Increasingly, as organic growth and productivity gains are proving hard to come by for many New Zealand companies, management teams, boards and business owners are looking to maintain or amplify their growth trajectory through a successful acquisition.
The financial performance of most New Zealand companies has been positive for a number of years now, providing a good platform to grow from. Historically low borrowing costs and strong balance sheets further support their ability to pursue M&A opportunities.
Recent volatility in international capital markets and a softening local equity market is also having an impact on M&A deal flow. Despite earlier expectations for a full IPO pipeline for 2015, there has only been one public share offer on the NZX this year - Fliway Group Limited - compared to the 12 main board listings that came to market in 2014.
Institutional investors are understandably taking a more selective approach towards IPOs, which is influencing appetite and importantly, relative value. As a result, fewer business owners are considering a listing on the NZX as their preferred option to raise growth capital or exit their business. Instead, more are opting to partner with private equity, iwi or to sell to a local or international trade buyer.
New Zealand remains an attractive investment destination for international companies and investors.
Despite a softening in domestic business and consumer confidence, the performance and outlook for the New Zealand economy remains positive against a stagnant global backdrop and the relative economic prospects of many other developed countries around the world.
Food security and demand for quality food businesses, particularly from Asian markets, is one of the macro themes that is likely to keep attracting strong investor and trade interest to New Zealand shores.
The rebalancing between the Australian and New Zealand economies has also boosted interest from across the Tasman this year, where we have seen plenty of play from Australian private equity - both in the mid-market range such as Allegro Private Equity buying Carpet Court and in larger deals such as Pacific Equity Partners' purchase of exporter Manuka Health.
Despite international capital market volatility, there's still plenty of appetite for businesses supplying quality goods that are globally scalable and strategically relevant. JBS Australia, a Brazilian-headquartered meat processor and exporter, agreeing to buy Scott Technology is a good example.
The weaker kiwi dollar is also making New Zealand assets materially cheaper for international trade buyers and financial investors. The New Zealand dollar has declined 16% against the USD over the last 12 months and has now reached its lowest level since 2009.
ASB's Growth & Transition Monitor reveals about 20% of New Zealand companies are looking to grow through acquisition in the next 12 months. The overarching theme is that confident management teams, boards and business owners have a clear focus on earnings growth.
Acquiring businesses can also open up new markets or provide fresh thinking and innovation. Seeking advice from good partners is critical to success, as is thorough due diligence. In many cases, smaller companies can be acquired efficiently and are earnings accretive before synergy benefits and cost savings are considered.
ASB's Growth & Transition Monitor also reveals there's plenty of support from the supply side, with 29% of the business owners surveyed as saying they are thinking about exiting their business in the next five years.
The 'succession wave' is becoming more apparent as a number of business owners approach retirement and are considering transitioning out of their business over time. Many who shelved those plans during the global financial slowdown are now reconsidering their options.
At the same time, many astute companies are exploring options to divest non-core business or property assets and re-invest into complementary growth businesses. Hellaby Holdings, for example, has flagged the sale of shoe stores Hannahs and Number One Shoe Warehouse. Fisher & Paykel Appliances is currently in a process to sell its finance arm, Fisher & Paykel Finance.
We can expect to see M&A activity continue to increase. Talking with many ambitious business owners, boards and management teams you can't help but be optimistic about the market. Investors have plenty of reason to be optimistic as well.
Hot sectors
• Private education industry
• Quality food businesses, particularly those that have scale and export potential
• Building products and construction industry
• Healthcare
Selected deals 2015
• FlexiGroup acquiring Telecom Rentals from Spark New Zealand for approximately $110m
• Marlborough Lines acquired 80% stake in Yealands Estate for $89m
• Pacific Equity Partners acquiring Manuka Health for $110m
• Steel and Tube acquiring Manufacturing Suppliers for $32m
Henry Withers is general manager, corporate banking, at ASB.
