This publication provides a snapshot of New Zealand’s M&A market, exploring the increasing levels of market confidence and key themes that are expected to characterise deal activity in 2014.
Building confidence – New Zealand economic overview
“Steady”, “robust”, “positive”, “booming” … however commentators choose to describe New Zealand’s economy, the outlook for 2014 appears rosy.
The Reserve Bank of New Zealand has reported that New Zealand is one of the fastest growing economies in the developed world. New Zealand’s GDP grew by 3.5% in the year to September 2013, and growth is expected to continue around this rate over the coming year.
HSBC’s chief economist for Australia and New Zealand, Paul Bloxham, recently went as far as calling New Zealand the “rockstar” economy of 2014 and believes the economy is already “firing on all cylinders”.
New Zealand business leaders are reflecting this optimism. According to the ANZ’s monthly business outlook survey, business confidence survey readings are the highest we have seen since 1994, with confidence growing to more than 70% in February this year. Furthermore, firms’ expectations regarding their own business rose to the highest reading since June 1994.
Market confidence has been driven by a number of factors, including:
- a relatively stable economic environment and low interest rates
- increased infrastructure spend – particularly in roading – with further stimulation from the Christchurch rebuild activity and plans to address Auckland’s severe housing shortage
- reinvigorated capital markets, in part due to the Government’s Mixed Ownership Model programme (see our report: New Zealand Capital Markets – trends and insights), and
- a global export market weighted towards soft commodities, booming world dairy prices and a rebound in production volumes which are pushing New Zealand’s terms of trade to their highest levels since 1973.
Small and strategic
The burgeoning economy is translating into an increased corporate appetite for M&A transactions. KPMG’s quarterly Mergers and Acquisitions Predictor reports a healthy and steady boost in deal volumes over the past 12 months, despite a backdrop of global decline, with interest from both listed corporates and private firms looking to expand operations and/or diversify earnings.
M&A activity in New Zealand is still focused predominantly on the small to mid-size part of the market and we haven’t seen the re-emergence of large, leveraged transactions since the GFC, aside from Transpacific’s recent sale to Beijing Capital Group (see below).
However, corporates with strong balance sheets continue to pursue strategic acquisitions to bolster their core business and improve earnings rather than merely divesting assets to release funds.
New Zealand’s largest retailer, The Warehouse, as an example, has made a number of recent acquisitions including No.1 Fitness, Shop HQ and Torpedo7 and has entered into agreements to acquire Shotgun Supplements and the Schooltex school uniform brand.
Fonterra, the world’s biggest dairy exporter, acquired the assets of failed Canterbury milk processing company New Zealand Dairies for $48.5m after the Russian-owned dairy factory was placed into receivership.
We expect this focus on growth through acquisition to continue, which could drive more small to mid-size deals in the New Zealand market as businesses buy out rivals or complementary businesses.
Many of the country’s largest acquisitions have been funded by equity raisings or comprised major block trades. The EBOS Group’s acquisition of Australia’s Symbion was a transformative deal partly financed by a $239m placement and rights offer.
The expected construction boom in Christchurch has been slow to start with delays in the consenting process hampering progress.
However, 2014 will be a turning point, marking the transition from the design phase to the construction phase for a number of major construction projects. The value of building consents issued over the December 2013 quarter (both residential and non-residential) was the highest on record at $936m. Insurer IAG expects its reinstatement programme costs to be in the vicinity of $500-600m this year.
The scale of the task has attracted global attention. Australia’s Cockram Construction was awarded the Burwood Hospital Redevelopment Project in December last year, in a joint venture with local contractor Leighs. Thiess has partnered with a local contractor to bid for the Justice and Emergency Services Precinct Project and there is talk of other major Australian contractors looking to enter the market as well as interest from elsewhere in the world. In July 2013, Arrow International and global construction giant China State Construction Engineering Corporation (CSCEC) signed a Memorandum of Understanding to jointly bid for projects.
Large transport projects have been earmarked for Auckland and Wellington. In Auckland the announced rail extension and a second harbour crossing as well as a series of smaller projects will come to the marketplace in the near future.
