raised over A$300m
70 IPOs of
Key themes of FY16
Due diligence surveillance
Guidance on disclosure of nancial information
Sell-side research investigation
EQUITY CAPITAL MARKETS
Trends in FY16
Predictions for FY17:
Robust pipeline for stategic M&A
Continuing interest from Chinese investors
Sector hotspots for FY17
Tech & telcos
Solid competition Launch of the
via dual track
Agribusiness & food
Quality assets whetted investors' appetites
Australia's IPO market remained reasonably robust in FY16, particularly considering the volatility in Australian and global nancial markets,increasing political and economic uncertainties following Brexit, the Australian federal election and the U.S. presidential election campaign.
Nonetheless, the IPO window remained open, with continued investor appetite for appropriately priced and quality assets likely to deliver strong yields. Stand outs were in innovation (with many optimistic tech start-ups seeking to capitalise on Atlassian's NASDAQ listing success), healthcare, and food and agriculture.
While FY16 saw relatively few IPOs from large-cap companies, there was good volume at the small and mid-cap end of the market (largely in the technology sector).
Dick Smith collapse changed approach to IPOs
IPO activity by private equity sponsors remained subdued in FY16. While market sentiment toward PE IPOs may have been a ected by the collapse of Dick Smith (which had only been brought to IPO in 2014), there were also a number of successful private equity-backed IPOs, including Tegel, GTN and Motorcycle Holdings.
The lower volume can be explained in part by the fact that many PE rms had completed their exit cycle, and were now in acquisition mode. Following Dick Smith though, there was:
increased pressure on private equity-backed IPOs to demonstrate to the market a more compelling investment thesis, and
in some cases, a market-led requirement on sponsors to retain a bigger investment in a company post-IPO to demonstrate their commitment to the post-listing development of the business.
Fast and furious take-privates
With the urry of IPOs undertaken over the past few years, the market saw a number of take-private transactions within a relatively short space of the company being listed. Vitaco and A nity Childcare are two recent examples. We expect this trend to continue. It may lead to a greater volume of IPOs, with vendors who may have been considering a trade sale pursuing an IPO instead in the rst instance and a take-private down the track. This will be of particular interest to vendors in circumstances where trade buyers are not able to meet their valuation expectations or would be more comfortable acquiring an entity that has been subject to the rigours of the public market.
Vitaco Holdings Limited
Vitaco Holdings Limited completed its IPO and ASX listing in September 2015. Vitaco's products are sold in a number of markets globally, including China, where consumers are attracted by the 'clean and green' image of food and quasi-pharmaceutical products from Australia and New Zealand a trend that we saw in a range of transactions in FY16, including the BWX IPO. Shares representing approximately 80% of Vitaco's issued capital were o ered under the IPO at $2.10 per share, implying an enterprise value of over $330m. In the rst quarter of FY17, Vitaco announced that it had received an o er from a consortium of Chinese investors to take Vitaco private by way of scheme of arrangement at a price per share of A$2.25 (representing a substantial premium to the IPO share price).
7 IPOs raised over A$300m
70 IPOs of A$150m
Solid competition via dual track processes
FY16 also saw an increase in popularity for competitive IPO/trade sale processes. IPOs provided solid competition in dual track processes and, in many cases, remained the more attractive exit route. We saw proper dual track trade sale/IPOs conducted from the outset of the process, and this trend is likely to continue. These processes are more likely to elicit greater strategic tension and therefore more optimal nancial outcomes. They can also act as a real hedge against any unforeseen downturn in capital markets.
Tegel was listed on NZX and ASX as a foreign exempt listing in Q4 of FY16. It was one of the rst NZ issuers to conduct a dual listing relying on the NZ securities law regime, and to seek admission to the ASX list following the new foreign exempt admission criteria for NZ companies. Shares representing up to 51.5% of Tegel's issued capital were o ered in the IPO at NZ$1.55 per share, implying an enterprise value for Tegel of NZ$671m. On completion of the IPO, Tegel's pre-IPO majority owner, Claris Investments Pte Ltd (owned by funds advised by A nity Equity Partners), held approximately 45% of the shares on issue with Intermediate Capital Group Hong Kong Limited and Asia Investment Capital 1 Limited (collectively, ICG) exiting their investment entirely.
One of the largest and most successful IPOs of FY16 was that of IDP Education. While the education sector has historically had mixed success in equity capital markets in Australia, this case illustrated the signi cant investor appetite in circumstances where success did not require IDP to raise new capital in the IPO. The IPO and listing followed a successful institutional sell down of SEEK Limited's 50% stake in IDP, with the o er attracting strong interest from domestic and international investors. The company reached a rst day market capitalisation of $840m.
ASIC undertook several reviews in FY16. For FY17, entities contemplating an IPO will need to consider new recommendations regarding due diligence, sell-side research investigation, and changes to guidance regarding disclosure of nancial information in prospectuses.
Due diligence surveillance: ASIC's recent review of the due diligence practices adopted by entities that had recently completed an IPO resulted in new recommendations:
Minimum due diligence requirements, considering the accuracy of information in the prospectus, recording signi cant issues and continuing until close of the o er to ensure material developments are monitored.
