversification intonew businesses

Risk reduction/sharing

Access critical/complementary organisational

capabilities/technology

Cost minimisation/obtaining economies of scale

Increasing or improving competitive advantage

Access to newmarkets/customers



0% 10% 20% 30% 40% 50%

Other

Regulatory undertaking

Investment window / intendedholding period

Liquidity

Capitalise on currentmarket valuations

Retirement / relocation / illness /re-prioritisation of personal time

Business/asset deemed non-corei.e. focus on the core

Primary reasons for divesting (select all that apply)



Why buy?KPMG’s survey also tries to understand why companies might want to buy other businesses or assets. An essential part of this is about understanding what concerns them – what they believe they need to do to stay relevant.

Clearly technology is on the minds of corporate Australia. Nearly half of the companies surveyed are concerned about an increase in disruptive technology over the next 12 months (47 percent). This jumped to 68 percent among the larger companies and 69 percent for those respondents from the TMT sector. Meanwhile, 59 percent of those in Financial Services put disruptive technology at the top of their list and 51 percent in Consumer & Retail (when combined with the Hospitality & Tourism sector).

However, while the survey reveals that disruptive technology is a concern for many respondents, it does not seem to be a key deal driver. Only a quarter of respondents said enhancing intellectual property (IP) or acquiring new technology was a top three reason for their M&A plans (although notably this did jump to 50 percent among those in the TMT sector).

A clearer answer is found elsewhere in the survey results. The fact is that 48 percent of companies are intent on expanding their customer base through M&A – almost half. There is no doubt that technology is an enabler here. Says David Heathcote, Head of KPMG’s Deal Advisory in Australia, “Technology is a large part of the sector convergence that is playing out at the moment. A lot of companies are now looking to expand into complementary sectors that can provide either the supply chain or access to better data mining.”

Of course, technology is not the only concern evidenced in the survey. Just over half of respondent companies are worried about an increase in competition (51 percent) over the next 12 months. This could be for many reasons, including disruptive technology.

There are also other reasons to buy. More than one third of companies (36 percent) are primarily interested in entering a new line of business. Says Heathcote, “This theme is likely to represent a number of businesses where the management or owners are of the view they operate in a mature market. Expanding into a new line of business may create a point of differentiation to help secure market share or to grow a larger customer base, where they can sell existing products or services to new clients.”

Adds Margaret Cowle, National Managing Partner of Brand & Engagement and Partner in Charge of the Global Strategy Group, KPMG Australia: “As technology challenges the status quo, companies are looking closely at diversification and redefining business models, looking for adjacencies and new value propositions to stay relevant and generate greater value. The key to successful diversification deals is the clear and consistent understanding of the underlying strategic assets of the buyer as the baseline for growth.”

48 percent of companies are intent on expanding their customer base through M&A – almost half. There is no doubt that technology is an enabler here.





0% 10% 20% 30% 40% 50% 60%

Other


Surplus credit/cash flow available


Shifting customer demands


Favourable asset prices

Limited organic growth options



Enter into new lines of business



Primary reasons for undertaking M&A indicated by those planning M&A over the next 3 years (select all that apply)

In the market in which you operate, do you expect to see any of the following over the next 12 months? (select all that apply)

0% 10% 20% 30% 40% 50% 60%

Other

Customers are increasingly in-sourcing the product or

service we offer

No material change in the market

A reduction in activity of our customers (e.g. deferred award of

contracts, reduced capital investment/projects)

An overall decline in growth opportunities

An increase in incidence of disruptive technology and innovation

by customers or competitors

An increase in competition



How to realise valueRealising value in M&A deals is another part of the survey which produced somewhat contradictory messages. According to the findings, only 13 percent of companies consider cultural fit critical to realising value in deals, yet more than 3 quarters (77 percent) find cultural alignment and human resource (HR) considerations the most challenging integration issues in M&A.

Similarly, more than half of companies (55 percent) cite partner compatibility and cultural differences as the biggest hurdles to overcome when seeking partnering arrangements.

This may be explained by the weight companies give to due diligence. A similar number of companies (54 percent) put their faith in effective due diligence to realise the value in deals. If companies recognise – as indeed they should – that due diligence must address issues of human capital and culture, it may explain the discrepancy in their responses.

“The issue is clear: culture is a leading cause of M&A integration failure – with the benefit of hindsight everyone can see this. However, the root of this failure is at the very beginning of the M&A process where too little attention is given to people and culture during deal evaluation,” says Stefanie Bradley, KPMG Partner in Charge of People and Change. “To reap the benefits of joint ventures and alliances, teams from different backgrounds need to work together effectively. Understanding your culture and that of your potential partner at the outset is non-negotiable.”

