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STRICTLY CONFIDENTIAL
52nd Japan-Australia Joint Business Conference
Arthur Ozeki
13 October 2014
STRICTLY CONFIDENTIAL
01 Introduction to Macquarie
PAGE 3
Introducing Macquarie Global provider of banking, financial advisory, investment and funds management services
New Zealand 3 locations
Australia 9 locations
Africa 2 locations
South America 3 locations
Asia 14 locations
Middle East 2 locations
Europe 12 locations
North America 28 locations Fixed Income,
Currencies and Commodities
Banking Financial Services
Macquarie Capital
Corporate Asset Finance
Macquarie Securities Group
Macquarie Funds Group
Macquarie Group
45-year history
Market Capitalisation of
$A18.6bn 13,900 employees
$A433bn assets under management
A2/A- credit rating
$A851m in Net Profit for FY2013
PAGE 4
A long history of profitability
yrs 2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0
$Ab
$1,265m
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000 0
Profit Staff number
PAGE 5
Asia is a key part of our 14,000+ global team
Asia Staff: 3,447
of
2,685
Americas
Staff
6,533
Australia
Staff
3,447
Asia
Staff
1,248
Europe, Middle East and Africa
Staff
PAGE 6
Our presence in Asia today
Seoul
Jakarta
Tokyo
Beijing
Taipei Hong Kong
Kuala Lumpur Singapore
Shanghai
Bangkok Manila
Mumbai
Gurgaon
Hsin-Chu
14 locations /11markets $A1,043m FY14 operating income
3,447 Staff ~50%
Global Shared Services
90% Approx. of
country heads are local
16 Membership licensed ac
ross
regional stock exchanges
30m Every day
In Asia
People use infrastructure managed by Macquarie
Key platform cross border trade be
twee
n
ANZ, EMEA & US
STRICTLY CONFIDENTIAL
02 Historical trends in
Australian FDI
PAGE 8
0 20 40 60 80
100 120 140 160 180 200
US
$ bi
llion
s
FDI Inflows into Australia are quite robust
Source: UNCTAD
2013 global FDI trends
Australia: #9 , $49,826m
Japan: #65 , $2,304m
Australia is a key target destination for FDI, ranking 9th among high growth economies such as Mexico and India
Conversely, Japan ranks 65th
Resources remains a large component of FDI into Australia: — Mining (38.6%) — Manufacturing
(14.1%) — Finance & Insurance
(11.2%) — Wholesale & retail
(9.1%)
PAGE 9
Historical FDI into Australia as of 2013 Japan is a major investor into Australia
Source: Department of Foreign Affairs and Trade
US, UK, Japan, Singapore, HK are the top investors into Australia as of 2013
Japan is 3rd after US and UK in FDI stock in Australia as of 2013
In 2013, approximately 34% of total FDI inflow was inward cross border M&A
The most active industries for the inward M&A in 2013 were: — Energy (26.6%) — Mining (20.1%) — Financial Services
(10.0%) — Services (10.0%) — Leisure (4.6%)
Rank Country FDI ($b) % of total M&A M&A % of FDI 1 United States 657.9 26.7% 5.2 0.8% 2 United Kingdom 562.9 22.9% 1.7 0.3% 3 Japan 131.0 5.3% 2.0 1.6% 4 Singapore 60.5 2.5% 1.5 2.4% 5 Hong Kong 51.3 2.1% 3.8 7.3% 6 Switzerland 47.1 1.9% 2.1 4.4% 7 Netherlands 37.0 1.5% 0.1 0.2% 8 China 31.9 1.3% 4.9 15.3% 9 New Zealand 30.1 1.2% 1.0 3.2% 10 Canada 26.9 1.1% 5.7 21.0% 11 Germany 24.2 1.0% 0.0 0.1% 13 Virgin Islands, British 19.6 0.8% 0.0 0.0% 14 United Arab Emirates 17.2 0.7% 0.8 4.4% 15 Malaysia 16.7 0.7% 0.2 1.0% 16 France 15.8 0.6% 0.1 0.5% 17 Luxembourg 15.6 0.6% 0.0 0.0% 18 Republic of Korea 15.1 0.6% 0.3 2.0% 19 India 10.9 0.4% 0.1 0.6% 20 Bermuda 10.4 0.4% 0.1 0.5%
PAGE 10
Japan has been a consistent investor into Australia
Source: Merger Market
8,372 5,914
33,586 31,383
24,206 24,322
45,526 43,462
26,464 31,135
0 5,000
10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
US
$ m
illio
ns
