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Welcome to the latest PwC New Zealand M&A Quarterly Update.
In this edition, we investigate M&A activity in New Zealand for July to September 2023.
We also discuss the developing opportunities for buyers and sellers in the current environment and the trends we’re seeing in debt and capital markets.
Deal activity
Consistent deal activity continued during Q3 with 36 deals announced, a slight decrease from 39 deals in Q2:
Private investors (high-net-worth individuals and private equity firms) accounted for 14% of total deals (5 deals), up from 3% (1 deal) in Q2.
56% of deals in Q3 (20 deals) involved domestic buyers, compared to 46% (18 deals) in Q2.
Telecommunication, Media and Technology (TMT) emerged as the most active sector, accounting for 30% of deal activity (11 deals), followed by the Consumer sector at 22% (8 deals).
Number of deals per quarter 2020 to 2023
In Q3 2023 36 deals were announced.
Number of deals by sector and buyer type
Number of deals by country and buyer type
Note:
The 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; (iii) other transactions where applicable.
Sources: Mergermarket, CapitalIQ, Eikon (3 October, 2023)
M&A outlook for the remainder of 2023
Watch Chris Croft, Partner in our Corporate Finance team, discuss the developing opportunities for buyers and sellers in the current environment.
Click on the tabs below to learn more.
1:44
Chris croft
As a Deals business we were expecting a softer quarter given market feedback and the impact of the general election. However, activity was better than expected (36 deals) compared to last quarter’s (39 deals) and the same period last year (59 deals).
Trade sales once again dominated the transaction landscape, accounting for 86% of total deals in Q3. By sector, Technology transactions have dominated (11 deals, 30% of total). The most notable deal was NZME’s acquisition of OneRoof Ltd, with Consumer (8 deals, 22% of total) being the next most popular sector, headlined by EBOS’ acquisition of Superior Pet Foods, and Cookie Time acquiring Mrs Higgins.
Our own experience and market feedback indicates activity levels picked up three to four weeks before the election. While this coincides with the second half of the year generally being a busier period than the first half, election polls consistently indicated a change in government was likely which may have helped spur early activity. While we see activity levels being stable for the remainder of the year, many vendors have adopted a “wait and see” approach and are now looking to re-engage in the New Year.
We do not think the new government will have a significant impact on transactional activity. However, we are optimistic about 2024 and believe it could be shaping up as a “reset” year for New Zealand deal activity. We are seeing pent up demand from both sellers and buyers who have been patiently waiting on the sidelines for a period of relative normality.
Barring external factors, we think sellers and buyers’ willingness to engage is improving. Without the extremities associated with COVID-19, chronic supply chain issues, weather events and the fastest monetary policy tightening we have ever seen, we believe a period of stability will bode well for both M&A activity and investor sentiment.
There is no doubt that trading has come under pressure in many sectors so this will remain a factor, as will the inflation trajectory and geopolitical landscape. However, unless these factors deteriorate significantly, we think investors will seek to overcome short-term challenges.
A key driver for activity is the significant level of capital available and ready to be deployed. The recently released Australian Private Equity and Venture Capital Association Limited’s (AVCAL) 2023 year-book states a record-breaking fundraising year in 2022 with AUD$9.0bn raised by Australian focused private equity (PE) funds in 2022, more than double the prior year (AUD$4.3bn). Australia-focused private capital dry powder grew by 30% between December 2021 and September 2022 on the back of strong fundraising figures and reached a record AUD$37.0bn in 2022. The need to deploy this capital in Australia and New Zealand will help underwrite activity and quality deal origination in the next PE vintage will separate the field.
We have seen increased interest in New Zealand from offshore private equity firms, and expect this to support strong deal activity in 2024 and beyond as these firms seek to deploy the record levels of capital raised. Whether you are a buyer or seller, the team at PwC is happy to discuss these themes further with you.
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By Chris Croft, Partner, PwC New Zealand
"While we see activity levels being stable for the remainder of the year, many vendors have adopted a “wait and see” approach and are now looking to re-engage in the New Year."
Back to basics: Trends in debt and capital markets in the face of uncertainty
As we help businesses raise capital in the face of uncertainty, we are observing that there is an enhanced focus on going back to basics. We think borrowers need to ask themselves three questions when contemplating a debt or capital raise:
What are the core focus areas for lenders when considering extending credit?