However, Ronan Gilhawley, Partner in KPMG Australia’s Global Strategy Group, is not convinced companies are giving ample consideration to these issues, mainly because they are not easily measured. “Given the time pressures of transactions and the typical focus of deal teams, there’s a tendency to boil down these transactions to aspects that can be easily quantified.” Yet, “if you view diligence as a strategic exercise, you have to think about the human capital of the business.”

In light of these findings, it is not surprising that legal, tax and financial due diligence, along with financial advice, are the most frequently outsourced services sought during deal processes (between 40 and 72 percent of respondents indicated they received outside help in these areas). On the other hand, few companies engage advisors to conduct commercial due diligence (just 24 percent) and only 15 percent seek advice around operational due diligence.

One reason for this is that outside services are typically sought to evaluate the risk of a deal, as opposed to the value of a deal. Yet, “executive teams should invest as much focus on proving up and planning for the capture of deal value as they do the risks present in the deal,” says Gilhawley.

Heathcote agrees: “Too often we see buyers focus on financial spreadsheets when assessing acquisitions without undertaking a full analysis on the operational aspects, including such things as governance and risk, people and culture, IT systems, finance and reporting, physical assets and logistics.”

Of course, all these aspects require careful integration planning as well. However, assistance here is also largely overlooked, according to the survey, with just 13 percent seeking outside help during deal processes.

Too often we see buyers focus on financial spreadsheets when assessing acquisitions without undertaking a full analysis on the operational aspects, including such things as governance and risk, people and culture, IT systems, finance and reporting, physical assets and logistics.





0% 10% 20% 30% 40% 50% 60%

Cultural fit

Positive economic conditions

Growth potential

Strategic fit

Strong Board and management

Retention of key people

Clear strategy for value creation post deal

Well executed integration plan

Effective due diligence, including real-time data & analytics

Factors most important for realising the value of an M&A deal (select all that apply)

Which of the following aspects of integration are most challenging? (select all that apply)

0% 10% 20% 30% 40% 50% 60% 70% 80%

Program management

Tax integration and entity rationalisation

Dealing with vendors who stay in the business

Accounting and finance transformation

Customer and supplier integration and rationalisation

Products and services integration and rationalisation

IT/Technology integration

Cultural alignment and HR issues



0% 10% 20% 30% 40% 50% 60% 70% 80%

Other

Integration assistance

Operational due diligence

Technical (property/physical due diligence

Commercial due diligence

Debt raising/financing

Financial due diligence

Financial advisory (M&A)

Tax due diligence

Legal due diligence

Services outsourced to third party providers in an M&A process (select all that apply)

What is the biggest hurdle your alliance or JV will need to overcome? (select all that apply)

0% 10% 20% 30% 40% 50% 60%

Joint venture contracting

Measures and incentives

Ability to meet performance expectations

Surpassing current ‘competitor’ mindset

Value sharing/JV economics

Co-creation of strategy/business model

Governance and controls

Trust

Partner compatibility/cultural differences



Beyond a quick fixIt’s sometimes the case that looking inward is the best course of action. According to the survey, more than 45 percent of companies are upbeat about organic growth. This rises to 63 percent in the Real Estate sector, 52 percent in Financial Services and 50 percent in Consumer & Retail.

Meanwhile, it is the chairs and boards that are most optimistic about their companies’ organic growth with more than half expecting to grow organically (56 percent).

The survey also evidences a concerted move to create value through specific profitability improvement initiatives. Just over one third of companies (34 percent) are looking to implement specific performance improvements, restructuring or turnaround initiatives over the next 3 years.

Among larger companies, it’s even more likely, with the response rate jumping to almost one half (48 percent). It is also more probable in ENR (52 percent) and TMT (38 percent).

Of those companies that are planning restructuring initiatives, about two thirds are focused on active cost reduction (67 percent) while almost two thirds again aim to manage or monitor cash flows more closely (65 percent).

Meanwhile, the most common strategies for responding to changes in the market are increasing communications with customers (58 percent) and preparing an action plan to respond to material adverse changes (42 percent).

Looking to cut costs is still a popular way of boosting returns however. Of the companies undertaking a restructure or turnaround, 87 percent are actively implementing cost-saving initiatives in order to improve profitability. Other popular strategies include productivity improvement programs (60 percent) and new technology solutions (56 percent). Those in the Consumer & Retail sector are much more likely to have renegotiated supplier contracts (80 percent) while the ENR sector appears to favour redundancies (63 percent).