Others South Africa France Thailand Netherlands South Korea
New Zealand Switzerland Singapore Hong Kong Mexico Japan
China United Kingdom Canada USA
M&A into Australia by country in 2004-2013
Japan has been consistently a large investor into Australia, having invested $22 billion over last 10 years
Other countries that have a track record of inward M&A into Australia include: — United States ($63bn) — Canada ($36bn) — UK ($35 bn) — China ($23 bn) — Mexico ($16 bn) — Hong Kong ($14 bn)
PAGE 11
Recent FIRB applications by country 2012-2013
PAGE 12
M&A into Australia by Japan in 2004-2013 by industry
Japanese M&A into Australia
15 97
3,774
1,710
6,805
2,570 2,929
1,712
0
2000
4000
6000
8000
2004 2005 2006 2007 2008 2009 2010 2011 2012
US
$ m
illio
ns
Industrial automation Agriculture Leisure Computer software Utilities (other) Computer services Services (other) Manufacturing (other) Construction Industrial products and services Chemicals and materials Financial Services Energy Consumer: Foods Mining Consumer: Other
Japanese M&A into Australia has been mainly in food & beverage, materials, energy and service industries
Major deals include: — Kirin – Lion Nathan
(2009, $4,000m) — Mitsui & Co – BHP
Iron Ore (2013, $1,500m)
— Sumitomo Chemical – Nufarm (2010, $1,350m)
— Dai-ichi Life – Tower (2011, $1,200m)
— Asahi – Schweppes (2009, $776m)
PAGE 13
FDI into Australia is an important component to its continued growth and in multilateral and bilateral relationships FDI represents an important and substantial commitment on the part of the investor and provides
longer term bond between nations, institutions and investment stability
In 1975, the Australian Government first formalized its foreign investment policy, which was much more restrictive than what exists today
Liberalization has progressed as evidence of the benefits of foreign investment materialized
Recent bilateral agreements with key trading countries such as Japan and Korea are key to fostering more investment in Australia
FDI is important to support growth
PAGE 14
But Australia ranks high in terms of FDI restrictiveness – Why?
Source: OECD
OECD FDI Regulatory Restrictiveness Index 2013
Despite a high level of FDI, Australia ranks 16th in OECD’s FDI Index which measures how “closed” its policies are toward foreign investment, and is considered “worse than average”
Japan, conversely ranks much better at 35
Question is what is Australia “missing” by perhaps being over-restrictive and what are the issues?
STRICTLY CONFIDENTIAL
03 Australian FDI Regulatory
Framework
PAGE 16
Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) empowers the Australian Treasurer (on advice of the Foreign Investment Review Board (FIRB)) to block (or attach conditions to) proposals considered to be contrary to the national interest
The Australian Competition and Consumer Commission (ACCC) is empowered to prohibit mergers that would have the effect, or be likely to have the effect, of substantially lessening competition in a market
Two key requirements
Key regulatory requirements for FDI
All direct investments in Australia by foreign governments or their agencies must be notified to FIRB, irrespective of size
Foreign persons acquiring a substantial interest (15 per cent or more of the issued shares) in a corporation or control of an Australian business valued at more than $248 million, subject to certain exceptions
No pre-merger notification requirements for ACCC review, but pre-assessment is highly recommended if possible and ACCC can always investigate post-completion
Who needs to apply?
PAGE 17
Record looks strong with few rejections and approx. 95% approved ...
