No easy money in Australian buyouts

By Michael Smith and Alison Tudor

HONG KONG (Reuters) - Buyout targets in Australia, Asia's biggest market for mergers last year, are far from drying up, but demanding valuations and stiff competition are expected to force investors to work harder for their money Down Under.

A wave of Australian mega-deals hit a record last week with a US$16 billion bid for retailer Coles Group Ltd. CGJ.AX, sparking renewed interest. But opportunities for private equity may be constrained by a limit in the number of large attractive targets, rising valuations and shareholder resistance.

"Australia is a very well-served market and that is before global gorillas arrived on the scene," Chris Rowlands, Managing Partner Asia for UK-based private equity fund 3i Group (III.L: Quote, Profile, Research, Stock Buzz), which has not yet taken the plunge into Australia, told the Reuters Hedge Funds and Private Equity Summit.

"It is not as though there is a yawning gap we could march into, so we need to think with some precision about whether there is a place for us there or not," he added.

Total merger deals in Australia doubled to $100 billion in 2006, with about one-fifth of those from buyout firms, according to data from Dealogic. Household names such as Coles and Qantas Airways (QAN.AX: Quote, Profile, Research, Stock Buzz) also became private equity targets.

"Last year's number of deals was a step jump in data. Ten or 12 of the largest companies are now in private equity talks. This will pass," said Grant Fleming, managing director at investment advisory firm Wilshire Australia Pty Ltd.

Private equity funds, which buy companies with the aim of turning them around and selling them at a higher price, have been attracted to Australia's mature and large companies, stable economy and compulsory pension schemes which provide an abundance of capital.

Buyout giants such as U.S.-based Kohlberg Kravis Roberts KKR.UL and Caryle Group CYL.UL have set up shop in what some private equity firms now see as a crowded arena.  Continued...