At the beginning of last year, our Forecast reported the busiest 12 months for transactions in decades. Massive deal volumes stretched the capacity of the entire M&A industry. Warranty insurers had run out of capacity. Billions of dollars had been injected into the global economy and a lot of it had found its way to our shores – used by international giants to buy up our world-renowned technology, finance and healthcare businesses.
We gave up speculating on when the much-heralded glut of insolvency would lead to a raft of distressed asset deals. We were no longer convinced that it would happen at all while funding costs remained so low.
Pipelines were full and the onslaught of deal-making seemed set to continue. Capacity remained a problem as the borders opened and the industry’s youngest and brightest headed off on their delayed OEs. 2022 looked set to be as big as 2021 for deal-making and we couldn’t really see what would change that outcome.
So how did 2022 play out and what lies ahead for the next 12 months? In this, our seventh M&A Forecast, we look at the themes that shaped 2022 and present our view of the year ahead.
A year of two halves
2022 was most definitely a year of two halves. We started the year at full throttle, with many deals closing in the traditionally quiet months of January, February, and March. Many of these deals were hangovers from 2021, signed up towards the end of that year and awaiting Commerce Commission and OIO approvals (or in some cases delayed as we waited for warranty insurance capacity to free up). The sheer volume of these legacy 2021 deals caught up with the industry again. Deal closings are typically conducted at the end of a month (which helps with the accounting involved in working capital and net debt adjustment mechanisms). The number of deals trying to close at the same time put incredible pressure on deal teams throughout the market. On one month end, we closed six deals on one day (three of them north of NZD200m in value).
As we hit March, new deal activity started to pick up again as a raft of processes kicked off. Our predicted wave of private exits continued, as more and more owneroperators decided that now was the time to sell. That meant that the trend of large international investors (such as PE giants KKR and Blackstone) taking an interest in New Zealand continued. A common theme was ‘FOMO’ as sellers put partially recovered businesses on the market and asked the most obvious buyers to ‘see through’ Covid affected results and pay full prices – the threat being that if they didn’t, the same businesses would be brought to market in 2023 once fully recovered, but this time to a much wider bidder pool.
All the signs seemed to be that deal activity would stay extremely high throughout the year.
But as the year wore on, the global outlook deteriorated, inflationary pressures became visible and the shine came off. Deals started to slow, although the firm remained heavily involved in major deals including the NZD1 billion Dai-ichi agreement to purchase Life Partners and the NZD2 billion Treasury buy back of the shares in Kiwi Group Holdings Limited, Kiwibank’s parent company, from New Zealand Post, the NZ Superannuation Fund and ACC. Due diligence started to take longer as buyers became more cautious. ‘Imminent’ large asset sales talked about in the press in March, were still being talked about in September.
We saw a lot of processes start to stall and, in a few cases, fall over. As interest rates rose, supply chains tightened and inflation started to kick in around the globe, we could feel buyers becoming increasingly gun-shy – particularly when it came to valuations. The change seemed predominately a reaction to market conditions than to the underlying assets themselves. In a couple of examples, we saw corporates pull out of processes when their internal deal-making teams went for board approval (usually considered to be a rubber-stamping exercise) and didn’t get it, despite the deal-teams’ obvious support for the acquisition. Clearly a risk-based
response to global conditions, rather than any specific reaction to the quality of the business being considered.
Other buyers appear to be talking a ‘wait and see’ approach, either slowing down deals or accepting of the fact that they may have to pay more when an asset comes back to market in 12 months’ time and there is more economic certainty to be had.
2022 was still a very busy year for M&A activity – we found ourselves involved in over 60 deals. However, the slow down at the end of the year was at odds with the same period in 2021 and, we think, heralds some changes to the deal-making landscape in 2023.
Headwinds for the year ahead
Deal activity continues to be strong leading into early 2023. We’ve received a number of in-bound enquiries in recent weeks and the initial pipeline for the year is looking healthy. A number of high-profile processes are scheduled for the first half of 2023 and advisers remain buoyant for the year ahead.
