In January we predicted that New Zealand’s comparative success with its COVID-19 response was likely to favour acquisition activity in 2021. As we head into our third week of Level 4 Lockdown, many are feeling a resigned sense of déjà vu. But for the M&A industry, this lockdown is not like the others.
In this update, we look back at the last eight months and comment on the emerging trends that look set to change our industry.
Activity continues to build
In January, Shamubeel Eaqub noted that while deal making had been disrupted by the Pandemic in 2020, low interest rates, abundant liquidity and traditional income investors looking for better returns, were likely to lead to increased global M&A activity in 2021. We thought that continued belief that New Zealand was a ‘safe haven’ would drive more than its fair share of that activity to our borders. It seems that we were right.
The beginning of the year was marked by the sale by Pioneer of its K9 branded pet food business to global PE giant KKR for what is widely believed to be a record domestic PE return. That deal appears to have been a precursor for steadily increasing activity, as many businesses came to market to take advantage of higher than normal valuations, pushed up by domestic and international competition. Our M&A and banking teams have never been busier, and the levels of activity look set to continue through to the end of the year and beyond. Such is the level of deal-making that we have heard stories of Big-4 financial due diligence teams putting clients on waiting lists.
As predicted, the drivers for this increased activity include:
- The extraordinary fiscal stimulus worldwide that means that there is now an enormous amount of money looking for a home.
- Global recognition of New Zealand’s emerging status as a developer of innovative tech companies, with a number of these being acquired by global tech companies in 2021 (an example being when we acted for EverCommerce acquiring Timely for NZD140 million).
- A marked increase in quality healthcare assets coming to market, with New Zealand’s healthcare sector enjoying overseas investor attention (we are currently working on upwards of eight sizeable heathcare deals).
- New Zealand now being firmly on the radar for some of the World’s biggest investors. KKR alone has made three investments in eight months (including the recently announced acquisition of iconic bus operator, Ritchies Transport, where we acted for the Ritchies family).
- International and domestic corporates divesting non-core assets. One example is the recently announced sale of GrabOne by NZME where we assisted Tanarra Capital backed Global Marketing to make this expansion play into New Zealand, and LIC’s sale of its automation business, where we acted for LIC.
- More and more owners deciding that now is the time to exit. Anecdotally, we have seen a number of deals where owners have decided to bring forward retirement plans, affected no doubt by the uncertainty and fear that surrounds pandemics, lockdowns, supply chain shocks and healthcare scares.
It is fair to say that it is a sellers’ market. Bid processes are receiving a lot of interest. Sell side advisers are running tight processes with vendor-friendly requirements. Warranty insurance is now widely required (with sellers refusing to accept any gap coverage). Material adverse changes clauses are now very rare. Buyers appear to have become comfortable with the uncertainty surrounding the Pandemic and are keen to press on with deals, for fear of missing out.
Arrival of the 'Big Guns'
While major global PE firms have dipped their toes in New Zealand waters before, this activity appears to have accelerated in the last 18 months. Firms such as KKR, Carlyle Group, Platinum, EQT, Advent, and TPG have all shown an increased willingness to participate in New Zealand transactions. Our clients tell us that factors that are driving this trend include:
- The increased ‘ticket size’ of many New Zealand deals, meaning that they now fall within the mandate of the global firms (and the ends justify the costs).
- The intense competition for assets in the US, which has had the effect of encouraging these firms to look further for deal opportunities.
- The emergence of New Zealand as an incubator of tech-based success stories.
- New Zealand’s reputation as a strong and innovative provider of healthcare services.
- The proximity of New Zealand to Asia as a market for exporting consumable goods, which is amplified by the constructive trading relationship between New Zealand and China.
The arrival of the global PE firms has opened up another exit opportunity for the (relatively) mid-sized New Zealand and Australian PE firms for their investments in New Zealand. With New Zealand continuing to grow in prosperity, and now well and truly established as a market for major global transactions, this is a trend that we expect will continue.
