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Asia Focus Newsletter | 1
NEW ZEALAND - GENERAL BUSINESS UPDATE
Prime Minister Jacinda Ardern visited China in April, meeting with President Xi Jinping and Premier Li Keqiang. The meetings revolved around economic relations, including the upgrade to the free trade agreement and New Zealand’s role in the Belt and Road initiative. Following this visit, Trade Minister David Parker travelled to China to also discuss the upgrade to the free trade agreement. Out of those discussions came a joint directive for the upgrade to be finalised as soon as possible. Parker also attended the Belt and Road Forum in Beijing, and indicated that the government is interested at getting on board, especially after China suggested that the remit of the project would be broadened beyond just infrastructure.
Looking at the markets - the NZX50 broke through the 10,000 level for the first time in April, continuing the strong performance of the New Zealand stock exchange this year. The milestone reaffirms how well the market has performed over the past decade, and is an indication of an economy that is performing well, despite a lack of business confidence in some quarters. The NZX50 has climbed about 284% in the past ten years and took five years to double from the 5,000 level. The Reserve Bank has cut the official cash rate to a record low of 1.5 percent, its first cut in more than two years. The cut is aimed at stimulating the economy and creating jobs. Early indicators are that retail banks will pass on the rate cut, with major banks lowering their lending rates in response. The government has recently announced that it is ruling out the implementation of a capital gains tax, which was the headline recommendation of the Tax Working Group’s final report. We expect this, along with low interest rates, to rejuvenise the flat housing market by reducing previous uncertainty around the capital gains tax.
Asia Focus Update May 2019
Agribusiness has been performing well, with dairy prices increasing for the eleventh consecutive time at the latest Global Dairy Trade auction and weather conditions leading to a plentiful season for apples and kiwifruit growers. However, one major challenge facing fruit farmers is a seasonal labour shortage, with more workers needed to pick and pack produce.
M&A activity remains strong. The year has already seen a major transaction signed in March, the acquisition of Westland Co-operative Dairy Company, New Zealand’s second largest dairy cooperative, by Inner Mongolia Yili Industrial Group’s subsidiary for an enterprise valued
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$588 million. The deal requires Overseas Investment Office consent and is projected to close later in 2019. The government has also announced the second phase of its consultation on Overseas Investment Act reforms, which aim to cut red tape and give decision-makers the ability to consider the broader impact on New Zealand of potential investments.
A major corporate governance decision was also recently handed down by the High Court, which found that the directors of Mainzeal (a leading New Zealand property and construction company), were in breach of their duty to avoid reckless trading. Mainzeal was put into liquidation in 2013, owing $115 million to around 1400 creditors. The decision was reached because the company was trading while balance sheet insolvent for a number of years, had no assurance of group support on which directors could reasonably rely and had poor trading performance. The directors were ordered to pay $36 million in damages. The judgment is now under appeal. The decision will likely make company directors more cautious, especially where there is a possibility of insolvency.
Please let us know if you or any of your clients are interested in discussing any of the topics covered in this newsletter, or have any other enquiries about undertaking business in New Zealand. You can contact us at [email protected] or feel free to contact any of the persons identified.
strengthen in the medium term, especially if positive news comes out regarding a trade deal between the US and China. The NZD steadily increased against the AUD in the first few months of the year, to a high of AUD 97 cents in March. It has since dropped back down to AUD 94 cents, after the Reserve Bank’s decision to cut the official cash rate.
• Share performance: After a rough end to 2018, global markets have rallied strongly on a new wave of optimism. The NZX50 has followed this trend, rising 14% from the start of the year to an all-time high of 10077 on 24 April, the first time it has gone above 10000. It has remained steady since then, currently sitting at 10039. Total trades remained steady with previous months at 295,205. The a2 Milk Company has continued to perform strongly, up 49% since the start of the year, as has Chorus, which is up 29%. Fisher & Paykel Healthcare, Auckland Airport, SkyCity Entertainment and Meridian Energy have also been strong performers since the start of the year, while Spark and Sky Network Television have performed poorly. The NZX is still struggling to attract new listings, exacerbated by the delisting of TradeMe and Methven after their acquisitions via schemes of arrangement. A joint review of New Zealand’s capital markets by the FMA and NZX is currently ongoing, with the aim of reinvigorating activity on the NZX.