FIRB approvals 2007-2013
Source: FIRB Annual Report 2012-2013
Outcome 2007-08
No. 2008-09
No. 2009-10
No. 2010-11
No. 2011-12
No. 2012-13
No. Approved unconditionally 1,656 2,266 2,672 4,606 4,900 5,535
Approved with conditions 6,185 3,086 1,729 5,687 5,803 7,196
Total approved 7,841 5,352 4,401 10,293 10,703 12,731
Rejected 14 3 3 43 13 -
Total decided 7,855 5,355 4,404 10,336 10,716 12,731
Withdrawn 521 341 167 390 534 466
Exempt 172 125 132 139 170 145
Total considered 8,548 5,821 4,703 10,865 11,420 13,322
PAGE 18
... Across many industries
2.00% 3.00%
17.00%
30.00%
0.17% 12.00%
0.55%
35.00%
FY2012
Agriculture, forestry & fishing
Finance & insurance
Manufacturing
Mineral exploration & development
Resource processing
Services
Tourism
Real estate (incl off-the-plan)
FIRB approvals by sector – 2012/13
PAGE 19
While rejection rates are very low, data does suggest room for improvement
A number of investment applications to the FIRB are never fully assessed, as they are withdrawn from the review process (approx. 4%)
In the last three years, of those approved, over half were only conditionally approved The data only shows where applications have been made; likely to be cases where investments are
commercially justified but never put forward for review Lack of transparency, predictability and consistency about decisions and what constitutes “national
interest” can lead to potential investors choosing to invest elsewhere — No ability to seek legal, judicial or other explanation
Any investment by a foreign government or agency must be reviewed, regardless of size Public sentiment or opposition can itself become a relevant factor in assessing national interest
concerns
What are the issues?
PAGE 20
Regulatory approval participants
Treasurer (Decision Maker)
Assistant Treasurer
(Delegate of Treasurer – non controversial applications)
General Manager , Foreign Investment Division (Delegate of Treasurer – minor matters)
The Treasury (Government Department)
Foreign Investment Division (Policy advice to Government)
Secretariat to FIRB (Advisory)
Foreign Investment Review Board (FIRB)
(Advisory only)
Other Government Agencies
(input)
PAGE 21
Approval period comprises a 40 day period (30 day examination period and additional 10 day notification period)
Government may extend indefinitely depending upon circumstances, seeking additional information The FIRB may offer an informal extension as an alternative, by allowing an applicant to withdraw and
resubmit an application thereby restarting the 30-day clock One issue is that the process is highly consultation-oriented, with no clear “driver” to push process
forward
Review Period
Review period and consultation can be long
In the examination of large or otherwise significant proposals, State and Commonwealth Government departments may be consulted strictly on a confidential basis
Consultation with States and Commonwealth Government departments
PAGE 22
What are the considerations?
Investments should not be contrary to the “national interest”
No hard and fast rules as to what constitutes “national interest”, decided on a case-by-case basis
Government balances potential sensitivities against benefits of foreign investment, and typically considers: – National security – Competition – Impact on Government policies
(including tax and environment) – Impact on general economy
and community – Character of investor – Independence
Specific rules apply to sensitive sectors, including media, telecommunications, banking, transport, defence, and uranium.
PAGE 23
Shell acquisition of Woodside (2001) Singapore Exchange acquisition of Australian
Securities Exchange (2011) Archer Daniels Midlands acquisition of
GrainCorp (2013)
Notable transactions blocked by FIRB
Examples of situations that were blocked or had significant undertakings
Arms length off-take arrangements Divestiture of certain assets Relisting of the Australian Stock Exchange
within 3 years Australian CEO and CFO or directors Reduced ownership over time Australian incorporated entity with offices and
principal place of business in Australia Australian operational control Operations to remain in Australia
Examples of selected undertakings
China Minmetals / OZ Minerals (2009) Yancoal / Felix Resources (2009) SABMiller / Fosters (2011) Shandong Ruyi / Cubbie Group (2012)
