M&A activity to direct deal flow
An 18-year Merrill Lynch veteran, Kevin Skelton has worked for the firm in New York, London, Singapore, Sydney and Melbourne where he has been responsible for domestic and cross-border corporate advisory, equity issues and debt financings. He is now country head and chairman of investment banking in Australia, and here he speaks with FinanceAsia about the firm's strategy for the market.
How did Merrill Lynch perform in Australia in 2004?
Skelton: 2004 was a banner year for Merrill Lynch. We made record profits across our global markets and institutional businesses. Our global private client business was also a strong performer - doing better than many of its global peers. Our margin-lending book grew to A$700 million during the year, which is larger than it has ever been. This success can be partly attributed to rising equity markets, which have given our clients a number of good opportunities. It has also been driven by a renewed focus on growing revenues rather than cutting costs.
Merrills has undergone substantial restructuring in recent years, are you now saying the strategy is to grow the franchise?
We're a full service investment bank that focuses on mergers and acquisition advisory, equity sales and trading, primary and secondary equity offerings, cross border debt financing and structured finance. We have a team of research analysts that cover the major stocks and a sales and trading group that ranks in the top five of trading in large Australian stocks.
All of these activities fall under our global markets and investment banking group. Our business here also includes our global private client division and our funds management business. Our strategy in 2004 was one of disciplined growth, both in the business and people. This continues in 2005.
How do you plan to implement this strategy?
In order for us to grow revenues we need to lead a number of successful deals during the year. This requires close coordination between the different divisions of the firm. We'll also achieve our goal by focusing on key sectors such as mining, property and infrastructure. We expect to pick up mandates for all equity type transactions and debt transactions as well. Another area of focus will be quasi-equity deals or hybrids, particularly reset securities. We had significant investor demand for both the Santos FUELs transaction and the QBE convertible notes deal last year, both of which we were the sole lead manager.
Do you prefer to work alone on deals?
We'd rather a sole lead manager role so that we can deliver a clear and consistent message to the market, but in Australia it is typical to have more than one lead manager on a deal. Local issuers believe that having more than one bank helps to broaden the distribution. Having said that, we were credited as being the sole bookrunner on about 90% of the transactions we worked on in 2004 which is quite a feat in a competitive market like Australia.
How do you utilize your global franchise?
We work on foreign deals that have some Australian relevance. Last week, for example, we won a mandate from an Asian client that needs an M&A advisor in this market. And last December, we helped Macquarie Infrastructure Trust Company to list in the US with a $535 million float.
What themes are likely to impact primary and secondary equity issuance in the coming year?
The Australian stock market is now fully priced, so we would expect acquisitions to dominate. CEOs now have the confidence to make purchases in order to grow their businesses. Given where the currency is trading, it also makes sense for them to look offshore for targets. A fully priced stock market will also bring more IPOs.
What does the IPO pipeline look like?
Last year's IPO market was dominated by private equity firms exiting their investments. This pipeline has been pretty much extinguished. Deals in 2005 are likely to come from the sale of infrastructure assets, property trust fund raising and from private companies monetising all or part of their business.
Quite a few IPOs fell bellow issue price in initial trading last year. While the stocks have since recovered, doesn't this suggest poor pricing on behalf of issuers and arrangers?
This probably had something to do with the nature of the IPOs. Because many of them involved private equity owners exiting 100% of their shareholdings, they were priced to maximize the exit price. If this year brings more deals from private companies that are still partly owned and operated by the entrepreneur then pricing might be more balanced.
What will drive issuance in the secondary markets?
Last year there was some obvious block trades as NAB sold its shares in St George and British Airways disposed of its Qantas stake. We expect less of these transactions this year. I think most secondary market deals will be driven by M&A activity and funding of asset purchases, particularly property and infrastructure assets.