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Deutsche bets on transtasman M&A

By Nick Stride

Friday 2nd May 2003

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It's customary in investment banking circles to speculate about who will be the next overseas player to pack its bags and leave the country. One that won't be going, insists chief executive Brett Shepherd, is Deutsche Bank New Zealand.

With no distribution arm Deutsche doesn't have the public profile of JB Were or ABN Amro.

Even so, with $13.7 billion of assets and an after-tax profit last year of $319 million, the bank is bigger than many of its corporate clients.

Although most of that profit is interest-related the bank's 25 "income-generating" staff contribute $67 million of revenues from trading income, fees and commissions.

The bank concentrates on the top 10 corporates, using the global network of its German parent to keep its clients up to scratch with overseas trends and developments.

Despite the shrinkage of the New Zealand big-company sector, Deutsche had no intention of chasing one-off smaller deals, Mr Shepherd said. Its aim was to build long-term relationships with a number of smaller clients.

Deutsche operates in three areas. The mergers and acquisitions (M&A) arm is number one over five years, with deals worth $19 billion under its belt. The key, Mr Shepherd said, was to understand companies' objectives and strategies; Deutsche's advisers sometimes sat in on board meetings and brought in overseas specialists to attend "offsite" sessions.

Deutsche, for example, has offices in Brazil, Chile, Mexico, Venezuela and gave Fonterra economic intelligence on each market as the dairy company weighed up the Latin American joint venture with Nestle.

Deutsche's offices also keep New Zealand in touch with overseas corporate developments. When a large overseas company is looking to sell New Zealand assets, for instance, potential local buyers want a "first-mover" advantage.

The M&A team is advising Australia's Fairfax on the $1.2 billion acquisition of INL's publishing assets.

It also advised on the formation of Fonterra, the sale of UnitedNetworks, Carter Holt Harvey's Australian expansion, and Norske Skog's acquisition of Fletcher Paper.

Its involvement in Fisher & Paykel's separation into healthcare and appliances companies caused some controversy at the time but has proved successful.

"It was an example of corporate finance theory that worked," Mr Shepherd said.

The equity capital markets arm makes use of Deutsche's balance sheet to fund clients' activities "on a targeted basis" and conducts capital raisings.

The ECM arm recently raised $200 million for Mighty River Power through a retail bond issue using retail sharebrokers' distribution.

The global markets arm provides foreign exchange and fixed-interest advice and execution, often linked to M&A activity. When overseas companies buy or sell New Zealand assets, for example, transactions can be big enough to move the value of the dollar significantly, necessitating hedging through derivatives such as options and swaptions to lock in the foreign currency value.

Mr Shepherd said Deutsche's transtasman presence was a particular strength.

This was bolstered early last year when his predecessor Scott Perkins headed to Sydney to take charge of the transtasman M&A operation alongside Tony Burgess. He took with him detailed knowledge of his New Zealand clients that had proved invaluable, Mr Shepherd said.

Deutsche is relatively pessimistic about the economic prospects for the second half of this year, both around the world and for New Zealand.

US gross domestic product growth is running at about 2% and could go either way. But consumer confidence is up since the Iraq war ended. "Everybody's hoping M&A will pick up," Mr Shepherd said.

European growth is still strong overall. In the first quarter of the year the EU region contributed more than 50% of M&A volumes, knocking the US out of first place.

While most companies are expecting slimmer results from the second half of the year, Mr Shepherd said talk of a downturn was overdone.

Deutsche believes most investment in New Zealand is likely to come from Australia and, to a lesser extent, from Asia. Although the image being painted here is of Australian "economic colonisation" New Zealand companies' investments are a growing part of the Australian economy.

Fonterra, for example, with its investments in Peters & Brownes, Tip Top, National Foods and Bonlac Foods, is Australia's biggest dairy consumer products player.

After an acquisitive drive Carter Holt Harvey now derives nearly half its earnings from its wood products business. Fletcher Building last year spent $760 million buying Laminex and now has a dominant position in wood panels and boards.

Sky City is there with the Adelaide casino and state-owned generator Meridian Energy recently bought Southern Hydro in two more Deutsche-advised deals.

Mr Shepherd said there were two local sectors to watch this year. In forestry, resolution of the ownership of the central North Island forests could trigger an industry consolidation.

In the energy sector the ball was in the regulators' court.

"Until the regulatory framework is settled quality players like Vector won't do anything until they know it will benefit shareholders."

Other issues were bringing further gas fields into production and building new generation plants .

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