Rain-sodden Brisbane is still shaping up as one of the hottest markets for the legal industry in 2011– but local firms are wary of the ever-increasing competition

To ascertain which markets law firms regard as “hot”, try following the trail of activity: the opening of new offices, law firms acquiring smaller firms, starting greenfields operations or poaching partners from rivals. It is true that the biggest fish of them all, Magic Circle firm Allen & Overy, has not apparently felt the need for a Brisbane presence, but many others have: new arrivals Johnson Winter & Slattery and Macpherson + Kelley and consolidation on the part of Cooper Grace Ward and Gadens via local mergers.

This is a market with a tradition of competition from new entrants: firms which have arrived through acquisition, such as Herbert Geer and greenfields operations such as Mills Oakley, both of which have plans to grow in Brisbane. “We’re not full-service yet – we accept that there are gaps and we are dedicated to filling those,” says Mills Oakley partner Stephen Dickens.

Other Brisbane firms are also looking to grow. Carter Newell, for example, was recently in the market for eight new lawyers and Thynne & Macartney is planning some “bolt-on” practices and lateral hires. Managing partner John Moore won’t disclose the details of these plans, but he says that they reflect his
optimism about the direction of the market in 2011.

Outwardly, the Queensland market has had more than its fair share of activity: the multi-billion dollar QR
float, some of Australia’s most ambitious resource-related plans in the LNG sector and plenty of M&A intrigue in the coal sector. However, Queensland firms report that many of their clients remain cautious and are not predicting a spectacular year. “There’s an increasing amount of confidence, but it’s still a case of hasten slowly,” says Dickens. “A number of businesses could do with some more working
capital but I suspect they’re concentrating more on consolidation rather than aggressive growth. That might change in the second half of the year.”

McCullough Robertson’s Brett Heading, who is hoping his firm will record 5% revenue growth this year,
says the theme of cautious optimism will continue: “I’m optimistic that we’re going to have a reasonable calendar year in 2011 but I don’t think it’s going to be fantastic,” he says. That caution may be a contrast to the billion-dollar deals and projects which are being freely discussed in the media, but much of this work is flowing to national toptier firms.

For example, the legal advisors on the QR float were Minter Ellison and Mallesons (advising QR), Allens
(advising the Queensland government) and Clayton Utz (advising the joint lead managers.) The use of Allens seems to continue a pattern by the Queensland Government of using top-tier national firms for sophisticated work. This preference was also in evidence during the Government’s privatisation of other key assets earlier in 2010, where Freehills, Allens, Minters and Clayton Utz again received the green
light.

Nonetheless, local Queensland firms continue to maintain that they are ready, willing and able to undertake this work if they are given the chance. In the meantime, with the government work and resources and infrastructure work alike, there remains plenty of scope for both national and statebased
firms to reap the benefits of the continuing strong investment in Queensland.

M&A activity
Lawyers are observing more activity in the M&A space, although this is mainly at the sub-A$50m level. Nonetheless, there is a new sense of buoyancy which was conspicuously absent last year – and unsurprisingly a key driver of activity is the resources sector. “What we’re finding is that companies are seeking to take control of their growth by increasing their tenement and resource exposure, which makes a lot of sense,” says HopgoodGanim’s Bruce Humphrys. “That brings with it increased M&A activity and we’ve also seen increased activity with the mid-cap and privately owned companies.”

The critical question is the availability of funding. “All indications are that credit markets will remain tight for some time, which will obviously impact on the level of M&A activity going forward,” says Humphrys. “All of that said, companies that are able to raise funding or have the capital themselves are in a strong position and are now looking at opportunities in the market.”

M&A activity at the micro-cap level in particular is attracting a good deal of interest. “The debt markets have hardened and if you’re a small company, it’s harder to raise equity – so it’s a bit of a vicious circle, so that pushes you into trying to make the organisation larger to make it more attractive,” says Heading. “There are a lot of micro-cap companies that see the only way forward is to do acquisition activity and to either merge or gobble up others. The reality is some of these companies are just too small to get on the radar and they need to get bigger. So I think there will be a fair bit of consolidation in that small-cap space over the next couple of years. We’ve got briefs from a couple of those companies – they haven’t been completed yet though. Certainly there’s been more activity in recent months.”

But the activity is not just limited to the micro-cap: McCullough Robertson is also seeing some activity from larger companies. “We’ve got two schemes of arrangement going at the moment and they’re quite significant jobs and that side of it’s going quite well,” says Heading. Holding Redlich is another firm which has observed an increase in M&A activity. “Our corporate group is way ahead of its projected budget which, if you’d asked me a year ago, I would have been very surprised at because there was so much doom and gloom,” says Brisbane managing partner Paul Venus.

The coal sector in particular is seen to be ripe for activity, with a recent example being New Hope’s hitherto unsuccessful bid for Northern Energy Corporation, a deal on which Blake Dawson and HopgoodGanim were advisors. Overall, there is a consensus that despite some obstacles, M&A activity is improving. “Even great transactions weren’t getting through before, whereas now I’m seeing more going through,” says Herbert Geer’s Jayne Steele. “That might be because people have the confidence to approach the banks or the banks are taking a slightly less rigid view.”

Property, construction and infrastructure
It has been a time of mixed fortunes for Brisbane property teams. Commercial property developments in particular have been rather slow, but some firms claim to have seen the light at the end of the tunnel. Herbert Geer, for example, is eyeing the prospect of hiring more property lawyers. “There isn’t a huge amount of growth in our property team at the moment, but we are very sure the cycle will change and we need to be prepared for that,” says Jayne Steele. Hebert Geer is perhaps better placed than most to sense the winds of change in this area, providing extensive advice to local and regional government
bodies on plans for accommodating population growth.

