Play 1: Strategically using transactions for reinvention

Our research shows transformational deals are once again on the rise. But which reinvention strategy is right for your organisation? Corporate strategy drives deal strategy which, in turn, drives M&A integration strategy. Your reinvention agenda, therefore, must align with your overall strategy.

This requires absolute clarity over the core attributes that will make your company competitive. For instance, what capabilities do you need to acquire to reinvent your business model? Where can you divest, outsource, and/or simplify your complex or non-core back-office functions? Transformational M&A has the power to turbo-charge your reinvention and super-charge value creation, but it all comes down to clarity on strategy. 

We explain the key reinvention strategies to unlock value creation in M&A here:  

1. Horizontal integration

Acquisitions in new markets or segments have the potential to accelerate horizontal integration (i.e. growing operations at the same level of the value chain, in the same industry) and improve diversification. Metcash, the parent of supermarket brands IGA and Foodland, recently announced the acquisition of Superior Food Group, Australia’s 3rd largest foodservice distributor for c.$412m. Should the acquisition gain ACCC approval, it provides Metcash access to new B2B customer segments (e.g. hotel, restaurants, cafes, health, education, etc.), across an expanded product range (across branded & private label) and unlocks new last-mile capabilities to access a greater share of the non-retail food wallet, providing a natural hedge against consumer shifts between in-home (via grocery) vs out-of-home dining.

2. Vertical integration

M&A has the potential to facilitate access to improved margin accretion and competitive advantage by consolidating operations upstream or downstream through vertical integration. Coles acquired two automated milk processing facilities from Saputo for approximately $110m in early 2023 under a vertical integration strategy. The facilities are predominantly used to process Coles' own brand 2L and 3L white milk products and are located close to Coles’ existing distribution centres. Through the acquisition up the value chain into processing, Coles has improved its security of milk supply and its supply chain resilience, with opportunities for further growth through new product innovation.

3. Access to new capabilities

M&A can accelerate access to new capabilities, unlocking new sources of strategic advantage and improved resilience in the face of disruption. In late 2023, Orica acquired Terra Insights, a leading provider of ground sensors, satellite tracking and digital data delivery technology for geotechnical, structural and geospatial monitoring in mining and infrastructure for approximately $560m. Following the acquisition, Orica has created improved competitive advantage in its GroundProbe platform and unlocked opportunities for further growth through expanded cross-sell across a broader technology-enabled service capability.

4. Pure play positioning

Investment and focus can be a challenge for non-core businesses. Separating out non-core businesses can trigger an upward valuation rerating in a listed entity where a pure play proposition is created. In late 2023, GUD Holdings sold Davey Water Products for $65m, positioning the remaining business as a pure play automotive parts business.

5. Stable cash flow delineation

Businesses with stable earnings tend to be valued significantly higher than businesses with less stable earnings. Where the two are combined in a listed entity, this has the potential to create risk contagion or discounting in the valuation of the group. In mid 2022, Tabcorp completed the spin-off of its lotteries and Keno business into the ASX-listed Lottery Corp. This demerger afforded shareholders improved choice by separating the lotteries business, with its strong, ‘infrastructure-like’ cash flow generation, from the more volatile wagering business (where the top line has flexed +/-c.10% over five years prior to the transaction).     

6. ESG portfolio delineation

Higher carbon exposure businesses in a portfolio have the potential to erode value across a group of companies. In mid 2022, BHP’s oil and gas portfolio demerged from the broader BHP group and merged with the biggest ASX-listed oil and gas company (by market cap) to create a global top 10 independent energy company (by production) and the largest energy company listed on the ASX. The combined business was positioned with a high margin oil portfolio and long-lived LNG assets to help supply the energy needed over the energy transition. It also afforded BHP shareholders improved choice in their exposure to carbon. Explore ESG portfolio delineation further in Play 2: Pursuing decarbonisation and other ESG goals via M&A.

_{^{Source: ASX Announcements, Standard & Poor's Capital IQ}}