Market volatility, inflation, interest rates and changing financial regulations are gaining strength and reliability. However, geopolitical conflicts – especially in the Middle East – could derail the positive uptick. The technology, media and telecommunications sectors have driven the increased market activity.
We are seeing these trends echoed here in New Zealand. There has been an increase in activity in recent months, with equity capital being raised by Auckland Airport, Fletcher Building, Heartland Bank, Infratil, and Synlait Milk.
However, similar to overseas equity markets, IPO’s have been noticed by their absence.
So, what are the opportunities for New Zealand’s capital markets to use IPOs as platform to drive future growth?
What is an IPO?
An IPO involves the company’s owners selling all or a portion of the company they own to the investing public and listing the company’s shares on an equity market.
These sellers could be private equity entities who are looking to realise the value from investments they have made.
Or they could be privately owned companies looking to equity markets to raise equity capital to fund growth.
Or they might be existing shareholders, such as central and local governments, company founders and early-stage investors, looking to realise some or all of their investment to cash up and fund future activities.
Who could be next to IPO in New Zealand?
The easiest companies to identify as potentials are those owned by central and local government.
This includes companies such as Kiwibank, Port of Auckland, Transpower, Lyttleton Port Company, Orion, Christchurch International Airport Limited, Aurora Energy, Dunedin Airport and Centre Port.
Where an IPO occurs, it will often come with a specific requirement, such as the Mixed Ownership Model which was employed for the sale of Meridian Energy, Mercury Energy and Genesis Energy and had the Government retain 51% of each company.
Then there are those companies which we would not expect to be IPO’d due to their current weak financial performance and outlook. This includes companies like Kiwi Rail and NZ Post.
Secondary public offerings
A secondary public offering occurs when a large block of shares in a listed company owned by an investor are sold to the public. In New Zealand, many listed companies have investors who own significant stakes.
Most companies are unlikely to be sold via a secondary public offering. These remain rare due to the long-term shareholders not showing any signs of selling or public ownership.
An exception was Auckland Council’s announcement last week about the sale of their 9.71% shareholding in Auckland Airport. In this case, Auckland Council had set up the Auckland City Future Fund, which will invest the approximately $1.3 billion in proceeds from the sale into a diversified investment portfolio.
By reinvesting proceeds into a diversified portfolio, the council aims to reduce financial risk, achieve higher returns, and ease the burden on property owners through lower rates.
Mergers and acquisitions
Companies typically merge with a view to gain market share, reduce operational costs, expand into new territories or adjacent industries, acquire access to technology and expertise, or unite common products.
A merger usually involves the exchange of shares in the existing companies for shares in the new merged company.
Typically driven by overseas buyers, an acquisition typically involves a larger company buying a smaller company, which is then absorbed. Acquisitions can be made for cash, shares in the acquiring company or a mix of both.
Equity capital raising
Through new investment and acquisitions, companies can grow their businesses by either retained earnings or raising new equity. The other reason new equity is raised is to strengthen company balance sheets by paying down excessively high levels of debt.
Some companies have a regular need to raise equity capital to grow as retained earnings are typically insufficient and will look to do so when valuation metrics are high.
The capacity for major shareholders to provide new equity capital and desire to not have their shareholding diluted can have a major impact on whether an equity capital raising will occur.
In recent months, we have seen Fletcher Building and Synlait Milk raise equity to repair their balance sheets, while Infratil, Heartland Group and Auckland Airport raised equity capital for growth purposes.
In aggregate, a total of $3.8b was raised.
New Zealand’s equity capital market is showing signs of life, especially in the areas of mergers and acquisitions and secondary public offerings. While IPO activity remains subdued, there are significant movements in capital raising and strategic acquisitions.
The increased activity in the market reflects a more stable economic environment with less concern over market volatility, inflation and interest rates.
The recent transactions involving major companies like Auckland Airport, Fletcher Building and Synlait Milk exemplify the ongoing dynamism and resilience of the market.
As the country navigates the complexities of the global financial landscape, the equity capital market is poised to play a crucial role in future of the markets.
Jarden Wealth Limited is an NZX Advisory firm. A financial advice disclosure statement is available free of charge at jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/. Full disclaimer available at https://www.jarden.co.nz/disclaimers/wealth-management.
