Corporate Dealflow

29 May 2010

Corporate Dealflow

Reflections on 2009 and 2010 Outlook

2009 was a difficult year in New Zealand's corporate advisory market. There has been activity in the capital markets, particularly the debt capital markets and with equity recapitalisations. But M&A activity has suffered. Simpson Grierson has taken great pleasure in advising on and participating in much of the activity that the New Zealand corporate sector has seen.

Capital Markets

According to NZX Limited, $7.28 billion of public funds was raised in 2009 - an all time capital raising record. Key catalysts have been:

• the deterioration in corporate balance sheets resulting from reduced earnings and increased impairment of investments. There has been a need to strengthen balance sheets and ensure an appropriate capital structure and working capital is sufficient to ride through the current economic crisis;
• decreased access to domestic and international bank debt and international debt capital markets; and
• in some cases, the desire for a “war chest” to facilitate timely acquisitions and/or maintain a more conservative capital structure should economic conditions continue to deteriorate.

Debt Capital Markets

The New Zealand debt capital markets largely remained open throughout 2009. This contrasted with many of the western world's debt capital markets, where in early 2009 international debt capital markets were characterised by a significant decrease in institutional appetite for debt, particularly debt issued from financial institutions. The lack of international investor appetitive for debt products resulted in many international issuers accessing equity capital markets to meet their funding requirements.

New Zealand saw a wave of debt issues. Fonterra executed the most notable issue. Struggling to raise capital overseas, it raised $800 million from its proposed $300 million bond issue (an additional $500 million raised via the acceptance of over-subscriptions). Other notable issues included those made by the Auckland and Manukau City Councils, Fletcher Building, Auckland International Airport, Vector, GPG Finance and various retail banks.

The $150 million Auckland City Council issue is worth particular mention as it was the first listed debt issuance by a territorial authority. Simpson Grierson was pleased to advise on that issue.

In the first quarter of 2010, New Zealand has seen three major debt issues. Following on from last year's successful issues, Auckland City Council ($350 million and on which Simpson Grierson also acted) and Fonterra (up to $150 million) have undertaken further debt issues. Meridian Energy Limited has also issued renewable energy bonds under its debt issue programme (up to $200 million).

A number of listed entities have signalled to the market that they may undertake debt issues in 2010.

Secondary Equity Capital Markets

A wave of equity recapitalisations started at the end of the first quarter, after an absence of any material equity capital markets transactions for some time. The most notable issues were those of Nuplex, Fletcher Building, Sky City, Freightways, Kiwi Income Property, Fisher & Paykel, Pyne Gould Corporation and PGG Wrightson.

Most issues were structured as rights offers, and many were coupled with a placement to institutional or new cornerstone shareholders. Two of the highest profile capital raisings were those of iconic New Zealand companies Fisher & Paykel Appliances and PGG Wrightson. Both deals saw the introduction of foreign strategic investors, who were able to deliver further expertise and opportunities to the companies (in addition to their cash contribution). Simpson Grierson acted for the strategic investors in both transactions.

These transactions were indicative of the increasing appetite of well-capitalised Chinese investors to look offshore. Cornerstone investments appear to be particularly favoured by China-based investors, especially those looking for access to Western intellectual property and expertise.

Chinese capital continues to be seen as attractive, with well-capitalised players in that jurisdiction increasingly looking at international opportunities. The outlook suggests that this will only increase, especially having regard to China's phenomenal growth path and foreign currency reserves. We expect that cornerstone investments and joint venture interests will continue to be favoured.

In the first quarter of 2010, there have been two significant rights issues in New Zealand, these being undertaken by Auckland International Airport (1 for 16 rights issue) and Rubicon Limited (1 for 7 rights issue).

Pike River Coal Limited has announced that it will undertake a rights issue shortly. Simpson Grierson has advised one of the substantial security holders in relation to this.

Going into 2010 we see risk aversion continuing to decrease as the global economy continues to recover. Debt capital markets are expected to remain open for quality issuers (investment grade) and equity capital markets will likely continue on from their strong end to 2009, when there were an increasing number of IPO’s being considered.

