Podcast: Australia Is Trailing the Global M&A ESG Landscape. What Does This Mean For Dealmaking?

This week’s episode looks at how Australia is playing catch-up on ESG and how that’s impacting M&A dealmaking. Joining host Julie-Anna Needham is Louise Weihart, a senior journalist for Mergermarket based in Sydney. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this episode, you'll hear about:

  • Why Australia is playing catch-up on ESG
  • How the delay is impacting dealmaking
  • How ESG is impacting valuations more broadly

Transcript

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. In this episode, we're looking at how Australia is playing catch-up on ESG and how that's impacting dealmaking. Louise Weihart is a senior journalist based in Sydney. Hi, Louise.

LOUISE WEIHART: Hi, Julie.

JULIE-ANNA NEEDHAM: Thanks very much for joining me today. So Louise, where is Australia in the overall global ESG landscape, looking at it particularly from an M&A point of view?

LOUISE WEIHART: OK, well, the short answer is that Australia is very, very far behind the global landscape. And before we even get to the M&A, we fall behind in terms of the big picture, because climate change has been the big issue. And that's moved along. But Australia hasn't even got their climate change considerations correct.

And in the run-up to the EU meeting in November, Australia's been put on notice that they have to get their act together. At this point in time, Australia is still refusing to increase its 2030 emissions reduction target. They're not even willing to put a target on. So that's the big picture.

So when it comes to the M&A, we are still quite far behind as well. But there are some drivers. And that's sort of more coming from the business and investor communities.

JULIE-ANNA NEEDHAM: And can you just go into a bit more detail on those drivers, please?

LOUISE WEIHART: The investment business communities actually understand that industry is a really important consideration. It's particularly important in dealmaking. That's where the presence is being felt. And I'll get back to that. But in terms of things that we are noticing, there has not been a lot of M&A dealmaking. But it's sort of starting.

And in July, there was a big mining software company called RPM Global, which is, like, a $400 million market cap company. And they actually went and bought a local ESG services company called Nitro. And that was to create a dedicated ESG division and to look for other ways to provide the whole mining industry with dedicated mining ESG offerings.

So that could be a forerunner to a lot of other deals. And that's a big company doing it. And interestingly, there was a local company that was a specialist in ESG that they could buy. So we can expect to see more coming out of Australia.

The other driver from the investor community is Macquarie Group, which is Australia's largest independent investment, banking and financial services group. Had a recent presentation. And in that, they dedicated, like, four pages to the importance of ESG, and they focused on all three aspects of ESG — the E, the S and the G. And we're just talking about how important it is becoming in how they're going to actually help their clients to address these issues.

There are other drivers as well, very interestingly. And this may be a global trend as well. But in Australia and kind of also related to COVID, there has been a lot more of the millennial type investors going online and investing. And that group is — they're much more worldly than the older generations, and they really care, care about ESG.

So that's a big driver from the sort of average investor side of things. And that's because-- it's also come in because there's also more awareness of the environment and consciousness around that. And just interestingly — and maybe this isn't specifically Australia-focused, but Yahoo Finance now has a [INAUDIBLE] sustainability tab, where investors can just go in and see how they're going, or companies are going with regards to ESG, which means the public is much more informed about ESG issues.

JULIE-ANNA NEEDHAM: Yeah, and it's certainly a wider trend that we've seen across the world, but interesting to find out that Australia is a bit behind in some ways. You gave the example of the mining services company buying an ESG group. Do you have any other examples of where ESG has been one of the main factors in dealmaking?

LOUISE WEIHART: Honestly, none that I had come across. There was actually one other, and this is — this one actually relates to valuation. But this was where we had spark infrastructure, which is like a billion-dollar market cap infrastructure investment group. And this was [INAUDIBLE] July, so [INAUDIBLE] is quite recent.

And they actually rejected a bid by KKR and the Ontario Teachers Fund. I think they thought the bid was too low because among other things, the bidders were not taking into account the value that Spark Infrastructure has in its pure renewables play assets. And I think they came back with higher bids, and they just kept rejecting him.

So that was very specific around ESG. And interestingly, it was the target that was rejected with it. But we also, I think, seeing in the dealmaking, where buyers are becoming more conscious — it's more affecting what buyers are going to buy. And we can go into that when we talk about the implications in valuations.

JULIE-ANNA NEEDHAM: And so talking about valuations, that's a really good example with the Spark Infrastructure rejecting the offer that they received on the basis that it was too low, and it was undervaluing their renewables division. How is ESG impacting valuations more broadly?

