NZ companies using reduced foreign investment to their advantage

By ELINORE WELLWOOD

New Zealanders are buying back the family farm as foreign owners pull out.

Since September 11, the Overseas Investment Commission (OIC) reports that net investment in New Zealand dropped to $1.18 billion last year from $5.35 billion in 2000. That is the lowest since 1997, when foreign investment sank to $1.7 billion in the face of the Asian crisis.

Merger and acquisition activity has suffered, but it may be turning around.

Investment bankers say the US and European recessions after the attack on the World Trade Centre have left big foreign companies with little appetite for mergers and acquisitions in far away countries.

The decline, however, needs to be seen in the context of a severe contraction in global mergers and acquisitions activity.

Head of corporate finance for ABN Amro, Robert Boger, said foreign buyers were pulling out because they were either in trouble or had become risk averse.

Boger said as a result companies with far lower share prices, who were finding it much tougher to refinance, were in divestment mode.

"To survive credit downgrades they're selling assets to get their balance sheets back into shape."

New Zealand's markets had not been hit the same way as Europe and the US because they were more fairly valued, Boger said.

"In New Zealand we haven't been in that fortunate position of sustained growth - we had the recession of 97. Our markets were more fairly priced."

Don Turkington, executive director at Forsythe Barr, said merger and acquisitions activity had been at a low level for 18 months. "It's a worldwide phenomenon."

Compounding the situation, New Zealand has had few big listings lately, now that the big privatisations are over.

The busy area, Turkington says, has been in debt - capital notes and capital bonds.

"That's a reflection of the relatively low returns available on bank deposits."

Global investment banks have responded to the global decline in mergers and acquisitions by consolidating.

Merrill Lynch and JP Morgan are gone.

CS First Boston sold out of New Zealand, leaving an affiliation with First NZ Capital and First NZ Securities.

Deutsche Bank has shifted equities research and secondary trading to Australia, but its New Zealand operation retains a high profile.

But ABN Amro and Forsythe Barr are among the few to expand.

"We see the consolidation as a growth opportunity for a New Zealand based and owned company," Turkington said.

ABN Amro's commitment at a time of flight has increased its prominence.

The bank has expanded New Zealand operations over the past two years, hiring senior equity professionals in Equity Capital Markets and Corporate Finance.

Last year, it took up a 50 per cent interest in Craig and Co, and acquired the private client business of Merrill Lynch.

Rewarding those who stayed, it would appear that the bottom has been reached, and that a turnaround in merger and acquisitions activity could be occurring.

In the six months to June 2002, the OIC reports net investment was $395 million compared with $309 million in the previous six months. Furthermore, activity in the third quarter of this year in the New Zealand mergers and acquisitions market leapt 34.6 per cent over the previous quarter, according to Thomson Financial - a sign domestic corporate activity could be improving.

All investment bankers interviewed said the big growth area for next year was in the debt capital markets.

And a new trend has been spotted: Kiwis are buying back the family farm.

ABN Amro acted for Auckland's ratepayer-owned Vector as it tried to acquire United Networks.

"Aquila, which had expanded hugely over the last few years, saw the impact of the Enron fallout, and had to pay down debt to maintain its credit rating. It decided to sell its offshore assets," Boger said.

Unusually, Boger said, it was a New Zealand owner that stepped in - the Auckland Electricity Consumers Trust.

To raise money, Vector sold $1 billion worth of assets, again to New Zealand owners. Powerco and Hawkes Bay Networks were the buyers.

That is not the only example of Kiwis being more successful in buying assets with reduced foreign investment.

New Zealand Dairy Foods was sold to Rank Group. Pacific Retail Group (advised by JBWere) bought Bendon, and Genesis bought NGC's retail customers.

ABN Amro was involved in $733 million worth of those deals, he said. Last year they did one; this year they did five.

The stock exchange has a new chief executive, who has a strong emphasis on bringing solid New Zealand industrial companies to the exchange.

Finance Minister Michael Cullen's superannuation fund would start coming on stream next year.

Whatever you thought of the fund and whether it was the best way of delivering superannuation, Moore said, the money would provide a boost to the markets.

The NZSE is also trying to stimulate more interest from Australia.

Clark Perkins, chief executive at JBWere, predicted more transtasman activity.

"We're seeing Australian-based corporates looking at New Zealand and New Zealand-based corporates looking at Australia."

Larger Australian and New Zealand corporates' balance sheets were very sound at the moment, so they were able to source relatively cheap equity capital from the hybrid markets, Perkins said.

Rob Hamilton, head of investment banking for First NZ Capital, said one of the key drivers would be overseas corporates bringing their empires back closer to home.

"You would not have seen United Networks sold unless Aquila was in financial trouble. We're likely to see more activity on that front."

Fletcher Building had already gone to Australia, with the purchase of Laminex, and Sky City bought its Adelaide casino.

Hamilton predicted another result of the absence of big overseas purses: the increased presence of private equity firms and private sponsorship.

"There are relatively few buyers with the capital to undertake major acquisitions. Most industrial assets sold over the last few years were sold to international buyers. There's a number of these private equity firms in Australia. I predict you will see an increased presence here."

Deutsche Bank chief executive Brett Shepherd said although most of the capital flow last year had been out of New Zealand, or from bank accounts and equities into debt markets, foreign investment would come back to New Zealand next year.

The insurance industry was restructuring, and the large amounts of forestry due for sale could only be funded by big overseas corporates.

New Zealand's dollar had strengthened, a reflection of the positive risk profile with foreign companies.

Buyers should have plenty of choice next year.

Natural Gas Corporation is selling its assets - although Contact and Genesis are the two main candidates to buy.

Royal Sun Alliance was to list next year.

The Central North Island Forests are unlikely to stay in receivership next year.

Fletcher will sell off its forests.

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