Australia set for strong M&A year though foreign investor limits dampen sentiment

By Jamie Freed

SYDNEY (Reuters) - Australia's privatisation drive is set to draw billions of dollars of acquisition funds in 2017 adding to what corporate advisers expect to be a strong year for dealmaking, albeit one tempered by potential restrictions on foreign suitors.

A flurry of smaller deals involving firms battling to stay competitive in an era of disruptive startups is likely to add to an infrastructure privatisation push aimed in part at narrowing public budget deficits, four corporate advisers told Reuters.

"There aren't enough deals to satisfy the appetite of infrastructure investors right now," said David Larocca, Oceania managing partner of transaction advisory services at EY. "Australia is a relatively stable economy and relative to other countries around the world the outlook remains good."

The state of Western Australia could be next in line for a windfall - as much as A$2 billion ($1.5 billion) from selling the Port of Freemantle if its government is reelected in March. That would follow Victoria's A$9.7 billion sale of the Port of Melbourne in September, and New South Wales' A$16.2 billion sale of Ausgrid a month later.

But Ausgrid's sale to local pension funds instead of higher-bidding Chinese and Hong Kong investors on national security grounds was behind Western Australia pursuing a A$15 billion stock market flotation of Western Power rather than a direct sale.

After Ausgrid, the federal government imposed limits on foreign investment for next year's A$4 billion sale of New South Wales power grid Endeavour Energy. Such developments could limit participation in merger and acquisition (M&A) deals, bringing down valuations, the corporate advisers said.

"There is some more nervousness around (foreign investors) participating in processes where there is likely to be an issue," said Aidan Allen, head of investment banking for Australia and New Zealand at Citi.

"Our sense is that the government is making efforts, however, to be more transparent," he said in reference to Endeavour.

BUSY BANKS

Power, infrastructure and transportation made up about 30 percent of the US$120 billion of Australian M&A deals announced to date in 2016, Thomson Reuters data showed. The country's overall M&A total was down just 1.2 percent from a year earlier.

For next year, EY said a survey of its Australian and New Zealand clients showed 96 percent expected the total to be stable or improve. Moreover, 65 percent of respondents said they had identified five or more potential M&A targets.

At annual general meetings over the last six months, firms which told shareholders they were examining M&A opportunities included wealth manager IOOF Holdings Ltd and miner South32 Ltd.

Flight Centre Travel Group Ltd told stakeholders it aimed to expand in China through acquisitions or partnerships. Agricultural chemicals maker Nufarm Ltd said a wave of M&As in its industry meant assets might come up for sale.

"Most law firms and banks right now are busy" with potential M&A deals, said David Holland, head of Australian capital markets at law firm Baker & McKenzie. "A lot of these M&A deals will drive secondary capital raisings to fund them."

FOREIGN FEAR

Deals that may attract inbound investment include Wesfarmers Ltd's possible sale of two coal mines that sources said could fetch over A$2 billion - a prospect some market watchers took as a sign that rising commodities prices could fuel a return of Australian mining deals after a three-year slump.

But the Ausgrid decision spooked foreign investors beyond China and Hong Kong. Large Canadian pension funds now consider Australia to be a riskier market, said an investment banker specialising in infrastructure deals, who was not authorised to speak publicly on the matter and so declined to be identified.

Caisse de depot et placement du Quebec did not respond to a request for comment while Canada Pension Plan Investment Board declined. Ontario Teachers' Pension Plan said it continued to view Australia as an "excellent and attractive" target market.

($1 = 1.3723 Australian dollars)

(Reporting by Jamie Freed; Editing by Christopher Cushing)