ESG Focus: ASX200 Off And Running, Part 5

ESG Focus | Apr 27 2022

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FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

ASX200 Off And Running – Part 4

ESG Mergers and Acquisitions and Institutional Public Offerings proved the highlight of the December half and February reporting season, and pundits competition for assets to intensify in 2022.

-Several high-profile acquisitions during the December half
-Private equity picks off key ESG assets at a fraction of potential 2019 prices
-Miners shuffle fossil fuel assets
-Demand for renewables commodities spurs IPO flurry
-Circularity M&A hot to trot
-More M&A to come in 2022 and beyond

By Sarah Mills

Perhaps one of the clearest signs of the growing pace of ESG in the February reporting season was the escalation in ESG Mergers and Acquisitions (M&A) and Institutional Public Offerings (IPOs) for renewable commodities and assets, and of divestments of fossil fuel assets.

2021 proved a groundbreaking year for M&A, Australian deals exceeding US$256bn, according to Lexology, more than double 2007’s previous high – or 10x the deal value of the previous decade according to Reuters.

Companies shifted from getting their ESG reporting metrics into gear in the previous financial year to deploying ESG strategies and restructuring businesses to prepare for a green and circular future.

Some offloaded profitable businesses to better align their remaining business to the new green paradigm. Others embarked on hostile bids, stepping into covid-depressed markets to pick up assets at a fraction of potential 2019 prices. 

And the December half was just the beginning, observers widely forecasting further M&A in 2022 and continued heat for at least the next decade.

Several High-Profile Acquisitions During The December Half

Let’s just start with a list of the main high-profile mergers and acquisitions in the December half.

Macquarie Infrastructure and Real Assets (MIRA), a private arm of Macquarie Group ((MQG),) purchased Bingo Industries for $2.3bn in October after considerable behind-the-scenes argy-bargy.

Then there was the biggest all-cash deal in Australia’s corporate history when the Sydney Aviation Alliance Group (SAAG) bought Sydney Airport for $32bn, the rationale driving the deal being covid and decarbonisation.

SAAG is owned by IFM Australian Infrastructure Fund, AustralianSuper, Australian Retirement Trust, IFM Global Infrastructure Fund and Global Infrastructure Partners.

BHP Group ((BHP)) and Woodside Petroleum ((WPL)) joined the fray, announcing a $41bn oil and gas deal in which Woodside basically took carriage of BHP’s Petroleum and LNG assets to create a top-10 global oil and gas producer, delivering a windfall dividend to shareholders.

Santos ((STO)) swallowed Oil Search ((OSH)) in a $21bn scrip-based takeover, which was expected to yield synergies of $126m a year, as oil companies consolidated to face an increasingly hostile future. Grant Samuel’s independent experts report noted Oil Search shareholders received a raw deal but given the ESG challenges facing the fossil fuels sector – particularly in accessing capital – the report advised acceptance.

Canada’s Brookfield bid $10.2bn for electricity and gas distribution company AusNet Services, after a bidding war with IPA, in a bid to gain exposure to Australia’s transition to net zero, and the government infrastructure spend required to meet that goal. 

The Australian Financial Review estimates that between now and 2050, $10bn will be needed to fund the connection of renewable energy generation and storage projects to the grid.

Kohlberg Kravis Roberts and the Ontario teachers’ pension fund bid $5.2bn for Spark Infrastructure and the deal was closed in December.

AGL Energy’s ((AGL)) renewables fund and Mercury NZ and PowAR purchased Tilt Renewables for $2.8bn following a bidding war with Canadian pension fund Caisse de depot et placement du Quebec.

In February 2021, the market was blindsided by Grok Ventures’ and Brookfields’ takeover bid for beleaguered AGL. The pair had planned to buy the company and bring forward the closures of its coal-fired power stations by up to 15 years. The company knocked back the bid and remains listed for now.

When it came to the “S” in ESG, food was a major theme and is likely to remain the largest/most important social M&A theme globally. The divestment of alcohol and gambling assets is also likely to remain a feature.

The world’s largest meat processing company, Brazil’s JBS, picked up Huon Aquaculture late last year for roughly $500m. J&F Investimentos, a private company wholly owned by Joesley Batista and Wesley Batista appears to own more than 40% of the listed vehicle.

Woolworths spun off its poker machine and pubs business into the Endeavour Group business for $12bn, allowing it to focus on its core business while simultaneously relieving it of potentially risky ESG assets such as alcohol. 

Also on the gambling front, Blackstone bid $8.5bn for Crown Resorts ((CWN)) after the company fell foul of the “G” in ESG – governance.

