Global investor interest in Australian equities has been expanding fast in recent years, as fund managers recognise the attractions of a stockmarket which simultaneously offers exposure to an increasingly broad-based, strongly performing economy and a safe haven against the problems elsewhere in the Asia-Pacific region.
Privatisation and demutualisation have added liquid new stocks to a market once dominated by the resources sector, while the high level of M&A and restructuring activity in the hot telecom and media sectors has attracted greater attention from fund managers.
And competition in the primary and secondary equities markets in Australia between international and domestic securities firms has become increasingly intense, bringing benefits to issuers and investors alike.
Interest from international investors in Australian equities is riding high, although the year to date has seen only a handful of significant equity offerings to satisfy the increasing overseas appetite for paper.
Despite all the regional and global turmoil, activity in 1998 was fairly dynamic and landmark deals such as the AMP demutualisation saw the emergence of new primary market offering structures.
All eyes are now on the potential Telstra 2 issue in which the government is due to raise at least A$18bn, based on current market prices for Telstra. Nevertheless, there have been some enticing deals for domestic and international institutions - especially in the sector so in vogue around the world, telecommunications and media.
Most of the transactions comprise block deals as corporates unwind cross-shareholdings and refocus on core businesses. Moreover there is also merger & acquisition activity such as the unwelcome Cable & Wireless bid for AAP Telecommunications - which itself raised A$150m in a global secondary offering in early March through ABN Amro, Credit Suisse First Boston and JB Were.
"The M&A activity we are now seeing, such as the offer for AAPT, serves to underline just how active the communications and media sector really is," says Campbell Lobb, director in charge of equity capital markets at CSFB in Sydney.
Steve Davenport, head of equities at Merrill Lynch, agrees. "The year to date has been somewhat unremarkable in terms of equity issuance by Australian corporates, although the general conditions are favourable," he says.
However, the telecom and media sectors are still providing the most appealing issues, as in 1998, and that trend is set to continue through to the next Telstra offering and eventually the IPO of the Australian operations of UK mobile phone group Vodafone, probably next year.
Other telecom issuers are also lining up to issue. Hutchison Telecommunications Australia has reportedly mandated Salomon Smith Barney and Warburg Dillon Read to run a flotation that could raise A$500m.
Merrill Lynch was at the forefront of the sale in late March of 75m shares in C&W Optus of the total 124m shares held by Kerry Stokes' Seven Network. Merrill acted alongside bookrunner Warburg Dillon Read in the A$273m selldown - which was arranged as an accelerated bookbuilding rather than a firm underwriting or bought deal.
"Whereas in a bought deal the intermediary would need to factor in a discount in order to protect the firm's capital, the accelerated bookbuild process allows the seller and intermediary to enjoy a harmony of interest," explains Davenport.
He adds: "Most block sales by corporates have traditionally been arranged as bought deals. But in this instance Seven management was convinced that the best price would be achieved through a global bookbuild process to access the greatest possible demand from around the world.
"This worked extremely well, achieving a rapid placement at a discount of just 1¢ to the prevailing market price of A$3.66 - much smaller than the standard discounts the market normally expects. It demonstrates that the Seven management were prepared to be very flexible in opting for an atypical structure to achieve an unusually attractive result, despite the fact that there were some risks to the seller in not demanding a fixed price deal.
"What the management really opted for was to allow Warburg and Merrill to unlock their joint global distribution capability rather than our appetite to assume risk."
David Graupner, managing director of corporate broking at Merrill Lynch, believes that the bookbuild method "produces a fairer price for all as it represents the outcome of competitive bidding".
He believes that, from the perspective of the institutions, "it is fairer as it enables buyers to compete based on their interest in obtaining shares, whereas in a fixed price offering it is difficult to differentiate between buyers as you cannot gauge their keenness of interest as expressed by the price they are prepared to pay."
Davenport will not be drawn on the precise geographical distribution of the Seven and Optus sales, although he says that "Optus has ongoing support from all institutional quarters around the world and the placements mirrored quite closely the IPO distribution".