A `substance over form' approach, promoting informed decisionmaking by investors.
Director involvement, re ecting their ultimate responsibility for the content of the prospectus.
Engaging appropriate professional and expert advisers.
Sell-side research investigation: ASIC recommended establishing better practices in relation to the structure and funding of research, expectations around the provision of research coverage and the nature of research team involvement in pre-deal investor education, and compliance monitoring for investor education research.
Changes to guidance regarding disclosure of nancial information in prospectuses: Key changes include:
A requirement for 2.5 or 3 years of audited historical nancial information for the issuer and any entity/business that is proposed to be acquired using funds from the IPO (if such entity/business is material), other than in very speci c circumstances.
Where a business has substantially changed, the need for audited nancial information included in the prospectus to have a relevant, current balance date.
A requirement for a cash ow statement to be included in the prospectus where historical trading is disclosed.
Impact of ASX and ASIC rule changes
FY16 saw (and FY17 will continue to see) substantial regulatory reform of Australia's capital markets. In addition to ASIC's changes to the guidance regarding disclosure of historical nancial information for issuers (together with any entities acquired by way of bolt-on transactions), ASX has made amendments to the ASX Listing Rules to:
increase the monetary thresholds that must be satis ed to meet either the 'pro t' or 'assets' test;
require an entity to have a 20% minimum 'free oat';
change the minimum spread requirements that must be met to obtain admission to ASX;
and in line with ASIC's revised guidance, require an entity seeking admission to ASX to provide 2 or 3 years of audited accounts for the group and any entity/business to be acquired by the group at, or ahead of, listing (thereby removing ASX's previous discretion to accept less than 3 years of accounts).
Secondary capital raising market accelerated signi cantly
Following a lengthy subdued period, FY16 saw the secondary capital raising market accelerate signi cantly. Although not at the levels experienced immediately following the GFC, the year nonetheless saw a sustained level of large and mid-cap companies successfully undertake secondary raisings, including to fund acquisitions and for balance sheet repair.
For example, in FY16 we saw Vocus Communications raise capital to acquire Nextgen Networks, Mayne Pharma undertake a secondary raising to acquire a portfolio of US generic products from Teva and Allergan (see below), and Smartgroup undertake a capital raising to fund its ongoing M&A strategy. Other notable transactions included Webjet's $72m fully underwritten accelerated entitlement o er to fund its acquisition of the Online Republic Group in New Zealand.
Other major rights issues included Virgin Blue's ($852m) raising, including an additional top up placement to a cornerstone investor of $90m, JB Hi-Fi ($394m) to fund the acquisition of the Good Guys, APN News and Media ($180m) and Clearview Wealth Limited ($50m).
Each of these quality capital raisings was received positively by the market. For other companies, and akin to the GFC-era 'balance sheet repair' raises, a number of companies have chosen the equity path over additional debt.
Mayne Pharma Group
Likely a contender for ECM 'deal of the year' was the Mayne Pharma Group's $888m fully underwritten accelerated entitlement o er and placement. The raising was conducted to fund the acquisition of pharma products from Teva Pharmaceuticals and Allergan. The acquisition is expected to signi cantly transform the scope and breadth of Mayne's US generics division, propel the company into the top 25 retail generic pharma companies in the world, and the top 2 in the oral contraceptive market in the US. The complex interlocking timing of the acquisitions and the capital raising, including seeking of US regulatory approvals for the acquisition, reinforces the signi cant nature of this successful transaction for companies requiring immediate funding from capital markets for their acquisitions.
Elders Limited undertook a $102m placement and non-renounceable rights issue for the on-market acquisition of all non-controlled Elders Hybrids. This was in order to simplify the capital structure of the company with the expectation of strengthening its balance sheet, and assisting with the company's intention to commence paying dividends in FY17. Consistent with the way in which rights issues have been embraced during the year, there has been a reduction in the number of rights issues brought before Takeovers Panel.
Launch of the rst simple corporate bond
The launch of Australia's rst ASX-listed 'simple corporate bond' in FY16 may signal more issuance of these new instruments, including in the non-bank nancial sector. Australian Unity raised $230m worth of bonds in a highly successful o er the rst company to take advantage of new rules to make bond issuance easier for listed corporate borrowers under a simpli ed two-part prospectus. The new bonds are unsubordinated and unsecured oating rate debt with a ve year maturity. They have a BBB+ investment grade rating and a 'green' product complexity indicator, indicating that they are among the least complex of nancial products.
The new regime provides a way of providing a reusable platform for multiple tranche funding needs for the short and medium term (within the life of the base prospectus). There are also potential time and cost advantages.
While this is an important evolution in the maturing of this market, we do not expect an avalanche of simple bonds until Treasury introduces a further round of regulatory reform to give simple bonds parity with equity raising rules (ie, short form prospectuses / cleansing notices).
