(Bloomberg) -- Equity sales to raise funds for mergers and acquisitions should remain strong in Australia and New Zealand through yearend, with traditional initial public offerings still far from picking up, according to UBS AG.
Some of the largest share sales in both countries this year involved offering stock to current shareholders, under so-called entitlement offers, to raise funds for asset purchases.
Larger companies are leading “this trend back towards shareholder-friendly equity raising structures,” said Matthew Beggs, co-head of equity capital markets for Australia and New Zealand at UBS. With many companies in a healthy position after cheaper funding since 2020, “I expect the majority of equity raising proceeds to skew towards M&A, or growth-related purposes.”
Traditional IPOs slumped in both markets this year, in line with global venues, as a surge in volatility, fears of economic slowdown, high inflation and rising interest rates kept investors wary and issuers on the sidelines. On the other hand, the share of follow-on offerings within overall ECM operations in the two markets jumped to 93% this year, compared with 70% for the same period of 2021, Bloomberg data show.
Four M&A deals worth more than A$1 billion ($651 million) used equities sales as part of their fund raising structure this year, with the trend likely to remain strong into the new year, Beggs said. The bank held the top position for the management of equity, equity-linked and preferred securities sales in both Australia and New Zealand in 2022, according to a ranking compiled by Bloomberg.
Tapping current holders as a source for funds is gaining appeal as higher interest rates make debt financing more expensive following years of low borrowing costs.
Infrastructure developer Atlas Arteria Ltd. earlier this month announced its plan to raise A$3.1 billion through an entitlement offer to help fund its purchase of Chicago Skyway toll road. In July, Australia and New Zealand Banking Group garnered about A$3.5 billion selling new shares to holders to fund the acquisition of Suncorp Group Ltd.
Also that same month, carsales.com Ltd. said it bought a 51% stake in Trader Interactive that was funded by an entitlement offer worth A$1.2 billion. By comparison, there hasn’t been an IPO larger than A$1 billion in Sydney in almost a year.
To be sure, some investors are seeing their holdings lose value once entitlement offers are announced. Shares of Atlas Arteria are down 14% since its offer to sell shares to purchase Chicago Skyway, while those of carsales.com have also dropped since its offer.
Once market expecations for inflation and central bank interest rate activity is better matched, IPOs may recover with a “more constructive” environment potentially seen over the course of 2023, Beggs said.
©2022 Bloomberg L.P.
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