Touch wood: The return of NZ’s M&A market?

by NZ Lawyer20 Aug 2014
The Japanese may have just invested NZ$1bn in New Zealand’s coniferous forest industry, but deal­ makers could be excused for wondering whether we’re out of the woods yet.

The NZ M&A market has been a curious beast in recent years: it’s a story of steady incremental improvement but not without the occasional outbreak of misplaced optimism.

Recent events suggest that we may be due for some more optimism. Japan’s Oji Holdings Corp and Innovation Network Corp recently acquired Carter Holt Harvey’s pulp and paper business for NZ$1.037bn while Australia’s Transpacific Industries has announced an agreement to sell its New Zealand business to a subsidiary of Beijing Capital Group for NZ$950m.

No doubt dealmakers would have observed the crossing or nudging of the $1bn mark with some satisfaction. It’s nice to be back in mega- deal territory.

Chapman Tripp recently issued a publication summarising a number of cogent reasons for believing the NZ M&A landscape would unfold in the context of robust market confidence this year.

New Zealand’s GDP grew by 3.5% in the year to September 2013, and growth is expected to continue at around this rate over the coming year.

HSBC’s chief economist for Australia and New Zealand, Paul Bloxham, recently described New Zealand as the “rock star” economy of 2014. ANZ’s monthly business outlook survey is now reflecting levels of business confidence not seen since 1994. Not a bad case for optimism.

Minter Ellison Rudd Watts partner Mark Stuart is in agreement with the general sentiment of the Chapman Tripp analysis.

“The M&A team is pretty excited with the way things are panning out,” he says. “We had three pretty good years but really what we’ve seen is a lot of mid-market type of transactions in the $10m to $30m space – those have been going on over the last few years, dispersed with some larger transactions, but the big deals haven’t really been happening all that frequently. What we’re seeing now is that that mid-market space is carrying on but there are a lot more deals in the larger space as well.”

Russell McVeagh’s Pip Greenwood agrees that business confidence is improved, but she notes that this has not translated into a significant spike in M&A activity.

She says the forthcoming general election has added a dimension of uncertainty, although this is tempered by the stronger likelihood of the incumbent government being re-elected.

Russell McVeagh partner David Hoare notes that M&A volumes seem subdued when contrasted with capital markets activity – particularly the govern­ment’s high-profile energy sell-downs–and suggests there may even be a causal relationship between the two.

“Over the last couple of years, the investment banks have been very focused on the government sell-down processes, and a number of private equity clients are saying that they’re not getting the number of pitches they used to get because the focus has been on the capital markets stuff,” he observes.

Caution still remains the order of the day. “When people look at deals they are looking at them very thoroughly,” says Stuart. “And it is still taking a while to get transactions across the line and to do the due diligence.”

Hoare agrees that parties are being far more thorough and tentative about transactions. “Years ago you used to have processes where all and sundry were invited and it was all done in a short space of time and the deal was done, whereas I think people are being a bit more sophisticated about how they run a process and they’re not necessarily inviting the world into it; they’re being more selective in terms of who they bring in,” he says.

Stuart has detected a slightly more accommodat­ing approach to competitive bids, which have been eschewed in recent years.

“There was a reluctance for people to contest bid processes. They didn’t really want to spend the money to potentially go through a process [and be unsuccessful] … we are seeing more transactions going through a process with multiple bidders,” he says. “People are definitely looking hard at what they’re paying for and they don’t want to overpay. But there is more competitive tension there at the moment on transactions.”

So, while the actual level of M&A activity may be somewhat mixed at the moment, there is less doubt about the generally robust tone of the broader economy. It’s only a matter of time before that translates into deals.

“We haven’t necessarily had that [confidence] for the last few years – that positivity is good and hopefully it will last,” says Stuart. “At least when you’ve got confidence in your own business and confidence in where it’s going, the next thing to do is to look out for growth. You could do that organically, but the quickest way to grow is by acquisition.”

This article appeared in New Zealand Lawyer’s latest magazine edition 6.2. Subscribe for more articles and detailed legal features.