Overview – A very big year
At the beginning of last year, we predicted that New Zealand’s comparative success with its COVID-19 response was likely to favour acquisition activity in 2021. But nothing prepared us for the onslaught of deal-making that followed. In this, our fifth annual M&A Forecast, we look back on the biggest year for M&A activity on record. We examine what we think has created the conditions for all these transactions and we make some predictions for the year ahead.
A year ago, Shamubeel Eaqub noted that while deal making had been disrupted by the Pandemic in 2020, low interest rates, abundant liquidity and traditional income investors looking for better returns, were likely to lead to increased global M&A activity in 2021. We thought that continued belief that New Zealand was a ‘safe-haven’ would drive more than its fair share of that activity to our borders. Dealmakers certainly arrived (virtually) in droves. But what really led them here?
The beginning of the year was marked by the sale of Pioneer’s K9 branded pet food business to global private equity giant KKR for what is widely believed to be a record domestic PE return. That deal appears to have been a precursor for steadily increasing activity, as many businesses came to market to take advantage of higher-than-normal valuations, pushed up by domestic and international competition. KKR alone made two more acquisitions (notably our client – Ritchies Transport in August).
Activity increased throughout the year. Technology, financial services and healthcare all figured heavily in the deals brought to market with rapid consolidation in certain industries, such as Radiology where upwards of six large transactions have already been announced (including the sale of three of our clients, Auckland Radiology Group, Bay Radiology and Hamilton Radiology/Midland MRI).
By August, many advisers were reporting that they were struggling with capacity. By September, we heard of buyers being put on financial due diligence waiting lists by overstretched transaction teams. By October, the whole M&A industry appeared to be swamped. By early November, W&I Insurers announced that they would not commit to insure any further deals in 2021 due to team resourcing issues. At least one insurer announced that (for the first time) it had reached its maximum capacity for exposure to W&I in the current financial year.
Our experience is that deal volume has almost doubled. There has been a frenzy of activity with our M&A and banking teams working on well over 50 transactions.
It is fair to say that it is a sellers’ market. Bid processes are receiving a lot of interest. Sell side advisers are running tight processes with vendor-friendly requirements. Warranty insurance is now widely required (with sellers refusing to accept any gap coverage). Material adverse change clauses are now very rare. Buyers appear to have become comfortable with the uncertainty surrounding the Pandemic and are keen to press on with deals, for fear of missing out.
And New Zealand is not alone. There has been a global explosion of activity that matches the New Zealand experience. Early in 2021, experts were predicting the biggest year on record by volume (USD4.5 trillion in 2015, being the previous pinnacle). Volumes blasted past the USD5 trillion mark by the end of August with some predicting that the final full year figure will top USD6 trillion.
So why are we so busy?
Twelve months ago, we argued that our ‘safe-haven’ status was driving international buyers to our shores. However, with Auckland having had 107 days of continual lockdown with little or no discernible impact on deal-making activity, it seems increasingly less likely that this has been the cause of the current boom. It seems instead, that a number of other global and local factors have all had their part to play.
Show me the money
The extraordinary fiscal stimulus worldwide appears to have boosted the Global economy and Shamubeel notes later in this Forecast that New Zealand’s economy has fared better than most. Interest rates are low. Capital is abundant and cheap. Private Equity managers have successfully raised funds throughout the Pandemic. Corporates have money to burn. In short, if you want to buy a business right now, there is someone willing to give you the capital to do it.
Competition driving buyers further afield?
With a boom in activity across the globe, investors are finding the competition pretty ferocious. We’ve had clients tell us that this increased competition has prompted them to look at other, more distant markets. Combined with more frequent large deals being brought to the New Zealand market (see more on that below), we are now frequently of interest to some of the World’s most ubiquitous investors. While major global Private Equity firms have dipped their toes in New Zealand waters before, they are now regular visitors. Firms such as KKR, Carlyle Group, Platinum, EQT, Advent International, and TPG have all shown an increased willingness to participate in New Zealand transactions.
The arrival of the global private equity firms has opened up another exit opportunity for the (relatively) mid-sized New Zealand and Australian private equity firms for their investments in New Zealand. With New Zealand continuing to grow in prosperity, and now well and truly established as a market for major global transactions, this is a trend that we expect will continue.
Is now (finally) the time?
The New Zealand M&A industry has been talking about the problem of succession for over 15 years. In 2005, ANZ published its first Privately Owned Business Barometer and declared that a large number of New Zealand private businesses were held by owner-operators that needed to plan for their retirement. In the intervening years, there has been plenty of adviser activity aimed at convincing owners to plan for succession. Relatively few have. Indeed, in most cases, all that has happened is that these owners have aged by 15 years. One consequence of these private owners holding on to the reigns for longer than expected is that their businesses have grown. In 2005, there were a huge amount of ‘mid-market’ privately held companies. Now, there are also a number of very large ones. These big family companies, have in many cases, become some of New Zealand’s best known and most iconic businesses.
Our observation is that COVID-19 may well be the catalyst that finally sees these companies coming to market. There can be few among us who have not taken stock of their priorities over the last 24 months. The “Great Resignation” is in full swing and owners are thinking the same way. Anecdotally, many private owners are telling us that it’s time to get out. They’ve seen large, high-profile, privately held companies come to market and get great outcomes. Their businesses are now big enough to ensure overseas interest. Some (sadly) have suffered from health issues, but after being locked up through much of 2021, many just want to get on with enjoying the spoils from all their successful years in business. We expect this trend to continue throughout 2022, with more and more private businesses coming to market to take advantage of the current conditions.
