The NZX is under attack — our listed companies are disappearing rapidly.
The total number of main board listings has fallen from 168 to just 155 since the end of 2015. This is the result of more takeovers, receiverships and other delisting decisions, than IPOs.
As investment bankers are indicating that they have far more takeover prospects than potential IPOs at present, the number of main board listings could shrink further over the remainder of the year.
Why are these companies leaving the NZX and why are shareholders so quick to accept takeover offers?
The accompanying table shows the 10 successfully completed takeovers since the end of 2015, with eight initiated overseas and only two from New Zealand. Three of the successful overseas-initiated bids have been from Asia, two from Australia and one each from Canada, Europe and the United States.
In dollar terms, 33 per cent of the aggregate $3.2 billion worth of offers came from European interests, 29.1 per cent from the United States, 16.8 per cent from Asia, 11.1 per cent from Australia, 8.8 per cent from Canada and only 1.1 per cent from New Zealand.
This overseas dominance is a familiar pattern, but Asian bidders have become more prevalent in the past 12 months.
By contrast, UK bidders played a bigger role in the 1970s and Australian and UK bidders in the 1990s and early 2000s. Eight additional significant non-takeover delistings have occurred since the end of 2015. These have been:
• Three insolvencies: Intueri Education; Pumpkin Patch; and Wynyard Group
• Speirs Group moving to New Zealand's Unlisted exchange
• Tenon delisting after the sale of its North American business to a New York based private equity group
• OceanaGold, which operates the Reefton, Macraes and Waihi gold mines, moved back to the ASX when it was worth $1.5b
• Coats Group, formerly known as GPG, decided to focus on the London Stock Exchange
However, the NZX's biggest blow was Xero's departure as it had a market value of $4.7b on departure, more than the 10 takeover targets in the accompanying table. The Xero delisting will take a long time to recover from, particularly as there are few major IPOs on the horizon.
There are two potential additional delistings at present. These are CBL Corporation, which is in voluntary administration, and Tegel Group Holdings, which has received notice of a takeover offer.
The Tegel offer is also consistent with recent trends — a poorly performing IPO and a takeover bid from Asian interests.
Tegel was established in Auckland in 1960 to produce poultry products and in the 1980s was purchased by the Goodman Fielder Wattie group of companies.
US-based HJ Heinz acquired Tegel in 1992 as part of its Goodman Fielder purchase.
Thirteen years later, the Australian private equity fund Pacific Equity Partners bought the enterprise from HJ Heinz for around $250m.
In 2011, Tegel was acquired by the Asian leveraged buyout firm Affinity Equity Partners for just over $600m. The new owners entered a sale and leaseback arrangement on five properties in its 2013/14 year.
This resulted in a dramatic increase in future lease commitments, from $69.4m to $209.2m, representing a significant transfer of wealth to current shareholders from future shareholders.
In March 2016 Tegel issued a Product Disclosure Statement (PDS) for the IPO of the company. At the time Tegel was owned:
• 87 per cent by funds advised by Affinity Equity Partners
• 11 per cent by funds advised by the ICG group
• 2 per cent by current and former management
The PDS was optimistic, with the company forecasting solid increases in revenue and net profit, particularly for the April 2017 year.
The indicative offer price was between $1.55 and $2.50 a share, but interest was lukewarm and an IPO price of $1.55 was determined. The proceeds from the offer were used as follows:
• $130m to repay Tegel debt owed to its banks
• $129.4m was paid to existing shareholders for the redemption of their redeemable shares
• $23.3m went to pay all costs related to the IPO, including a management bonus
• $1.2m was retained by Tegel
Total costs of $23.3m represented 8.2 per cent of the $283.9m raised.
Following the offer, the major private equity shareholders maintained a 45 per cent shareholding.
The company listed two years ago, on May 3, 2016, with 29.1 million shares trading on the first day, representing over 15 per cent of the shares issued to the public.
The share price was up 8 cents to $1.63.
Broker analysts release positive reports, as they usually do, with outperform recommendations and the result for the year ended April 2016 was slightly ahead of the PDS forecasts. Chairman James Ogden and chief executive Phil Hand wrote in the 2016 annual report that, "We have started FY2017 with strong momentum through domestic contracts won in FY2016, new products and customers gained in overseas markets.
"Efficiency improvements made in our operational sites and new technology being utilised in our livestock operations will deliver ongoing improvements in animal welfare and agriculture".
Ogden and Hand's fellow directors were Tang Kok Yew and Brett Sutton of Affinity Equity Partners, David Jackson, formerly of Ernst & Young, and George Adams, a former managing director of Coca-Cola Amatil New Zealand & Fiji.
Ogden, Jackson and Adams had only become board members a day before the PDS was registered.
This potentially put them at a huge disadvantage compared with the two long-standing Affinity Equity Partners-related directors.
Tegel's share price drifted lower in the second half of 2016 and early 2017 until the surprise announcement on May 5 that Ogden had resigned from the Tegel board "effective immediately". No reason was given and he was replaced by Jackson.
Net profit after tax for the April 2017 year was $34.2m, well below the $44.0m PDS forecast. Jackson and Hand wrote that the result had been disappointing because of "competitive pricing challenges in the New Zealand market".
Ogden received a pat on the back in the 2017 annual report even though he resigned after only 13 months on the board.
Tegel's share price hit an all-time low of 81c at the end of the March 2018 quarter after the company downgraded its April 2018 year net earnings forecast to the $25m to $27m range.
On April 26, seven weeks after the profit downgrade, Tegel received a notice of a takeover offer from Bounty Fresh Foods, a private Filipino company, at $1.23 a share.
The main lesson from Tegel's poor performance is New Zealand investors must stop accepting the sucker role in the private equity game.
The original shareholders made money when they sold to Goodman Fielder Wattie, the latter made money when it sold to HJ Heinz, the US company made a profit when it sold to Pacific Equity Partners, the latter made a positive return when it sold to Affinity, and Affinity has also had a positive experience because of its leveraged purchase and Tegel's property sale and leaseback arrangement.
The lead manager to the IPO also received a fat fee and, if the takeover offer is successful, the new owner will probable do extremely well.
The only group to lose money in this ownership chain are the IPO investors who purchased their shares at $1.55 and accepted Bounty's $1.23 a share offer.
In capital terms, the Tegel share price has declined 20.6 per cent since listing while the NZX50 Capital Index has appreciated by 15.7 per cent over the same period.
Many Tegel shareholders will be quick to accept the $1.23 a share because they are fed up with the cynical structures and poor performance of many of our IPOs.
The inability of many IPOs, particularly private equity driven issues, to achieve their profit forecasts is having a devastating impact on the NZX and its ability to raise investor confidence and attract new listings.
- Brian Gaynor is an executive director of Milford Asset Management.