The highly successful IPO of Optus was handled by Merrill and WDR in November last year and the institutional allocation was placed roughly 40% to Australasia, 30% to the US and 30% to the UK, Europe and Asia.
In most cases, though not all, large blocks tend to be sold at a discount. However, an exception was the placement of News Corporation's stake of 25m shares in TAB Limited to raise A$ 87.1m in early March. The deal, also led by Merrill Lynch, was priced at A$3.49 - a premium of 3¢ to the market price on March 5.
Simultaneous with the Seven selldown, Merrill Lynch also executed the sale on March 31 of 16.52m Optus shares held by Publishing & Broadcasting Ltd (PBL) - one of the flagship enterprises in the Kerry Packer empire.
The sale actually achieved a 1¢ premium, at A$3.67, and was conducted as a bought trade. "The trade was the culmination of a three month effort in which the entirety of PBL's 64.5m share stake was liquidated, with most of the shares sold by us on an agency basis," explains Davenport.
"Again, the agency transaction is a relatively unusual method of block disposal in the Australian market, but it was highly successful as PBL announced later that they obtained an average price of A$3.84. What we achieved was significant in that we managed to access liquidity for Optus around the globe without disturbing the market. We take our hats off to PBL for choosing the less obvious but more effective solution to the block sale."
Packer's PBL was in the news again in late April when leading home-grown Australian brokerage firm JB Were snatched the placement of 48.6m new shares from the hands of Salomon Smith Barney and Macquarie Bank and raised A$499.99m for the company.
"JB Were had not looked likely to win the deal," says a competitor, "because the mandate had looked firmly tied up." However, market sources report that when the Nasdaq market slumped almost 6% on April 19, SSB and Macquarie apparently wanted to renegotiate the terms of their agreement with PBL due to concerns about the direction of stock prices in the global technology sector. This led PBL to offer the deal to JB Were on April 20; the firm snapped up the opportunity and successfully sold the issue on April 21.
"We were given very little notice of the chance to make a bid," recalls Terry Campbell at JB Were, "but we moved quickly, sure in the knowledge that our research team was firmly behind the PBL stock. This was not quite a bought deal, more of a new issue underwriting whereby we received fees for guaranteeing the placement price."
The placement proved a success despite some concerns amongst leading institutions that they should not be buying if Kerry Packer was selling. The jury was out on whether this was a smart sale of shares in PBL at high prices by a very smart operator - or a sensible capital-raising to build a war chest for further expansion of PBL's business franchises in the media and communications sector.
"As a firm we certainly took the view that Packer has a long term game plan in the sector and that the deal represented an excellent opportunity to buy into a leading sectoral play," says Campbell.
The Nasdaq fall-out and concern over Packer's motives led some of the larger institutions to stay away from the issue. "But this was not a problem," says Campbell, "as we managed to access a surprisingly large number of the smaller institutions in Australia as well as significant overseas demand which accounted for around 25% of the take-up."
Of this amount, Campbell reports that demand was split roughly evenly between Asia (mainly western fund managers located in Asia), the US and Europe.
The discount was just 6.2% to the PBL price before trading was suspended in the stock on April 19. However, when trading restarted the stock plummeted over concerns about the issue and the placement price, at A$10.29, was actually a premium to the April 21 closing price of A$10.10.
"What this deals confirms," asserts Campbell, "is that the downside in the market is limited because, when prices slip, the liquidity is there to soak up the sellers with a wave of buying. This was our view before the issue and it reconfirms our willingness to take appropriate risks and back our judgement with our capital and our execution capability."
Leading competitors in Australia praise JB Were's boldness and professionalism. "They really did an excellent job of the PBL private placement in pretty tough conditions," says the head of equities at one leading foreign house.
Another broker wondered if there were any other firms in Australia that could have pulled of the deal at that particular time. "JB Were had a great success with the sale of Solomon Lew's stake in Coles Myer back in February," recalls another banker, "but although that deal is the largest of the year, at A$768m, PBL was a more remarkable achievement as it was a far tougher deal."
