A third paradigm for Aus-Japan investments

New energy and partnerships emerge as the notable, and to an extent related, developments of merger and acquisition (M&A) activity between Japan and Australia during the past year.

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These new energy partnerships, driven by Japan’s need to ensure secure sources of imported energy in a decarbonising world, will have an essential role if Australia is to continue as the main energy supplier to Japan leading up to 2050 and beyond.

“Japanese-Australian partnerships are extending to battery materials, decarbonisation and renewable energy initiatives.”

The Japanese Government announced a significant increase in its carbon reduction targets which is driving a re-think of corporate strategy and a further shift in investment priorities. As Japan explores various technology options and hydrogen sources, Japanese companies are involved in hydrogen supply chain–related projects with countries around the world, including Australia, Brunei, Indonesia, Malaysia, Singapore, Saudi Arabia, the United Arab Emirates and the United States.

According to the latest Herbert Smith Freehills’ 2021 Japan Australia Investment Report, Japanese-Australian partnerships are rapidly growing in number, particularly those focused on the production and transport of hydrogen and ammonia for both the domestic market and exports. Partnerships are also now extending to battery materials, decarbonisation and renewable energy initiatives.


Lower than anticipated

Despite the strong overall performances of Australia and Japan, Japan-Australia M&A activity was lower than anticipated. There were 33 M&A deals (27 acquisitions and 6 divestments) and, of the total transaction value for the 11 deals disclosed, the value was just over $A1.3 billion.

In fact, one single transaction contributed the bulk of the total value: TAL Dai-ichi Life’s $A900 million acquisition of Westpac’s life insurance business. The other notable transaction in 2021 was the divestment by Japan Post Toll of the Australian and New Zealand operations of its Toll Global Express business to Allegro Funds for a reported $A7.8 million deal value. This resulted in a $624 million loss for Japan Post Toll for the 2021/22 financial year.

The level of M&A activity between Japan and Australia was consistent with the COVID-related decline in 2020 activity levels. Activity in both years was slightly lower by volume and considerably lower by value than annually during the 2017 to 2019 period (described as “more deals, more dollars and more sector diversity” in Herbert Smith Freehills’ 2019 report).

The primary reasons for the decrease in acquisitions in 2020 and 2021 were border closures, quarantine requirements, restricted numbers of overseas entrants and internal Australian state border restrictions. Australia’s international border remained closed to international visitors until late 2021, posing significant impediments to the physical site visits that are a key component of due diligence by prospective Japanese buyers. In one instance, a prospective buyer faced the prospect of travelling to Australia by a private jet and undertaking hotel quarantine in multiple States. Restrictions are now easing but challenges remain.

Looking forward, the fundamentals of the Japan-Australia economic relationship are strong. Japanese investors reinvested profits and continued to fund existing projects. Relationships were not diminished by the challenges of COVID-19 and established companies will continue to invest as new opportunities arise. New entrants are likely to return once the impediments to movement are removed to build on the 2017 to 2019 trend when approximately half the acquisitions were by new entrants to Australia.


New partnerships

There were a growing number of partnerships in each of 2019 and 2020 but the annual number of new partnerships doubled in 2021. Publicly available information revealed 25 new partnerships, including alliances, collaborations, joint feasibility studies and memoranda of understanding. As at the time of publication, there are over 40 new energy-related partnerships with regular new announcements.

Because project feasibility is uncertain and these new technologies are largely unproven in large scale production, many Japanese companies are adopting a portfolio approach to their investment in Australian-based new energy projects. This involves participating in multiple partnerships/projects located in different Australian states with different counterparties, technologies and even differing products.

This also has the consequence of a much more people-intensive era in the bilateral relationship that places at a premium Australia’s ability to do business with Japan and the extent of cross-cultural skills in both workforces.

The new energy partnerships involve more Japanese and Australian parties working collectively at a project level than ever seen before to bring together the required technology, financing and logistics supply chain infrastructure to make a project a reality. Also notable and new is the significant support available in the form of grants, concessional funding and credit support from the Japanese, Australian federal and state governments and numerous government agencies in both countries.

These partnerships are a distinct third paradigm in the Japan-Australia business relationship which started (firstly) with joint ventures in minerals, energy and food in the 1960s and evolved with (secondly) numerous 100 per cent or majority acquisitions of a variety of domestic businesses from 2007.

It appears likely the partnership model is here to stay and will form the basis of significant new investment over the next five to 10 years as projects are commercialised.

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Key drivers for the future

The underlying drivers of Japanese investment into Australia in the short, medium and long-term include no change to the underlying macro-economic factors that have previously driven investment (stable government, population growth, economic strength, rule of law) and a significant lift in the profile of bilateral co-operation at government-to-government level.

2022 should hopefully see an end to COVID-19 conditions which led to short-term absence of new entrants to the Australian market as well as lower levels of activity overall, given the difficulty undertaking due diligence and negotiations without being able to physically visit Australia.

A mixture of divestments in traditional areas and an increased focus on investment in new emerging sectors was evident even in the smaller deal numbers and should continue in 2022 as companies accelerate mid-term business plans and respond to Government policy settings on decarbonisation.

Environmental, social and governance (ESG) considerations are now a fundamental threshold criterion in investment decisions, especially for listed Japanese corporations driven by greater scrutiny of decisions by shareholders and independent non-executive directors.

“New Energy” continues to be strongly supported by Japanese and Australian governments, financiers, credit agencies, energy companies, engineering firms, port owners, trading houses and funds.

Australia is increasingly recognised for its innovation, technology and research & development opportunities.


2022 started positively for M&A deals and investment in new partnerships announced. Herbert Smith Freehills predicts this will continue – particularly from those companies who are able to take advantage of an established network in Australia as they continue to invest in new sectors as part of their mid-term business plan to diversify revenue sources.

With international business travel between Japan and Australia resuming, we expect there will be a significant number of new entrants coming into the Australian market with growing numbers of deals and, particularly, partnerships. Overall activity will revert to pre-COVID-19 levels and ESG, new energy and technology will be the drivers for many of the transactions.

The consequences arising from the recent events in the Ukraine will further strengthen the strategic importance for a stable supply of both traditional and new energy from Australia to Japan.

Ian Williams is Senior Advisor and Tatsuki Shiratsuchi is Solicitor for Herbert Smith Freehills


You can read the full Japan Australia Investment Report 2021 here.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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