Lockdown. What Lockdown?
One thing that has markedly changed from 2020 is that buyers are simply unfazed by lockdowns or by the Pandemic generally. In March 2020, almost every single one of the transactions that we were involved with, when New Zealand’s Prime Minister Jacinda Ardern announced our first lockdown, were abandoned or went on hold. In January, we noted that some overseas buyers remained reticent about making acquisitions without having ‘boots on the ground’ in New Zealand.
Those days are gone.
Technology and some clever thinking from our corporate finance colleagues have led to the birth of the truly virtual deal. Management presentations, negotiations and even site visits are all now conducted seamlessly online. In fact, even though New Zealand has been kept largely out of lockdown over the last 18 months, our observation is that the vast majority of meetings are still being conducted virtually. The result has been that when we entered Level 4 lockdown on 18 August 2021, we didn’t miss a beat. Not one of our live deals was abandoned or even slowed down. In fact, we have signed or closed seven deals since this latest lockdown began.
It is clear that these changes to the way deals are conducted are here for good. There are some serious advantages to the online execution of deal – not least of which is that they are a lot more efficient.
Still no insolvency
In January, we predicted that the Pandemic would start to bite in the second half of this year, leading to an increase in distressed acquisitions. We have continued to see a trickle of insolvency-related transactions, with the winery industry in particular experiencing a number of insolvencies and distressed asset sales, including the receiverships of the Sacred Hill winery group (where we acted for the secured lender) and Carrick Vineyards (where we acted for the receivers). We have also acted for purchasers on various distressed asset sales, including the purchase of Drymix (in receivership) by Cemix. However, it remains the case that the majority of these insolvencies have eventuated from systemic issues in the relevant businesses that existed pre-COVID. The question is – will the Pandemic eventually bite and lead to a glut of transactions?
We are not so sure. One observation is that for businesses that are truly Pandemic affected (such as tourism and travel) the position may be pretty binary. There are examples of tourism deals in the market (we recently acted for Fullers Bay of Islands who sold their tourism business to Explore, and late last year we acted on the pre-packaged receivership sale of the Jucy tourism business). But we fear that for many, rather than sales, these businesses may simply be shut down or put into liquidation.
For many other businesses, the current lockdown will be of concern and we will watch with caution. We know that the targeted Government assistance largely worked last time. Much will depend on how quickly we can emerge from this latest scare and how quickly we can open borders and kick start supply chains. In the meantime, continued high levels of liquidity will cloak underlying weaknesses in many otherwise at-risk businesses and any predictions of mass insolvency-related deal activity will be put off for another six months.
The rise and rise of warranty insurance
There seems to be no end to the popularity of warranty insurance as a transaction risk mitigation tool. All warranty insurers we have spoken to have full pipelines and there seems to be more than enough work to go around. We understand anecdotally that some warranty insurers have had to turn away work due to employee resourcing constraints (although their capacity to write deals is not in question). As long as the New Zealand M&A market remains buoyant, we expect these trends to continue.
As we predicted in January, Covid-19 continues to be an issue that is closely scrutinised by all insurers (particularly where a target business has claimed Covid-19 specific relief, such as employee wage subsidies). However, insured parties have generally been doing a good job of explaining how Covid-19 impacts the target businesses they are acquiring and, as a consequence, most New Zealand warranty insurance policies no longer include the general Covid-19 exclusions that were being insisting upon just 12 months ago.
Financiers have been busy in 2021, competing to win their share of new debt deals. A lot of the larger debt deals have been refinancing transactions, where sponsors and borrowers have looked to lock in the most competitive terms – often on the advice of specialist debt advisors. Many of these were deferred from 2020, some undertaken to readdress capital structures, whilst others have been forced as banks have looked to “shuffle their decks”.
