Economic uncertainty has put a dampener on mergers and acquisitions, globally and locally, over the latter half of last year.
Now, while big deals are still being done, they are tending to take longer to complete.
Others, such as the mammoth bid for Ramsay Health in Australia, simply failed to get over the line.
Last September, a KKR & Co Inc-led group withdrew a A$20 billion ($21.4b) bid for hospital operator Ramsay after talks hit a stalemate.
The deal was mooted in April 2022. Its ultimate failure underscored the volatility of dealmaking at a time of heightened disruption in capital markets.
Locally, Pushpay Holdings’ takeover by Pegasus Bidco has only just gone through, having taken just over a year to complete.
“In the second half of last year we saw a lot of macro shocks with interest rates and inflation,” Regan Hoult, corporate finance leader at PwC says. “All of those things definitely added more uncertainty to markets and equity markets came off their highs.
“All of that does put a constraint on activity. M&A is very much driven by confidence and also confidence in numbers and outlook.
“The changing macro environment last year definitely raised more questions around the outlook.
“Undoubtedly, that put a lot of transactions either on hold or just made them a lot more work and harder to get across the line.
“And, we saw that here as well.
“We saw a number of our transactions that took longer to get across the line and, with more work required to get buyers comfortable with the outlook and the numbers.”
Deal volumes were constrained.
Hoult, who specialises in corporate finance and transaction advisory services, said PwC’s M&A advice differed from company to company.
“But fundamentally, to get a transaction over the line, there needs to be a meeting of buyer and seller around value and around the outlook.
“Sometimes we have a big spread, or gap, between buyer and seller, with the seller often more confident in the numbers than the buyer, and that’s where deals fall over.”
As an adviser, Hoult seeks to understand first what the shareholders’ objectives are, and what’s driving them for a transaction.
“Even with all these macro headwinds, there are still certain sectors and certain companies within those sectors that are doing extremely well and will attract very strong interest and strong values from parties.”
He said there was an overlay of interest in Australia and New Zealand from private equity.
“Good companies will always get strong interest.
“We talk around a triangle of the three variables around strategic objectives, business readiness and market overlay.
“And in the current market, you can still get very, very good outcomes with those three alignments.”
From Hoult’s experience, private equity players are “keen and motivated” to deploy capital.
“So they do have record levels of committed capital that does need to be invested.
“I think certain funds were more cautious at the end of last year.
“They were just waiting to see how all those macro conditions played out.”
Conditions would change for the better, once there was more certainty around the direction of interest rates and inflation.
Among the likely investment hotspots was the healthcare sector, backed up by the underlying thematics around healthcare and an ageing population.
Information technology (IT) and IT-enabled businesses were another likely investment hotspot.
Interest in infrastructure assets from dedicated funds was another.
Then there was the likelihood of consolidation in sectors that have been shaken up by the impact of Covid-19.
“Over the next six to 12 months there will be businesses that are struggling to maintain profitability, maybe breaching banking covenants, or falling behind on some of their tax payments,” Hoult said.
“I think there will be more pressure put on them to take action to address those issues.
“There’s probably been more leeway given over the last couple of years for those with Covid issues, and with low interest rates.
“But now with higher interest rates, and these wider stakeholders actually are now requiring companies to take action if they aren’t profitable.”
More transactions may result from parties trying to reduce costs.
As the Ramsay deal proved, getting transactions over the line can be challenging.
Hoult, citing Ryman’s $902m capital raise as an example, said many companies would be looking at their capital structures.
Geographically, Hoult expects more M&A interest to come from across the Tasman.
“Australia is still our largest source of foreign capital and it just reflects our strong business ties, a lot of businesses operating trans-Tasman or looking trans-Tasman and that will continue.
“We still see a lot of interest out of the US capital markets.”
He said many of PwC’s clients were private family businesses looking to release capital or exit a business on reaching retirement.
