Capital Markets Report: Agri sector is in strong demand

Sellers are getting better deals from private equity investors. Photo / File

Globally, the mergers and acquisitions (M&A) market remains buoyant and deal terms suggest that it's a good time to be a seller, says global business law firm DLA Piper.

DLA Piper, with more than 4200 lawyers based across Europe, the Americas, Middle East, Africa and Asia-Pacific, produces a unique annual Global M&A Intelligence report providing insight into the regional differences in elements of M&A transactions. The latest one, surveying 1000 people, will be published late next month.

The 2016 report, based on data from about 500 M&A deals in Europe, North America and Australia, said though there has been some softening in the market year on year, there is strong competition for good assets, and sellers are generally able to negotiate exits which leave them with limited residual risk.

New Zealand is sharing a slice of this action. The domestic M&A market is presently seller-friendly, with hot competition for solid businesses and other assets, particularly in the agri-sector.

The intelligence report noted that auction processes drive better deal terms for sellers, who are more likely to get a fixed price or locked box deal, a shorter claim period and a lower cap on their liability.

The use of insurance on M&A deals was increasing and it's a global trend -- but deal size and the types of buyer and seller still played a big part.

Rachel Taylor, a DLA Piper corporate partner based in Wellington, highlighted four M&A trends that have flowed into the New Zealand market:

• Private equity investment is strong globally and we are seeing an increase in this activity in New Zealand. Sellers get better deal terms when private equity is involved. They want to get things done and the closing time between a conditional agreement and selling is as narrow as possible.

• We are seeing more warranty and indemnity insurance in sale and purchase transactions -- the buyer insures against warrant and indemnity risk and generally there is no recourse to the seller. The seller is then able to have a clean exit.

• There are fewer takeover offers, and scheme of arrangements through the High Court are becoming more common as an alternative. In a scheme of arrangement the board of the target company is more actively negotiating the terms, the board can make a recommendation to the shareholders, and the deal can work more effectively.

It goes back to certainty. Once the board of the target company has agreed to the terms and an appraisal report has been commissioned, the buyer is fairly confident of getting High Court approval. In the case of listed companies, a scheme of arrangement requires a 'no objection' letter from the Takeovers Panel before it can be sanctioned by the High Court.

• There is a strong flow of Chinese investment into New Zealand despite changes to capital controls in China. A lot of Chinese money is routed through Hong Kong and the Cayman Islands and the true investment is more than the Department of Statistics publishes. (The 2017 M&A Intelligence report will include data and analysis from Asian deals).

Martin Thomson, a DLA Piper corporate partner based in Auckland, says Chinese investment in agri and food businesses is significant. "China has an increasingly affluent population and we produce high-quality food products. There is a lot of opportunity in that market.

"Chinese investment is focused on sourcing quality food products and other primary produce and securing supply back to China."

There are fewer takeover offers and schemes of arrangement through the High Court.

He says progress has been made on the consenting process involving the Overseas Investment Office (OIO).

"The Shanghai Maling application (to buy 50 per cent of the shares in Silver Fern Farms) was too long -- almost a year.

"It is getting more efficient. Clients expect the process for sensitive land to take three to six months depending on the complexity of the deal -- and closer to three months should be the norm."

In competitive sales processes involving large deals requiring OIO consent, sellers are making efforts to speed up the consenting process. Thomson says that, as part of the deal process, the seller will produce an OIO application form.

"The seller is saying to the buyer 'here's a draft application and we've populated it with everything we can say. Now you undertake to meet a deadline and populate your information'.

"The sale and purchase agreement is signed subject to the OIO consent condition.

"The buyer is required to consult with the seller in respect of communications with the OIO and is bound to accept some reasonable consent conditions (often a material adverse change clause is excluded) -- that is quite a change reflecting the increased rigour of the OIO process," Thomson says.

Thomson says there's increased interest from private equity players particularly from Australia because of the strength of the New Zealand economy. "Banks have tightened up on the availability of debt funding and we are likely to see more equity funded deals rather than leverage transactions."

He says there's a wall of baby boomers who have spent their lives building substantial businesses and they have reached the age where they want to wholly or partially sell. "Private equity players are in a position to buy a bunch of these businesses, roll them up and look to complete an initial public offering (IPO)."

DLA Piper applies its global experience in M&A deals to guide New Zealand clients through every stage of a deal -- from due diligence and structuring to negotiation and preparation of deal documents, obtaining OIO consent and finally transaction completion and post-merger integration.