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New Zealand capital markets are on track to turn in a respectable performance this year, buoyed by solid economic growth, a rally in the dairy price and continuing low interest rates.
But we are not looking at a return to the stellar activity levels of 2013 and 2014. There are some lurking concerns about the size and structure of the NZX’s equity boards and in the current global environment any prediction must be hedged with caution until we know more about the downstream geo-political and economic effects of Brexit and the Trump Administration’s isolationist impulses.
Chapman Tripp publishes annual reports on New Zealand’s mergers and acquisitions (M&A) and equity capital markets (ECM). Both are available on our website. The main prediction in this year’s ECM report is for a continued decline in the number of issuers on the NZX Main Board.
The downward drift began last year, reversing at least five years of sustained expansion. It reflects the combined impact of delistings due to insolvency or takeover and the fact that there were only three IPO additions last year to the Main Board.
We expect those trends to continue this year.
Other factors behind the NZX’s diminution in 2016 were:
- trade sales to private interests
- several New Zealand based companies which might have listed in New Zealand opting instead to list offshore, usually with the ASX, and
- overseas owned issuers electing to delist on the NZX but to remain listed on their home exchange.
On a more positive note for the NZX, we expect the number of secondary capital raises to remain strong and continued innovation in capital raising structures – in particular we expect Accelerated Rights Entitlement Offers (AREOs) to remain the structure of choice for significant secondary capital raisings.
In the M&A space, deal momentum began to build in the last quarter of last year and is showing no signs of faltering. On the contrary, we think that the availability gap between hungry investors and quality investments will create a sellers’ market, resulting in strong price expectations but without a return to the irrational exuberance of 2007.
We expect the volume of trade sales to remain high this year for a number of reasons; strong buyer interest from cashed up private equity firms on both sides of the Tasman, diversification by iwi corporates of their asset bases and also, at the margins, an improved consent process for foreign investors due to better resourcing of the Overseas Investment Office (OIO).
OIO figures show that applications are now taking an average of 97 days from the date they are accepted. This is a significant decrease on the past but there is still space for improvement. The OIO is currently pursuing a slate of initiatives designed to make the consent process more transparent and efficient. These include pre-application meetings with applicants and new standardised application templates.
The Māori economy is now estimated at $43 billion. Recent M&A investments include:
- Ngāi Tahu Holdings investing in the recent Movac capital raising and acquiring 50 percent of manuka honey producers Watson & Son, and
- Tainui Group Holdings selling 50 percent of Te Awa to Kiwi Property for $192.5 million and using the proceeds to reduce debt and ultimately re-invest in a balanced range of investment classes.
Other broad predictions for 2017 are:
- growing interest in New Zealand from Chinese investors looking to widen their portfolio beyond the primary production sector and tourism
- schemes being increasingly preferred to conventional takeovers in negotiated listed company acquisitions
- mergers rather than buy-outs, reflecting high asset prices
- a desire for price certainty manifesting in more use of “locked box” purchase price mechanisms instead of traditional completion accounts, and
- debt pricing to continue its upward trajectory.
The market sectors to watch will be aged care, construction, financial institutions (where the need for a higher return on capital will prompt a divestment of non-core assets), food and beverages, media and telecommunications and natural health and nutraceuticals.
The New Zealand Commerce Commission, in common with most other competition authorities, finds itself living in interesting times as it negotiates the impact of technological disruption on incumbent players.
It approved the complex Z Energy/Chevron transaction last year, has just canned the Sky/Vodafone merger and is due to make its final determination on the NZME/Fairfax merger later this month.
Tim Tubman and Rachel Dunne are partners in Chapman Tripp specialising in corporate law.