New Zealand Mergers & Acquisitions - Trends and insighTs March 2018 - Chapman Tripp

 
New Zealand Mergers & Acquisitions - Trends and insighTs March 2018 - Chapman Tripp
New Zealand Mergers
& Acquisitions
T r e n ds a n d i n s ig h t s
March 2018
New Zealand Mergers & Acquisitions - Trends and insighTs March 2018 - Chapman Tripp
NZ Law Firm of the Year
Chambers Asia‑Pacific Awards 2018

Most Innovative National Law Firm of the Year (New Zealand)
IFLR Asia Awards 2018

New Zealand Deal Team of the Year
2017, 2016 & 2015 Australasian Law Awards
New Zealand Mergers & Acquisitions - Trends and insighTs March 2018 - Chapman Tripp
Contents

                      Rational exuberance?...................................................................................................................3

                      2017 – ups and downs...................................................................................................................4

                      New Zealand M&A in 2018..........................................................................................................8

                      The private equity race continues.......................................................................................... 13

                      ComCom takes the gloves off ................................................................................................. 14

                      OIO – a year of change and challenges ahead...................................................................... 15

                      NZX a hunting ground (again) in 2018? ................................................................................ 17

                      Chapman Tripp’s M&A team..................................................................................................... 18

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                                                                       home   1
We look back at New Zealand’s mergers and acquisitions activity
         last year and identify the likely trends for 2018.

         Rational exuberance?

         M&A has kicked off with a strong start, with deal
         momentum from the end of 2017 in full swing.
         2017 was another solid year for global M&A activity,        Speed wobbles?
         although slightly down on 2016 for both deal volumes
                                                                     Market frenzies around exotic financial instruments,
         and values.
                                                                     such as Bitcoin et al, bring to mind some of the
                                                                     excesses of the period leading up to the 2008
         In New Zealand the story was similar. The absence
                                                                     financial crisis. More conventional markets are also
         of a few major transactions relative to 2016 had a
                                                                     encountering increased volatility, spurred on by the
         significant effect on aggregate deal value, as it will in
                                                                     end of quantitative easing and the spectre of rising
         a market as small as New Zealand’s, and there were
                                                                     interest rates in the world’s largest economies.
         slow periods, especially around the general election,
         but the pace picked up in the closing months of the
                                                                     If the economists promoting the ten year economic
         year to deliver a respectable result.
                                                                     cycle are right, we could be in for a bumpy ride.
                                                                     The impact of China’s government‑mandated M&A
         Looking ahead, we expect a strong M&A pipeline
                                                                     pull back could also be felt here, given the prominent
         in 2018, underpinned by cashed‑up private equity
                                                                     role of Chinese buyers in the New Zealand market
         buyers, strategic investors with money to spend
                                                                     over the last decade.
         following several years of solid corporate profits,
         and generally favourable economic conditions, with
                                                                     Regulatory static?
         continuing low interest rates (in New Zealand, at least)
         ensuring affordable debt financing.                         On the regulatory front, dealmakers may also face
                                                                     additional hurdles this year.

         “
                                                                     Chief among them will be that old perennial, our
             Looking ahead, we expect a                              overseas investment regime, where legislative
         strong M&A pipeline in 2018.”                               amendments may lead to longer assessment times
                                                                     for overseas investors (and the domestic vendors
                                                                     selling to them) – at least in the short term.

                                                                     An increasingly hands‑on Commerce Commission
                                                                     could also prove a challenge for transactions which
                                                                     look to consolidate markets.

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                               home   3
2017 – ups and downs

                          The good                         The bad                             The ugly?

              Increase in deal volume              Decrease in deal value              Several big deals
                                                                                       stymied by regulators
                                                   Increase in deal
                                                   execution timeframes

         Globally, 2017 was another impressive year for            The pace of New Zealand M&A activity varied
         M&A, although the data showed a slight decrease           throughout the year. After a slow start, M&A activity
         in aggregate deal value and volume relative to 2016       increased in the second quarter, before declining
         – total value US$3.15 trillion, down from US$3.26         again in the third quarter (predictably coinciding
         trillion in 2016; total volume 18,433 deals, down from    with the lead up to New Zealand’s general election).
         18,592 in 2016.                                           Once the election and subsequent lengthy coalition
                                                                   talks concluded, 2017 ended with a flurry of M&A
         In New Zealand, total deal value was down                 activity, which has carried over to the start of 2018.
         significantly (from US$8.6 billion to US$3.5 billion).
         This reflects the comparative lack of big deals, like     There is significant momentum heading toward
         2016’s Sistema or Nuplex. It is also worth noting that    the end of the March quarter in New Zealand and,
         the information is incomplete as there were more than     anecdotally at least, bankers, lawyers and other
         60 announced transactions with no disclosed value.        advisors have more on their plates than they did
                                                                   this time last year.
         Deal volume, on the other hand, was up 30% on 2016
         – 127 transactions in 2017 versus 97 the previous year.