Notable transactions approved with conditions
PAGE 24
Areas of FIRB sensitivities
Sector
— Uranium miner
— Media
— Military supply / training
— Strategic mineral assets
— Airports / airlines
— Banking
— Strategic ports
— Telcos
— Iron ore miner
— Major diversified miner
— Diamond miner
— Residential real estate
— Shipping
— General resources
— Other ports
— Agricultural
— Forestry
— Hospitals / schools
— Childcare
— Other infrastructure
— Non-strategic mineral assets
— Manufacturing / industrial
— Commercial real estate
Ownership Interest in
Australian Target
— 100% — 49.9% — JV with Aust. Partner (< 50%)
— < 15%
— Diversity of ownership
FIRB sensitivity HIGH LOW
PAGE 25
Areas of FIRB sensitivities (cont’d)
Governance
— Control — Appoint all directors — Non-Aust management team — Board meetings outside Australia
— Director appointments consistent with shareholding
— A proportion of Independent Directors
— Economic interest only — No Director appointments — Retain Aust mgmt team — Board meetings in Australia
Target
— No growth plans/reduced production — Monopoly — Defence/National security significance — Environmental significance
— Growth plans/increased production
— Significant competition — Create Australian jobs — Increase Australian
Government revenues
Acquirer
— Offshore incorporated — Customer of target — Access to price setting process — Off-take agreements
(resources sector)
— Australian incorporated — Independent of target — Not customer of target
Political issues — Community/ minor party concern — Comply with Australian Industrial Relations Laws
FIRB sensitivity HIGH LOW
PAGE 26
Requests for FIRB approval should take the following into consideration
Investors should meet with FIRB prior to announcement or lodgement of application on a confidential basis — Investors should travel to Canberra to meet and discuss proposals with FIRB — This will help the identification of features of the proposed transaction that are likely to be areas
of FIRB sensitivity and areas that the FIRB would like further clarification Investors should not take a narrow, legalistic approach to the guidelines as this can delay the
process. The foreign investment regime is a mixture of law and policy FIRB do not like surprises or being pressured (e.g., aggressive media campaigns) Strategic use of Government Affairs and Public Relations consultants is recommended for sensitive
or major proposals
FIRB approval tips
PAGE 27
Free trade agreement with Japan – July 2014
Raising of thresholds for investments requiring FIRB approval by entities incorporated in Japan (A$248 million to A$1,078 million – the same as for US, New Zealand and soon Korea investors)
Lowering of thresholds does not apply to investments in agriculture or foreign government investors — Agriculture becoming area of focus as witnessed by Sumitomo’s acquisition of Emerald Grain
(2014) and Mitsubishi’s acquisition of Olam Grains (2014)
China also being given consideration for raising of threshold for private sector investments
JAEPA impact on FIRB approval
Wall crossing
Conflict check
Embargo Client onboarding
Commercial approval
Workspace setup
Mandate Deal update
PAGE 28
FIRB and ACCC are supportive of FDI
Investors and advisors tend to focus on the “worst case” scenario and reputations can be influenced by selective difficult or complex cases but these are rare instances
The Australian regulatory regime, while characterized by uncertainty in some respects, can also be considered “light touch” compared with other jurisdictions
The FIRB process, however, can be long and early interaction with regulators is key Anti-trust should also be addressed early on where possible As in any jurisdiction, political factors will influence outcomes Japanese entities have historically deployed significant capital and resources into Australia, with few
if any issues JAEPA will foster further investment into Australia
In summary
Wall crossing
Conflict check
Embargo Client onboarding
Commercial approval
Workspace setup
Mandate Deal update
STRICTLY CONFIDENTIAL
04 A Japanese Perspective
PAGE 30
Top 10 target countries of Japanese outbound M&As 2009-2013 (US$m)
Japan has been investing heavily across the globe
Target regions of Japanese outbound M&As 2009-2013 (US$m)
Source:: Mergermarket
USA 107,892
50%
Switzerland 17,960
8%
United Kingdom 16,507
8%