• Dairy prices: Dairy prices at the latest Global Dairy Trade auction (7 May) increased of 0.4% from the previous auction. This marks the eleventh consecutive price increase, with dairy prices trending upwards since the 4 December auction. Whole milk powder, New Zealand’s largest dairy export, was down 0.5% at the latest auction, but has been on a steady rise since early December. Butter stayed steady (but is up 35% since December), and skim milk powder was up 2.8%. Fonterra increased its forecast Farmgate milk price in February to $6.30-$6.60, up from $6.00-$6.30. John Monaghan, Fonterra’s Chairman, said the improved milk price forecast reflects the increases in global milk prices over the last quarter.
INDUSTRY-SPECIFIC UPDATE Agribusiness
• Westland Dairy: Westland Co-operative Dairy Company Limited has signed a conditional agreement to sell to Chinese-owned Inner Mongolia Yili Industrial Group’s subsidiary in a deal worth $588 million. The transaction is subject to shareholder approval, which will be sought at a special shareholder meeting expected to be held in early July. The proposed transaction also requires court approval and consent under the Overseas Investment Act. The agreement prices Westland shares at $3.41. Westland Chairman Pete Morrison said the proposed transaction represents the best outcome for
THE MARKETS• Residential property market: New Zealand’s residential
property market remains stable. The median house price for New Zealand in March increased to a record level of $585,000, up from $560,000 last year. This was driven by strong prices in the regions, with 14 of 16 seeing an increase in the median sale price from last year, and three reaching record median sales prices. The median house price in Auckland fell by 2.7% from the same time last year to $856,000. The fall was partly due to a reduction in the number of properties sold for more than $2 million. Auckland’s median price has stayed at around $850,000 for nearly three years now, suggesting this is its “new normal”. The number of residential properties sold in March fell 12.9% from the same time last year. REINZ considers this is due to uncertainty on capital gains tax legislative changes and difficulty with accessing finance, but expects volumes to normalise in the next few months, particularly after the government ruled out implementing a capital gains tax and predictions that the official cash rate will be lowered.
• New Zealand dollar: The New Zealand dollar (NZD) has fallen after the Reserve Bank’s decision to cut the official cash rate. It had been hovering at around USD 67 cents since the start of the year, but fell to just below USD 66 cents after the announcement. It is expected to gradually
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shareholders, and has the unanimous support of the board.
• Tip-Top Ice Cream: Fonterra has sold its Tip Top Ice Cream brand and manufacturing plants to global ice cream giant Froneri for $380 million. Froneri was chosen after a comprehensive two-stage auction, and is believed to have outbid Australian private equity firms Pacific Equity Partners, BGH Capital and Mercury Capital. Fonterra will continue to supply milk to Tip Top and will retain ownership of the Kāpiti brand. Tip Top will continue to be led by its existing management team. The deal is due to settle on 31 May.
• Acquisition of PGG Wrightson’s seed and grain business: Simpson Grierson (led by Partner Simon Vannini) acted for Danish cooperative DLF Seeds in its acquisition of PGG Wrightson’s seed and grain business for $421 million. The acquisition was given approval by the Commerce Commission in February, and the Overseas Investment Office in May. The acquisition has now settled.
• Fruit picking shortage: The Ministry of Social Development has declared an official seasonal labour shortage in the Bay of Plenty for the first time in more than a decade, as the fruit industry struggles to get seasonal workers for the harvest. Around the peak of the harvest, in mid to late April, there is expected to be a shortage of around 3800 workers, up from last season. A labour shortage being declared allows visitor visa-holders to work those jobs. The shortage coincides with a great season for apples and kiwifruit.
• Mycoplasma Bovis update: 168 farms have been infected with Mycoplasma Bovis, the cattle disease discovered in the South Island in July 2017. 114 of these farms have now been cleared. So far, more than 97,000 cattle have been culled in an effort to eradicate the disease. $67.2 million in compensation has been paid to farmers affected by the disease, with many claims yet to be processed. 68% of the costs for the eradication programme will be funded by the Government, 30% by Dairy New Zealand, and 2% by New Zealand Beef + Lamb. The Government has emphasised its commitment to eradicating the disease, refuting speculation that it plans to shift into long-term management of the disease. It is believed that it will cost $886 million over 10 years to eradicate the disease. The disease is understood to be harmless to humans and is not transmitted through meat or milk.