                                       Global                                      New Zealand

                                       2016                 2017                   2016              2017

              Total value (US$)        3.26tn               3.15tn                 8.6bn             3.5bn
              Total volume             18,592 18,433                               97                127
         Source: Mergermarket

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                            home   4
2017 – ups and downs (continued)

                                               New Zealand M&A highlights in 2017

                                                     A busy year in the consumer sector, including:

                     VF Corporation’s                         Direct Capital’s investment             Navis Capital’s acquisition of
                    acquisition of New                           in the rapidly growing               a majority stake in Mainland
                  Zealand outdoor apparel                        New Zealand clothing                    Poultry, New Zealand’s
                  manufacturer, Icebreaker                     manufacturer, AS Colour                    largest egg producer

                                 Financial services businesses were on the radar in 2017, with several high‑profile
                                                       transactions taking place, including:

                AIA’s announced acquisition                   Finance Now’s acquisition                 The NZ Superannuation
               of Sovereign, New Zealand’s                    of The Warehouse Group’s                    Fund’s investment
              largest life insurance business                   Financial Services arm                      in Fidelity Life

                                             The transport and services sectors gained popularity in 2017,
                                                   with PE buyers showing a clear interest, including:

                                          Waterman Capital’s                         Direct Capital’s investment
                                     acquisition of freight solutions                  in the trustee services
                                        business, PBT Transport                         business Complectus

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                                             home   5
2017 – ups and downs (continued)

         The proportion of cross‑border deals rose in 2017 –
         up to 58% from 43% in 2016. These included:

                               Opus was acquired
                               by WSP Global, the                      “Hot” sectors
                               Canadian headquartered
                               global consultancy

                               ANZCO Foods was acquired
                               by Itoham Yonekyu Holdings,
                               a Japanese listed entity        Transport
                                                               Up 350%

         Some large would‑be deals failed to obtain
         regulatory approval, including:                                          Services
                                                                                  Up 150%
                               the proposed merger between
                               Vodafone NZ and Sky TV

                                                                Financial
                                                                 Services
                               NZME and Fairfax                 Up 33%            Consumer
                               NZ’s proposed merger
                               (now on appeal)                                    Up 31%

                               Vero’s scheme of
                               arrangement with Tower

                               HNA’s $660m bid for
                               UDC Finance

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                   home   6
2017 – ups and downs (continued)

         2017 by the numbers

         Sector spread of top 40 New Zealand deals by disclosed purchase price

                                                                                                    Consumer
                                                                                                    Financial Services
                                                                                                    Services
                                                                       20%                          Medical
                                                                                                    Agriculture
                                 ~3% each                                                           Transportation
                                                                                                    Energy
                                                                                                    Automotive
                                                                                 15%                Chemicals and materials
                                                                                                    Computer software
                                                                                                    Industrial products and services
                                      5%                                                            Industrial: Electronics
                                                                        13%                         Leisure
                                               8%
                                                          10%                                       Manufacturing
                                                                                                    Media
                                                                                                    Real Estate
                                                                                                    Telecommunications: Carriers
                                                                                                    Utilities
                                                                                                    Source: Mergermarket

         All New Zealand deals by disclosed                                            All New Zealand deals
         purchase price (USD)                                                          cross-border/domestic split

         18

         16
                                                                                       2015
         14

         12

         10
                                                                                       2016
         8

         6

         4
                                                                                       2017
         2

         0
                                                                                              0%        20%         40%          60%      80%    100%
                   9m

                                 m

                                           m

                                                     9m

                                                                   n

                                                                             n
                                                                1b

                                                                         1b
                               49

                                          99
                ‑$

                                                    49

                                                               ‑$

                                                                        >$
                                          ‑$
                             ‑$
              1m

                                                               m
                                                    ‑$
                                     0m
                           0m

                                                                                                              Domestic     Cross‑border
                                                           00
New Zealand M&A in 2018

                          The good                          The bad                               The ugly?

              Strong year anticipated               Economic uncertainty?                 Signalled OIO reforms
              with high levels of                                                         could prove painful for
              competition between                   Excess froth?                         dealmakers, at least
              cashed up purchasers                                                        in the short term

         Expected commercial and legal trends

         •    A sellers’ market – The seller‑friendly market         •   PE continuing its run – Private equity firms raised
              dynamic we saw in 2017 will continue (and perhaps          more capital in 2017, after an already‑strong
              reach its apex), as demand for high quality assets         year of fundraising in 2016, and will remain in
              outstrips supply, debt remains readily accessible,         acquisition mode, with bolt‑on acquisitions likely
              and both trade and financial investors command             to feature.
              sizeable war chests.
                                                                     •   An interventionist ComCom – Several high‑profile
         •    Rationality (hopefully) prevails – High price              declines in 2017 and more proactive enforcement
              expectations should drive more scrutiny of                 signal that the gloves may be off at the
              potential deals and a greater need for dealmakers          Commerce Commission.
              to build a strategic case for proposed acquisitions.
                                                                     •   Action on the Main Board – Takeovers of listed
              Likely effects of these trends will be fewer
                                                                         companies will remain in vogue, despite the
              deals passing initial screening and longer
                                                                         relatively full pricing of listed equities.
              execution timeframes.
                                                                     •   Pragmatism not idealism – M&A deal terms will
         •    OIO a persistent challenge – The Overseas
                                                                         continue to drift towards more seller-friendly
              Investment Office consent process is likely to
                                                                         positions, given the high level of competition
              become more fraught, after a recent period of
                                                                         for quality assets.
              improvement. Processing times will probably
              lengthen, at least in the short term, as the           •   Shareholder activism is here to stay – The
              OIO’s resources are redirected towards the                 emergent and welcome trend towards increased
              new government’s tougher residential land                  shareholder activism will create greater impetus
              requirements. Vendors looking for a quick sale may         for boards to consider strategic acquisitions or
              favour domestic bids as a result. The possibility          divestments of non‑core assets.
              of more far‑reaching amendments in future
                                                                     •   Disrupt or be disrupted – We will see a rise in
              should also be kept in mind. Beyond the possible
                                                                         convergence and “defensive” M&A, as businesses
              inclusion of forestry cutting rights within the
                                                                         seek to acquire talent and technology, sometimes
              sensitive land regime, nothing has been announced
                                                                         outside their traditional sectors, in order to stay
              yet, but the policy preferences of key members
                                                                         one step ahead of existing competitors and
              of the government mean further changes can’t
                                                                         disruptive new players.
              be discounted.
New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                                home   8
New Zealand M&A in 2018 (continued)