Foreign investment and the China connection
It is now almost six years since the landmark New Zealand-China Free Trade Agreement was signed in Beijing, and the relationship between the two countries continues to deepen. China has overtaken Australia as New Zealand’s biggest export market – Statistics New Zealand reported $1.2b of exports to China in January 2014, representing a record 30% of New Zealand’s total exports and more than double the value to Australia over the same period. The rise in exports to China is driven primarily by demand for dairy products, including milk powder, butter and cheese.
Chinese investors continue to show strong interest in other New Zealand assets, particularly in agribusinesses and primary production.
In March 2014, ASX-listed waste management and services company Transpacific Industries Group Ltd entered into an agreement to sell its New Zealand business to a wholly-owned subsidiary of the Beijing Capital Group for $950m (approximately AU$880m). Chapman Tripp acted for Transpacific on the sale.
Other recent acquisitions and investments include:
- Shanghai CRED, one of Shanghai’s largest property development companies, acquired the 1,100 hectare (2,718 acre) Peppers Carrington resort in November 2013.
- In April 2013, two Chinese-owned dairy companies gained approval from the Overseas Investment Office to set up milk processing plants producing infant milk formula.
- Also in April, the New Zealand Superannuation Fund announced its sale of 11 forestry blocks in New Zealand’s North Island to China National Forest Products Trading Corporation.
- And in December 2012, China’s Shanghai Pengxin finally settled its purchase of the 16 Crafar Farms.
With China’s continued interest and improving US, UK and Japanese economies, we expect to see more foreign buyers making competitive bids for quality New Zealand assets.
It comes as no surprise that the retirement and aged care sector is experiencing rapid growth.
Ryman Healthcare started the trend with its IPO back in 1999 and it continues to achieve strong earnings, with a 31 December market capitalisation of $3.93b, representing a $450m gain in the three months from 30 September 2013. That equates to a $1.65b rise in value for Ryman since the end of 2012, when its market capitalisation was $2.28b.
Summerset Group followed suit with its 2011 IPO, and Metlifecare’s recent capital raising suggests more development opportunities may exist.
The Māori economy continues to be important in local investment and deal activity with a focus on collective asset buying in the primary industries (such as fishing and agriculture) and infrastructure. The collective Māori asset base is valued at $37b and will continue to increase, largely as a result of Treaty of Waitangi settlements.
On 3 March 2014, New Zealand Superannuation Fund announced that it had sold a 2.5% stake in New Zealand’s largest forestry business, Kaingaroa Timberlands, to six central North Island Māori groups (iwi). The investment is one of the biggest ever involving an iwi collective.
The six iwi representative organisations, Ngati Rangitihi, Ngati Whakaue Assets and Te Arawa River Iwi Limited Partnership, Ngati Whare, Raukawa, Te Arawa Group Holdings Limited and Tuwharetoa, have formed Kakano Investment Limited Partnership (Kakano) and purchased the stake from the New Zealand Superannuation Fund (NZSF) for an undisclosed price. Last year, NZSF had put a value of $945.1m on its Kaingaroa investment, which includes 190,000 hectares in the central North Island.
Other likely avenues for Māori to maximise the returns from their asset base are joint ventures and other partnerships with investors who can bring capital, value-added processing and employment opportunities, and market access.
Solid returns for private equity
In contrast to global trends, New Zealand firms have been taking full advantage of the attractive private equity investment opportunities stemming from the increased M&A activity.
We’ve seen Waterman Capital investing into Partner’s Life and Healthlink International and acquiring a 24% stake in Academic Colleges Group Limited, a private school owner/operator in New Zealand, Indonesia and Vietnam.
In one of last year’s highest profile transactions, Pencarrow Private Equity and Accident Compensation Corporation (ACC) acquired Bell Tea and Coffee Company (BTCC) from Foodstuffs New Zealand on 1 October.
Despite the challenging environment for exits, private equity is generally delivering solid returns to investors, particularly with realisations being a priority for many limited partners at the moment.