Personal finance and KiwiSaver columnist at the NZ Herald

Stellar trend set to continue

Simpson Grierson partner Michael Pollard. Photo / Supplied
Simpson Grierson partner Michael Pollard. Photo / Supplied

With deals nudging the $9 billion mark, 2015 was a stellar year for local mergers and acquisitions, a trend set to continue, say market watchers.

Although 2015 got off to a slow start on the M&A front, by mid-year New Zealand-based deals were coming thick and fast, says Simpson Grierson partner Michael Pollard.

"I certainly worked the hardest I've worked for 12 years," Pollard says.

Simpson Grierson's roles - in transactions including Shanghai Maling stitching up a $260 million deal to purchase 50 per cent of Silver Fern Farms, Archer Capital rolling up various New Zealand private training businesses under the Aspire2 brand and Marlborough Lines' purchase of winemaker Yealands - saw it ranked the top New Zealand law firm in the 2015 Thomson Reuters Global M&A Legal Advisory Review league tables for both announced and completed deals across Australasia.

Sitting down to dissect the deal flow alongside Simpson Grierson partners James Hawes and Andrew Matthews, Pollard says a bumper year for mergers and acquisitions around the world, with global volumes up 37 per cent, had a flow-through effect into the New Zealand market.

Locally it's driven by well-funded overseas buyers - not a new trend, but one set to continue into this year, says Pollard.

"There was a lot of activity, in particular from the Australian private equity firms - very sophisticated buyers with access to substantial pools of institutional capital.

"When that capital is combined with typical bank funding, they have significant buying power and we would expect to see ongoing interest in good quality New Zealand assets in 2016."

In just the past two weeks, offers for software company Diligent and resin-maker Nuplex, with a combined market value of near $1.7 billion, have been tabled by private equity players.

But the sheer volume of overseas buyers has also created headaches, highlighted last year by Shanghai Pengxin's $88 million offer to buy the central North Island's Lochinver Station falling at the final hurdle when vetoed by the Government after the Overseas Investment Office (OIO) recommended it go ahead.

It took the OIO and Cabinet Ministers 14 months to assess the deal before it was turned down.

Hawes says statistics released by the OIO show it has been managing to meet its turnaround targets for applications to buy sensitive land and significant business assets in only 40 per cent of cases.

"We've seen application periods of seven months," says Hawes.

The volume of new deals and resulting under-resourcing of the OIO, coupled with difficulties in interpreting the existing legislation, have created a major problem in getting deals done quickly, he says.

"It's clear to us that they are working hard to get the deals through.

"But for my money, the turnaround time is the biggest issue presented by many of the deals in front of us," says Hawes.

"We've spoken to fund managers who regard it as a major issue in getting foreign investment into this country.

"If you're trying to sell something, the last thing you want is a long wait for an uncertain regulatory clearance."

All agreed it would be useful to consult again with the lawmakers and the OIO more broadly on the legislation, to streamline some of the issues they are seeing, but the key focus for the moment has to be getting through the applications.

"The other thing we're seeing is that because the public capital markets haven't been as welcoming of new companies as in previous years, there have been fewer IPOs and we have seen good IPO prospects pushed into private sales," says Pollard.

"There have been a fair number of dual-track processes where you run a trade sale alongside an IPO but they've effectively gone to a trade sale."

Even if an IPO might deliver a better price for an asset, many vendors' typical default is to go to the private market, given the public market spotlight, unless you are intent on using a listing as a tool for generating publicity and profile around your company, Pollard says.

Certainly, IPOs went off the boil in 2015, with three new listings on the main board compared to 12 the previous year.

The main market action came from secondary capital raisings and Origin Energy's $1.8 billion sell-down of its 53 per cent stake in Contact Energy - the largest block trade in NZX history.

As a result, the year-old Financial Markets Conduct Act, which overhauls the securities legislation, didn't get the major workout expected.

Matthews says one of the fundamental principles of the new legislation is to make capital raising faster and cheaper, which is particularly beneficial to smaller listed companies.

It also aims to get more relevant information into the hands of investors, he says.

Though it was a slow start for the Act, there's been good progress on a journey that began eight years ago with the creation of the Capital Markets Development Taskforce, but there is some way to go, says Matthews.

As IPO rumours swirl, with Pollard saying Tegel is expected to come to market in the next few weeks, sharemarket action this year may include sell-downs by owners of stocks listed in 2014 as they clear their escrow periods.

Matthews says that will be highly dependent on share price and whether that delivers value those owners want to realise at this time, with the majority of those stocks in the escrow period languishing below their listing price.

Pollard says though there is still a reasonable amount of optimism, he is concerned about market turbulence offshore against a background of a slowing Chinese economy, the challenges for central banks which are stimulating economies with already low interest rates, low oil prices, deflation in some countries and ongoing conflict in the Middle East.

He says investors appear to be looking for assets with good yields, meaning assets like utilities should remain attractive.

"I spoke to someone a few days ago who said we need a war, like a decent war, to shore up a slightly jittery global economy.

"I'd take a slower economy and leave the war out of it, personally."

Hawes says care needs to be taken about being over-confident about the coming year.
"To me, the issues that China's got are going to be a big part.

"We saw a number of deals last year, Silver Fern Farms being the most prominent example, where the Chinese were, if not the ultimate buyers, at least involved in the process and driving the competitive tension.

"If they're not going to keep that up then that is going to have an impact on valuations."

- NZ Herald

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