Australia Special Report: Downturn under
16 February 2009
Thanks to their investments in Asia, Australian firms have so far steered clear of the worst effects of the recession. But they certainly won’t be seeing another boom year, says Kelly Parsons.
Australia’s top law firms have so far enjoyed relative immunity from the recession-centred challenges facing firms in other common law jurisdictions.
But with Chinese demand for resources slowing and major infrastructure projects beset by funding issues, two valuable streams of work are beginning to suffer.
“The Australian economy traditionally lags behind the world market, due to the commodities cycle, so we haven’t been hit as hard as the UK or US,” says John Weber, executive managing partner of big six law firm Minter Ellison.
“Our primary banking sector had little direct exposure to the financial losses that have crippled so many overseas institutions, and banks here remain tightly regulated and well capitalised.”
According to the Standard & Poor global bank ratings, Australia’s big four banks – Westpac, Commonwealth Bank, National Australia Bank and ANZ – are now some of the largest by stock market capitalisation in the world, ranking ahead of Citigroup, Morgan Stanley, Barclays and Deutsche Bank.
“The Australian banks have been conservative and simply weren’t prepared to take the same risks as banks in the UK and US,” explains Nigel Clark, a finance partner in Minter Ellison’s London office. “The top four major banks are still rated AA and are now licking their lips, both in terms of consolidating domestically and looking to opportunities abroad, particularly in Asia.”
Many partners within Australia’s leading firms are cautiously optimistic and although the jury is out on whether Australia will experience full-blown recession, firms are hopeful they can ride out the next year by relying on a broad spread of practice areas and clients. “We’re fortunate to have a large counter-cyclical practice, which includes the largest litigation group in Australia, contributing nearly 40 per cent of our revenue,” says Clayton Utz chief executive part-ner David Fagan. “Government-related ;work also remains strong, as do our construction and major ;projects departments.”
Robert Milliner, chief executive officer at Mallesons Stephen Jaques, adds: “Mid-tier practices have certainly suffered in terms of general commercial work, but the larger law firms are currently cashing in on a flight to quality by corporates and banks. The unprecedented challenges those clients find themselves facing are very complex and a focus on distressed assets, restructuring, regulation, class actions and sophisticated insolvency undoubtedly pushes work towards the large firms.”
Much of the delay in Australia’s economic decline was underpinned by China and India’s insatiable demand for resources, particularly iron ore and coal. Australian firms reacted to that boom by expanding significantly into Asia.
Of the big six firms, Allens Arthur Robinson leads the pack in Asian operations, with offices in Bangkok, Beijing, Hanoi, Ho Chi Min City, Hong Kong, Jakarta, Phnom Penh, Port Moseby, Shanghai and Singapore. Mallesons has offices in Beijing, Hong Kong and Shanghai; Minter Ellison in Hong Kong and Shanghai; and Blake Dawson and Freehills both have Shanghai operations (with the former also present in Port Moseby and Jakarta). Only Clayton Utz has eschewed the strategy of putting people on the ground, although this has not stopped the firm profiting from the region, advising on both the $15bn (£10.05bn) Taiwan High Speed Rail project and the A$2bn (£910m) Lao-Thai Nam Theun 2 Hydroelectric project in 2008.
With the resources boom over, China-related work has now shifted to advising Chinese companies on their increasingly opportunistic acquisitions.
“China still has a lot of reserve and we’re continuing to see interest on the resources side,” says Fred Chilton, a corporate and commercial partner at Allens Arthur Robinson. “The number of Chinese companies looking to secure their supply chains in Australia has been noticeably increasing and we’re advising several Chinese companies looking for investments here at lower prices.” A regional Allens team recently acted for Chevron in negotiations with Chinese state-controlled PetroChina.
Mallesons has also been advising on several large China-related deals, including acting for Chinalco in relation to Chinalco’s and Alcoa’s acquisition of a 12 per cent interest in Rio Tinto for $14bn (£9.38bn) and advising Chinese company Hunan Valin Steel Tube & Wire Co on its acquisition of a 11.4 per cent stake in Australian iron ;ore ;explorer ;Golden ;West Resources. Minter Ellison likewise advised Midwest Corporation on its A$1.3bn (£590m) off-market takeover by Sinosteel Ocean Capital Pty, the first hostile takeover by any Chinese company outside China and the first in Australia’s mining sector.
Given the impressive M&A activity of 2008, this year was always going to be an anticlimax for Australia’s corporate lawyers. Two of the most high-profile deals – BHP Billiton-Rio Tinto and BA-Qantas – may have turned out to be non-events, but the legal bills still improved the fortunes of several firms.
“In 2008, we had huge transactions such as the merger between Westpac and St George banks and BHP’s pre-conditional offers for Rio Tinto,” says Allens chairman and co-head of M&A Ewen Crouch. “In the first six months of 2009 we’re certainly not expecting to see deals of the same scale.”
Allens advised both St. George Bank on the A$67bn (£30.43bn) merger with Westpac (advised by Gilbert & Tobin) and acted alongside Linklaters for longstanding client Rio Tinto. Allens also acted for Qantas alongside SJ Berwin, with Mallesons and Slaughter and May advising British Airways on the proposed merger.
Clayton Utz, meanwhile, acted as Australian counsel for the bookrunners and lenders on the $55bn (£36.84bn) multi-currency term and revolving facility and subscription agreement for BHP’s proposed takeover of Rio Tinto.
Clayton Utz was also busy advising Origin Energy on its A$9.6bn (£4.36bn) deal with US liquefied natural gas operator ConocoPhillips, to jointly develop Origin’s vast coal seam resources in Queensland, and the concurrent defence of a hostile takeover bid by BG Group – a deal widely regarded in the market as the best response to a hostile bid in recent corporate history.
Despite governments across Asia, and in Australia in particular, pushing infrastructure projects as a way to boost struggling economies, private sector participants are struggling to fund large projects. “We’re on the cusp of a new chapter in the infrastructure sector at the moment,” says Milliner. “Australia has come to rely on the PPP model and the government has been highly vocal about its desire to ensure those continue. But given the current challenges around foreign bank funding, projects are increasingly coming under stress and financing for large projects can only come from direct government funding.”