Australia 15,541
7%
Ireland (Republic)
13,746 6%
Thailand 10,804
5%
India 9,639 4%
Brazil 9,156 4%
France 7,918 4%
Canada 7,877 4%
North America 115,769
41%
Europe 77,092 27%
Asia Pacific 53,627 19%
Latin America 19,350
7%
South Asia 9,658 4%
Africa 3,699 1%
Middle East 1,325 1%
Russia 1,157 0%
PAGE 31
Outbound M&A by Asian Countries 2009-2013
Japan and China lead Asia outbound M&A
Source: Dealogic
Japan and China have been the largest investors in outbound M&A in the last several years
Japan accounted for around 30%-40% of total outbound M&A
China’s has been consistently increasing its investment volumes over the last 5 years
3,153 15,768 15,513 39,643
9,758 10,534 13,794 9,651
10,493
8,453 1,586 1,938 4,150
4,229
1,609 20,997
23,890 24,422
13,692
24,953 21,581
32,115 29,587 19,314
20,041
36,433
49,857 54,041 57,116 67,966
27,597
35,903
83,608
110,857
52,085
0
50,000
100,000
150,000
200,000
250,000
300,000
2009 2010 2011 2012 2013
US$
milli
ons
Others Korea Taiwan Singapore HK China Japan
PAGE 32
Japan has $95 trillion in cash/deposits
Japanese financial institutions continue to have large balances of financial assets
Japan has one of the lowest costs of capital in the world and banks are avid lenders
Japan continues to have significant resources
Balance of financial assets (as of September 2014)
Asia stock market comparison (as of August 2014)
Balance of cash/deposit (as of September 2014)
0
1
2
3
4
5
$US
tr
Source: World Federation of Exchanges (market cap as of end of Aug 2014)
Source:“Flow of Fund Accounts” (Bank of Japan, September 2014) Source:“Flow of Fund Accounts” (Bank of Japan, September 2014)
Segment ($US b) % Private Banks 66,353 69.6% Households 15,785 16.6% Private nonfinancial corporations 8,751 9.2% Insurance and pension funds 1,777 1.9% Private nonprofit institutions serving households 1,273 1.3% Social security funds 782 0.8% Local governments 756 0.8% Other financial intermediaries 382 0.4% Central government 127 0.1% Overseas 39 0.0% Public nonfinancial corporations -107 -0.1% Central bank -241 -0.3% Financial auxiliaries -401 -0.4% Total 95,276 100.0% Subtotal - Financial Investors 2,559 2.7%
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
Fina
ncia
l In
stitu
tions
Priv
ate
nonf
inan
cial
co
rpor
atio
ns
Pub
lic n
onfin
anci
al
corp
orat
ions
Cen
tral
gove
rnm
ent
Loca
l go
vern
men
ts
Soc
ials
se
curit
y fu
nds
Hou
seho
lds
Priv
ate
nonp
rofit
In
stitu
tions
svs
hou
seho
lds
Ove
rsea
s
New others
Other liabilities
Investments
Accounts receivable/payable Trade credits and foreign trade credits Deposits money
Insurance and pension reserves Equity
Securities
Loans
Currency and deposits
PAGE 33
Bilateral Investment Treaties
Japan is seeking agreement with many Asian countries
Other Investment Agreements In Force Signed (not in force) Bangladesh Colombia Cambodia Iraq China Kuwait Egypt Mozambique Hong Kong, China SAR Myanmar Korea, Republic of Papua New Guinea Lao People’s Democratic Republic Saudi Arabia Mongolia Pakistan Peru Russian Federation Sri Lanka Turkey Uzbekistan Vietnam
ASEAN –Japan FTA Japan-Malaysia EPA
ASEAN-Japan Framework Agreement Japan-Mexico EPA
Australia-Japan EPA Japan-Mongolia EPA
Australia-Japan Framework Agreement Japan-Peru EPA
Brunei-Japan EPA Japan-Philippines EPA
Chile-Japan EPA Japan-Singapore EPA
China-Japan-Korea trilateral investment agreement Japan-Switzerland EPA
India-Japan EPA Japan-Thailand EPA
Indonesia-Japan EPA Japan-Vietnam EPA
PAGE 34
Japan and Australia enjoy a strong partnership
Japan has consistently been in the top 5 countries for sourcing investment into Australia Japan has not seen rejections nor major issues in terms of investment into Australia, but many have
also been minority investments Australia and Japan enjoy a strong strategic and long-standing relationship New EPA/FTA will provide a welcome change for Japanese seeking to invest in Australia Japan will see increased competition for investment in Australia, but enjoys a very low cost of capital Challenge for Japanese investors longer term will be in terms of exercising appropriate governance,
especially for control investments
Japan will continue to be a major investor in Australia
STRICTLY CONFIDENTIAL
52nd Japan-Australia Joint Business Conference
Arthur Ozeki
13 October 2014
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