2021 M&A Forecast - Public markets: A strong pipeline for 2021
In last year’s forecast we predicted that the recent trend of fewer IPOs and more takeovers/schemes of arrangement would continue through 2020.
We got that right, but our rationale for the dearth of IPOs missed one important factor that only became apparent as we moved through February and March.
There were very few IPOs on the NZX in 2020, with the only ones of note being NZ Rural Land Company, Rua Bioscienes and Me Today (a reverse listing), none of which were significant enough to make the NZX50. In December, Radius Residential Care listed on the NZX by way of a compliance listing, without raising any capital.
On the takeovers/schemes side of the equation we saw Metlifecare, Abano and Augusta leave the NZX. These transactions were all in train pre-COVID-19 and ended up transacting at a lower price than was initially agreed. Interestingly, there have been no successful takeovers/schemes since then, but the recent approach by AustralianSuper to acquire Infratil, shows that there is still offshore interest in well run New Zealand listed companies.
2020 did highlight one of the benefits of being listed. Companies that needed capital were able to raise it quickly through a variety of placement and rights offer structures, which strengthened their balance sheets in uncertain times. While we think that most of these capital raisings have now been completed, we could see more secondary raisings in 2021 as listed companies that may not have been adversely impacted by COVID-19 look closely at funding acquisition opportunities with equity as a means to accelerate growth.
In our last forecast we also identified four reasons why we thought an increase in IPOs was unlikely in 2020. These included private companies being able to access capital from other sources, significant interest from trade or financial buyers on an exit, a shorter transaction time frame on a private sale process, and those processes not exposing directors to the same level of risk as an IPO.
In our view, these factors remain relevant in 2021. However, with the increase in the stock market and more cash in the market looking for returns above bank deposit rates, we think the pendulum is swinging back in favour of IPOs and believe that market conditions will mean there will be more listings in 2021 than we have seen for many years. Whether these primary listings will be on the NZX or ASX is yet to be seen – a number of successful IPOs by New Zealand companies on the ASX may have paved the way for high growth companies to look more closely at the ASX, while companies with sustainable businesses and strong dividend yields will more likely look to the NZX.
Listed companies are facing more challenges ahead (regulatory activity, climate change reporting, modern slavery accountability etc.) so these are all factors that companies will need to weigh up
before deciding whether to IPO.
With the increase in the stock market and more cash in the market looking for returns above bank deposit rates, we think the pendulum is swinging back in favour of IPOs.
We also think that increases in stock prices to record highs will make takeovers/ schemes more difficult in 2021, but with investors and funds looking for greater returns (and adjusting return on investment criteria) we still think transactions will occur.
There are difficulties undertaking due diligence in the current environment, where offshore bidders are unable to “kick the tyres” on the ground in New Zealand. This could create a barrier to a wider range of potential bidders (especially those outside of the United States and Europe) but we don’t think these issues are insurmountable.
There could also be opportunistic bids for companies that have been impacted by COVID-19, but we think it is unlikely to occur to any significant degree. From our observations, boards of companies that have been impacted by COVID-19 have a plan in place for the way forward (mostly based on conservative assumptions) and have access to capital to get them through this period. This gives boards a fair degree of latitude to reject any offer that they consider is taking advantage of their current position. This would likely be backed up by the OIO emergency notification regime which is intended to ensure that companies are not snapped up in this way.
Overall, we think that market conditions will mean that there will be a strong pipeline of IPOs in 2021, well above what we have seen in recent years, and takeovers/schemes for well run New Zealand listed companies may continue at similar rates to previous years.