Initial Public Offerings

2009 saw the continued drought in the number of IPOs in New Zealand. The recent Kathmandu dual listing was the first for nearly two years. This float has seen many commentators predict that 2010 will see a return of IPOs. 

There were a number of IPOs planned for 2009 that were either delayed or withdrawn. Two recent examples include the DNZ Property Fund, which postponed its planned listing (and is expected to come back to market), and Synlait, which called off its IPO. Several more floats are also rumoured to be coming to the market in 2010, such as South Canterbury Finance and Hirepool.

Many private equity groups who purchased assets over the last five years will potentially be looking for exits. The IPO channel has always been one of the key means of achieving this, particularly for larger and retail-focussed businesses. For that reason alone 2010 could potentially see a higher number of new listings.

Legislative Changes and Industry Led Groups

2009 saw government and industry-led groups take positive steps to assist with re-stimulating the capital markets. The Capital Market Development Task force (the organisation established to develop New Zealand's capital markets) continued its work. Simpson Grierson was active with submissions to the task force. The resulting regulatory and legislative changes can only be viewed as positive steps. 

It is expected that 2010 will see a number of further developments and amendments to New Zealand's capital markets with the implementation of New Zealand's new financial adviser regime and a full review of New Zealand's Securities Act.

M&A

The global financial crisis has had a huge impact on M&A. Deal volumes have been significantly reduced as a result of:

• the lack of available debt funding (at both the senior and subordinated level);
• potential purchasers being more focused on ensuring existing businesses are able to survive the downturn;
• potential purchasers not wanting to commit to material acquisitions and increase gearing levels whilst the macro-economic outlook remains uncertain;
• a lack of opportunity, with few transactions being brought to market on the understanding that “fair” value will not be realised; and
• a mismatch between vendor pricing expectations and what purchasers have been prepared to pay.

Some observations around the M&A market include the following:

• private equity-backed transactions in particular have been very quiet and, most notably, there has been an absence of any leveraged buy-outs due to private equity funds experiencing decreased access to cheap debt financing;
• trade buyers have come back into the market, no doubt because private equity has been quiet and because more of the M&A volume has tended to offer strategic acquisitions; and
• there has been a notable absence of any sizeable deals, although the mid-market (where deals require less leverage) has been relatively active.

We expect M&A volumes to start to recover through 2010, as many factors mentioned above resolve themselves and as the banks (hopefully) have an increased appetite for lending.

Succession issues will likely still drive much of the mid-market but, as confidence and the availability of debt finance returns, well-capitalised businesses will be looking for opportunities. This is particularly the case with private equity funds sitting on large pools of committed capital. The perception remains that these are "vintage years" for investment. These funds will no doubt also be looking for exits in relation to their existing investments, which have been held through their natural investment life cycle.

Consolidation plays still remain very relevant, particularly where synergies become an important part of the business case. A good example is the financial services sector, which has been particularly volatile. By the start of 2009 we had seen 29 finance company failures with many, such as Hanover and Dorchester, entering moratoriums. Consolidation manifested itself in the proposed merger of Hanover with Allied Farmers, PGC's recapitalisation and proposed plans, and Dorchester's announced plans to raise new capital for these purposes.

As a note of caution, it is likely that some of the highly-leveraged deals of recent years have not yet been refinanced. This may cause some pain as previous terms are not able to be matched on rollover. 

Parting Thoughts on the Outlook

Many organisations will hopefully recognise the increasing challenge of addressing short-term priorities but still building a long-term strategy. In doing so the opportunities for growth in 2010 will be there, especially for those organisations with strong balance sheets that can finance deals without needing to significantly increase their leverage.

The continued difficulty for organisations in obtaining external finance may also see investors become more creative in deal structures. But if, as expected, there continue to be difficulties with obtaining external finance, other deal structures (such as share for share exchanges, asset swaps and deferred consideration or earn-outs) may become more common.

2010 has the potential to be a more positive year as the global economy continues to work its way through the troubles of 2008 and 2009. Difficult challenges will remain, but we see light at the end of the tunnel.

Author

Michael Pollard

Partner - Corporate & Commercial

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