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Welcome to the latest PwC New Zealand M&A Quarterly Update.
In this edition, we provide a summary of PwC’s deal activity in 2022 and also look at how M&A activity is shaping up for 2023. As a focus topic, we also discuss financial aspects and key considerations of Sale and Purchase Agreements (SPA).
PwC 2022 transaction snapshot
In 2022, PwC teams assisted clients with 15 transactions across a range of sectors and valuation outcomes. Exceptional outcomes were achieved with a number of sell side transactions.
PwC Corporate Finance is also proud to maintain its #1 M&A advisor position by number of deals completed in 2022 (Source: MergerMarket league tables).
For individual transaction summaries, read here
2023 M&A outlook
In this article, we explore how M&A activity is shaping up for 2023 and the developing opportunities for buyers and sellers in the current environment.
Click on the tabs below to learn more.
With a shift in economic conditions, the burning question in the financial community is what can we expect over the next 12 - 24 months? There is no doubt that market exuberance peaked in 2022 and is progressively normalising. Against a backdrop of heightened uncertainty, we think there are reasons for optimism.
We believe the positive perspective is:
New Zealand M&A activity is performing better than most countries and is less susceptible to global pressures / headwinds.
Global interest rate tightening is expected to plateau in the first half of 2023.
China has reopened from successive lockdowns which is positive for the Asia Pacific region (including New Zealand).
Less interruptions with COVID-19 lockdowns now behind us.
Many of the issues faced in 2022 such as inflation, labour shortages and supply chain issues should ease throughout 2023 (acknowledging these issues will remain).
Feedback from the PwC Global network indicates similar themes - i.e. we are quickly moving through the peak of short-term challenges. PwC’s Global M&A Industry Trends: 2023 Outlook supports this.
PwC is currently working on several large infrastructure projects and new M&A mandates and has an active pipeline of opportunities. In our view, bearish global news does not translate directly to the deal sentiment and investor confidence that we see in the local market.
Transactions are taking longer and people are being more cautious, but we believe that is reversion to norms (following a period of exuberance) rather than outright risk aversion.
Looking forward, the key drivers of M&A activity are:
Higher proportion of mid-market M&A transactions - ‘baby boomers’ coming to market in their 70s rather than 60s, some of whom have held off through Covid-19.
The next 12-24 months is a key investment phase for a number of Australasian PE - net buyers of assets rather than sellers.
A bigger lens than ever on new investment opportunities which is positive for vendors and/or businesses seeking a growth partner.
Recapitalisation and restructuring activity are on the rise which will address problem situations and reposition businesses for growth.
Interesting election year – sentiment is likely to swing in favour of business to help address the many challenges facing enterprises across the country – inflation, labour shortages, supply chain and margin compression to name a few.
Our international counterparts in the PwC Global network are observing similar themes. Read more in PwC’s Global M&A Industry Trends: 2023 Outlook which reveals themes for consumer markets, financial services, industrial manufacturing and automotive sectors, energy and utilities, health, and TMT.
No doubt there will be some challenges to navigate, but as above there are reasons for optimism and we are more resilient than ever.
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By Rod Harris, Partner, Corporate Finance
Transactions are taking longer and people are being more cautious, but we believe that is reversion to norms (following a period of exuberance) rather than outright risk aversion.
How to optimise value by getting the Sale and Purchase Agreement (SPA) terms right
In an uncertain financial climate, parties in an M&A transaction are increasingly focused on ensuring assumed value outcomes in their deals. The financial elements of the Sale and Purchase Agreement (SPA) – and the purchase price adjustments in particular – are a key part of a deal team’s value maximising toolbox.
In this article, we discuss these elements in more detail and highlight four things a buyer or a seller of a business should think about when considering the financial aspects of a deal.
Watch Angela Gatward, Partner, discuss the financial aspects of Sale and Purchase Agreements (SPA).
1:17
Angela Gatward SPA
Don’t let inflation affect your purchase price provides more information on issues to consider in SPA negotiations to minimise unexpected value transfers at completion.
Click on the tabs below to learn more.
M&A continues, but deal strategies are adapting to an uncertain macro environment.
The global upheavals of the last three years, and the accompanying financial uncertainty, has created a tumultuous and fast-changing M&A environment. While the economic and political headwinds are expected to continue, there are indicators that these are easing. Businesses and investors are exercising understandable caution around M&A. But they are balancing this with the need to secure longer-term growth.
While M&A deals continue, purchasers’ deal strategies are adapting to the new macro environment. Ensuring valuations are appropriate and targets do not face undue risk is essential for purchasers to maintain value going forward. In relation to the financial aspects of the SPA, purchasers and vendors need to consider:
How should the purchase price be structured?
Will some be paid on a deferred basis through an earn-out?
What price adjustment mechanism is best – closing accounts or ‘locked box’?
How should the working capital target price adjustment be calculated and assessed?