Doing deals in your living room
One thing that has markedly changed from 2020 is that buyers are simply unfazed by lockdowns or by the Pandemic generally. In March 2020, almost every single one
of the transactions that we were involved with, when Jacinda Ardern announced our first lockdown, were abandoned or went on hold. In January, we noted that some overseas buyers remained reticent about making acquisitions without having ‘boots on the ground’ in New Zealand, but all that has changed.
Those days are gone
Technology and some clever thinking from our corporate finance colleagues has led to the birth of the truly virtual deal. Management presentations, negotiations and even site visits are all now conducted seamlessly online. In fact, our observation is that the vast majority of meetings in the first half of 2021 were conducted virtually. That meant that when Auckland entered Level 4 lockdown on 18 August 2021, we didn’t miss a beat. Not one of our live deals was abandoned or even slowed down. In fact, we signed or closed upwards of 20 deals during the lockdown period.
It is clear that these changes to the way deals are conducted are here for good. We’ve set out some observations on virtual deal-making later in this report.
New Zealand’s ‘sweet spot’ industries
In recent years, New Zealanders have been creating and growing great businesses in some very hot sectors. In particular:
There is global recognition of New Zealand’s emerging status as a developer of innovative tech companies, with a number of these being acquired by global tech companies in 2021 (examples being when we acted for EverCommerce acquiring Timely for NZD140 million; for Livestock Improvement Corporation on its asset sale to MSD Animal Health for NZD38.1 million; and for Soul Machines in establishing a relationship with the World Health Organisation along with contractual arrangements and intellectual property implications.)
There has been a marked increase in quality healthcare assets coming to market, with New Zealand’s healthcare sector enjoying overseas investor attention (we acted on Rangatira’s acquisition of Boulcott Hospital, the purchase by Proactive Rehab of Waikato Occupational Health Consultancy, the sale of Auckland Radiology Group and Bay Radiology to Infratil and the sale of Hamilton Radiology to IMed).
Our booming financial services sector is attracting international attention (an example being the recently announced sale of MMC by our client, Pencarrow Private Equity). The sector has been busy all year with deals such as Macquarie’s agreement to acquire the Australasian Global Equity and Fixed Income (GEFI) business of AMP Capital. In addition, we continue to expect (and are starting to see) interest in acquiring KiwiSaver businesses following the Government’s shakeup of the sector through its review of KiwiSaver default scheme providers (we acted for Aon when it sold its KiwiSaver business to Fisher Funds). The insurance sector also remains active, particularly with respect to life insurance businesses. Finally, a transaction such as the agreement by Square to buy Australian fintech provider Afterpay for NZD41 billion is also likely to encourage some focus on New Zealand’s fintech sector, where a number of companies are starting to gain traction and grow steadily.
A year ago, we predicted that the Pandemic would start to bite in the second half of 2021, leading to an increase in distressed acquisitions. We have continued to see a trickle of insolvency-related transactions, with the winery industry in particular experiencing a number of insolvencies and distressed asset sales, including the receiverships of the Sacred Hill winery group (where we acted for the secured lender) and Carrick Vineyards (where we acted for the receivers). We have also acted for purchasers on various distressed asset sales, including the purchase of Drymix (in receivership) by Cemix. However, it remains the case that the majority of these insolvencies have eventuated from systemic issues in the relevant businesses that existed pre-COVID-19. The question is – will the Pandemic eventually bite and lead to a glut of transactions?
We are not so sure. We predict an increase in re-financings in 2022, but the jury is out on whether that will lead to increased M&A activity. One observation is that for businesses that are truly Pandemic affected (such as tourism and travel) the position may be pretty binary. There are examples of tourism deals in the market (for example, we acted for Fullers Bay of Islands who sold their tourism business to Explore). But we fear that for many, rather than sales, these businesses may simply be shut down or put into liquidation.
For many other businesses, the recent lockdown may well have been the final straw and so we will watch with caution. We know that the targeted Government assistance largely worked last time. Much will depend on how quickly we can emerge from this latest scare and how quickly we can open borders and kick start supply chains. In the meantime, continued high levels of liquidity will cloak underlying weaknesses in many otherwise at-risk businesses and any predictions of mass insolvency-related deal activity will be put off for another six months.
Warranty Insurance – has the shine come off?
There was a huge resurgence in the popularity of warranty insurance in 2021. There have been a great deal of hotly contested processes and it’s a no-brainer to insist that bidders take out buy-side insurance and release the sellers from liability. The industry has had such a big year that by November, most of the insurers had to start refusing new deals due to an inability to resource them. However, this contest for insurer attention has been reflected in much higher pricing and more stringent terms. Whereas 12 months ago, cover was available at premiums equal to 1% or less of the cover sought, now the same premiums are getting nearer to 2%. Insurers are also now insisting on more exclusions and more onerous due diligence requirements. This is causing some sceptics to question the value of a product which, on the face of it, often no longer covers the key risks for a particular transaction. There is a balancing act with W&I insurance. Insurers are well within their rights to exclude known risks or areas where there has been no due diligence focus. However, if the product starts to become too full of coverage gaps and the pricing stays as high (or gets higher) we may start to see dealmakers vote with their feet and revert to traditional vendor-to-purchaser warranty and indemnity packages.
2022 – more of the same?
It’s fair to say that advisers in the M&A industry are working hard on hiring and retention strategies, in anticipation of another big year.
We are already experiencing a very busy start to the year as many deals that signed at the end of 2021 will seek to close as regulatory consents are obtained in the first few months of this year.
And the current trend seems set to continue in 2022. The pipeline of deals coming to market does not appear to be shrinking. Our expectation is that activity levels will remain high throughout this year and it’s hard to see what could change that outcome. If borders do open as planned, we expect to see more and more buyers hit our shores. Sectors such as healthcare, technology and financial services look set to continue to run hot. But we also think that the food and beverage sector will play a big part in 2022.