                                                   Key sectors to watch

                          Financial services                        Media                             Forestry
                 Banks, driven by regulatory        Traditional media business              Uncertainty regarding
                  demands, will be looking          will continue to look to M&A          upcoming changes to the
                    for opportunities to            for quicker access to digital         regulation of this primary
                  divest underperforming               transmission channels           industry may prompt increased
                    or non‑core assets.               (Commerce Commission               divestment activity in 2018.
                                                             permitting).

                                      Consumer                                            Technology
              Consumer confidence and spending are expected            Global PE interest in high‑tech businesses
               to remain buoyant in the short to medium-term.         is strong, including among New Zealand and
              Export businesses should thrive, with a low OCR       Australian PE firms. Strategic investors continue
               keeping the New Zealand dollar in check. There         to pursue digital transformation strategies,
              are a lot of high quality New Zealand businesses       both internally and by acquiring the necessary
                 in this sector, which are achieving increased                    technology and talent.
                                global exposure.

                                     KEY MACROECONOMIC THEMES IN 2018
           Faltering business confidence –         Softening housing market –           Capacity constraints – New
           According to some surveys (not          All signs point to a slowdown in     Zealand’s unemployment rate
           all), business confidence is at its     the overheated housing market        dropped to a nine‑year low in the
           lowest point since 2009. It is too      (though this is looking more         last quarter of 2017. With more
           early to say whether or not this is     like a gradual correction than       restrictive policy settings towards
           a lasting or rational reaction to the   the bursting of a bubble). If the    immigration and existing plant
           election of the Labour/NZ First         downward trend in house prices       and equipment nearing capacity,
           coalition government.                   continues, there could be flow‑on    our economy faces significant
                                                   effects for consumer spending in     constraints on further growth.
           Consumer confidence remains
                                                   the longer term.
           strong – Despite concerns among                                              NZ dollar subdued – Lower than
           business leaders (for the moment                                             expected inflation has prompted
           at least), consumer confidence                                               the RBNZ to forecast no changes
           remains strong.                                                              to the OCR until June 2019, which
                                                                                        is likely to be a boon to export-
                                                                                        driven businesses.

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                              home   9
New Zealand M&A in 2018 (continued)

         A frothy market is driving more
         seller‑friendly deal terms

         An analysis of key deal terms in the M&A transactions we
         worked on in 2017 has yielded some interesting findings,
         both a continuation of existing trends and some new patterns.
         The dominant trend from our                  Warranty and indemnity                  Tax indemnity: a greater
         database is a drift towards more             liability caps                          proportion of deals featured
         seller‑friendly positions in some                                                    caps on the seller’s liability under
                                                      Warranties: surprisingly there
         (but not all) areas.                                                                 the tax indemnity (52% of deals
                                                      was an increase in the percentage
                                                                                              featured no cap in 2016, versus
                                                      of deals which had higher liability
         This may indicate a willingness                                                      27% in 2017).
                                                      caps for warranties other than
         from buyers to be slightly more
                                                      title and tax (or no cap altogether).
         pragmatic in order to get deals                                                      Warranty minimum claims
         across the line.
                                                                                              Sale agreements often provide for
                                                                                              a minimum warranty claim amount,
                                                                                              on a per claim basis (“de minimis”),
         Warranty liability cap as percentage of purchase
                                                                                              and in aggregate (“basket”). Based
         price (other than title and tax)
                                                                                              on our review it appears that
                                                                                              buyers accepted a slightly more
         40
                                                                                              seller‑friendly position on these
         35                                                                                   points in 2017.

