Low borrowing costs, weaker kiwi to underpin NZ M&A activity in 2016

Friday 4th March 2016

Cheap borrowing costs and a New Zealand dollar that has shed a fifth of its value in the past two years are likely to underpin merger and acquisition activity this year, according to a law firm that advised on some of the biggest deals in 2015.

Chapman Tripp says the current year is likely to be characterised by continued interest from Australian private equity firms, flush with new capital, China's ongoing demand for primary sector and tourism assets, banks keen to fund acquisitions and offshore investors such as those in the US drawn to local businesses that have become cheaper in US dollar terms. The law firm cites aged care, telecoms, primary products and the energy sector as likely targets for M&A.

"We expect the New Zealand market to show another strong performance in 2016, following a record 2015 for global M&A," Chapman Tripp said in its NZ Mergers and Acquisitions trends and insights report. That would mean deals of more than $8 billion, as was achieved last year.

On the current run rate, 2016 may exceed 2015, with some $2.4 billion of deals announced so far, including private equity backed Allnex Belgium's offer for Nuplex Industries via a scheme of arrangement, venture capital firm Insight Venture Partners' takeover of Diligent Corp, Fletcher Building's planned acquisition of roading firm Higgins Group, Trustpower's plan to spin off its windfarms and renewable development pipeline, and US private equity firm Blackstone Group's purchase of five retirement villages from Lendlease Group.

There is also talk of a deal in the telecommunications sector, where Two Degrees Mobile is seen as a target for companies seeking to flesh out their offering and Affinity Equity Partners is expected to exit at least some of its interest in New Zealand poultry business Tegel Foods, which may be by way of a share float.

Chapman Tripp said 2015 saw the re-emergence of Australian private equity buyers who tripled their fund raising to A$2.7 billion last year, led by the Pacific Equity Partners Fund V at A$2.1 billion, Crescent Capital Partners Fund V with A$565 million and both Next Capital Fund III and Mercury Capital Fund 2 at A$300 million.

Asian investors, especially those from China, were expected to be looking for acquisitions in the New Zealand market again, even though the government's rejection of Shanghai Pengxin's purchase of Lochinver Station "may have a negative impact on ambitious land transactions," the law firm said. Japanese investors were also expected to be active again.

It said the Overseas Investment Office imposed slow time-frames on cross-border deals, which had the effect of prompting some vendors to accept inferior local offers and risked undermining New Zealand's reputation as an easy place to do business. The OIO could review its definition of "sensitive land" because it had been applied to unexceptional land and it recommended the government use its powers to exempt some transactions from that test.

Banks were willing to fund M&A activity and the domestic debt market was "the most attractive it has been since the GFC," the law firm said in its report. Although benchmark interest rates were low and could move even lower given weak inflation, there were other factors that could push out debt funding spreads, including the Basel requirements for banks to strengthen their balance sheets.

The state sector would be an important source of assets in 2016, with Housing New Zealand's plan to transfer some housing stock to other providers, while there would be focus on Christchurch, where city-owned assets including the airport, port and lines company could be sold to raise funds to meet some earthquake costs.

Chapman Tripp said it expects to see more schemes of arrangement since Allnex's proposal for Nuplex. Those involved in deals may face higher costs for warranty and indemnity, or W&I, insurance after Asahi settled with two private equity firms it claimed had inflated the value of Independent Liquor, which was sold in 2011.

BusinessDesk.co.nz

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