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New Zealand M&A trends and insights - 2013

22 March 2013

New Zealand economic overview

​Both the New Zealand Treasury and the Reserve Bank of New Zealand (RBNZ) are expecting the New Zealand economy to gain momentum over the next two years. Treasury is forecasting GDP to increase by 2.9% in the March 2013-2014 year while the RBNZ’s forecasts are for GDP growth of between 2.5% and 3% in each of the next two years.

These projections are supported by the latest NZIER survey of business opinion which showed a sharp resurgence in business confidence over the December 2012 quarter (to plus 19% from minus 1% seasonally adjusted) and a surge in economic activity to levels not experienced since mid-2007.

But the recovery is still grumpy, and partial. Most of the “bounce” is coming from Auckland and Christchurch while other regional economies continue to struggle, the labour market is still flat and, although investment intentions are positive, they are still low by comparison with previous recoveries.

Building boom ahead

Much of the projected economic growth will come from the construction sector, with BIS Shrapnel projecting a NZ$46b building boom in the next five years. By far the largest contributor will be the Christchurch rebuild (estimated at NZ$30b). Other contributors are:

  • high immigration (both foreign and domestic) into Auckland
  • earthquake strengthening work in other centres, particularly Wellington, and
  • repairs to leaky buildings (Auckland, Wellington and Tauranga).

Other sources of economic stimulus are:

  • major infrastructure projects, such as investment in additional power generation and national roading, the rollout of fibre-optic broadband and the proposed Pacific Fibre undersea cables, and 
  • the benefit to capital markets from the government’s planned sell-down of a slice of its Air New Zealand holding and partial sale of three State-Owned Enterprises: Mighty River Power, Meridian Energy and Genesis Energy. State coal company Solid Energy was also to be included in the partial sales programme but has been removed after sustaining a collapse in value due to lower coal prices and an unsuccessful attempt to diversify into bio-fuel production.

Christchurch on the launch pad

The rebuild of the Christchurch CBD is now cleared for take-off. The CBD “Red Zone”, the area within the cordon, has shrunk from 387 hectares to 38 hectares and is expected to be gone by the middle of this year. It has now also been officially re-named the “Rebuild Zone”.

CER Investment Protocol

The Closer Economic Relations (CER) Investment Protocol, effective from 1 March, has increased (from NZ$100m to NZ$477m) the threshold at which Australian business investments into New Zealand require regulatory approval.
Assets involving sensitive land and/or fishing quota, will still come within the screening regime.

The exemption does not apply to Australians acting under the direction, control or influence of a non- Australian investor but will apply to an Australian subsidiary or branch of an overseas company provided that it carries on “substantive business operations” within Australia or is at least 75% owned or controlled by Australians or New Zealanders.

The threshold for Australian Government investments remains at NZ$100m but both thresholds will be adjusted each year to reflect changes in GDP.

Likely trends in the New Zealand market

Energy sector will remain a resilient source of deal-making

The energy sector in New Zealand will undoubtedly be a key focus this year with three IPOs planned, from which the New Zealand Government expects to net $5b to $7b. Mighty River Power will launch in April or May, followed by Genesis Energy or Meridian Energy (which could be as early as November this year). Confirmation on 4 March of the timetable for the Mighty River Power IPO helped propel the NZX to 4276.31, the highest close since October 2007.

Market rumour also suggests that Z Energy, which bought Shell New Zealand’s downstream business in 2010, could be floated this year in what would be the largest float outside of the state-owned power companies.

Increase in strategic acquisition as stronger performing corporates look to generate growth

Results from the interim earnings season have been encouraging with a number of companies reporting strong profits, including Trade Me, Fletcher Building, Metlifecare, Sky Network Television and Freightways.

Air New Zealand, which is part of the government’s sell-down plans, posted a first-half profit of NZ$100m in the six months ended 31 December – more than double the NZ$38m achieved in the first half of last year.
Corporates with strong balance sheets are looking to pursue strategic acquisitions to bolster their core business and improve earnings. The Warehouse Group, the country’s biggest listed retailer, bought consumer electronics and appliance chain Noel Leeming Group from Gresham Private Equity in December of last year, and Vodafone New Zealand bought competitor TelstraClear for NZ$840m. We expect a continuing focus on growth through acquisition, which could drive smaller to mid-size deals in the New Zealand market as businesses buy out rivals or complementary businesses.