A week after the PBL issue JB Were was in the market again with a placement of 12.5m new shares in pharmaceutical distribution concern, FH Faulding & Co Ltd, to raise A$100m to partly fund the firm's A$135m acquisition of Bullivants Natural Health Products.
"As with PBL, Fauldings had been relatively weak in the market," says Campbell, "but the stock was keenly sought, again demonstrating the appetite for value amongst institutions."
The telecom sector will continue to be flavour of the year as, aside from the Telstra issue, a number of potentially exciting transactions are waiting in the wings. The timing of Telstra 2 will be determined by parliament - which is likely to decide in favour of the next issue in June, with the timing likely to be in October or November.
Meanwhile, CSFB and Morgan Stanley Dean Witter have been mandated to lead the flotation of Austar, the largest satellite-system cable television franchise in Australia. Austar is owned by UIH Inc of the US and operates in rural Australia with a subscription base in excess of 300,000.
The brokers concerned cannot comment on the forthcoming issue, but other brokers in Sydney believe the float could raise as much as A$500m to value the enterprise at more than A$2bn.
Merrill Lynch and Goldman Sachs are mandated to lead the year's potentially most alluring internet IPO as PBL has signalled its intention to float PBL Online. Brokers estimate that the enterprise value could be anywhere between A$500m and A$800m, but much will depend on prevailing Nasdaq valuations of US internet plays.
The deal will be preceded by the float of Travel.com to raise A$23.5m through Ord Minnett, implying a company valuation of A$53m. Another internet play likely to emerge is InvestorWeb, a small deal aiming to raise around A$8m to expand its online stockmarket research service.
Elsewhere, brokers report that there is considerable renewed interest in the Australian resources sector. "International investors are driving this sector," says JB Were's Campbell. "They have clearly decided that Asia, where there is strong demand for Australia's commodities, has bottomed out and so have commodity prices."
Merrill's Graupner points to the transition of the Australian economy which is a powerful lure for foreign buyers. "There have been two major themes that we can say are driving portfolio demand from global investors," he says.
"Firstly, the Asian crisis ironically had a very positive effect on Australia as it has become very clear to the market that Australia is not as reliant on the Asian economies as global investors might have thought. The GDP growth we are currently enjoying validates that story.
"The second and more important change that has emerged is structural. It is now very clear to analysts and to market participants that Australia is successfully making the transition from a commodity driven, natural resources, lower value added economy to a more broad based economy in which sectors such as tourism, financial services and telecommunications have become major constituents of the index."
He continues: "This does not necessarily mean that Australia's core industries are falling away but rather that they have diminished in relative importance. This has significantly increased the attractiveness of the market to global portfolio investors."
Graupner has witnessed the trend for broader geographical interest in the local market. "Traditionally the global investor demand for the Australian market has come from the UK and, to a much smaller extent, Europe," he says.
"There has been a marked increase in portfolio investment from the US and clearly firms such as ours can play a significant role in facilitating that through our global distribution network. The buyers from the UK have not fallen away they have simply been supplemented by a new category of investors from both Europe and US. In fact the historical and new buyers are all increasing their interest in Australia."
Merrill colleague Davenport reinforces Graupner's views. "As Australia has developed into a more broadly based economy in line with other leading economies of the world, the country has been able to attract the attention of the major global investment houses," he maintains.
"This has brought international distribution and underwriting skills and techniques as well as research capability that links Australian corporates to their regional and global comparables."
The net result is growing appetite from global investors for a market that offers both a relatively safe haven against continued uncertainty in Asia - although stockmarkets in the Asia-Pacific region have recently bounced strongly - and exposure to a diversifying and strongly performing economy.
"Australia is attracting growing interest from global investors," says Davenport. "The story has really come together in recent years - effective monetary policy, a strong fiscal position, low and stable inflation, low interest rates, higher productivity and a solid banking system - all achieved during a period of economic turmoil in Asia." EW