However, the incredible highs of 2021 and early 2022 were clearly a peak. We don’t think that deal-making will completely dry up in 2023. However, we do expect to see a return to more normal transaction volumes. A number of domestic and Australian PE funds have capital to spend (see our MinterEllison colleagues’ comments on the Australian PE market on page 11 in the pdf) and we expect that they will drive transactional activity. However, we can also expect a return of trade buyers as competitive bidders for assets as rising interest costs and the reduced availability of debt impacts returns for financial investors. The advisers we have spoken to think that New Zealand corporate balance sheets are generally in good shape and, with tougher economic conditions, we can expect to see synergistic acquisitions and industry consolidation so corporates can realise scale benefits in a higher cost environment. Meanwhile, those corporates with less-healthy balance sheets, may undertake strategic reviews with a focus on key business units and a divestment of non-core assets – which will provide a supply of assets for those looking to expand.
But all the advisers we have spoken with (see our article on page 8 in the pdf) are in agreement. Deal-making will be more challenging in 2023. And it’s not only the prevailing economic conditions (and more expensive debt) that will make things harder. Our clients are coming to terms with a tighter workforce, increased regulatory requirements (see our article on page 13 in the pdf) and new due diligence requirements – in particular in light of a global investment focus on ESG principles. The general election that will take place in the second half of the year will also potentially slow things down, as buyers may want to wait and see what happens before making a commitment. Deals will definitely be done in 2023 – but they will be hard work and take longer to complete.
Distress on the horizon?
After two years of trying to predict when the ‘tidal wave’ of insolvency was going to hit, we finally gave up in our last Forecast. But with a recession being widely predicted in the year ahead, our opinion has changed. With the banks and insolvency specialists gearing up for a lot more work in this area, we think that distressed deals will be a big feature of 2023. Adding to this is the relatively new overlay of bank conduct issues – with some observers noting that the past bank practice of a very measured and patient approach to borrowers in distress, may not cut it under the ‘conduct’ lens (as this could be interpreted as being irresponsible). We expect to see banks more actively managing their problem borrowers in 2023 – and for deals to emerge as a consequence.
‘Virtually’ virtual deal making
The pandemic necessitated a seismic shift in the way deals had to be conducted and the industry responded well. In the last two years, dealmakers have shown that transactions can be originated, negotiated and completed, entirely online. Many of our largest deals of the last 48 months were completed without a single face-to-face meeting. In some cases, buyers never set foot in New Zealand. There is no doubt that virtual deal-making is here to stay. The vast majority of deals will continue to be conducted in the virtual world. However, now that borders are open again, the ‘human’ need our clients have, to meet and shake the hands of the counterparties, has come back into the mix. Our view is that the new normal will be a hybrid of the old and the new way of doing deals. The administrative side of M&A (due diligence, documentation, closings) will remain online – it being universally agreed that there are material benefits to this approach. But kick off meetings, premises tours and relationship building between principals will become increasingly important, as clients value and prioritise the need to connect with their counterparties.
ESG to the fore
Following rapidly growing trends in both Europe and the United States, investor demand for implementing ESG policies across entire investment portfolios is increasingly more important than regulatory demands or investment risk, not least as the climate crisis becomes more critical. ESG will continue to be a key investment criterion early on in any deal process and will continue to be central to value creation post-acquisition. This will also be a major factor in the ability of any investor to leverage acquisitions of fossil fuel businesses or large businesses without a robust ESG roadmap.
Technology, healthcare and financial services to remain popular
Continuing the theme from previous years, our technology, healthcare and financial services sectors will lead the charge on deal activity. These were very busy areas for us in 2022 (see our article on this on page 6 in the pdf). With numerous deals from these industries in our pipeline, we expect to see that trend continue in 2023.
Approvals may become easier
While there are some changes on the horizon in the regulatory environment (see our article on page 13 in the pdf), we expect the year to be easier for regulatory approvals, as deal volumes reduce to pre-2021 numbers and regulators have more capacity for processing. Both the OIO and the Commerce Commission have been incredibly stretched in recent times. We expect that 2023 will give them time to fine tune their approach to the more recent regime changes and get back to more normal timeframes for consents and clearances. One note of caution: with an election due later in the year, there is a risk of delayed processing times for OIO, as the
Government seeks to minimise political fallout from OIO decisions (in either direction).
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