The craft beer segment of the New Zealand market continues to provide a source of deal activity, with Lion acquiring independent brewer Emersons pre- Christmas and Independent Liquor buying Founders Brewery, a small Nelson brewer, in December. Independent Liquor has signaled that it is on the lookout for further acquisition opportunities in the craft beer space.

Increasing importance of ties with China will continue to encourage Chinese  investment in NZ assets

The China-New Zealand relationship is deepening. In 2011, China surpassed Australia to become New Zealand’s largest source of imports and Chinese investors continue to show strong interest in New Zealand assets, particularly in agricultural and primary production.

The sale of the 16 Crafar farms in the Bay of Plenty to China’s Shanghai Pengxin in 2012 caused considerable controversy (including an unsuccessful challenge to the Court of Appeal), much as similar purchases have in Australia. However, the emphatic nature of the Court of Appeal’s judgment in Crafar and the clarity and certainty that it offers investors, make it likely that Chinese investment in New Zealand will continue to grow.

Yashili International Holdings, which manufactures and distributes infant milk formula products in China, is the latest Chinese company looking to invest in New Zealand, with plans to build a 1.1 billion yuan (NZ$210m) processing plant, which is expected to process up to 52,000 tons of finished and semi-finished products including base milk powder by the second half of next year, according to a statement on the Hong Kong Stock Exchange.

The Maori economy continues to be important in local investment and deal activity

A 2010 study put an estimated value of NZ$10.6b on the collectively owned assets held by various Māori organisations. This figure has increased since 2010, and will continue to increase, largely as a result of Treaty of Waitangi settlements (for example, the recent settlement by Ngāti Whātua Ōrākei). The focus for iwi continues to be collective asset buying in the primary industries (such as the fishing and agriculture) and infrastructure.

Private equity rebounds

Private equity (PE) buyouts in Asia-Pacific (excluding Japan) in 2012 were down 30.7% on 2011, the worst year since 2009, and 2013 has continued the flat conditions of the last three years for most PE investors. But there are some encouraging signs.

Credit markets are robust, M&A activity is rebounding and long-term PE returns continue to outpace those of all other asset classes. In fact, recent research by the New Zealand Venture Investment Fund shows that PE investments into unlisted New Zealand companies have, on average, doubled in value over the investment holding period (based on data from 1994 to 2012). In addition, a survey by Ernst & Young on the outlook for 2013 for PE across Asia-Pacific found that the region continues to be the preferred location for PE investors. We can expect these trends to have flow-on effects for the New Zealand PE market, although it is possible that local PE firms will face strong competition for assets from strategic corporate purchasers, looking to drive growth through acquisition.

​Chapman Tripp recent M&A highlights

  • Advising Fisher Funds on its NZ$79m acquisition of Tower Investments. The acquisition, aided by TSB Bank, makes Fisher Funds the biggest New Zealand-owned KiwiSaver provider. Fisher’s total funds under management will increase from NZ$1.4b to NZ$5.5b, ranking the firm New Zealand’s fourth largest. The transaction is expected to complete in early April.
  • Advising The Warehouse Group on its up-to-NZ$33m acquisition of a 51% majority shareholding in Hamilton-based online retailer Torpedo7, operator of the Torpedo7, 1-day and Urban Daddy websites in Australia and New Zealand.
  • Advising News Limited on the sale of its 44% stake in Sky Network Television, New Zealand’s pre-eminent pay television broadcasting service, for in excess of NZ$800m.
  • Advising Hellaby Holdings on its acquisition of an 85% stake in Contract Resources Holdings for NZ$73m and associated NZ$40m bank debt refinancing.
  • Acting for Waterman Capital on its acquisition of a 24% stake in Academic Colleges Group Limited, a private school owner/operator in New Zealand, Indonesia and Vietnam.
  • Advising NDA Group on the sale of its milk storage and refrigeration services business, Dairy Technology Services, to Tru-Test Group, for NZ$73m.
  • Acting for Godfrey Hirst subsidiary Canterbury Spinners on the acquisition of a wool-spinning business and assets from Summit Wool Spinners, New Zealand’s largest independent spinner.
  • Acting for Blue Star Group on the recent contested sale of its Australian printing business to Wolseley Private Equity and CaxtonWeb, and its New Zealand printing business to a joint venture of Mercury Capital private equity and Tom Sturgess interests.
  

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