Will 2024 mirror the last 12 months for equity capital markets?

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    08 February 2024

Will 2024 mirror the last 12 months for equity capital markets? Desktop Image Will 2024 mirror the last 12 months for equity capital markets? Mobile Image

In our last M&A Forecast we predicted that 2023 would see equity market valuations hit hard resulting in an increased appetite for takeover activity.

With public companies expected to trade at attractive valuations in 2023, we thought that they would become the targets of private capital. That has certainly played out in 2023. Examples of Schemes of Arrangement (Schemes) that have either been implemented or recommended by the board of the target – include Pushpay Holdings, MHM Automation and Volpara Health Technologies. We expect this trend to continue through at least the first half of 2024. While more aggressive bidding tactics were expected in 2023, there was never an expectation that New Zealand would adopt some of the more aggressive M&A tactics that have been adopted in Australia. That has certainly held true in 2023 and we expect that to continue into 2024. This is because Schemes are the preferred transaction structure in New Zealand for take-privates and they require agreement between the target company and a bidder – a bidder cannot launch a ‘hostile’ takeover using this structure. The adoption of this structure has left little room for some of the more aggressive takeover tactics seen overseas.

Schemes of Arrangement becoming the preferred transaction structure

With Schemes becoming the preferred transaction structure, there has been some noise in the market that they fail to protect the interests of shareholders as effectively as takeover offers under the New Zealand Takeovers Code (Code). Schemes generally have a lower shareholder voting threshold to acquire a target company compared to the take private threshold in the Code. Accordingly, some believe that an offer under the Code lowers the chance of a bidder being able to opportunistically acquire a company that might be at a low point. However, this fear didn’t play out in 2023.

Boards have become far more willing to reject bids they consider to be inadequate and prevent bidders from undertaking due diligence. Metro Performance Glass rejected a Non-Binding Indicative Offer (NBIO) to take private the company via a scheme of arrangement on the basis the offer significantly undervalued Metroglass and was not in the best interests of the company and its shareholders. The board of directors of Sky Network Television similarly rejected a NBIO that was at a value range which fell short of the board’s view of the fair intrinsic value of Sky, and the board of directors of EROAD rejected an NBIO which it considered materially undervalued EROAD’s business. While Schemes generally do have a lower take private threshold, they require the co-operation of the target company and the increased willingness of boards to reject inadequate offers means they have not become mechanisms to opportunistically acquire listed companies.

That said, the Takeovers Panel (Panel) has indicated that there are some areas where the regulatory regimes that apply to Code offers and Schemes could be aligned.

The Panel issued a consultation paper on 18 September 2023 titled Regulatory Alignment of Schemes and Code Offers – Application of Certain Code Rules to Schemes, where it indicated that its preferred approach is to extend some of the Code rules to Schemes. These include aligning the regulatory regimes relating to misleading and deceptive conduct, disclosure obligations, restrictions on acquisitions and dispositions by a bidder, and obligations relating to funding. However, the Panel itself considers that the takeovers market in New Zealand is currently functioning well and with target boards taking a more robust approach to rejecting inadequate offers, we think that there won’t be a pressing desire from the Government to amend the laws relating to Schemes. We think the incoming Government will have its eyes on other regulatory changes.

IPOs will remain subdued in 2024

While the market has had an opportunity to process higher interest rates, inflation and other external shocks, the consensus remains that it will be a tougher economy in 2024. Indeed, interest rates are forecast to stay higher for longer than initially expected. Therefore, it is likely that potential IPO candidates will be under earnings pressure that will impact results and pricing. While pricing pressure does not apply to direct listings, the overall market is down, and we expect this would impact appetite for listing. From a regulatory perspective, the new climate reporting regime will also add work to the IPO / listing process. Candidates will need to carefully consider the alignment of prospective climate risk and opportunity disclosures, with that of PDS and profile disclosures.

Quite apart from the legal requirements, practically, proper consideration of climate risks and opportunities will be expected by institutional investors, especially those from overseas. Indeed, recent severe climatic events have brought physical climate risks to the forefront, but equally important will be consideration of transition climate risks.

Greater activity in secondary markets

We expect greater activity in the secondary markets in 2024, as listed entities look to restructure debt, but also for those in a stronger position looking to raise capital to buy-out strained targets. For those issuers looking to restructure debt or that are otherwise distressed, we expect that NZX’s revision of capital raising settings to permit accelerated non-renounceable entitlement offers (ANREOs) to be very helpful. ANREOs generally find more underwriting and sub-underwriting support (thereby having lower cost) and can be helpful where 15% placement capacity is insufficient, there is time pressure, and a large shortfall is expected. Outside of those scenarios, we would expect that placements and share purchase plans (SPPs) will retain their popularity. This is particularly as SPPs have had their per shareholder entitlement increased from $15,000 to $50,000, and the overall cap on shares issued increased from 5% to 10%.

For issuers looking to raise capital to acquire targets, given the state of the market, we would expect to see issuers using scrip as part of the consideration. Apart from conserving cash, this can also incentivise performance through the current cycle where target owners remain involved in the business.

Read the M&A Forecast 2024