Finance and The Economy series: Mergers and acquisitions

Merger and acquisition activity in New Zealand is sitting at around 20 percent of its pre-global financial crisis level according to Chas Cable of Deloitte. But it is starting to rise, thanks mainly to Asian investors eyeing up our dairy firms and state-owned power companies.
Cable heads up Deloitte’s corporate finance team which handles the company’s M&A work. He says that before the GFC there was an elevated level of M&A activity around the world – driven by easy credit and private equity firms flush with cash.
“A lot of that activity was being driven by private equity firms who tended to inject high levels of gearing into their deals,” says Cable. “But as soon as the GFC came along, and the banks brought down the shutters, the availability of debt went away and liquidity went out of the market – that turned the M&A market off very quickly.”
Cable says business owners haven’t been selling because they have found it impossible to get the price they want. On the other side of the coin, the banks haven’t been lending to finance M&A deals.
“That left private equity (PE) firms to fund M&As, but they have not all been in position to step in either,” says Cable. “Not only are private equity firms not buying new assets, they probably have bunch of assets that are highly geared. Given the economy, that gearing would have looked highly aggressive.
“A lot of those larger PE firms around the world aren’t yet truly back in the market because they are busy mending fences inside their own funds.”
In February 2010 there was talk of recovery in the global economy and hopes of an increase in M&A activity. While there was talk of ‘green shoots’ the predicted up-turn has been slow to surface.
“I think that while there are some PE firms that have told us they have been quite busy, my general observation is that it hasn’t happened as much as we would have predicted year ago,” says Cable.
“However, there are some signs that the M&A market is going to open up. We are starting to get visits again from Australian PE firms, who like to come over and make sure they are being thought of, and that we will show them deals. Those visits dried up for period but are starting again.”
Right now, Cable can see four trends emerging on the M&A front in New Zealand. rise in the number of Chinese buyers, an increasing number of trade buyers (firms wanting to buy companies operating in the same business), higher activity from Australian firms looking for bargains and Asian investors keen to get slice of Kiwi. One only has to look at what has been happening to predict future trends.
Notable M&A activity out of Asia includes Brights Dairy Foods’ $82 million investment in Canterbury’s Synlait Milk in 2010, Haier’s 20 percent purchase of Fisher & Paykel in 2009 for $58 million (at time when F&P announced $95 million loss) and Agria’s 50.01 percent stake in PGG Wrightson in May 2011.
Then there is the ongoing interest in the Crafar farms, Dairy Holdings and the farms held by South Canterbury Finance. Let’s not forget the milk powder plant owned by New Zealand Dairy.
“These are assets that are on the block, that Chinese and other foreign interests are watching,” says Cable.
In June, Cable hosted delegation from China whose members monitor state owned enterprises (SOEs). The group was on fact-finding mission and expressed an interest in New Zealand’s state-owned power companies – which will be partially privatised if National wins the next election.
“I had to point out to members of the delegation that it is uncertain what level of foreign ownership the SOE sale processes will tolerate,” says Cable. “However, it is further evidence that China is source of capital and probably, for the foreseeable future, is going to be large part of the M&A landscape.”
Although there is long way to go before M&A activity returns to pre GFC levels, Cable is starting to see glimmer of growth.
“There is anecdotal evidence that the banks’ balance sheets are starting to strengthen,” he says. “But I still think that there is level of caution among banks when it comes to smaller deals of between $30 million and $50 million.” M

Steve Hart is business journalist.

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