         30
                                                                                              Warranty claim time limits
         25
                                                                                              So that sellers do not remain
         20                                                                                   indefinitely exposed to potential
                                                                                              warranty or indemnity liability,
         15                                                                                   sale agreements typically include
         10
                                                                                              time limits for claims to be made.
                                                                                              In 2017, claim time limits were
         5                                                                                    generally consistent with our
                                                                                              analysis in previous years:
         0%
                      N/A            0‑20%   21‑40%      41‑60%      61‑80%      81‑100%
                                                                                              •   caps ranged from 12 months
                                               2016   2017
                                                                                                  to 48 months for business-
                                                                                                  related warranties

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                                     home   10
New Zealand M&A in 2018 (continued)

         •    the 12‑23 month bracket                      tend to be relatively complex and      Purchase price adjustments
              remained the most popular for                highly negotiated, since they can      based on the difference between
              claims under business-related                result in significant additional       a target working capital figure,
              warranties (of the deals which               value transfer between buyer and       and actual working capital
              featured a time limit, 40% fell              seller (depending on which party       at settlement, remained the
              within this bracket, compared                the adjustment favours).               preferred mechanism (47% of
              to 71% in 2016)                                                                     deals). Adjustments based on
                                                           Last year we predicted that the        net assets at settlement (which
         •    24% of deals included no time
                                                           “locked box” mechanism (under          also take into account changes in
              limit on claims under business-
                                                           which the economic benefit and         fixed assets) were the next most
              related warranties, up from
                                                           risk of the business effectively       popular (12% of deals).
              9% in 2016.
                                                           transfers to the buyer at signing)
                                                           would become more popular,             Slightly fewer deals included any
         Purchase price adjustment
                                                           however, based on our data, this has   kind of purchase price adjustment
         mechanisms
                                                           not occurred. Only 8% of the deals     in 2017, suggesting that parties
         Purchase price adjustment                         we worked on last year followed        may be more prepared to take
         mechanisms are a common feature                   this approach, a low percentage        any downside risk of trading
         of sale agreements, reflecting the                compared with markets in the           between signing and settlement
         fact that there is often a time‑lag               northern hemisphere. This perhaps      in the interest of getting deals
         between when the agreement is                     reflects a general unfamiliarity       finalised quickly.
         signed and when the transaction                   with the “locked box” approach
         is completed. These adjustments                   in New Zealand.

         Warranties other than title/tax – time periods (percentage of deals)                     Completion accounts mechanism

         80

         70

         60
                                                                                                      31%
         50
                                                                                                                           47%
         40

         30                                                                                          2%
                                                                                                       8%
         20
                                                                                                              12%
         10

         0%                                                                                                 Working capital
                      N/A            48 months
                                                  months      months      months                            Net assets
                                                    2016   2017
                                                                                                            Locked box
                                                                                                            Other
                                                                                                            None

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                                       home   11
New Zealand M&A in 2018 (continued)

         Deposits                                                  Historically, W&I insurance has been favoured
                                                                   primarily by PE firms seeking a clean exit from their
         Deposits were an even less common feature in
                                                                   investee companies. However, in 2017 deals with PE
         the deals observed in 2017 than they were in 2016,
                                                                   sellers made up only about a third of insured deals and
         payable in only 8% of deals (versus 10% in 2016). We
                                                                   a third of insured deals featured no PE involvement
         suspect that the slight uptick in the use of deposits
                                                                   at all. This suggests that the value and utility of the
         in 2016 was due to increased nervousness regarding
                                                                   product is becoming more widely recognised by
         regulatory risk for bidders based in China (of which
                                                                   strategic/trade investors.
         there were fewer in 2017).
                                                                   We expect the following trends in W&I insurance
         Escrow/retention amounts
                                                                   in 2018:
         Amounts held in escrow (e.g. to satisfy warranty
         claims) featured in 27% of the deals we acted on in       •   lower premiums on larger deals – premiums are
         2017, a significant drop from 2016 where nearly half of       trending down as the market becomes increasingly
         deals featured an escrow amount. In part, this may be         competitive – although competition isn’t as strong
         explained by the increased prominence of Warranty             at the low end
         and Indemnity (W&I) insurance in 2017. It also tends to
                                                                   •   lower deductibles – deductibles are trending down
         indicate a higher risk appetite among buyers in a more
                                                                       (and more policies are featuring no deductible,
         seller‑friendly market.
                                                                       although not all insurers are willing to go there).
                                                                       This is also a function of increasing competition
         Material adverse change (MAC) conditions
                                                                       and better aligns W&I insurance coverage with the
         MAC conditions (which provide an “out” for the buyer          positions traditionally taken in non‑insured deals
         in the event of a significant material adverse event
                                                                   •   stapled insurance – W&I insurance will increasingly
         affecting target business between signing of the
                                                                       be “pre‑packed” in competitive processes. Sellers
         sale agreement and the settlement date) were widely
                                                                       will pre‑arrange a broker, underwriter and draft
         used in 2017, though less so than in 2016, when they
                                                                       policy to streamline the process
         featured in more than half the deals we observed.
         Again, this suggests buyers were more willing to          •   coverage percentages – in larger deals, coverage
         take on risk in 2017.                                         (as a percentage) may be lower, as buyers take
                                                                       a view on the likelihood of an “Armageddon”
         Warranty & indemnity insurance                                event occurring, and
         W&I insurance, which allows sellers to lay off the        •   warranties covered – although there will
         risk of claims under warranties and indemnities to an         remain some no‑go areas for underwriters
         insurer, was a feature of 19% of the deals we worked          (e.g. environmental warranties, at least in the
         on in 2017, up from 15% in 2016.                              absence of comprehensive due diligence). As a
                                                                       general rule, insurers are taking a slightly more
                                                                       commercial approach to the range of warranties
                                                                       that are insurable (again subject to appropriate
                                                                       due diligence having been carried out).

