Ernst & Young's Oceania Transaction Advisory Services Leader Graeme Browning, says while ASX200 companies are generally well-capitalised, the fear that global markets will freeze again is keeping most companies on the sidelines with their cash.

"Those companies with the confidence in their longer term strategy and the courage to make prudent purchases may well find 2012 is an ideal time to act. These are the times to get ahead of your competition, rather than growing in lock step," he says.

"SAB Miller's acquisition of Fosters is a good example of this."

However Browning says private equity, active in the past six months, is likely to continue to buoy the Australian M&A landscape into 2012, buying and selling mid-market businesses that would traditionally be IPO candidates or ASX200 acquisition targets.

"The ongoing European sovereign debt concerns have pushed companies into taking unusually conservative positions. The concerns are valid and understandable, however the downside is missed opportunity. Doing nothing might be a safe option but if your competitors are prepared to be a little bolder you might find you get left behind," he says.

"Companies are passing up acquisitions now that they will end up buying in a few years time at a premium."

Browning says that regardless of how the European debt issues are resolved, the shake-out will have a ripple effect globally, particularly for those companies with operations in Europe.

"Inevitably, there will be winners and losers."

Low gearing but focus remains on capital preservation

Ernst & Young's most recent bi-annual Capital Confidence Barometer, released in October, found 30% of Australian corporates were focused on preserving capital. Browning says this sentiment may well be higher now given concern around the ongoing European sovereign debt issues.

The October Capital Confidence Barometer also confirmed the low debt levels in corporate Australia, with nearly 80% of those surveyed having a debt to capital ratio of less than 25%.

"These companies are well positioned to take advantage of considered and strategic transaction opportunities as they arise. The question is will they be bold enough to seize the opportunity?"

Browning says company earnings should remain positive but in this low growth environment earnings will likely continue to be driven by cost cutting and efficiency measures. Well considered and strategic transactions can help a company break away from low growth peers."

Divestments

The New Year is likely to bring an uptick in corporate sales of non-core assets, with "fair" valuations and an active private equity sector likely to make it a relatively good time for divestments, says Browning.

The October Capital Confidence Barometer found 26% of Australian companies planned to make divestments inside 12 months, with the main drivers listed as focusing on core assets and to shed underperforming business units. The Capital Confidence Barometer also identified a narrowing in the value gap between buyers and sellers, suggesting that more deals are going to get done.

Private equity

Ernst & Young's Oceania Private Equity Leader, Bryan Zekulich, agrees private equity deal activity in the mid-cap market is likely to remain strong in the first half of 2012.

"Overall we do expect deal activity to continue and not just from Australian private equity funds. Global and regional funds are increasingly looking at investments here because of the stable market and good growth prospects relative to many other markets."

"We also expect to see a number of European corporates with global brands looking at different ownership structures for their regional assets, and private equity would be an obvious candidate for these deals."

Zekulich says the question mark over the level of private equity activity through 2012 will be the level of available liquidity and global debt markets, with PE-backed assets typically more highly leveraged than corporates and with not insignificant levels of European bank financing.

"In this regard we expect to see more overseas hedge fund buyers in Australia looking at PE assets that need to re-finance in the next 12 months or so," he says.

Select sectors to dominate 2012 deals

Deal activity in 2012 is likely to be dominated by resources, infrastructure and government asset sales.

Browning says some further consolidation in financial services is also on the cards as is rationalisation in the property sector.

"The resources sector has been very strong and it would require a fairly drastic change for that to soften markedly. We see no slow down in inbound investment in this sector," he says.

Infrastructure and mining services deals will also be stimulated by the continued resources investment.

IPOs

Browning says it is difficult to predict when the IPO market will return.

While Ernst & Young's year-end Global IPO Update ranks the ASX at number three globally for volume of listings in 2011, this was primarily driven by small exploration and development companies in the resources sector.

In 2010 there were 88 IPOs on the ASX which raised a total of US$7.758 billion, compared to 91 this year (January to November) raising just US$1.093 billion.

"Businesses needing capital for growth that would have considered an IPO when markets were stable are instead turning to private equity or trade buyers," he says.

"Clearly that won't change until there is a sustained period of confidence and stability in equity markets and it is difficult to predict when that might be."

www.ey.com.au