A positive, but cautious outlook for M&A activity in 2020
After recent surges in activity in 2018 and 2019, New Zealand’s M&A activity is expected to slow down in 2020, with processes taking longer, and some deals failing to complete.
However, the prediction from MinterEllisonRuddWatts’ leading Corporate and M&A team isn’t all bad news.
The firm predicts:
a settling of the market and further adjustment where deals are being perceived as expensive.increased M&A activity in the financial services sector.continued cooling for IPOs, particularly on the NZX.greater divestment activity by private equity firms, with at least 56 investments ripe for sale (based on traditional holding cycles of three to five years).the increased use of alternative funding structures as New Zealand’s banks respond to the new capital requirements.
"Generally, there is a higher level of caution emerging within the market," says Silvana Schenone, Partner and Head of the firm’s Corporate division.
"More patience is required with deals taking longer and parties will no doubt need to work harder to prevent transactions from falling over. We know that deals will still get done, but the nature of these deals may change.
"In the private equity space, we predict that funds will continue to invest in quality assets with good performance records and solid plans for the medium to long term. But they will act with cautious optimism. For example, they may take a smaller stake initially, planning to acquire a larger potion later.
"With very few IPOs completed in the last 12 months, we predict the slowing of listings to continue with more businesses turning to other sources of equity. This is because of the perceived higher compliance costs and technical requirements demanded by the NZX."
Corporate Partner Neil Millar suggests with increased caution due (in part) to recent examples of buyer remorse, the trend towards increased risk mitigation is set to continue.
"Due diligence has ever increasing importance, with buyers often adopting a ‘wait and see’ approach before investing. Warranty and indemnity insurance activity is also likely to climb as bidders look for ways to reduce their risks."
With capital requirement changes in the banking sector affecting lending, Banking and Finance Partner Steve Gallaugher sees increased M&A activity in the financial services sector.
"The Reserve Bank’s move to impose regulatory capital increases on the country’s main trading banks is likely to lead to an increase in M&A transactions in the financial services sector. Such activity is anticipated as banks look to exit their capital-intensive assets and ration their capital", says Steve Gallaugher.
"We also expect a more prevalent use of alternative funding structures such as unitranche, term loan B, stretch-senior and mezzanine lending structures in M&A transactions here in New Zealand. Further growth of credit funds and non-bank institutions in the debt market, along with increased demand for specialist debt advisors is also likely".
MinterEllisonRuddWatts in-depth report on New Zealand’s merger and acquisition activity is available here.