What is the best form of capital when looking to raise finance? e.g. banks, non-banks or other alternatives
How do you manage risk while exploring new opportunities in the face of uncertainty?
Watch Alex Wondergem, Partner in our Debt and Corporate Treasury Advisory team, outline the trending themes we are seeing across the Australasian financing markets.
2:04
Alex Wondergem
Click on the tabs below to learn more.
What are the core focus areas for lenders when considering extending credit?
Whether we work with our clients through the top or bottom of the economic cycle, the number one focus for lenders and investors is cash flow. In today’s uncertain economic environment, there is an enhanced focus on cash flow and the phrase “cash is king” remains more relevant than ever.
Post the COVID-19 driven economic stimulus, focus is also on whether the level of cash flows driven by the pandemic is sustainable over the longer term. As businesses contemplate the ‘new normal’, we are seeing investors and lenders increasingly focusing on the key fundamental drivers of cash flow. These include:
Revenue and gross profit margins: what are the underlying trends in revenue and gross profit margins? Are these sustainable or under pressure in the current inflationary environment?
Capital expenditure: how much upcoming capex is mandatory versus discretionary, and what are the effects of this on free cash flow?
Dividends: what are dividend expectations and how does this impact cash retention in the business?
- Key supplier and customer relationships: what is the degree of concentration or supply chain risk and how are suppliers and customers impacted in the current economic climate of heightened uncertainty?
Is it time to think about other options outside of bank finance when raising capital?
The ongoing ability to access capital is important for businesses as they plan for the future. As they look to raise capital in times of uncertainty, it is important to take a broad market view to ensure there is sufficient liquidity and diversification to enable a successful capital raise.
Following global trends, we are observing the rise of non-bank lenders in the New Zealand market. These non-bank lenders consist of offshore credit funds as well as domestic non-bank lenders and can offer borrowers an attractive alternative to traditional bank finance. The volume and diversity of appetite across the risk spectrum is compelling. Four of our key observations from working with non-bank lenders are:
One size does not fit all: non-bank lenders often have specific sector, return and volume requirements and therefore it is important to understand the right parties to approach.
Flexibility: non-bank lenders are often able to offer more flexibility in terms than traditional bank finance.
Higher risk appetite: this varies for each lender, and non-bank lenders typically have a higher level of risk appetite than traditional banks.
- Higher pricing: flexibility and a higher risk appetite means higher pricing than traditional bank finance.
How do you manage risk while exploring new opportunities in the face of uncertainty?
Whilst none of us have a crystal ball, a key criterion of any investment or lending decision is a business’s ability to manage risk. Time and time again, as we work with our clients through various economic cycles, good debt structuring and risk management is a key focus for investors and lenders alike.
When assessing risk for new opportunities, businesses should be thinking about:
Does the current capital structure reflect the ability of the underlying business to support debt and provide the right balance of financial flexibility and resilience?
Are working capital facilities appropriately matched to underlying liquidity requirements?
What is the current debt maturity profile and is there sufficient liquidity in the market to refinance and raise additional capital if, or when, it is required?
What is the sustainability strategy or transition plan? ESG is now a key due diligence item for lenders and investors.
Is there an up-to-date treasury policy to manage interest rate, funding, liquidity and counterparty credit risks?
Conclusion
If businesses are looking to approach lenders for financing (including ‘new to bank’ and refinancing), bringing the focus back to the basics will be important. Cash is, and will always be, king. Look for a broad base of lenders to diversify and mitigate against relying on a single lender or type of lender. Do not forget that risk management is fundamental to any investment strategy and borrowing decision.
Our Debt and Capital Advisory team can support the preparation of required debt financing materials to help you to achieve an optimal outcome through a robust and independent process that goes beyond an initial transaction.
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By Alex Wondergem, Partner, PwC New Zealand
"As businesses look to raise capital in times of uncertainty, it is important to take a broad market view to ensure there is sufficient liquidity and diversification to enable a successful capital raise."
How PwC can help
PwC New Zealand’s Corporate Finance and M&A team is the largest in New Zealand, 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 in New Zealand for the amount of M&A deals by Thomson Reuters (now Refinitiv) for the last 18 years.
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