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By Angela Gatward, Partner, Sale and Purchase Agreement (SPA) Advisory
Increasing use of earn-outs can be difficult to get right.
Earn-outs are typically used to bridge value gaps between vendors and purchasers. Earn-outs have been common in New Zealand where smaller, high growth businesses are being acquired, and valuations assume future sales growth along with retention of key personnel. Earn-outs were less prevalent in the highly competitive sellers’ market of 2021-2022, but we are now seeing a resurgence of them in deals as purchasers seek to manage value and risks in the new environment.
Earn-outs can be difficult in both concept and execution. They relate to the target’s activities for years after the deal is done and represent an inherent tension between the financial interests of the vendor and purchaser. They require clear understanding of the commercial intent of the earn-out, the agreed principles on which the calculations are based, the dynamics in the target’s business that could impact the earn-out, and careful consideration of the appropriate metrics and benchmarks. All must be assessed from the perspective of both parties. Clear drafting of the SPA provisions affecting the earn-out is essential.
The locked box trend is likely to continue, but completion accounts are more prevalent in the short term.
Both locked box and completion accounts price adjustment mechanisms are intended to help provide buyers with certainty on value, as reflected in the purchase price. Locked box mechanisms typically work best when there is a relatively short period between the locked box date and completion. Completion accounts ‘hit’ on the completion date, and so provide a purchaser with more certainty that they are ‘getting what they paid for’ if there is a longer pre-completion period.
Transactions in New Zealand have typically based the purchase price adjustment on completion accounts. This has been driven largely by the long lead times between signing an SPA and the completion required for regulatory approval processes. Additionally, the market is skewed towards mid-market transactions, where robust financial information needed to support a locked box mechanism could be lacking. The highly competitive M&A market in New Zealand and Australia in the last two years has seen the trend shift towards locked box mechanisms – usually viewed as more favourable to sellers.
Long term, we see the locked box trend continuing due to the certainty that it provides to both parties ahead of a deal (and so helping to shore up value assumptions from the outset), and as the New Zealand market becomes more familiar with the mechanism. However, use of completion accounts mechanisms is likely to prevail in the short term due to deals taking longer to complete (as a result of market uncertainty), and the risk of another recession. In recent months there have been fewer multi-party auction processes where use of a locked box is common.
There will be even closer scrutiny of net working capital targets.
Typically, parties agree that the purchase price will be adjusted (up or down) for the value of net working capital (NWC) delivered at the completion date (or locked box date), against a normal or target level of NWC. The target NWC has traditionally been a product of the target’s NWC profile for the previous 12-24 months, on the basis that this is a good indicator of working capital levels required going forward. In today’s environment, such an assumption may not hold.
Irrespective of market conditions, significant value can be won or lost in the negotiation of the target NWC and other financial terms in the SPA. In today’s climate, parties (and purchasers in particular) are now even more cautious about what the NWC target should be and apply even greater scrutiny to how relevant terms appear in the SPA.
Getting the best out of the price adjustment arrangements, whether vendor or purchaser, requires skill and care during financial due diligence (to ensure all relevant issues, including tax issues, are identified). Further, when the SPA is negotiated, to ensure all terms impacting the net working capital price adjustment are properly negotiated and drafted. An M&A party seeking to navigate this aspect of the SPA process while unsupported by expert help should tread very carefully.
A checklist for a deal team considering the financial elements of an M&A transaction:
Which purchase price adjustment mechanism will best meet your commercial objectives – use of completion accounts or a ‘locked box’?
Will there be any deferred consideration (earn-out or otherwise)? How have the principles been set? And, how do these compare to your benchmarks?
What is a ‘normal’ level of NWC for the business, and how will it impact the price paid/received at completion?
What time period best reflects the NWC requirements of the business?
If using a completion accounts mechanism, how do the accounting policies reflect current practice?
Irrespective of market conditions, significant value can be won or lost in the negotiation of the target net working capital and other financial terms in the Sale and Purchase Agreements.
New Zealand Q4 2022 deal activity
Strong deal activity continued during the fourth quarter of 2022 with 64 deals (vs Q4 2021 107) announced:
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53 of the 64 deals (83%) announced in Q4 involved trade buyers
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35 of the 64 deals (55%) in Q4 involved domestic buyers
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Financial services, consumer and business services were the most active
Number of deals per quarter 2019 to 2022
In Q4 2022 64 deals were announced.
Number of deals by sector and buyer type for Q4 2022
Number of deals by country and buyer type for Q4 2022
How PwC can help
PwC New Zealand’s Corporate Finance and M&A team is the largest in the country, with a proven track record across a diverse range of sectors. We offer a full range of M&A advisory services including divestments, acquisitions, private equity, capital raisings and strategic relationships.
Our links to the global network of PwC firms provides relationships with key global market participants, and our close relationship with our Australian colleagues ensures a comprehensive understanding of the Australasian marketplace.
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