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Mining services sector on the menu
Mining services sector on the menu

Foreign companies and private equity players are circling not only miners and explorers but the companies that service them, an Ernst & Young transactions adviser says.

Citing "very strong" domestic and international interest in Australia's resources industry, E&Y Oceania managing partner Graeme Browning said private equity, in particular, was homing in on the mining services sector.

Mr Browning said the targets tended be lesser-known private companies that provided services like transport, catering and housing in remote mining areas.

Acquisition models employed included acquiring such companies and then growing their business or looking to buy a 50 per cent shareholding.

He urged Australian corporations not to be too cautious about pursuing mergers and acquisitions because of the uncertain global environment.

"I'm encouraging Australian companies to really just accept that we're in for a period of fairly significant volatility," Mr Browning said.

"If Australian companies aren't able to diligently and appropriately see through the noise and appropriately evaluate their transactions, then others will, whether foreign companies or private equity businesses.

"Our corporates will end up playing catch-up down the track."

An E&Y survey of global business confidence found that, despite being positive about the local economy, 51 per cent of executives in Australia and New Zealand thought the global economy was in decline. Forty-one per cent of companies expected to make an acquisition in the next year, down from 46 per cent in the last Capital Confidence Barometers six months ago.

But the chances of deals being made had improved with 25 per cent of Australasian companies planning to divest, up from 15 per cent and the highest percentage since the global financial crisis.

Companies were well capitalised after a positive reporting season and the gap between buyers and sellers in terms of valuations had also narrowed.

"What we're seeing now is a combination of probably some adjustment down by sellers but also probably some greater ability for buyers to pay a bit more for assets," Mr Browning said.

However, 30 per cent of the Australasian respondents were preserving "unusually high" levels of capital, up from just 8 per cent earlier in the year and well above 19 per cent globally.

The survey was conducted in July and August, a time of considerable turmoil in global markets.