Then There Were The Floats

Companies sought to jump on the ESG bandwagon as growing signs of growing demand for transition assets started to fire up in the December half.

The 2021 year experienced the highest number of new floats in a decade, a significant percentage of which flowed through in the December half. In all, more than $12bn was raised – more than 2019 and 2020 combined.

Future-facing commodities proved a hot IPO theme. Copper producer 29Metals ((29M)) was one of the major listings at $528m but there were plenty of smaller listings offering solid stags, such as nickel explorer Nimy Resources’ ((NIM)) $7.5m IPO, and lithium producer Green Technology Metals’ ((GT1)) $24m IPO.

Archer Materials ((AXE)) divested its mineral exploration business in a $7m scrip deal into iTech ((ITM)).

Interestingly, an Australia technology company Gelion Batteries also launched on the British sock exchange to a solid stag. The company has developed an efficient flow battery.

Roughly three quarters of listings were gold projects and 17 were in “new materials” projects.

Digitalisation deals also fall under the ESG given they link to the decarbonisation theme. Technology-optimisation technology also falls under ESG as do some finance deals.

In this respect, Australia’s largest e-conveyancing company PEXA ((PXA)), listing for $1.17bn on July 1, (representing an enterprise value of $3.3bn) was the standout.

When it came to the “S” in ESG, APM Human Services International’s listing ((APM)) was the highlight, and pretty much took the IPO crown at $3bn-plus.

Private Equity Picks Off Key ESG Assets At A Fraction Of Potential 2019 Prices

Covid triggered the biggest transfer of wealth in history from the many to the few on many fronts.

Lexology notes private equity activity soared in Australia in 2021, with total buyout value targeting Australian firms, skyrocketing to US$71bn – more than four times 2018’s record high.

On the stockmarkets, big funds and private equity stepped in to snap up assets in covid-depressed markets with infrastructure M&A the highlight. Often bids were hostile. Elsewhere, companies were forced to divest or dispose of fossil-fuel exposed assets.

As noted above, Macquarie took Bingo, SAAG bought Sydney Airport (Morgan Stanley doubts Australia will ever see the return of listed airports), and Spark Infrastructure was also pocketed.

AGL’s tussle with Grok Ventures’ and Brookfield’s bid extended throughout the second half into 2022. The bidders offered a second higher bid of $8.25 a share, again knocked back. That bid was paired with a commitment to invest up to another $20bn in large-scale renewable energy and batteries.

AGL has been one of the main victims of ESG investing over the past two years as investors piled out of the beleaguered fossil fuel-exposed company, causing the share price to fall from roughly $21 in early 2020 to $5 last November. 

It has since bounced to above $8 as fossil fuels recovered but remains a long way from its pre-covid prices.

The AGL brouhaha is yet another example of the intense competition being waged between companies, infrastructure funds and private equity to pick up potential ESG plays at covid-induced and ESG-induced bargain-basement prices.

Meanwhile, AGL announced plans to demerge AGL Australia, splitting its business into two. Under the plan, AGL Energy will be renamed Accel Energy and will focus on turning existing operating sites into low-carbon industrial energy hubs and new clean energy projects.

AGL Australia will provide energy services to households and businesses (including broadband), invest in flexible energy trading, storage and supply and decentralized energy services.

AGL wasn’t the only ESG recalcitrant to feel the heat (AGL had failed to build green moats). Origin Energy ((ORG)) was forced to close its Eraring power station seven years earlier than expected because it was uneconomic to keep it open, saying the end of legacy coal contracts and household solar had eroded the core of the company’s earnings.

Origin plans to replace as much as 25% of Eraring’s capacity with its own battery.

Circularity M&A Hot To Trot

Circular and recycling assets were the subject of strong M&A in the December half and are expected to remain the most among the most coveted assets over the next three decades at the least as the world undertakes its journey to become a closed-loop economy by 2050.

One of the key themes to watch is the shift to viewing waste materials as potentially valuable commodities rather than large volumes of material to be disposed at the lowest possible cost.

This will involve a raft of legislation, which will set the direction for the new economy.

The NSW Government, for example, has introduced the resource recovery framework, the Federal Government has its National Waste Strategy, and there is a hive of behind-the-scenes government activity on this front. 

The takeover of Bingo Industries proved the December-half highlight but there was plenty of action on other fronts.

Sims Metal ((SGM)) ticked off several acquisitions in the period.

The company bought US metal recycler Atlantic Recycling for $37m and in February announced the purchase of aluminium scrap recycler Alumisource Corp for $22.5m with additional payments expected within three to five years.

