No Match Found
In this edition, we investigate M&A activity in New Zealand for April to June 2023.
We also discuss the trends we’re seeing in M&A this year, and how ESG due diligence can impact value and support stakeholders through a transaction.
Despite a challenging economic environment and market volatility, deal activity has remained consistent and broadly steady.
During Q2, 39 deals were announced, a small decrease from 42 deals in Q1:
Trade buyers dominated deal activity for the quarter, accounting for 97% of total deals (38 deals).
54% of deals in Q2 (21 deals) involved international buyers, in line proportionally with previous quarters.
Consumer emerged as the most active sector accounting for 26% of deal activity (10 deals), followed by the Industrials and Chemicals sector at 23% (9 deals).
From Q2 2023 data has been filtered to exclude: (i) real estate transactions; (ii) early stage venture capital transactions where size is stated or estimated to be less than $1.5m; and (iii) other transactions where considered relevant. Q1 2023 data for the above graphs have also been retrospectively revised for the above criteria.
Sources: Mergermarket, CapitalIQ, Eikon (17 July)
In this article, we discuss key insights from deal activity this year and what M&A trends to expect for the rest of 2023.
Watch Wayne Munn, Partner in our Corporate Finance team, provide an overview of the key themes emerging from this year’s M&A activity.
Click on the tabs below to learn more.
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Transaction activity during the first half of 2023 has been surprisingly consistent despite challenging economic factors. General market feedback indicates a slowing effect which isn’t necessarily reflected in recent quarterly data.
Anecdotally, we’re seeing a higher proportion of acquisitions from strategic/trade purchasers and several lower to mid-market transactions. There are also many examples of these transactions being quietly conducted on a bilateral (one-on-one) basis which can leave the perception of reduced deal activity - this isn’t necessarily accurate.
Looking through the Q2 data, the reality is there have been some amazing transactions. Our recent transactions include the sale of Moda Systems to Amcor plc and the sale of Brooklands Pet Products to Castlerock Partners. Our internal pipeline of activity also remains encouraging.
This is a question we frequently get asked. We’re positively surprised at the number of technology businesses included in the transaction data. Investors are attracted to New Zealand tech, particularly those which are highly scalable with recurring revenue models.
The NZ Hi-Tech Awards held in June showcased the depth of New Zealand’s Tech sector and attracted over 1,000 people from across the country. PwC was proud to sponsor the NZ Hi-Tech Company of the Year award which reflects our strategy to support New Zealand tech companies in their growth journey. This award was won by cloud-based inventory management software developer Cin7 - a fantastic achievement.
Until the second quarter of this year, Financial Services had been the most active sector since Q3 2022. In Q1 2023, Technology, Media and Telecommunications joined Financial Services as the two most active sectors. This quarter, Consumer came through as the most active sector, followed by Industrials and Chemicals.
This quarter, our internal activity levels have increased and market sentiment is broadly similar. While not the same number of competitive processes as 2021/2022, we’re hearing that due diligence teams across the New Zealand market are busy. This is a positive signal for both business owners and investors.
Investors are undoubtedly being more selective, but investment appetite is holding and there is no shortage of private capital to be invested in quality opportunities. Investors are endeavouring to meet and/or bridge realistic vendor expectations and we expect this to continue.
Challenges have arisen in the Retail, Hospitality, Construction and Food Manufacturing sectors. Inflation and cost pressures are eroding margins, and interest rates are increasingly biting into consumer wallets. Given discretionary consumer expenditure will continue to come under pressure, it is possible that we’ll see a more pronounced “two state” or “two speed” economy. In other words, the continuation of some sectors struggling more than others.
There are economic headwinds for sure, but it's not all bad news. Earnings may be down or sidewise, but for business owners we think now is an opportunity to take a medium to longer term view. For example, is it time to look at capital options to build resilience and/or to consolidate the market?
That’s where we can help at PwC, and welcome the discussion. From previous economic cycles, it’s the action taken now that helps reposition for the next “up cycle” and the new opportunities that will emerge from it i.e. helps avoid the all too familiar story of the missed opportunity.
By Wayne Munn, Partner, PwC New Zealand
Investors are undoubtedly being more selective, but investment appetite is holding and there is no shortage of private capital to be invested in quality opportunities.
As investors and regulators demand increasing transparency from companies on their ESG performance, we are seeing due diligence in this area rapidly becoming a new standard for M&A.