The least common initiatives among the various sectors include outsourcing aspects of the business (25 percent) and seeking to renegotiate terms with customers (30 percent).

Just over one third of companies (34 percent) are looking to implement specific performance improvements, restructuring or turnaround initiatives over the next 3 years.





0% 10% 20% 30% 40% 50%

None of the above

Equity capital raise

Debt (re)financing

Sale or divestment

Performance improvement, restructure or company

turnaround

Merger or acquisition

Alliance, joint venture or other partnering arrangement

We are expecting to grow organically

Initiatives in the next 3 years (select all that apply)

Of those undertaking a performance improvement, restructure or turnaround, over the past 12 months what have you observed within your business? (select all that apply)

0% 10% 20% 30% 40% 50% 60% 70% 80%

Increase in pressure from creditors

Decline in the utilisation asset base

Greater scrutiny by its bankers

Experienced a delay in collections from debtors

The need to manage/monitor its cash flows more closely

Active cost reduction



0% 10% 20% 30% 40% 50% 60%

No new strategies implemented

Diversified markets

Ceased operations of underperforming business units

Diversified service offering

Increased scrutiny by owners/board

Prepared an action plan to respond to material adverse changes

to the business

Identified opportunities to make acquisitions (e.g. equity

investment or capital purchases)

Increased communications with my customers

Of those undertaking a performance improvement, restructure or turnaround, over the past 12 months what strategies have you implemented to respond to changes in your market? (select all that apply)

Of those undertaking a performance improvement, restructure or turnaround, over the past 12 months what have you done to improve profitability of your business? (select all that apply)

0% 20% 40% 60% 80% 100%

No specific profitability improvement initiatives

Outsourced aspects of my business offering

Renegotiated customer contracts

Implemented redundancies

Renegotiated supplier contracts

Introduced technology solutions

Implemented productivity improvement programs

Implemented cost savings initiatives



25Australia’s Evolving Deals Landscape 25Australia’s Evolving Deals Landscape



Looking for fundingWhile it isn’t surprising that so many companies seek M&A advice, the fact that companies are just as likely to seek external help with their debt financing (40 percent) is somewhat unexpected (refer chart on page 20 for the services outsourced in an M&A process). The debt advisory market is still in its infancy and the prevailing perception is that debt financing can be completed without separate independent advice.

Nevertheless, independent debt advisory offers clear advantages and the survey’s results would appear to support this view. It brings with it market knowledge of pricing and terms, access to diverse pools of capital, experience and expertise in managing the most efficient and effective processes, increased commercial acumen and extensive support in managing more complex financing relationships.

Nevertheless, only a small portion of companies aim to raise debt or refinance existing facilities over the next 3 years. Just 18 percent of respondents indicated such plans, their reasons for doing so fairly evenly split between funding M&A (40 percent), funding organic growth (44 percent) and refinancing existing debt facilities (44 percent).

Any differences were more notable among the various sectors. TMT companies are intent on funding M&A for the most part (63 percent) as is the Health sector (60 percent) and ENR (56 percent). Yet more than half of the Financial Services sector (58 percent) is raising debt to fund organic growth.

The Consumer & Retail sector differs again. Of those raising debt, 60 percent are using it to refinance maturing debt. It fits in with the picture of a sector that is currently facing considerable challenges through increased competition and a corresponding decrease in prices, together with a rise in property costs. It is with good reason that the companies in this sector are focusing more closely on their debt arrangements.

Independent debt advisory offers clear advantages and the survey’s results would appear to support this view.





Why are you considering sourcing debt finance? (select all that apply)

0% 10% 20% 30% 40% 50%

Other

Refinance upcoming maturity of debt

Fund organic growth

Fund M&A

What is your view on banks’ appetite to finance M&A activity?

No viewWeakModerateStrong

Refinance upcoming maturity of debt

15%8%

53%

24%



Who can you bank on?When it comes to understanding who companies are likely to use for the purposes of debt raising, there are some interesting results. Nearly 3 quarters of companies (76 percent) intend to use one or more of the Big 4 Australian banks, according to the survey. What is more telling is the one in four companies (24 percent) who won’t. Possible reasons may include recent regulatory constraints on the Big 4 Australian banks, thereby resulting in a more competitive landscape. Certainly there are more alternative financier options in the market that are filling the gap as the Big 4 banks focus on traditional offerings.