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                            home   12
The private equity
         race continues

         Private equity houses were again active in 2017, with global
         PE M&A values and volumes up on 2016 levels.
         Locally, PE deal volumes (both entries and exits)                  focus on smaller bolt‑on acquisitions which can add
         increased 90% on 2016, according to Mergermarket,                  more value through synergies with their existing
         but value was down, suggesting some hesitancy to                   portfolio companies.
         write larger cheques early in fund life‑cycles. Pressure
         will be building on PE firms to deploy capital in 2018.            The IPO market is tipped to remain subdued in 2018,
                                                                            so PE sellers will continue to prefer exits by way
         Consumer and technology (particularly artificial                   of trade sale (rather than pure IPO or “dual track”
         intelligence) sectors are expected to be of particular             processes as we saw in earlier years). We expect that
         interest to PE buyers. We also expect that, given                  IPOs will be back on the agenda in subsequent years,
         higher seller price expectations, PE firms may find                as changes to regulatory settings and solid market
         it harder to find deals which meet their IRR (internal             performance will drive increased interest in the
         rate of return) expectations, and may instead                      equity capital markets.

                                            2017 PE highlights by sector

              Consumer                            Leisure                                      Industrial

              AS Colour                           International                                Contract Resources
              Direct Capital (NZ)                                                              Anchorage Capital (Australia)
                                                  Volunteer HQ
                                                  Mercury Capital (Australia)
              Mix                                                                              Smart Environmental
              Pencarrow (NZ)                                                                   Maui Capital (NZ)
                                                  Medical
              Mainland Poultry
              Navis Capital (Australia)                                                        Services
                                                  HealthLink
                                                  Waterman (NZ)
              Trilogy                                                                          Smart Trade
              CITIC (China)
                                                  Nirvana Health                               International
                                                  Mercury Capital (Australia)                  Pemba Capital (Australia)
              Number One Shoes
              Allegro (Australia)
                                                  Heritage Lifecare
                                                                                               Transport
                                                  Adamantem Capital (Australia)
              Icebreaker
              Pencarrow (NZ)
                                                                                               Netlogix
                                                                                               Pencarrow (NZ)
              Provincial
              Education                                                                        PBT
              Waterman (NZ)                                                                    Waterman (NZ)

                                              Target   PE Firm (Location)   Investment   Divestment

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                                     home   13
ComCom takes
         the gloves off

         In 2017, the Commerce Commission declined to clear                 •   In the Fairfax/NZME authorisation, the Commission
         or authorise three high‑profile deals: Sky/Vodafone,                   was willing to look beyond economic outcomes to
         NZME/Fairfax (which it also successfully defended on                   potential detriments to news quality and media
         appeal) and Vero/Tower. It also declined to clear a fire               plurality, and those concerns tipped the scales
         protection services deal,1 while Trade Me’s acquisition                against the merger. More generally the Commission
         of Motorcentral (a supplier of software and websites                   signalled that it is willing to consider a broad range of
         for motor vehicle dealers) remains stalled pending                     potential detriments in its decision‑making (e.g. the
         further Commerce Commission consideration.                             environment, employment, privacy interests).

         Overall, 2017 was an outlier year for the number of                Given the higher proportion of declines in recent times,
         deals the regulator has turned down.                               it is possible that sellers may look even less fondly on
                                                                            bids that are conditional on clearance or authorisation.

                                                                            “
         Commerce Commission merger clearance
         and authorisation decisions 2012‑2017                                 Overall, 2017 was an outlier
                                                                            year for the number of deals the
         18

         16                                                                 regulator has turned down.”
         14

         12                                                                 The Commission has also been active in merger
         10                                                                 control enforcement. Some of the Commission’s
         8
                                                                            enforcement work is typically not public, at least in its
                                                                            early stages. But the publicly known cases give a sense
         6
                                                                            of the Commission’s willingness to get into the ring
         4
                                                                            when parties don’t apply for clearance for a deal the
         2
                                                                            Commission is interested in:
         0
                  2012         2013      2014        2015     2016   2017
                                                                            •   Vero came under investigation for acquiring 19.99%
                                      Approved     Declined                     of Tower, on the basis the stake may have given Vero
                                                                                a substantial degree of influence, or the ability to
                                                                                bring real pressure to bear on the decision‑making
         These numbers include some large transactions in                       of its rival
         sensitive and/or concentrated markets. But there is
                                                                            •   The Commission joined Complete Office Supplies
         no doubt the Commission is displaying a high degree
                                                                                in seeking an interim injunction to prevent the
         of confidence:
                                                                                acquisition of OfficeMax by Platinum (owner of
                                                                                Staples), pending a trial on competition concerns.
         •    In Sky/Vodafone and Vero/Tower, the prospect
                                                                                The Commission had previously cleared the merger
              of a more competitive alternative scenario wasn’t
                                                                                but the clearance lapsed because the deal was not
              necessarily obvious but the Commission concluded
                                                                                completed within the 12 month statutory timeframe.
              that an alternative scenario (that would be more
              competitive) had a “real chance” of emerging,
                                                                            This more proactive approach to enforcement may
              which, under the legal test, was sufficient to justify
                                                                            cause buyers to think twice before proceeding with
              declining clearance
                                                                            acquisitions in concentrated markets without the
                                                                            Commission’s blessing.

