Virgin Australia is due to relist on the ASX this month.
Virgin Australia is due to relist on the ASX this month.
Fletcher Building’s disclosure that some parties are interested in its businesses, combined with takeover talk surrounding Spark, has spurred speculation that New Zealand might be in for a round of mergers and acquisitions.
The building and construction firm – once one of the local market’s biggest companies – rel="" title="">said this week that it had received inquiries from parties interested in its businesses, including the construction division.
Investors can expect to learn more when the company updates progress on its strategic review at an investor day on June 24.
Then there was a report in the Australian along the lines that United States private equity giant Kohlberg Kravis Roberts had been considering a buyout of Spark in recent months.
And the newly recapitalised Ryman Healthcare’s very low share price has fuelled talk that it too might be a contender for corporate action.
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The share prices of all three would appear to fit the cliche of “counter-cyclical buying opportunities”, said Craigs Investment Partners investment director Mark Lister.
He said Ryman’s “bombed out” share price ($2.22 on Thursday market open) was making the stock look cheap, relative to its net tangible asset backing.
“So you can probably add Ryman into the mix as a potential one that finds itself in the conversation as people start to look at some of these large companies,” Lister said.
“It’s normally smaller companies that attract the attention of buyers or potential suitors, but it’s now some of our bigger stocks that have underperformed and whose managements haven’t got things quite right.
“We may start seeing international investors, private equity firms, or others with deep pockets, have a look at where they can pick up some undervalued opportunities,” Lister said.
“Yes, it [counter-cyclical buying opportunities] is a cliche, but it’s probably a cliche for a reason.
“You’ve got an economy that has stabilised, but it’s still far from firing on all cylinders.
“The general thinking is that we will improve over the balance of the year, and we have got interest rates that have come down a long way, and there’s probably a little bit more to come in terms of the decline in interest rates.”
Lower interest rates will mean lower funding costs for any potential buyer wanting to put capital to work.
“And the opportunity cost of taking some of these opportunities is lower.
“These are big, established businesses with strong market positions that have lost their way. They haven’t been well run, if we’re honest.
“Some of these management teams have done a bad job, and that presents opportunities for other investors that can maybe step in and get them back on their feet and drive a bit more growth and return.”
Despite their weak share prices, possible suitors for the three out-of-favour stocks will still need a big chequebook.
Fletcher Building’s market cap is $3.5 billion, Spark’s $4.4b and Ryman $2.2b.
Virgin Australia IPO
After a dearth of new listings in recent years, the Australian IPO (initial public offer) window is wide open, says Fisher Funds senior portfolio manager – Australian equities, Robbie Urquhart.
Up to four new companies are due to hit the boards in the coming weeks.
The list includes early-stage founder-led medical device company Tetratherix, backed by New Zealand’s Rod Drury, and the high-profile relisting of Virgin Australia, which will be closely watched.
“How Virgin trades post-listing could dictate to what extent we see more IPO candidates emerge this year,” Urquhart said.
Having fallen into administration post-Covid, Virgin was acquired by Bain Capital and the indications are this is likely to be a successful float, he said.
“Yes, it is an airline, and yes, it involves a private equity vendor taking money off the table in IPOing the company. Both these factors are normally red flags for a range of investors.”
So why the excitement?
“Although airlines have not historically provided a good return on capital, Virgin is focused on the Australian domestic market, which is less competitive than international long-haul routes.
“The excitement in the market for the float also simply comes down to price: Bain is floating Virgin at a substantial discount to Qantas and Air New Zealand.”
Bain recently sold a chunk of the business to Qatar Airways, also at a premium to the IPO price.
“Markets can be fickle, and this alone doesn’t guarantee Virgin trades well post listing – but it is a good start.”
Private equity operators in New Zealand and Australia seeking to use the IPO market as an avenue for exits might want to take a leaf out of Bain’s book, Urquhart said.
In the prospectus, Virgin’s directors provided earnings guidance only to the end of June 2025 – less than one month from the registration of the prospectus.
“This, too, is a model that companies looking at IPOing might want to emulate if they can, as it helps assuage directors’ concerns around having to stand behind long-dated earnings guidance in a volatile global economic environment.”
Virgin expects to list on the ASX on June 24.
At A$685m ($738m), the offer will represent 30.2% of the Virgin Australia shares on issue.
At that price, the company would have a market cap of A$2.3 billion.
Virgin Australia is the country’s second-largest airline group, carrying 20 million passengers a year.
The company has more than 100 aircraft on 76 routes to 38 destinations across its domestic and short-haul international airline business.
Steaming ahead
Power generator-retailer Mercury, at this week’s investor day, surprised the market with an announcement that it has five terawatt hours of geothermal potential under evaluation.
Mercury NZ is looking at building more geothermal assets.
While this opportunity is still being firmed up and remains subject to consent, it could materially rerate Mercury’s value over time, Jarden said in a research note.
“Given geothermal is baseload and requires minimal firming, if Mercury can achieve a levelised cost of below $105/MWh, this would likely put downward pressure on wholesale price expectations through the 2030s,” Jarden said.
Mercury is targeting full-year 2030 ebitdaf (earnings before interest, tax, depreciation, amortisation and financial instruments) of between $1.15b and $1.25b, broadly in line with Jarden’s projections.
“This is a positive update from the company, relative to our expectations.”
“While FY25 ebitdaf guidance remains unchanged at $760m, Mercury has signalled a normalised base closer to $900m, highlighting both the challenging FY25 backdrop and an expected rebound in FY26,” Jarden said.
Global asset owners are closely evaluating their thinking amid heightened geopolitical uncertainty and volatility, Morningstar said.
The investment research firm said its annual survey, which covers a range of institutional types and sizes, showed private markets were getting more attention from asset owners.
“Several of the interviewees shared their hesitancy to throw too many eggs into the US market basket and are considering adjusting away from US assets given the current state of play,” Morningstar said.
“In addition, private markets are increasingly being seen as a strategic investment allocation with asset owners able to have a more direct influence over company operations and, potentially, less regulatory restriction,” it said.
“It comes as no surprise that with the growing interest in private equity investing across all global regions, asset owners are expressing a need for stronger and more comprehensive data on private companies and markets,” Morningstar said.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
