Jamie Gray 's Opinion

Jamie Gray is a business reporter for the New Zealand Herald and APNZ wire agency

Jamie Gray: Floats bring a new buoyancy

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Key players are cautiously optimistic about the progress the market made last year. Photo / Brett Phibbs
Key players are cautiously optimistic about the progress the market made last year. Photo / Brett Phibbs

Partial privatisations of power generators and Fonterra's Shareholders' Fund will form the bedrock for the IPO market and attract new investors

In the heady, post-deregulation days of the mid-1980s, the standing joke was that market conditions were so buoyant that even the Titanic could be floated.

Unfortunately for thousands of investors who were engulfed in the 1987 crash, many companies ended up in the same predicament as the ill-fated transatlantic ocean liner.

For some, the wounds of 1987 still run deep.

Today, key players are cautiously optimistic about the progress the market made last year and about what lies ahead, despite the uncertainties that Europe's wobbly economies still pose.

The state's partial privatisation of Mighty River Power and the advent of Fonterra's Shareholders' Fund will form the bedrock for the initial public offer (IPO) market this year and next, assuming all goes to plan.

The 49 per cent of Mighty River that the Government is putting up for sale will be huge. Worth an estimated $1.5 billion, the offer will be up there with IPOs for Telecom in 1991 and Contact Energy in 1999.

Fonterra won't be small beer either. Once listed, the Fonterra fund will be worth not less than $500 million, which will place it somewhere between Michael Hill International and Freightways on the NZX's top 50 list.

This year's IPOs will follow two large and successful issues last year of retirement village owner, operator and developer, Summerset, and online trading platform, Trade Me. Summerset is still majority owned by Australian private equity partnership Quadrant, and Australian publisher Fairfax still has a majority stake in Trade Me. In a sense, they are similar to the Government's mixed ownership model, which will see the state retain a majority interest.

There were other successes for the local market last year. Listed retirement village operator Metlifecare raised $45.5m in new equity and the separation of Chorus from Telecom was also seen as a feather in the market's cap. Yet no one is popping open the champagne. Investment bankers say the market made solid, incremental steps forward last year. It looks likely to do the same this year, and the achievements clocked up over 2011 and 2012 will set a platform for still more improvement in 2013.

Current market conditions are also running in favour of new issues, with the share market trading at a four-year high. The Government intends to partially privatise state-owned power generator and energy retailer Mighty River Power in the latter half of this year under its so-called mixed ownership model. It also intends to sell down its 100 per cent ownership of the state's other energy companies - Meridian, Genesis Energy and Solid Energy - although the order and timing of these IPOs has yet to be determined. The Government also intends to reduce its majority holding in Air New Zealand.

Mighty River is expected to come to the market in September and the Fonterra Shareholders' Fund, which will allow non-farm investors to gain financial exposure to the dairy co-operative, is expected to be up and running by November or December.

Michael Pollard, specialist corporate partner at Simpson Grierson, agrees that a degree of confidence has returned to the market. "Europe is obviously a basket case but it is becoming less relevant," he says. "We have some good ongoing growth in China and Asia, and there are solid signs internationally, particularly in the United States. You do wonder whether people have got over the crash of the late 80s but this is certainly an opportunity to get some retail investors back into the market who have not been there for a decade or two."

John Moore, head of equity and capital markets at Craigs Investment Partners, says positive signs are emerging. "There are offshore shocks that could damage or derail that, but we think there are signs of hope for the primary market and we certainly want the market to be a viable option for New Zealand companies to raise capital so that they can keep growing."

Last year's listings of Summerset and Trade Me broke an IPO drought that had lasted several years.

Moore says these two IPOs have helped instill a sense of confidence in the New Zealand capital markets.

Craigs IP was involved in the floats of Summerset, whose shares were issued at $1.40, and Trade Me ($2.70). Summerset trades today at $1.67 while Trade Me is at $3.82.

"Our clients are happy with the way they have gone," Moore says.

"They are delivering on what they said they would deliver. All that is good for the confidence of the market because it's been a long time since there has been a decent IPO. It validates the chatter that we hear from our client advisers; that people do want to get back into equities because interest rates are down and they are looking at place to get yield, which is good for the larger projects that are coming on - particularly the mixed ownership model programme IPOs and Fonterra."

But aside from the big two, there is little else on the horizon for this year because no issuer will want to compete head-to-head with either Mighty River or Fonterra. If anything happens on IPO front, it will happen in the current window - before Mighty River comes to the market in September, investment bankers say.

Retirement home operator Vision Senior Living (VSL) was last year talked of as a possible IPO, but on Monday, NZX-listed Metlifecare, VSL and Private Life Care proposed a three-way merger which, if successful, will create a retirement village operator to rival market leader, Ryman Healthcare.

Waste collection and landfill operator EnviroWaste is another possible, although insiders say its owner, Australian private equity fund Ironbridge, is likely to seek a trade sale.

With the Government being keen on broad ownership of state assets, the advertising and marketing campaigns for Mighty River are expected to be extensive, so the profile of share investment generally will be raised.

Moore says the big two are likely to bring new investors into the market - people who have not invested in equities before. "Some will treat it as a one-off but others will treat it as being the start of a savings plan and the building of a portfolio.

"It means more money will go into the equity market, not just Mighty River and Fonterra, so that increases the chances of, and appetite for, new transactions from 2013 onwards."

Research from Ernst & Young came up with the improbable-but-true statistic that New Zealand raised more funds through IPOs in the fourth quarter of last year than all of Europe combined, mostly reflecting the truly dire state of play offshore.

"When you add things up, New Zealand is a fairly active market, relative to where we have been, and so the optimism is proving to have some credence," Ernst & Young partner Andrew Taylor says.

Several major New Zealand businesses are owned by private equity partnerships, so will they start to divest through the equity markets?

"The answer to that is possibly," Taylor says. "They will ultimately assess the equity markets."

Mark Lister, head of private wealth at Craigs IP, says market conditions look positive. "But my view is that there are still a lot of things to worry about out there," he says. "Europe is obviously the key one and there are high debt levels in different parts of the world, but things are certainly better than they were six months ago. Investors are more open to new investment opportunities because of low interest rates. It's not an environment where people are blindly going to go and invest in anything, because we are not in some sort of bubble."

Rob Cameron, a founding partner of investment bank Cameron Partners, says a big shift is taking place from fixed interest in favour of equities.

In New Zealand, there have historically been low levels of participation at the retail investment level.

"You might expect that to improve, particularly given the value of the product and of the value of product that they got hammered on in previous years," Cameron says.

* Jamie Gray is a business reporter for APNZ

- NZ Herald

Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and APNZ wire agency

Jamie Gray is a business reporter for the New Zealand Herald and APNZ wire agency. He has been a business journalist for 30 years, working for NZPA and, mainly, the Reuters news agency. He enjoys fast breaking business news stories but also likes to get to the bottom of complex issues. He is driven by telling readers what is going on but also has a soft spot for the occasional quirky business story which gets people talking. He has a special interest in Fonterra.

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