         1 Aon/Fire Protection Services Limited.

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                                        home      14
OIO – a year of change
                 and challenges ahead

                 Proposed legislative amendments spearheaded by the new
                 Labour‑led coalition government appear likely to present a number
                 of challenges for the Overseas Investment Office (OIO).
                 Current application processing timeframes
                 The OIO is still working through the bottleneck of applications which built‑up before and during the
                 “interregnum” period following the general election. Recent indications are that, despite the refinements to the
                 OIO process introduced last year, the OIO is having difficulty meeting its processing KPIs, due to both volume
                 of applications, and perhaps, the approach to the assessment of certain sensitive land applications mandated
                 by the new government.

                 History of OIO application work‑in‑progress                                                                                                   Current OIO average
                 numbers as at end of each month*                                                                                                              timeframes (Feb 17‑Jan 18)

                                                  80

                                                                                                                                                               Significant business assets
         Number of applications being processed

                                                                                                                                                               47 business days
                                                  70
                                                                                                                                                               Sensitive land (OIO consent
                                                                                                                                                               under delegated authority)
                                                                                                                                                               52 business days
                                                  60
                                                                                                                                                               Sensitive land
                                                                                                                                                               (ministerial consent)
                                                                                                                                                               73 business days
                                                  50
                                                       01‑17   01‑17   03‑17   04‑17   05‑17   06‑17   07‑17   08‑17   09‑17   10‑17   11‑17   12‑17   01‑18

                 *Above timeframes exclude time spent by OIO waiting for information/details from applicant.

                 Interestingly, there was little difference in processing time between sensitive land applications decided under
                 delegated authority and significant business assets applications.

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                                                                                                   home   15
OIO – a year of change
         and challenges ahead (continued)

         Legislative reform means              On the other hand, as part             Need for transparency
         possible resourcing issues ahead      of the Comprehensive and               highlighted
                                               Progressive Agreement for
         The OIO may face significant                                                 The OIO’s high‑profile decision to
                                               Transpacific Partnership (CPTPP),
         resourcing challenges once the                                               decline consent to China‑based
                                               the threshold above which
         Overseas Investment Amendment                                                HNA to acquire UDC Finance
                                               transactions involving overseas
         Bill (which regulates purchases                                              (which had been shaping up to
                                               acquirers from countries which are
         of residential land by overseas                                              be one of the banner deals of
                                               parties to the CPTPP will require
         persons) comes into effect.                                                  2017) on the grounds that it could
                                               OIO consent (as acquisitions of
                                                                                      not determine who ultimately
                                               “significant business assets”) will
         Treasury has estimated that the                                              owned and controlled HNA has
                                               increase from $100m to $200m.
         law change could blow out the                                                brought the need for transparency
         number of transactions involving                                             in consent applications into
                                               The upshot for 2018 is that
         “sensitive land” from around 150                                             sharp relief.
                                               consents will likely take longer,
         a year to more than 4,700. We
                                               and may be more challenging
         don’t expect the increase to be                                              HNA publicly expressed its
                                               to obtain. Foreign bidders may
         so dramatic due to innovations                                               disappointment in the OIO’s
                                               be at a further disadvantage,
         such as “standing” consents. But                                             decision, calling it “inconsistent
                                               particularly if sellers are prepared
         it will be important for the new                                             with the views of other regulators
                                               to leave some money on the table
         government to ensure that the OIO                                            around the world”. Whether or not
                                               to secure a certain and timely exit
         is adequately resourced to handle                                            this is a fair comment, the decision
                                               from a domestic acquirer.
         its increased responsibilities.                                              may give offshore investors
                                                                                      with similar issues pause when
         A new Ministerial Directive Letter                                           considering bidding for New
         came into effect in late 2017                                                Zealand assets.
         raising the threshold for acquiring
         rural land and forest land by                                                Sellers should also take steps
         requiring applicants to satisfy                                              to ensure bidders are willing to
         the OIO that the benefits from                                               be frank with the OIO, and carry
         their investments are “genuinely                                             out their own OIO‑style “good
         substantial and identifiable”.                                               character” checks on bidders,
                                                                                      prior to signing.

         “   The upshot for 2018 is that consents will likely take longer, and
         may be more challenging to obtain. Foreign bidders may be at a
         further disadvantage, particularly if sellers are prepared to leave
         some money on the table to secure a certain and timely exit from a
         domestic acquirer.”

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                            home   16
NZX a hunting ground
         (again) in 2018?