However, it is interesting to note that planning lawyers advising corporate clients have also been busy. “Across Brisbane, you wouldn’t find a single planning lawyer who is not busy,” says Holding Redlich’s Venus. “That suggests that people are getting approvals and getting ready for activity.”

Cooper Grace Ward is another firm to sense a possible change of fortune for property lawyers. “You always worry that you’ll make a call that will make you look a fool later on, but I think that there is a sense that, generally speaking, better times are ahead,” says managing partner Chris Ward. “Some of the larger developers are looking a bit further out now, and asking where they need to be in 12 months time. So we’re seeing some activity in terms of some pre-planning and macro activity.”

Other property and constructions lawyers agreed that Brisbane projects were starting to come out of hibernation, although the Gold Coast continues to be regarded as problematic. Inevitably, the issue of funding comes to the fore. “Our property team is flat out, but acting for buyers who don’t need finance,” says Venus. “They’re doing some big – A$50m plus – transactions. If you have money you’re in – if you don’t, that’s a different story.”

However, the consensus is that conditions are improving, with the implication that front-end construction may experience a revival – a description which firms would be reluctant to apply to the present market, however.  HopgoodGanim’s Humphrys, for example, says that he has not seen any evidence of a revival in frontend construction and other firms are similarly underwhelmed. However, there is one important exception to this rule: infrastructure. According to firms, a healthy pipeline of infrastructure projects is more than compensating for a sluggish commercial and residential workflow. “With the amount of infrastructure  which needs to be put in place in Queensland to help the growing mining industry, that’s a great opportunity for us and for other law firms,” says Venus. “A lot of construction companies in Queensland have been diversifying their interests, so that whereas once they might have specialised in building a multi-story unit block or skyscraper, they’re now looking at how they can service what has now become a very substantial part of the QLD industry – mining.”

Ward shares this enthusiasm: “Generally speaking, Queensland is a state that needs a lot of infrastructure,” he says. “I’d imagine there’s 2-3 years of fairly heavy construction ahead of us, where we need to address a lack of infrastructure spend for a fairly considerable time, so we need to play catch-up. We believe that there are real opportunities there and we intend to make the best of those two or three years.”

This activity is driving demand for legal services across a range of areas. For example, law firms such as Carter Newell with a specialist insurance practice are finding themselves in demand for advice on the insurance implications of these projects.

Mining and disputes
Queensland’s booming coal and LNG sector will be familiar territory to many readers. The Federal Government’s approval of two new coal-seam-gas/ LNG projects in Gladstone has been the catalyst for multi-billion dollarinvestment from BG Group, Santos, Origin Energy and Conoco Phillips. There is a strong likelihood of further “mega-projects” in the pipeline, spinning off legal work not only to the
national firms typically found on these deals, but also local advisors. “Clearly the mega-firms have
their presence, but there’s plenty of work up there,” observes Humphrys. “It’s not just simply facilitating development, but other issues such as problems with environment impacts that are keeping legal service providers quite busy.”

But confidence on the part of the large mining companies does not necessarily mean confidence in the mining industry as a whole. “You read about Rio, BHP, BG, Santos – I think there’s certainly activity [from smaller miners] below that, but I just don’t think it mirrors the same growth as the big miners,” says Ward. He believes that the smaller mining companies are still concerned about the Federal Government’s mining tax. “I think they’re still worried about the mining tax – it’s still got to be played out yet,” he says. “My understanding is that it did knock the mid and junior miners around a lot. Behind the scenes there was a lot of lack of confidence – but it’s slowly coming back.”

Heading also believes that confidence has improved, pointing out that many projects which were on hold have now become active again. New projects are also being mooted and existing clients are looking to expand mines. “Capital raisings have been much easier for junior explorers and smaller mining companies and the larger companies had a very strong last 18 months and have surplus cash to spend. There’s also a fair bit of international interest,” he says.

Carter Newell has enjoyed growth in the resources sector, to the point where the firm has made a new partner appointment in this area. Work relating to contract mining arrangements, worth up to A$400m each, has been a particularly busy area for this firm. However, Hopkins warns that a certain business environment is likely to be a key factor in the fortunes of mining companies in 2011. “The key issues impacting growth in the resources area are likely to be the operation of the proposed mineral and petroleum resources rent taxes, as well as the potential introduction by the Federal Government of a price on carbon,” he says.

The resources boom may also have an impact on indirectly-related practices. Thynne & Macartney, for example, is well known for its shipping practice and presumably an increase in exports will see work flowing through to that area. The firm has already reported strong growth with bulk shipping volumes up and an increase in commercial disputes, such as cancellations of contracts and payment defaults. That business may seem to have a counter-cyclical flavour to it, but Moore points out that disputes are also the product of positive economic activity. “As activity increases, so does the opportunity for errors, misunderstandings and misrepresentations,” he observes.

This is a critical point which is the subject of some debate among Brisbane lawyers in the disputes area: is the volume of GFC-related disputes beginning to taper away? Some lawyers believe this to be the case, but Mills Oakleys’ Stephen Dickens says that he is continuing to see new disputes referred to his practice. He is expecting this to continue in 2011.

“I see a lot of people hanging on for what they’ve got,” he says. “One of the drivers might be that ‘cash is king’ and they don’t have the cash. That also puts constraints on litigation and leads to mediation or alternative dispute resolution at an earlier point than might otherwise have been the case.” ALB