The Diligent and Nuplex offers are both positive and negative -- good news for the shareholders of the individual companies, but negative developments for the NZX.
Both companies are in the benchmark NZX50 Index and they have a combined market value of nearly $1.7 billion at the offer prices. The NZX cannot afford to lose two benchmark index companies, particularly as KiwiSaver funds already find it difficult to identify suitable domestic investments.
One of the more interesting aspects of the two proposals is that they are both private equity-driven. This suggests there could be a large number of these private equity deals in the months ahead.
The recently released 2016 Preqin Global Private Equity & Venture Capital Report revealed that, widely defined, private capital funds raised over US$500 billion in 2015, the third consecutive year they raised in excess of US$500 billion. This compares with less than US$50 billion raised by New York Stock Exchange and Nasdaq IPOs in the same 12-month period.
Preqin also reported that these private capital funds had $4.2 trillion under management. The report also estimated that $1.3 trillion of this $4.2 trillion was dry powder or unused capital at the end of 2015 -- a record.
In light of these huge dry capital levels, and extremely low interest rates, it is not surprising that the week opened with a flurry of private equity initiated activity on the NZX.
The first announcement on Monday was at 8:48am, when Nuplex revealed it had received an indicative, non-binding and conditional proposal from Allnex Belgium. Allnex is a coating resins company backed by Boston based private equity firm Advent International Corp, which has US$31 billion under management.
The Diligent and Nuplex offers give a strong signal that there will be more private equity offers in the months ahead.
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The target company reported that "following the initial approach, the board entered into discussions, which were strictly confidential and inconclusive.
With the assistance of financial and other advisers, the board initially rejected Advent's proposals. Subsequently, after three offer revisions since the initial offer from 30 October 2015, Allnex and Advent have submitted the current proposal, offering improved total consideration of $5.55 per share".
As the offer price represents a 44 per cent premium over the previous day's closing price of $3.86 per share, and there are break fees in excess of $10 million on both sides, there is a very strong probability that the offer will be completed. The break fees are a particularly strong incentive because if Nuplex rejects the proposal it will have to pay $10 million to the offeror and if the Allnex/Advent consortium withdraws its offer it will have to pay $10 million to Nuplex.