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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