LOUISE WEIHART: OK, so this is where we are seeing the ESG issues coming to the fore. And I actually, I have spoken to a lot of advisors in the space. And there's a lot of consensus around it, where they're saying ESG is becoming a value driver, so it's increasing valuations and multiples for companies that have ESG components.

Before — and I suppose this is in line with the global trend — the ESG component was seen as something that was nice to have, an additional extra, but now it's actually becoming material in companies' valuations. And I guess, well, Spark is kind of an example there. I don't really have many others. It's more the big picture of what advisors are saying.

Deloitte actually released a report saying that 30 percent of executives polled were willing to pay a premium if the target had ESG attributes. EY also has done a recent report. They were saying that management teams are finding it more difficult now to determine and communicate what assets are on an off strategy with regard to ESG.

And I guess maybe this does more also to the advisory impact, that advisors really have to upscale because ones that can help companies that those issues are going to be in great demand. And in Australia, specifically at the moment, there is high demand, and there's not a lot of skill.

So the findings from that study show that it wasn't just Australia, it was Oceania. So it's a little bit broader. But the percent of executives polled said a failure to enhance their ESG rating was the greatest area of failure in divestments. And that was compared with 59 percent globally. So that shows how our region is almost 20 percent more affected.

Pitcher Partners did a market update recently as well. And they said-- and this is really interesting — that especially in the mid-market, M&A deal flow is coming back. And they expect to carry on for the rest of the year. But companies that are not doing well with ESG might not actually be able to benefit from it.

And they also referenced a report by Baker Tilly, which found that 65 percent of international dealmakers believe ESG is a key consideration when making an investment and an M&A decision. And 60 percent said they'd walked away from deals that didn't have the ESG component, which is interesting about Spark again, because it was actually the target was walking away in that instance.

JULIE-ANNA NEEDHAM: And so how is the advisory community reacting? You mentioned that they need to upscale. But how are they doing that? Are they buying in Thailand? Are they retooling existing staff?

LOUISE WEIHART: Well, that's really interesting. And I spoke to so many-- bankers, lawyers, the accounting firms. And across the board, most of them were reluctant to actually say what they were doing. And in the main, it's the one, I mean, they're all looking to upscale, but most of them are doing it internally.

But interestingly, a lot of them that I spoke to said, we will start seeing actual M&A in the advisory community in the next 12 months because they need the skills quickly. And that refers to consulting services, as well as technology, and buying is going to be much quicker and much cheaper. So that is actually going to come.

JULIE-ANNA NEEDHAM: So that would be larger banks or advisory firms buying smaller counterparts that have been able to improve their offering in the ESG on the [INAUDIBLE] front?

LOUISE WEIHART: Yes, and also specialists. And I mean, this isn't an advisory deal, but it was really interesting to see that Blackstone acquired an ESG software data and consulting services company called Sphera for 1.4 billion. And KKR took a majority stake in what's believed to be the largest pure play sustainability consultancy called ERM. And that was just to get more focus on energy consultancy expertise. So that's global, but when the world sneezes, Australia catches the cold a little bit later. And if PE is doing deals like that, you just have to know it's going to come.

JULIE-ANNA NEEDHAM: So how quickly are things changing? You say Australia's quite a bit behind most of the rest of the developed world, but how quickly do you see things unfolding?

LOUISE WEIHART: Well, I think it's almost a sudden impact because these issues were addressed by an article that we did in 2018. And it was a lot of talk about advisors and business community and investors having to start actually taking ESG considerations seriously. And really, nobody was.

And that was 2018. And now we're in 2021, and no one's saying, oh, well, let's see how we go. It's like, the race is on. And I think that's also where M&A is going to play a big role because they have to do it quickly now. It's just taken off there quickly, and also the whole social and governance side of it. And just, like, it's a small interesting aside, there are a lot of small, but a lot of innovative Australian companies.

So for example, there's an Australian Medtech called [INAUDIBLE]. They've just raised 34 million. And they've got an investment from an impact investor. We have got quite of the smaller impact investment groups. And the reason was — why it's considered ESG and impact, even though it's a Medtech is because it's improving-- what they are doing is improving life. And that's ESG today.

JULIE-ANNA NEEDHAM: That's great. Thank you very much, Louise.

LOUISE WEIHART: Thanks, Julie.

JULIE-ANNA NEEDHAM: That was Louise Weihart, a senior journalist based in Sydney. Thank you for listening to this week's episode of the Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast.

You can find us on Apple Podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.

7 October 2021