It is with good reason that the ENR sector stands out from the crowd. More than 3 quarters (78 percent) plan to turn to foreign banks for debt, hardly unexpected given the large sums required for their projects. It would also be interesting to understand the part played by social/shareholder activism. The Big 4 Australian banks have been under considerable pressure when it comes to lending to environmentally unfriendly businesses such as dirty coal and coal seam gas.

Of those companies keen to access debt, nearly half (49 percent) consider the cost of debt to be the most prohibitive aspect. However, structural restrictions are also a factor for almost as many companies (42 percent). Meanwhile, the two issues clearly resonate with the Health sector where both factors attracted 80 percent of votes.

Not surprisingly, the cost of debt weighs most heavily on Consumer & Retail (60 percent of companies) as does the availability of finance (also 60 percent). Again, it is an indicator of the tough times currently faced by this sector.

Tenor is a significant issue for those in Financial Services (42 percent). This is likely due to the mismatch in their funding requirements – long-term assets, including mortgages of 20 years or more compared to access to funding of typically 5 to 10 years (unless they are tapping offshore public markets). This is notably less of an issue for other sectors.

Certainty of debt options (16 percent), sources of debt (20 percent) and availability of funds (22 percent) are considered the least prohibitive aspects of debt funding across the board.

Nearly 3 quarters of companies (76 percent) intend to use one or more of the Big 4 Australian banks, according to the survey. What is more telling is the one in four companies (24 percent) who won’t.





0% 10% 20% 30% 40% 50% 60% 70% 80%

Other

Public debt capital markets

Alternative providers of debt capital

Foreign banks

Institutional funds

One or more of Australia’s Big 4 banks

Sources of debt finance considered to support M&A activity (select all that apply)

Most prohibitive part of debt financing that impacts your business (select all that apply)

0% 10% 20% 30% 40% 50%

Tenor of available finance options

Certainty of debt finance / options

Limited sources of debt finance

Availability of finance

Structural restrictions

Cost of debt finance



The pull of private equity When it comes to selling a business or asset, companies are overwhelmingly focused on the price they will get. The survey shows that 65 percent are intent on negotiating a fair price.

However, finding the right buyer for their business also concerns the majority of them (56 percent), as does simply finding a buyer at all (36 percent).

So where does that leave Private Equity? While they can at times attract negative press in Australia, KPMG’s survey found that overall, corporates are happy to sell to them with most respondents considering a sale either neutral (59 percent) or positive (21 percent) when Private Equity was involved in the process.

Just one in five companies aren’t keen, some going so far as to express concerns that they (Private Equity) are too focussed on their own returns with no broader community viewpoint.

Noticeably, CEOs are much more positive than the other executives about having Private Equity bidders. In the survey, 45 percent indicated they were happy to include them compared to just 21 percent of other respondents.

Financial Services, Consumer & Retail and Manufacturing view Private Equity buy-in more positively than other sectors – although, unfortunately, Private Equity is likely to be wary of the retail sector just now, says David Willis, KPMG’s National Sector Leader of Private Equity, given the levels of stress.

Transport is the standout with 50 percent of companies in this sector indicating they were not keen on involving Private Equity. Perhaps this is because the feeling is likely to be mutual. The longer return timeframe of transport makes the sector much less appealing to equity and more interesting for long-term return-minded superannuation funds.

It may well be that now is the time to seek Private Equity funding. “Private Equity started putting their money into IPOs a few years ago,” says Turner “This got them the returns they needed to go back to investors and raise more capital. Now that money is trying to find a home.”

While they can at times attract negative press in Australia, KPMG’s survey found that overall, corporates are happy to sell to private equity.





0% 10% 20% 30% 40% 50% 60% 70% 80%

Leaving a legacy

Getting your house in order e.g. the financials are a mess

Distraction from business as usual

Staff not looked after by buyer

Deal process itself and completing the deal

Finding a buyer

Finding the right buyer

Negotiating a fair price

Biggest concerns about selling your business (select all that apply)

Perspective on an approach by Private Equity buyers

Not keen on their involvement

Neutral about their involvement

Keen to include them in the process

21%

59%

20%

David HeathcoteHead of Deal AdvisoryDeal Advisory +61 2 9335 7193 [email protected]

Peter TurnerPartnerMergers & Acquisitions+61 3 9288 6022 [email protected]

Joanne LuptonPartnerValuation Services +61 2 9335 7530 [email protected]

Margaret CowlePartnerGlobal Strategy Group+61 2 9335 8569 [email protected]

Ronan GilhawleyPartnerGlobal Strategy Group +61 2 9335 7029 [email protected]

Stefanie BradleyPartner in ChargePeople & Change +61 8 9263 7774 [email protected]

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