         Despite listed equities in New               A notable feature of two of the     It is pleasing to note that the
         Zealand being fully priced in                successful takeover offers were     documentation around takeover
         historic terms, takeover activity            the significant premiums on         and scheme transactions was
         was relatively strong last year.             offer. Elongated OIO approval       considerably more clear, concise
         2017 saw eight “take private”                timeframes continued to impact      and effective in those documents
         transactions launched, coming                transaction execution.              produced in the last quarter
         in the form of both traditional                                                  of 2017, after the Takeovers
         Code offers and schemes of                   With a shortage of quality assets   Panel published new guidance/
         arrangement, although three                  coming to market through            expectations in August.
         failed. The most recent takeover             traditional M&A channels, we
         attempt for Abano launched in                expect a high level of takeover     In March 2017, the Takeovers Panel
         2016 also faltered.                          activity, and high premiums         recommended for ministerial
                                                      for fortunate shareholders,         approval a number of technical
                                                      to continue in 2018.                amendments to the Takeovers
                                                                                          Code which will reduce compliance
                                                                                          costs and provide clarity. These
                                                                                          include altering the Code’s
           Premium to the previous close prior
                                                                                          application to small companies
           to the announcement of the offer
                                                                                          by excluding those with less than
                                                                                          $15m of annual revenue or $30m
           WSP Global’s successful full takeover
           of Opus International Consultants
                                                                           87%            of assets, as well as clarifying
                                                                                          the Code’s timing rules and
                                                                                          providing for greater electronic
           OG Oil and Gas’s successful partial takeover                                   communication with shareholders.
           of New Zealand Oil and Gas
                                                                           25%
                                                                                          Technical changes to the
           Zeta’s unsuccessful partial takeover                                           Code should be in place by
           of New Zealand Oil and Gas
                                                                           18%            30 September, but the proposed
                                                                                          “small companies” change to the
           Zhejiang RIFA’s successful full takeover of Airwork             20%*           Act will take longer.

           CITIC’s scheme of arrangement with Trilogy                      27%            The Panel was also conferred
                                                                                          with a new power to settle
           Fairfax’s failed scheme of arrangement with Tower               48%            takeover cost recovery disputes,
                                                                                          but to date has not used it.
           Vero’s failed scheme of arrangement with Tower                  77%            The Kathmandu/Briscoe Group
                                                                                          court action over disputed costs
           Yang Kee successful Logistics’ takeover of Fliway               13%            settled, but the acrimonious
                                                                                          Abano/Healthcare Industry court
                                                                                          proceeding over costs, and Abano
         *Bid price less than 2016’s partial offer.                                       withholding a dividend due to
                                                                                          Healthcare, continues.

         “   With a shortage of quality assets coming to market through
         traditional M&A channels, we expect a high level of takeover activity,
         and high premiums for fortunate shareholders to continue in 2018.”
New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                              home   17
Chapman Tripp’s
         M&A team

         Chapman Tripp’s national M&A team partners with                                We play a significant role in
                                                                                        merger, acquisition and disposal
         clients to successfully execute some of the biggest, most                      transactions for international
         complex and challenging transactions in New Zealand.                           and New Zealand clients, large
                                                                                        multinationals and leading private
         Our team has advised on more           Clients value our long history of       equity players across many
         M&A work than any other New            innovation, strong relationships        industries. We regularly advise
         Zealand law firm, including many       with regulators and proven              on the structure, strategy and
         of New Zealand’s most significant      ability to get even the most            implementation of takeovers,
         cross‑border deals.                    challenging deals across the line.      schemes, joint ventures and
                                                We maximise opportunity, identify       other complex transactions.
                                                and manage risk early on and work
                                                strategically with our clients to       Chapman Tripp’s work for
                                                achieve the outcome they want.          international clients has involved
                                                                                        some of the most high profile OIO
                                                                                        applications in recent times.

         Chapman Tripp recent M&A highlights

         In 2017 we advised on:                 •   Southern Pastures’ 25%              •   Ireland’s Clanwilliam Group’s
                                                    acquisition of Lewis                    staged acquisition of Toniq
         •    First Gas’s $200m acquisition         Road Creamery                           Limited (a developer of retail
              of the Ahuroa gas facility from                                               and pharmacy software), and
                                                •   New Zealand law firm AJ Park’s
              Contact Energy                                                                a 50% stake in Healthlink
                                                    sale of its intellectual property
                                                                                            Ltd from Waterman
         •    outdoor apparel manufacturer          business to publicly‑listed
                                                                                            Holdings Limited
              Icebreaker’s sale to US‑based         Asia‑Pacific IP group (IPH
              VF Corporation, which owns            Limited) for $66.1m                 •   Arvida Group Limited’s
              The North Face, Timberland                                                    acquisition of three retirement
                                                •   Waterman Capital’s acquisition
              and Vans                                                                      villages (Mary Doyle Lifecare
                                                    of freight solutions business,
                                                                                            (in Havelock North), Strathallan
         •    Australasian carpet‑maker             PBT Transport
                                                                                            Lifecare (in Timaru) and 50% of
              Godfrey Hirst’s sale to
                                                •   Beach Energy’s acquisition of           Village at the Park Lifecare (in
              global flooring manufacturer
                                                    the Origin Energy subsidiary            Wellington)) for $106m
              Mohawk Industries
                                                    Lattice Energy for AU$1.585b
                                                                                        •   digital agency Little Giant’s
         •    New Zealand Superannuation
                                                                                            sale to Japan’s Dentsu
              Fund’s 41.1% investment in
                                                                                            Aegis Network
              insurer Fidelity Life

