A tough stance by Australia's competition regulator and a strong Australian dollar will drive Australian companies to look offshore for targets as takeover activity ramps up over the coming year, according to Macquarie Equities.

Below-average gearing, strengthening cash flows, and recovering management confidence will "almost certainly" lead to pick-up in merger and acquisition activity, Macquarie analysts said in a report Tuesday.

"We expect the volume of offshore M&A by Australian companies to once again be strong over this cycle as the Australian economy has recovered well ahead of the rest of the world, providing a solid domestic earnings base for most companies," the analysts said.

Australia's big four banks - Commonwealth Bank of Australia (CBA.AU), Westpac Banking Corp. (WBK), Australia & New Zealand Banking Group Ltd. (ANZ) and National Australia Bank Ltd. (NAB) - are likely to look offshore for acquisitions as the regulatory environment restricts opportunities to expand at home.

The ACCC has taken a strict stance on mergers and acquisitions recently. In December it rejected Caltex Australia Ltd.'s (CTX.AU) proposed A$300 million takeover of 301 Exxon Mobil Corp. (XOM) filling stations and GUD Holdings Ltd.'s (GUD.AU) proposed A$266.8 million takeover of rival kitchen appliance supplier Breville Group Ltd. (BRG.AU). Last week it surprised the market with its announcement it wouldn't allow NAB's A$13.29 billion bid for AXA Asia Pacific Holdings Ltd. (AXA.AU).

"Australian banks have been at the heart of domestic and, to a lesser degree, regional consolidation in the banking sector over the last two years; helped by strong balance sheets, largely pristine asset quality and AA credit ratings," the Macquarie analysts said.

"However, the outlook is less favourable domestically where it appears domestic regulators are concerned about the level of concentration in the industry. This is likely to lead to the Australian banks searching further afield for growth, with the banks likely to have a broad choice of targets with the continued shakeout from the global financial crisis."

Already restricted by the government's so-called "four-pillars" policy, some of the major banks are looking to Asian acquisitions to drive revenue growth.

ANZ, which already has a strong focus on expanding in Asia, is considering a bid for Dallas-based Lone Star Fund's controlling stake in Korea Exchange Bank (004940.SE), currently valued at US$4.1 billion as it looks to boost its presence in Asia, a person familiar with the situation said Wednesday.

Meanwhile, Commonwealth Bank of Australia said Wednesday that it plans to acquire a 20% stake in small lender Vietnam Investment Bank, marking the bank's first corporate transaction in that fast-developing Asian economy.

While NAB has said it is pursuing its options, which include legal action, with regards to the ACCC finding, analysts have said the bank is more likely to expand in the U.K. if it can't take over AXA APH. NAB put in an indicative bid for 318 Royal Bank of Scotland branches there, people familiar with the situation have said.

Other companies with a global mergers and acquisitions focus that are expected to be active over the coming year include BHP Billiton Ltd. (BHP), Rio Tinto PLC (RTP), CSL Ltd. (CSL.AU), Resmed Ltd. (RMD.AU), Sonic Healthcare Ltd. (SHL.AU), Ansell Ltd. (ANN.AU), QBE Insurance Group (QBE.AU), Lend Lease Group (LLC.AU), Westfield Group (WDC.AU), Oz Minerals Ltd. (OZL.AU), Sims Metal Management Ltd. (SGM.AU), AWE Ltd. (AWE.AU), Beach Energy Ltd.(BPT.AU), Billabong International Ltd. (BBG.AU), Worley Parsons Ltd.(WOR.AU), Aristocrat Leisure Ltd. (ALL.AU), Iress Market Technology Ltd. (IRE.AU) and Seek Ltd. (SEK.AU).

"Australian companies of scale which have the ability to issue relatively cheap debt in global markets are best placed to make offshore acquisitions, benefiting from both a strong Australian dollar and cheap financing," the analysts said.

-By Rebecca Thurlow, Dow Jones Newswires; 61-2-8272-4679; rebecca.thurlow@dowjones.com
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