Brenton Saunders: Why ASX mid-caps are becoming fertile ground for M&A

Takeover interest in ASX mid-caps can help highlight undervalued companies. Pendal portfolio manager BRENTON SAUNDERS explains what is attracting buyers

• Cyclical pressure creating valuation opportunities
• M&A activity can validate strategic value
• Find out more about the Pendal MidCap fund

CORPORATE activity is rising among Australian mid-caps — a segment Pendal portfolio manager Brenton Saunders describes as a “sweet spot” for larger companies seeking attractive opportunities.

“One of the reasons mid-caps do well, and better than some of the other sectors of the market over time, is just because there’s elevated corporate activity in the space,” says Saunders.

“These are companies that aren’t super big, they’re typically still growing quite quickly, and often they’re fairly progressive and entrepreneurial at that stage of their development.”

Three factors appear to be driving mergers and acquisitions (M&A) interest in mid-caps: cyclical pressure creating valuation opportunities, operational underperformance attracting private capital, and structural or regulatory change increasing strategic value.

Cyclical pressure, underlying value

Cyclical industrials with durable market positions but temporarily depressed earnings or valuations are attracting potential buyers.

Saunders points to Reliance Worldwide as an example of how housing market weakness and cost inflation can weigh on a high-quality, cash-generative business.

Reliance sells plumbing materials and retail items in the US, predominantly through major hardware retailers such as Home Depot and Lowe’s Home Improvement.

Global investment firm Brookfield made several offers for Reliance, which has now accepted a bid valuing it at $4.1 billion.

“Reliance had been cyclically battling with the fact that the US housing market has been experiencing very high interest rates. The company had also been battling with fairly high procurement and materials inflation,” explains Saunders.

“It had earnings downgrades over the past couple of years for mostly those top-down reasons and less to do with the company specifically.

“But that got it to a point where the dividend yield on top of the share buyback that they’ve been doing just got more and more attractive. In our view, it is still a very high-quality and cash-generative company.”

Hear more on the midcap space from Brenton:

Private capital eyes operational upside

Cleanaway illustrates how operational challenges can attract private capital.

The waste management company has agreed to a $9.3 billion takeover by Swedish private equity firm EQT. The offer represents a 34.5 per cent premium to Cleanaway’s three-month volume-weighted average share price to 12 August 2026.

Saunders says Cleanaway’s subdued valuation before the offer largely reflected scope to improve operational execution.

“Consensus earnings estimates for the company just kept getting marked down weighing on the share price,” he says.  

“The downgrade cycle that this company found itself in was more self-inflicted than it was necessarily a function of the macro overlay or anything else.”

Pendal MidCap Fund holds positions in both Reliance and Cleanaway.

Regulatory change unlocks strategic value

Japanese financial services firm Daiichi Life’s $7.8 billion bid for annuities provider Challenger highlights a third driver: regulatory changes that make Australia more attractive to international buyers.

From mid-2026, the Australian Prudential Regulation Authority (APRA) introduced new capital requirements for decumulation products, such as annuities.

The changes aimed to make annuities less capital-intensive to write, potentially attracting new providers to a market with limited participants.

An annuity is a contract with an insurance company that provides a guaranteed income stream, either immediately or in the future, and is often used in retirement planning.

Challenger (ASX:CGF) is one of the few Australian investment management companies offering annuities.

Once the changes were made clear, Saunders and Pendal analyst Graeme Petroni predicted Challenger would likely attract the attention of a larger international player.

Pendal MidCap Fund also holds a position in Challenger.

“Australia always had a different and more onerous version of capital requirements for annuity companies, and it created some inefficiencies around the amount of capital and assets that these companies had to carry against their annuity liabilities,” explains Saunders.

“This made them very susceptible to having to sell the most volatile parts of their investment portfolio at the worst times.

“The capital requirements have effectively been aligned with companies globally, which means that international companies are now much more inclined to look at this market as a target market for annuities – and the big players in that are typically the Japanese and the US companies.”

Together, these examples highlight how active investors can identify strategic value in mid-cap companies before it is reflected in share prices.