Sims North American joint venture partner SA Recycling also purchased PSC metals from Icahn Enterprises for US$290m.

Sims also sold its majority stake in Sims Municipal Recycling of New York in December for $62.1m to a consortium of investors led by Closed Loop Partners (FNArena mentioned Closed Loop in its first article on circularity).

At the time, Sims’s CEO Alistair Field said: “The transaction demonstrates Sims’ leadership and commitment to innovate quickly – and at scale – and to maximise opportunities within the circular economy.” This suggests M&A is likely to underpin the company’s ESG strategy going forward.

Under the deal, Sims will hold two of five seats on the Municipal Recycling board which operates the New York recycling program.

Cleanaway Waste Management ((CWY)) only managed to pick up in $501m Suez assets after its $2.52bn bid for all of Suez Australia failed after Suez and French Conglomerate Veolia announced a Euro13bn global merger.

Cleanaway has also announced its intention to take 100% control of the waste-to-energy market and announced during the February reporting season, its intent to buy Maquarie’s stake in a shared NSW energy from waste project (EfW), which holds extensive offshore EfW experience.

More M&A to come

ESG M&A is expected to continue featuring strongly in 2022 as capital-rich investors eye ESG assets in a highly competitive market. 

Supply chain issues are also likely to drive strategic M&A and divestments as companies review strategies through an ESG lens. Pent up demand post-covid and low funding costs have also generated a strong pipeline of deals.

Gilbert & Tobin in Lexology predict more ESG-drive M&A will surface in 2022. 

Gilbert & Tobin expects expects that this year, ESG investors will also take a more active role in making ESG Issues more significant in structuring M&A deals. As an example, the adviser points to the Brookfield bid for AGL, which was accompanied by pledges to bring forward the company’s net zero emissions target by 12 years, and another $10bn investment in the energy transition by closing down AGL’s remaining coal power power stations 15 years earlier than planned to 2035.

The adviser expects coal-fired power stations will continue to attract ESG commentary and investor interest in 2022 and beyond.

For 2022, Gilbert & Tobin expects:

-Continued activity in the energy sector (divestment of fossil fuel assets, purchases of renewables assets;
-M&A in other ESG-sensitive areas such as food and agriculture and healthcare;
-Continued M&A as public companies divest assets to align with ESG strategies; 
-An increased focus by bidders on ESG as part of due diligence.

Meanwhile ACCC chief Rod Sims has called for an overhaul of merger and takeover laws, saying the laws fall short of international standards and consumers are losing out through higher prices due to a lack of competition.

Sims wants to change the law to ensure companies must formally notify the ACCC and seek its approval for mergers, and to lower the bar for onus of proof.

The ACCC also plans to introduce special rules for tech multinationals.

PWC expects also expects M&A activity to continue in 2022.

According to PWC research, 88% of Australia’s CEOs expect growth in the Australian economy and the firm expects Australia will witness strong “buy side” activity this year, with buyers attempting to avoid bidding wars through exclusive deals. Markets will also be keeping a keen eye to election pledges.

PWC’s Australian M&A Outlook: Energy, Utilities and Resources (EU&R) says ESG performance has become a key deciding factor for both buyers and sellers.

“More than ever, ESG is driving deals across the EU&R sector in Australia and overseas,” says the report. “In fact, the global push towards decarbonisation has made ESG the leading factor when determining, protecting and creating value in many EU&R deals."

PWC expects the shortage of critical minerals for the transition and batteries in particular will be a key driver of M&A, as competition for commodities escalates and that investors are scouring Australian and global markets for opportunities.

In the oil and gas sector, the firm expects existing companies may evolve in hydrogen in clean gas companies. One avenue to do this is through M&A.

In the power and utilities sectors, PWC notes the energy "gentailer" model is threatened “with most large operators undertaking strategic reviews and exploring divestments and demergers” as renewables companies, oil and gas companies and telecommunications companies all enter the fray. (Telecoms companies are selling electricity and AGL has entered broadband).

PWC also expects a flurry of deals in the health sector over 2022.

Morgan Stanley in a December 6 report Eight Thing to Ponder in 2022, believes 2022 will be a transitional year for infrastructure and utilities, as ESG investment escalates.

The analyst notes 2021 saw an unprecedented return dispersion in gas versus electricity stocks.

“Future gas infrastructure scenarios range from stranding (eg accelerated electrification) to new life (eg retrofitting for a hydrogen economy),” says the report.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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29M AGL APM AXE BHP CWN CWY GT1 ITM NIM ORG OSH PXA SGM STO

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