Quality local assets are in demand
Despite global uncertainty our capital markets are in a healthy state, write
New Zealand’s capital markets are in a buoyant and positive state reflecting the strength of New Zealand’s economy. Local and offshore buyers are on the hunt for quality New Zealand assets especially those with a potential growth angle into Asia. New Zealand businesses are also looking at opportunities to expand domestically and offshore via acquisition.
In some industries, such as media and telecommunications, a rapidly evolving environment is forcing parties to adapt, including via acquisitions and divestments. All buyers currently have confidence about their ability to finance strategic acquisitions.
Indeed it is a pretty good time to be a vendor of a quality New Zealand asset.
Private equity funds throughout the world (both here in New Zealand, Australia, Asia, Europe and the United States) currently have lots of cash to invest and are needing to “pay up” to acquire desirable assets. Multiples being paid on deals are, in some cases, back to pre-Global Financial Crisis heights.
New Zealand has long been a hunting ground by foreigners (whether private equity or other foreign investors) for assets to acquire. New Zealand assets and businesses — particularly those in our agri and food sector — are seen as particularly attractive right now.
New Zealand is seen internationally as clean and green — our distance from market is in many cases a positive — and food and food-related products here are seen as coming from a pure place far away from polluters. With a growing emphasis by many consumers on knowing the source of products and on sustainability, products produced in New Zealand can demand a price premium.
Consumers around the world but particularly in Asia are very focused on food safety.
The current multiples vendors can achieve in private treaty sale processes are probably a factor in some New Zealand businesses opting for this method to realise their investment, rather than listing on the NZX.
For example, we do act for and know a number of owners of quality New Zealand businesses who simply do not want the publicity and regulation associated with an NZX listing.
There have been a paucity of new listings on NZX so far this year.
Another dynamic in the market in 2017 is the Commerce Commission’s recent decision to decline the Sky/Vodafone and the Fairfax/ NZME deals. Those contemplating mergers are clearly on notice that the Commerce Commission process is not a rubber stamp.
As New Zealand markets have become more concentrated, additional merger activity becomes more difficult from a regulatory perspective.
Our expectation is that these recent decisions will result in market players being more cautious about what mergers they seek to transact.
Spending a year, or close to it, putting together a merger and then to have it fail is a huge cost to those entities involved.
It’s not just the costs of advisers, it’s the management distraction which is unavoidable during the process.
Likewise, the Inland Revenue and other regulators in the context of global efforts to control money laundering and financing of terrorism are also increasing their focus on M&A transactions.
While taxation and structuring issues will often be front and centre of transactions, the days of ‘ inventive’ tax structuring are probably over.
For many years, market participants were critical of the Overseas Investment Office (OIO) — its processes and time taken to read decisions. The Government responded earlier this year by increasing the resources of the Office and bringing in some new faces.
The OIO itself has also responded with reviewing its processes and looking to assist parties to effect obtaining approval more quickly. Our view is that all of these changes have been positive and participants in the market now need to give the OIO the opportunity to deliver.
However, as we head into an election there will be concern that the approval process will slow down and that Ministers may seek to defer making decisions during the election process.
Obviously the length of time needed to form any new government post-election and appoint new Ministers also has the potential to slow commercial deals from being completed.
This is a key business risk for those seeking to effect a transaction — as in the current market it is common for a deal to be subject to a “material adverse change” clause, allowing the buyer to walk away if a “material adverse change” arises before the money is paid.
The longer the time between signing a deal and completing it, the greater the risk that such an event will occur.
Despite a backdrop of global political and economic uncertainty, our capital markets are in a healthy state — as evidenced by the extent of merger activity, the number of parties chasing deals and the multiples vendors are receiving.
At the same time market participants seem more disciplined than at the height of the last boom in 2006 — financiers are not being foolish in the levels of debt they will provide.
That all bodes well for a continuing period of positive activity.
Cathy Quinn and Silvana Schenone are Partners Corporate and Commercial with MinterEllisonRuddWatts