Watch Andrew Keenan, Director in our Deals Sustainability team, discuss how ESG factors can impact value and how an integrated, risk-based approach to ESG due diligence can support stakeholders through a transaction.
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ESG topics can be incredibly diverse, and each transaction will draw a different focus from investors. We take a risk-based approach to due diligence, tailoring our focus and objectives to each transaction. This approach integrates with traditional financial, tax and commercial disciplines, while incorporating additional elements including carbon abatement, HR and cyber.
As we look to the future, we think Deals professionals need to ask themselves three questions ahead of any transaction:
How does ESG impact transaction value?
How can ESG diligence support the value creation activities after completion?
What is a risk-based approach and how can it apply to a given transaction?
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The interaction between ESG factors and valuation is an evolving and complex topic. Research by Schroders, the UK Asset Manager, is typical of a number of studies showing that listed companies which perform highly on ESG metrics command higher multiples relative to lower performers. This is especially notable in relation to environmental factors, with sectors such as Energy, Materials and Industrials showing a 60 - 130% variation in P/E ratios between top and bottom quartile performers.
We have seen this trend reflected in the private markets. The attitude and approach of private equity firms has matured in recent years with a greater emphasis on all areas of ESG, including how they value ESG performance and how this influences investment decisions, enterprise value and/or multiple.
ESG also unlocks access to a substantial pool of dedicated capital, with ~US$1.6 trillion flowing into ESG funds this decade and global ESG fund assets totalling ~US$2.5 trillion (Morningstar Research).
During a transaction there are a range of ESG factors that can influence valuation which should be considered through due diligence. These include:
Carbon footprint and emissions profile, including exposure to Emissions Trading Scheme (ETS) costs and regulatory change.
Climate change adaptation and physical risk profile, including the potential investment requirements to mitigate material risks.
Labour practices and employee relations.
Supply chain management and resilience.
Downstream customer considerations, including risks and opportunities from changing consumer behaviours.
A transaction should go hand-in-hand with an evolution in strategy. Completing the right transaction has a material impact on business value and future success. ESG due diligence will uncover opportunities to unlock future value and protect value erosion from evolving sustainability expectations. The findings from our work are designed to be pragmatic and appropriately prioritised, often including a sustainability roadmap for the company to consider post-transaction to derive benefits including:
ESG-driven innovation: Finding sustainable solutions to business challenges can lead to new products, services or processes, or strategic acquisitions.
Performance improvement: Our findings include identified opportunities for policy improvements, operational changes, stakeholder engagement activities and capital allocation observations, amongst others, which can be used to improve financial and non-financial performance.
Talent attraction and retention: Employees increasingly prioritise working for companies that align with their values and demonstrate a commitment to sustainability. A strong ESG performance can attract top talent and improve employee retention.
Stakeholder engagement: Understanding and addressing stakeholders' values, and then aligning the company's actions with their values, can lead to stronger relationships and increased trust ultimately benefiting the company and the stakeholders.
Risk management enhancement: The risk-based materiality assessment and maturity analysis outputs of ESG due diligence can ensure that value is protected post completion. Insights can be directly integrated into ongoing risk management processes.
A risk-based approach targets the critical issues most likely to materially impact on transaction value. In the context of ESG due diligence, this focuses attention on industry and business-specific risks such as potential environmental liabilities, supply chain vulnerabilities, labour issues or governance deficiencies that could pose significant challenges post-transaction.
When adopting a risk-based approach to ESG due diligence, purchasers and vendors should ask:
Which specific ESG factors are most material to this business?
How does the business identify and prioritise its material ESG risks and opportunities?
How mature is management’s approach to addressing the relevant ESG factors?
What actions have been taken to mitigate risks and capitalise on opportunities?
How does the company engage with its wider stakeholders on ESG?
Deals professionals are facing rapidly changing expectations on how sustainability is prioritised by their stakeholders. ESG due diligence allows a company to best prepare and align to its investors, and we use our global insights to make sure that clients are best prepared for that process in advance. Our Deals Sustainability team can support you to maximise deal success, determine a fair value of the target company, and to find value creation opportunities to target post transaction.
ESG due diligence allows a company to best prepare and align to its investors, and we use our global insights to make sure that clients are best prepared for that process in advance.
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.
Our M&A team has been ranked the number one firm for the amount of M&A deals by Thomson Reuters (now Refinitiv) for the last 18 years.