Adjusting to the impact of the new Foreign Investment Review Board regime
While M&A is more traditionally viewed as the key impact area for FIRB, its impact on Australian equity capital markets cannot be underestimated. All Australian markets continue to adjust to the new FIRB regime, which took e ect in December 2015. The new regime represents wholesale change that will a ect the planning decisions, timing and level of interest of foreign parties wishing to participate in ECM transactions in Australia. Sectors that remain highly sensitive to the FIRB regime are agribusiness, health, transport/infrastructure and state privatisations.
Banks continue equity and debt market raisings
As predicted in FY15, FY16 saw all the major Australian trading banks continue their equity and debt market raisings as part of their capital adequacy and management programs. These took di erent forms, ranging from more traditional equity raises to capital notes including hybrids.
Bank CBA NAB NAB ANZ ANZ Westpac Bank of Qld Suncorp
Name of Issue PERLS VIII Capital Notes NAB Capital Notes 2 Fixed Rate Subordinated Medium Term Notes Floating Rate Subordinated Notes Subordinated Notes Westpac Capital Notes 4 Perpetual Subordinated Unsecured Convertible Notes Floating Rate Unsecured, Subordinated Notes
Amount A$1.45bn A$1.5bn A$800m A$600m US$1.5bn A$1.7bn A$150m A$225m
The majority of o ers took the form of capital notes or unsecured convertible subordinated notes, with the hallmark feature of convertibility on certain trigger events to fully paid ordinary shares.
Robust pipeline for strategic M&A
The pipeline for domestic and cross-border M&A transactions, particularly in the private M&A space, remains robust and we expect to see similar levels of M&A activity in FY17. Given the apparent strength of Australian equity capital markets, notwithstanding regular external shocks, we believe that companies will continue to seriously consider equity funding for strategic M&A while factoring in the continued availability of low-cost debt. The highly successful secondary capital raises from ASX listed companies should provide con dence for transactors and their corporate advisers to translate positive nancial results and positive strategies into successful capital market transactions.
Tech & telcos
The TMT sector remained active throughout FY16 and continued to lead listing volumes by sector, with
12 listings in the rst half of 2016. Transactions such as Apply Direct, TPG Telecom and Link were all
successful IPOs or secondary raisings. Apply Direct demonstrated a well-executed oversubscribed IPO in
the sector. TPG Telecom's $300m fully underwritten placement demonstrated the Australian company's
ability to raise fresh equity in a compressed timeframe followed by a $50m follow-on share purchase plan. The capital raising followed the $1.7bn TPG/iiNet merger. The Link IPO and ASX listing was signi cant as the largest IPO undertaken in 2015. We expect the sector to continue to provide fertile ground for capital markets in FY17, notwithstanding ASX's published amendments to the listing rules, some of which will impact on early stage tech
companies seeking to list on the ASX.
In FY16, this sector saw interesting new listing entrants, including Oneview Healthcare, the rst Irish company to seek a listing on the ASX. In addition, we
saw the largest healthcare sector deal of the year in the $888m Mayne Pharma placement and rights
issue. In FY17, health continues to be a high priority area for capital markets. In particular, Chinese players are seeking to leverage Australian medical know-how
to service strong domestic demand in China. We expect these drivers to continue to fuel demand for
equity participation in listed health companies.
REITs - with a theme
Real estate investment trusts are likely to continue to make periodic appearances in listings and capital market transactions in FY17, concentrating around hot Australian sectors. For example, in FY16 we saw the Gateway Lifestyle acquisition of Tasman and its IPO. We expect this to occur through a combination of expansion plans from existing local players, alongside appetite from overseas operators seeking to internationalise their operations portfolios through M&A and listings.
Agribusiness & food
We anticipate an ongoing appetite in the market for quality food and agribusiness o erings. O erings will include both high end major market players such as occurred with the Tegal and Vitaco IPOs. We expect to see a continuation of mid-market transactions, particularly as family owned or other privately held assets come to market. (Expect to see signi cant dual Australian/New Zealand listing to also feature here, such as the recent King Salmon IPO.)
Good quality retail industry capital raising o erings are still possible, evidenced by successes such as the JB Hi-Fi capital raising in September 2016 to fund its acquisition of the Good Guys.
While FY16 did not see any signi cant infrastructure assets translate into IPOs, we expect this sector to create more opportunities for IPOs going forward (as part of a dual track process or as a stand-alone process). The private sector will continue to be a potential source: Argo Infrastructure was the largest IPO of a listed investment company in Australia in more than eight years and also the rst listed with a focus on investing in shares in international infrastructure companies (underpinning assets such as utilities, transport, infrastructure, railways, airports and ports).
Australian products attractive to Chinese investors
Good Australia-China stories can be expected to come to market in FY17. The BWX oat was one of the most successful in FY16. BWX owns and manufactures organic and natural products with a focus on skin care and hair products, which have been an in demand product area for Chinese consumers. The listing positioned the company for growth and to enable a more rapid entry to the Chinese market and enhance its ability to acquire complimentary businesses. We anticipate this pattern to continue, capitalising on Chinese consumers' interest in Australian health and lifestyle products and services.