New Zealand companies continue to show a steady appetite for M&A deals – while the rest of the world takes a more conservative stance in response to various global uncertainties.
According to KPMG New Zealand’s latest M&A Predictor, our local market remains relatively buoyant; with deal volumes up 14% during the first half of 2016 (relative to the comparable 2015 period).
Nick McKay, KPMG M&A Director, says the sustained level of deal activity is a reflection of New Zealand’s robust economic performance, coupled with little activity in the IPO market given sustained market volatility (which was analysed as part of the latest M&A Predictor). There is little change locally to either market confidence (measured by forward PE multiples), or capacity to fund deals (measured by net debt / EBITDA); which is in contrast to the results the analysis produced for both Asia Pacific and globally.
“Strong consumer confidence and retail spend statistics, as well as dairy prices picking up more recently are all important factors contributing to New Zealand’s GDP growth of 3.5% for the recent June quarter. Industries performing particularly well recently include building materials and tourism, a reflection of strong fundamentals such as population growth, strong net migration to New Zealand and of course a very strong residential and non-residential construction pipeline for the next 10 years”, says McKay.
“Globally, we’ve seen corporates take a fairly conservative stance in response to various global events – such as Brexit, the upcoming US election, uncertainty around interest rate rises and sustained pressure on oil prices” says McKay. “As a result, globally we’ve seen capacity (measured by net debt / EBITDA) increase 12% as corporates conservatively grow cash reserves or reduce borrowing levels. Interestingly, we’ve seen a real slow-down in the number of deals actually completing offshore – in-fact down 14% - consistent with messages we’ve had from our colleagues offshore that many deals are being ‘parked’ or taking longer to achieve a successful outcome, particularly post Brexit earlier this year.”
Sustained volatility in New Zealand’s equity markets has also ensured that the IPO market has remained quiet, despite valuation levels remaining strong. There have been only two listing so far this year; with Tegel, and Investor Property.
The latest issue of the Predictor also analyses the “staggering” influence of Chinese activity in the global M&A space. Ten years ago, China represented around 2% of M&A volume (both domestic and outbound); while today, it is around 24%. McKay says, “Once focused on energy and resources, entities from China are increasingly focused on meeting the needs of its rising middle class. We’re seeing entities from China increasingly search for value-added targets which deliver new technologies, premium products and brands which can leverage an existing supply chain and route to market.”
The Predictor is a forward-looking tool, published every six months, that helps our clients consider trends and expectations in merger and acquisition (M&A) activity. By tracking important analyst indicators up to 12 months forward, it examines the appetite and capacity for M&A deals. The rise or fall of forward price to earnings (P/E) ratios offers a good guide to overall market confidence, while net debt to EBITDA (earnings before tax, depreciation and amortisation) ratios help gauge the capacity of NZ firms to fund future acquisitions.
KPMG International also releases a Global M&A Predictor twice a year which provides a similar analysis by sector and country across the globe.