Financiers have also benefitted from the buoyant M&A market in 2021. The “Big-4” New Zealand banks continue to be the first port of call, but as predicted, we’ve continued to see private credit and debt funds playing an increasing part of the financing solution. These institutions now provide significant volume in sub-investment grade credits across a wide range of asset classes, often on more flexible terms than the banks can provide.
The financial services sector remains extremely busy with deals such as Macquarie’s agreement to acquire the Australasian Global Equity and Fixed Income (GEFI) business of AMP Capital. In addition, we continue to expect (and are starting to see) interest in acquiring KiwiSaver businesses following the Government’s shakeup of the sector through its review of KiwiSaver default scheme providers. The insurance sector also remains active, particularly with respect to life insurance businesses. Finally, a transaction such as the agreement by Square to buy Australian fintech provider Afterpay for NZD41 billion is also likely to encourage some focus on New Zealand’s fintech sector, where a number of companies are starting to gain traction and grow steadily.
New uncertainty for overseas investors?
As we all know, in June of last year the Overseas Investment (Urgent Measures) Act introduced a temporary notification regime, under which every overseas person wishing to take a 25% or greater stake in New Zealand business shares or assets (regardless of size) was required to notify (and seek the consent of) the Overseas Investment Office (OIO) before their transactions could be completed. While there were some initial concerns about whether these rules could impact deal timeframes, they were largely unfounded – the OIO processed notifications swiftly, and almost always within the 10-working day review period. We were impressed with the OIO’s responsiveness on all the transactions we took through this process.
On 7 June this year, the temporary regime ended and was replaced by a permanent notification regime. The permanent notification regime (unlike the temporary regime) does not apply to all transactions involving overseas persons – it instead targets investments in “strategically important businesses” (SIBs) that may pose a significant risk to New Zealand’s national security or public order. The regime does not mandate notification in most cases, but for those that choose not to notify there is the spectre of the OIO having the right to “call-in” the transaction and imposing conditions or even rejecting it and forcing administration and divestment orders onto the purchaser.
While it is great to see a more targeted approach, the new rules create uncertainty because of the relatively wide categories of business that can fall into the definition of a SIB. It is our view, for example, that almost any healthcare business which holds patient data for more than 30,000 patients, is a SIB. In the vast majority of cases, it will be hard to see how a particular transaction could threaten national security or public order, but proceeding without notification leaves a level of uncertainty that many clients will be uncomfortable with and that could lead to unnecessary costs and delays. With the rules only being with us for a little over two months, we don’t yet have much in the way of precedent when it comes to the OIO’s likely approach to the question of what constitutes a threat to national security and public order. It is our hope that as test cases emerge, we will have a clearer picture of the approach and give our clients more certainty on this thorny topic.
A sample of our 2021 deals
- Advising Livestock Improvement Corporation on the divestment of its automation business to MSD Animal Health.
- Advising Macquarie Group on the New Zealand aspects of its acquisition of AMP Capital’s Global Equities and Fixed Income business.
- Advising Global Marketplace (backed by Tanarra Capital) on its purchase of GrabOne from NZME.
- Advising Ritchies Transport on its sale to global investment firm KKR.
- Advising Fullers Bay of Islands on the sale of its tourism business on its sale to Explore.
- Advising the receivers of Carrick Wines on its sale to a private buyer.
- Advising EverCommerce on its acquisition of Timely.
- Advising Bupa on the sale of its rehabilitation business to Evolution Healthcare.
- Advising Jucy Group and Calibre Partners on the pre-packaged receivership sale of the Jucy Rentals business.
- Advising Allegro Private Equity on its acquisition of the Toll New Zealand logistics business from Japan Post.
- Advising Tourism Holdings on its acquisition of the remaining 50% interest in Action Manufacturing.
- Advising TSA Management Group Holdings, and its shareholders on its sale of 100% of the shares in the company to Quadrant Private Equity.
- Advising Harbourside Holdings on the sale of its remaining interests in the Heritage Lifecare Group to interests associated with Adamantem Capital.
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