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New Zealand sharemarket floats are forecast to nearly double in value this year, but buyouts are still expected to reduce the overall size of the market, with at least one top 10 company likely to be targeted.
The prospect of more top firms leaving would be bad news for the beleaguered New Zealand stock exchange, which has seen the equity market shrink by around $3 billion over the past two years thanks to mergers, buy-outs and privatisations.
"I don't think the IPO supply in 2007 will be enough to change the net picture," said Goldman Sachs JBWere strategist Bernard Doyle. "You'll still have M&A activity markedly outstripping IPO activity."
He is picking the value of IPOs to lift to near $500 million in 2007 from $280 million in 2006, but said that figure was likely to be easily outstripped by M&A.
New Zealand, like many markets, saw a record level of mergers and acquisitions in 2006, with Thomson Financial figures showing an increase of 10.9 per cent to US$14.2 billion ($20.6 billion).
Doyle said trying to forecast M&A activity was difficult, but there was no reason for the trend of private equity buying to suddenly reverse in 2007 and predicted at least one of the country's biggest firms would be a takeover target.
"There are a lot of nice bite-sized companies, even for private equity firms, within our top 10," he said.
Firm's which fit that description and have been talked about as favoured takeover targets in the local media include building materials and construction firm Fletcher Building , New Zealand's No 2 company with a market value of $4.7 billion.
Either of the Fisher & Paykel "twins", F&P Appliances, worth $1.1 billion, or F&P Healthcare, worth $2.2 billion, are also seen as attractive top 10 targets.
"I think we're just going to have more of what we've already seen in 2006," said Tyndall Investments joint equities manager Ricky Ward. "If you've got a pretty fragmented register and low gearing levels, then you're going to be a target."
In contrast, no large scale IPOs are thought to be in the pipeline -- although New Zealand's largest company, dairy co-operative Fonterra, worth an estimated $7.9 billion, will conduct a review of its capital structure this year with a partial float among the options.
Expected IPOs for 2007 include NZ Oil and Gas' Pike River coal mine and Malaysian owned infrastructure consultants Opus, each expected to be worth less than $50 million.
"Last year was certainly a lean one for new floats," Brynn Gilbertson, an M&A specialist and partner in leading commercial law firm Bell Gully said. "But with the share market being so strong we expect to see more new listings this year."
With many companies that might have considered an IPO ending up in private hands, stock exchange operator NZX has been feeling the pinch.
Revenue from trading activities was down in the first nine months of 2006, but the loss was balanced against increased revenue from its new data services.
However de-listings and a shrinking market was offset by a record breaking year for the exchange. The NZX benchmark Top-50 index broke through the 4000 mark for the first time in late December, and was trading around 4050 in mid-January.
The market is trading at almost 17 times forecast earnings, compared with a world average price/earnings ratio of about 14.5 times.
First NZ Capital is picking the equity market to provide total returns of about 10 per cent in 2007, comprising 4 per cent yield and 6 per cent price. The market will be boosted by favourable tax changes for local equities and the introduction of the first national savings scheme, KiwiSaver, in July.
NZX markets development manager Geoff Brown said some private equity players think asset prices are becoming too high, a sign that the market may enter an exit phase in a year or two.
"If you look at those investments, they are undertaken primarily to get value out of companies, and then to exit. The traditional exit has been through public markets," he said.
"We don't necessarily believe that we have to compete, we could just be the end of the chain. It's just that at the moment we're seeing the investment phase, not the exit phase."
- REUTERS
