2020 M&A Forecast - Public markets: Under pressure

In last year’s Forecast we predicted that pressure on the public markets would continue. This prediction has proved to be correct.

There were plenty of market rumours of companies looking to IPO in 2019, but only Napier Port came to fruition.

In 2019 we also saw a continued decline in companies listed on the NZX, with TradeMe exiting the platform and a significant amount of liquidity in Restaurant Brands being removed from the market.

Late in the year, take-private transactions for Abano and Metlifecare were announced. This is in stark contrast to the only IPO of note during the year; that of Napier Port.

We don’t see any reason why this trend would change in 2020.

More about value potential, than listing

We continue to see trade and private equity buyers with access to funding taking a significant interest in high-performing NZX companies. But buyers are also interested in NZX companies that haven’t performed to expectation, where they believe that they can extract value by taking the business out of the listed environment.

The widespread use of schemes of arrangement, where support of the target board is essential at the outset, makes these transactions more likely to succeed than the traditional takeover route.

Red tape

Listing is increasingly viewed as a less attractive option due to higher compliance costs, stringent technical requirements, increasing activity from market regulators supervising listing companies and the ability to obtain alternative funding from other non-public sources.

However, a number of NZX companies did highlight the benefit of being listed when raising capital in market through debt or equity issues. Successful equity capital raisings for THL, Kathmandu and Tower were all completed in 2019, and in many cases those capital raisings were used to fund M&A activity. A number of companies also conducted successful debt capital raisings. We expect this availability of capital to continue into 2020 given how relatively straightforward the fundraising process is for listed companies.

To the clear detriment of our capital markets, we see the trend of continuing takeovers and declining IPOs continuing in 2020.

Four reasons why an increase in IPOs is unlikely

Despite the efforts made by market participants, including the publication of the Capital Markets 2029 report, we don’t foresee a significant increase in the number of companies listing on NZX in 2020. Why? We see four main reasons:

1. Companies that are primarily looking to raise capital to fund expansion are finding private investors willing to take minority interests.

2. Vendors looking to exit businesses that have strong growth prospects, or are able to enhance an existing business, are finding plenty of interested buyers.

3. While sale processes are taking longer to complete and there is some uncertainty as to regulatory approvals and other hurdles, these processes are still considerably shorter and less intensive than an IPO process. They also generally provide for a full exit if required, even if some consideration may be subject to an earn out.

4. Private processes don’t expose the directors to the same potential liability as an IPO, and don’t subject the company to the same level of ongoing cost, compliance and scrutiny as it would face in the public environment.

Read the Full Merger and Acquisition Forecast

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