Billions in value set to be wiped off NZX

Analysts reveal impact a trend of mergers, acquisitions will have on sharemarket

This year is already shaping up to be a big one for New Zealand mergers and acquisitions, with $3.5 billion in value set to be wiped off the local sharemarket, JBWere said.

The investment and brokerage firm said the “disturbing” trend of merger and acquisition activity continued throughout 2018, which was the busiest since 2012.

“We estimate about $1.5b in value was wiped from the NZX following successful takeovers,” JBWere said in its annual equity ownership survey.

“Looking ahead, 2019 looks set to dwarf this with about $3.5b worth of transactions still subject to takeover approval,” it said.

This year, the takeover Trade Me by private equity company Apax for $2.5b, subject to shareholder and court approvals, looks set to top the M&A list.

JBWere said foreign ownership of New Zealand-listed stocks rose by 1 per cent to 39 per cent last year — the highest point since 2007.

Foreign ownership of New Zealand equities has fluctuated from 44 per cent in 2005 to as low 22 per cent over 2014, 2015, JBWere data shows.

The local market remained an attractive destination for offshore investors over the year. The aggregated offshore ownership level included Australian investors owning about 16 per cent of the total float of the S&P/ NZX All Index.

The survey consisted of 64 companies, accounting for 95.6 per cent of the S&P/NZX All Index in terms of total market capitalisation.

Of the 64 companies surveyed, 13 companies saw offshore ownership decreases of greater than 1 per cent, 34 saw increases above 1 per cent, and 14 were essentially unchanged.

Positive offshore investor sentiment towards the New Zealand market was reflected with offshore investors increasing their holdings across the board of constituents within the S&P/NZX All Index.

“The general theme observed from the results of this year’s survey saw offshore investors upweight their positions in large cap names considerably and more aggressively in small cap names in the S&P/NZX All Index,” JBWere said. “This is in sharp contrast to last year’s result which saw the level of offshore ownership increase due to the remarkable foreign buying in both a2 Milk and Xero,” it said.

There were material differences to this year’s constituents within the survey with a number of stocks exiting the NZX, which included Xero migrating to the ASX.

This had a material effect on the overall offshore ownership level as in past years, as Xero was majority owned by offshore investors and also had a significant representation within the sample.

In addition, a2 Milk’s robust performance saw its representation within the survey materially increase.

JBWere analysis suggested the global shift towards passive investing in equities has also had an influence on the NZ market over the last year.

“Despite only having limited visibility on the proportion of offshore funds that are actively managed here in New Zealand, analysis suggests there has been a rise in passive ownership from offshore passive investment funds,” JBWere said.

Notable year-on-year changes in passive ownership in the New Zealand market, including an approximate 125 per cent rise in passive ownership of a2 Milk, Fisher and Paykel Healthcare (26 per cent) and Spark (15 per cent) while notable decreases were in Fletcher Building, down 19 per cent, and Mercury, down

26 per cent. The overall market ownership by NZ managed funds increased from 21.4 per cent to 23.6 per cent over the past year on the back of significant inflows into NZbased fund managers, combined with an increase in the level of funds that ACC and the NZ Super Fund have deployed within the New Zealand market.

“As highlighted in last year’s report we expected this trend to play out due to the continued momentum of KiwiSaver having an increasingly material effect on inflows and the Labour coalition government reinstating contributions to the NZ Super Fund over the past year,” JBWere said.

The Government intends to increase contributions over the next four years with $1b in contributions planned for the Fund in 2019, $1.5b in 2020 and $2.2b in 2021.

JBWere said retail ownership of the local market continued to trend 2.1 per cent lower to 20.5 per cent, a historical low.

Despite the prospects for a number of new listings occurring, 2018 proved to be another quiet year for initial public offerings (IPOs). The only listing was QEX listing in February, which subsequently migrated to the Main Board in September.

“The subdued level in listing activity is mostly driven by private equity funds continuing to aggressively absorb potential candidates, combined with equity capital being a relatively costly source of funding relative to debt, given historic low interest rates in New Zealand,” it said.

The loss of a number of listed companies throughout the year from the exchange, including Xero, had stopped the market achieving another record level of market value, and the ratio of market capitalisation to GDP showed a slight improvement of 1 per cent to 47 per cent.

However, New Zealand continues to trail its global peers considerably on this measure, it said.

“The lack of 2019 prospects and potential loss of Trade Me Group means this is likely to remain the case, certainly in the near term.”