M&A trends in New Zealand and Australia
June 2017 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2017 Issue
Recent years have been buoyant times for M&A in New Zealand and Australia, with a steady flow of transactional activity underpinned by strong interest from offshore investors, cashed up private equity funds and large corporates with strong balance sheets and access to (relatively) cheap funding.
Both New Zealand and Australia, with stable and free-market growing economies, continue to be attractive investment destinations for foreign corporates and private equity firms. This has particularly been the case for Asian based investors seeking food and agri-businesses, but strong investment levels have also continued from Europe and North America. It has been interesting to note that this has continued despite global (and local, in the case of Australia) political uncertainty.
With the IPO market in New Zealand and Australia relatively quiet, sellers of good quality assets have been, and continue to be, able to realise strong values for their assets through M&A processes. The search for good quality assets has also led to an increase in public M&A activity, with a significant preference for schemes of arrangement over takeover offers. Opportunistic buyers (including both trade buyers and private equity) have been quick to bid for listed companies with low share prices.
In some industries, such as media and telecommunications, technology changes have forced parties to attempt to merge or change their businesses to adapt.
Deal activity has been reasonably widespread across a number of sectors, but particular areas of focus in New Zealand and Australia have been: (i) health and aged care assets; (ii) food and agribusiness; (iii) financial services (including loan portfolio sales and insurance mergers); (iv) infrastructure and infrastructure services; (v) construction businesses; and (vi) transport and logistics companies.
For smaller transactions, roll-up activity continued in 2016, following on from a number of successful industry consolidations in 2014 and 2015. However, while many projects were discussed throughout the year in various industries, including health and age care, food and beverage, transport and logistics and education, few were successfully launched.
In the technology, media and telecommunications (TMT) sector, digital convergence has led to significant activity among market players. In New Zealand, this has led to the Commerce Commission intervening and declining to grant clearance for the proposed merger of the New Zealand Vodafone and Sky Television businesses, and also the proposed merger of the Fairfax New Zealand Media assets with NZME (a digital, print and radio media operator in New Zealand). Developments in the sector will be interesting to watch, with revenue streams for media operators (and therefore their business models) continuing to be subject to significant disruption.
In terms of debt funding, all-in pricing levels for bank-debt funding in 2017 are likely to remain attractive compared to other funding sources. However, we are seeing some increased cost of funds pressures which flows through to banks’ base rates, and a small but growing percentage of deals have been funded by alternative funding sources, such as non-bank lenders.
Increasing regulatory focus
Regulators on both sides of the Tasman are becoming increasingly active and important on M&A transactions. In particular, the Australian Competition and Consumer Commission (ACCC) and the New Zealand Commerce Commission are becoming increasingly active in scrutinising deals, and this has led to a number of merger clearance applications being declined.
Amid a global backdrop of nationalism, and increased public concern around immigration levels, the Australian Foreign Investment Review Board (FIRB) and the New Zealand Overseas Investment Office (OIO) approval processes have become more complex and time consuming. While both the FIRB and the OIO are more rigorous than they have been in the past, and parties should be very aware of the time approval processes will take, our experience is that well advised reputable bidders, that spend time preparing their applications, will still obtain approval for acquisitions. We expect the more intense FIRB/OIO scrutiny will be applied to less reputable bidders, or to transactions that are highly politically sensitive, such as transactions involving key infrastructure, or particularly large parcels of land – particularly in the midst of an election year, as is the case in New Zealand in 2017.
Similarly, we are seeing an increase in Chinese regulatory scrutiny of outbound investments, particularly those involving SOEs, and those changes can have a considerable impact on the timing and certainty of transactions for those parties.
As well as the antitrust and foreign investment regulators, the tax authorities,
the Australian Taxation Office and the Inland Revenue Department in New Zealand, are also increasing their focus on M&A transactions, and taxation issues will often be front and centre of transactions. The days of ‘inventive’ tax structuring for transactions are surely over.
We expect the trend of increased regulatory focus to continue in 2017, and we would advise buyers and sellers to seek advice and consider these matters early in the process, so that all parties can take into account the potential time and risk factors that may be involved.
Trends and developments in transactions that are providing simplicity and certainty
The increasing prominence of private equity buyers, and sellers of companies running competitive auction processes, has resulted in transaction structuring and negotiation becoming simplified, with the result of saving costs and time on negotiation, and providing certainty to the parties.
One example is warranty and indemnity insurance, which is now a firmly established component of the New Zealand and Australian deal landscape. While insurance has historically been used by private equity firms, we have seen an equal amount of corporates use the product in recent times, attracted by its value as an effective risk-mitigation strategy. What has not changed is the speed at which insurers are able to act. Insurance should always be considered on the table as a solution to break an impasse at any stage of a transaction.
The increased involvement of warranty and indemnity insurers has resulted in a more ‘standardised’ set of warranties becoming the market norm, and consequently negotiation of transaction documentation is often streamlined and quicker than it used to be. We have also seen corporates adapting to become increasingly nimble and flexible in negotiating deals, to more easily allow them to compete with private equity bidders in terms of a clean and streamlined offer.
In terms of public M&A activity, which has become more popular over the last 12 months, schemes of arrangement have continued to take preference over takeover offers in Australia, and that has become the case recently in New Zealand with the New Zealand Takeovers Panel endorsing schemes as a viable option. The benefits of schemes have primarily been that they provide more certainty to bidders, and are more flexible in adapting to differing deal structures and conditionality (such as regulatory approvals).
Against a backdrop of global economic and political uncertainty, the New Zealand and Australian economies continue to show that they are well regulated and easy places to do business, with a track record of growing strong businesses, and as a consequence they continue to have an active and thriving M&A market which is increasingly attractive to global investors.
Mark Forman is a partner MinterEllisonRuddWatts. He can be contacted on +64 9 353 9944 or by email: firstname.lastname@example.org.
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