It’s been a busy, record-breaking year for the Australian share market. Not only did the S&P/ASX 200 close out its best financial year in two decades, but initial public offerings (IPOs) and mergers and acquisition (M&A) activity also reached new highs.
So, where might opportunities lie in this avalanche of prospectuses and scheme deeds?
On the way out
M&A activity in 2021 has eclipsed the 2007 record, with corporate acquirers driven by cheap interest rates, low leverage at many listed companies, and an imperative to grow earnings. Meanwhile, private equity firms are sitting on a mountain of cash and super funds have entered the fray in a bigger way, seeking a home for accumulating retirement savings.
A $23.6 billion bid for Sydney Airport (SYD) was announced recently and, if complete, will represent one of Australia’s biggest ever buyouts. A $2.8 billion takeover bid was also proposed for fund administrator Link (LNK) – a rehash of last year’s offer for the business. In another replay, Blackstone is back bidding for Crown (CWN).
Premiums have also been higher than usual this year, averaging roughly 30%. Class Super (CL1) was bid for by HUB24 (HUB), with a staggering 72% premium. The Mainstream Group (MAI) takeover saga, which we chronicled in our June Monthly Report, finished with Apex Group paying $2.80 per share – 153% higher than where the business was trading before the initial bid. The $14 million for our remaining Mainstream shares landed in the Forager Australian Shares Fund’s bank account at the end of October.
A more recent example is Seven West Media (SWM), which made a bid for Prime (PRT) in October and handed Prime shareholders a 74% payday. By spending $72 million to fully own Prime, Seven West has paid just under three times earnings before interest, tax, depreciation and amortisation. Coupled with news that the company gained access to flexible new lending arrangements, its share price was more than 67% higher at the November peak.
While there were several businesses leaving the market this year, there were also plenty of new listings. Australia’s IPO market has been back in full swing – rebounding from last year’s COVID slump and overtaking the 2017 record to raise about $3 billion in the first six months alone. And so it should; macroeconomic conditions are favourable, equity valuations are healthy, and investors are opening their wallets in search of the next success story.
Small-cap IPOs have been landing on fund managers’ desks quicker than they can be chucked in the bin. Many of these small, and largely unproven, businesses have been dressed up for sale and offered at hefty prices. There have been plenty of well-timed exits from private equity sellers.
We haven’t found a lot to participate in so far, but we are sifting through the rubble. The post-IPO blues can send good businesses far below their listing prices as the market’s attention wanes and the reality of listed life sets in.
For example, the Forager Australian Shares Fund invested in online beauty retailer Adore Beauty (ABY) after its well-timed October 2020 IPO, but at a discount of about one-third to its IPO price. The Fund also invested in fintech lender Plenti (PLT), purchased a quarter below its IPO price. These are unlikely to be the last blown-up IPOs offering opportunities to patient investors.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.