Patience might be required to get deals done, but Hoult said the right preparation was key.
Sam Trethewey, portfolio manager at Milford Asset Management, said M&A had always been a big part of equity markets.
“It keeps investors honest and keeps share prices honest at times when they can get overdone to the downside.
“When the market gets too cautious, M&A is a way that has historically highlighted the long-term value in companies, and we have seen that play out quite a few times across the NZX.
“A lot of people are saying that we are coming off a pretty elevated base over Covid, with cheap money driving activity, and that times will be tougher ahead.
“At the moment, and from what I can see in the listed space, certainly the macro environment is impacting the ability to get deals done.
“They are still getting done, but it’s the timeframes to get those transactions done that have clearly been extended.”
The gaps between buy and sell had become bigger.
“Covid has created some big earnings benefits for some companies and some big headwinds for others.
“Working out what a business’s underlying profitability really looks like has become more challenging.
“And then there is uncertainty around interest rates, and the cost of funding, and the availability of funding.
“What we’ve seen on the NZX is probably not really out of line with what is happening offshore.”
Trethewey said the failed Ramsay bid illustrated the difficulties facing M&A.
In March, Australia’s Origin Energy agreed to a A$15.35 billion ($16b) takeover offer from a consortium led by Canada’s Brookfield, making it one of Australia’s biggest private equity-backed buyouts
Trethewey said the Origin deal looked likely to proceed.
“But again, it has taken a very, very long time to negotiate and get across the line.
“I guess it would be a reflection of just, the general state of confidence.
“It’s also a reflection of where we are at in the cycle.
“And at the moment, some of those factors reflect the high level of uncertainty that is out there in the broader economy.”
Even so, while the New Zealand economy looked to be slowing down, the S&P/NZX50 index was largely holding its ground.
At current levels, the index is only about 1500 points off its record peak, set in January 2021, of 13,558.19.
“For all the doom and gloom out there about the economy, the index is highlighting that a lot of our businesses are still in pretty good positions, individually, and many do have some decent competitive advantages around them.
“Their earnings are reasonably consistent.”
Overlaying markets was the sheer weight of money pumped into the world’s financial system through quantitative easing over the past decade or so.
“It is surprising the time it’s taking for that liquidity to withdraw.”
He noted private equity had attracted high levels of investment flows over the years.
“Some funds will be starting to feel some pressure to deploy that cash and to start generating returns for the investors.
“I expect private equity to be active and looking at situations where companies have got themselves into trouble and to take advantage of that and put money to work.”
After several years of very low interest rates, fixed interest has become an attractive destination for some.
“If people are getting a reasonable return from term deposits going through 5 per cent or the official cash rate going through that 5 per cent, it’s quite a mental hurdle for people.”
More broadly, Trethewey said investing was at a difficult stage.
“We, as a firm position are positioned defensively, relative to our business’s history, and are being patient for that cycle to play out.”
As it stands, the market could do with more certainty around what future earnings look like, and where interest rates are likely to settle.
“There are hopefully things this year that occur that take us to that point.
“Once investors have confidence around those two features, then you can see a lot more stability and share prices and investor returns.”
Economic and market cycles aside, Trethewey said there were two areas gaining investor attention – renewable energy and artificial intelligence.
“Decarbonisation is a huge global theme that is capturing investors’ minds at the moment.
“Artificial intelligence is the other one. Investors are trying to figure out how this is going to reshape industries and reshape companies going forward.
“Those two are the two big global thematics that investors are weighing up at the moment.”
Trethewey said M&A would be very much a feature of the market going forward.
Specifically, in terms of corporate activity, he expects the cyclical stocks to attract some M&A attention.
“I think that the cyclical stocks in the market generally are trading on very, very cheap valuations versus history.”
In that camp, Trethewey put Fletcher Building and Steel and Tube, as well as retirement village assets and some names in the retail sector.
“I’d expect to see some interesting opportunities for potential activity.”
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