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                                  home   18
Chapman Tripp’s
         M&A team (continued)

         •    Direct Capital’s investment      •   ACG Education’s acquisition      •   Hawkins Group’s sale of Harker
              to acquire a minority                of NZX‑listed private training       Underground Construction’s
              shareholding in AS Colour, a         provider Intueri Education           assets to Abergeldie Harker
              leading international provider       Group’s seven New Zealand
                                                                                    •   Tenon Clearwood LP’s
              of high quality blank apparel        vocational schools
                                                                                        purchase of Tenon’s New
              and other merchandise
                                               •   Australia’s Evolution                Zealand‑based Clearwood
         •    WSP NZ Acquisition Limited           Healthcare’s sale of two             manufacturing and global sales
              (WSP), a wholly‑owned                hospitals (Bowen Hospital            operations, for US$55m
              subsidiary of Canadian               and Wakefield Hospital) to
                                                                                    •   Pencarrow Private Equity’s
              WSP Global Inc. takeover of          Vital Healthcare Property
                                                                                        acquisition of interests in Mix,
              NZX‑listed Opus International        Limited for $68m
                                                                                        a leading manufacturer of
              Consultants for $263.2m
                                               •   Shell’s sale of its Kapuni           natural beauty and personal
         •    Finance Now’s acquisition            onshore oil and gas field            care products
              of The Warehouse Group’s             to its joint venture partner
                                                                                    •   Australia’s Home Care BidCo
              Financial Services arm               Todd Energy
                                                                                        Pty Limited’s acquisition of up
         •    Trilogy International’s          •   ASX‑listed BlueScope Steel,          to 40% of Healthcare of New
              acquisition of 80% of Lanocorp       which owns New Zealand Steel,        Zealand Holding, and
              New Zealand for $12.5m plus          sale of its Taharoa export
                                                                                    •   NZX‑listed code company
              future earn‑out payments             ironsands business to Taharoa
                                                                                        Airwork Holdings’ response
                                                   Mining Investments Limited
         •    Trilogy International’s scheme                                            to the $211.4m full takeover
              of arrangement with CITIC        •   Downer EDI’s acquisition of          offer by China’s Zhejiang Rifa
              Capital in respect of 100%           Hawkins construction from            Holding Group Co. Limited.
              of the shares in Trilogy             the McConnell family
         •    Australia’s Blue Sky Private     •   Precinct Properties’
              Equity’s formation of, and its       acquisition of 50%
              investment in, Active New            of co‑working space
              Zealand LP                           operator Generator

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                           home   19
Primary contacts

 Tim Tubman – Partner                   Joshua Pringle – Partner               John Strowger – Partner
 T: +64 9 357 9076 M: +64 27 344 2178   T: +64 9 358 9831 M: +64 27 504 6572   T: +64 9 357 9081 M: +64 27 478 1854
 E: tim.tubman@chapmantripp.com         E: joshua.pringle@chapmantripp.com     E: john.strowger@chapmantripp.com

 Josh Blackmore – Partner
 T: +64 4 498 4904 M: +64 21 828 814
 E: josh.blackmore@chapmantripp.com

 Other contacts

 Fiona Bennett – partner                Rachel Dunne – partner                 Pip England – Partner
 T: +64 3 353 0341 M: +64 27 209 5871   T: +64 9 357 9626 M: +64 27 553 4924   T: +64 9 357 9069 M: +64 27 434 8854
 E: fiona.bennett@chapmantripp.com      E: rachel.dunne@chapmantripp.com       E: pip.england@chapmantripp.com

 Hamish Foote – Partner                 Bradley Kidd – Partner                 Alister McDonald – Partner
 T: +64 3 353 0397 M: +64 27 289 9151   T: +64 4 498 6356 M: +64 27 224 1271   T: +64 3 353 0392 M: +64 21 477 935
 E: hamish.foote@chapmantripp.com       E: bradley.kidd@chapmantripp.com       E: alister.mcdonald@chapmantripp.com

 Geof Shirtcliffe – Partner             Roger Wallis – PartneR
 T: +64 4 498 6322 M: +64 27 481 1699   T: +64 9 357 9077 M: +64 27 478 3192
 E: geof.shirtcliffe@chapmantripp.com   E: roger.wallis@chapmantripp.com

New Zealand Mergers & Acquisitions
Trends and insights
March 2018                                                                                                            home   21
Our thanks to Jeremy Gray and
                                                                                                 Kit Adamson for helping to write
                                                                                                 this report.
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Chapman Tripp is New Zealand’s leading full‑service commercial law firm,                         subscriptions@chapmantripp.com.
with offices in Auckland, Wellington and Christchurch. Our lawyers are                           Every effort has been made to ensure
recognised leaders in corporate and commercial, mergers and acquisitions,                        accuracy in this publication. However,
                                                                                                 the items are necessarily generalised
capital markets, banking and finance, restructuring and insolvency, litigation                   and readers are urged to seek
and dispute resolution, employment, government and public law, intellectual                      specific advice on particular matters
property, telecommunications, real estate and construction, energy and                           and not rely solely on this text.
natural resources, and tax law.                                                                  © Chapman Tripp

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