Mining and Exploration
• OMV drilling in the Great South Basin: Austrian oil giant OMV has announced plans for possibly three exploration and seven follow-up appraisal wells off Otago’s coast. They have applied to the Environmental Protection Authority for a marine discharge consent to release
contaminants into the sea. The consent is currently open for public submissions, with a decision expected later in the year. If granted, OMV could begin drilling as early as this year, and depending on results, continue through to the end of 2030. The government’s ban on new oil and gas exploration meant it has stopped issuing any new permits, but those acquired before the law change can continue under the old regime’s regulations.
• Bathurst running ex-Solid Energy mine: Bathurst Resources Limited have had success running the ex-Solid Energy mine at Stockton on the West Coast. The mine contributed to 82% of their profit for the year, which is at its highest level since Bathurst was set up a decade ago and comes on the back of a strong coal price. Bathurst purchased the mine in 2016 from Solid Energy (along with two others mines) as part of the asset divestment programme undertaken by the former state owned coal mining company. Expansion of the mine will be a topic at the NZ Minerals Forum in May.
Forestry
• Forestry sales at record high: Strong growth in log export volumes are driving a 7% increase in forestry export revenue to $6.8 billion for the year ending June 2019. Much of this growth has come from increased Chinese demand for New Zealand logs, supporting both continued high prices and record export volumes. Sawn timber exports have increased since 2014, driven by a recovery in the US market and ongoing growth in markets such as Indonesia and Malaysia. Total log production has been increasing steadily over the past decade, with the majority of the increased harvest being exported as logs to China. Processing volumes have remained largely steady over this time. This shift coincided with New Zealand’s Free Trade Agreement with China and a rising number of trees reaching maturity.
• One Billion Trees Programme: The government has approved the first partnerships under the One Billion Trees Fund, with over $1 million committed to projects that will help achieve the goal of planting at least one billion trees by 2028. Launched in November, the Fund includes $120 million for partnership initiatives that support an increase in planting throughout New Zealand. The three projects funded are a seed planting trial in Otago and Canterbury, a regional study in Hawkes Bay to identify forestry activities that provide benefits to the community and a national strategy for native tree nurseries to address sector capability and support seedling production. The programme aims to mitigate climate change, protect the environment and support New Zealand’s shift towards lower emissions. Additionally, the Government is hopeful that the programme will create employment and workforce development, as well as support Maori values and aspirations.
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Climate change affecting the above industries
• Simpson Grierson Climate Change Report: Simpson Grierson has released a report on how business leaders can prepare for the future of climate change. The report gives an overview of the proposed Zero Carbon Bill, Emissions Trading Scheme changes and the potential impacts of climate change on key sectors. We think that any business that produces, or is even remotely reliant on emissions will be affected by upcoming changes detailed in the report. You can read the report on our website, or by emailing us at [email protected].
• Zero Carbon Bill: Climate Change Minister Jamie Shaw has introduced the Zero Carbon Bill into Parliament after extensive behind the scenes discussion with coalition partners. It commits the Government to reducing New Zealand’s long-lived greenhouse gas emissions to net zero by 2050, and methane emissions by up to 47% by 2030. It also establishes an Independent Climate Change Commission that will give advice on what action needs to be taken and when. Overall, it aims to provide a framework for New Zealand’s contribution to ensuring there is no more than 1.5 degrees of global warming above pre-industrial levels. The Bill will go to the Select Committee in the second half of 2019 and is intended to come into force in late 2019.
• Government Climate Change Landscape Report: In March, Parliamentary Commissioner for the Environment Simon Upton released a report about what New Zealand’s long-term climate change targets could mean for our landscapes. The report proposes stopping New Zealand’s carbon dioxide emitters from using forestry planting as a convenient way to avoid cutting their actual emissions. It proposes to do so by shutting carbon emitters out of purchasing tree-planting credits under the Emissions Trading Scheme - instead ring-fencing forest sinks for the exclusive use of farmers, whose carbon emissions generally do not last as long in the atmosphere. However, Climate Change Minister James Shaw said that reconstructing the Emissions Trading Scheme into two schemes is not an option, due to a desire to provide policy stability and predictability.
Recent M&A activity
• Yili subsidiary’s acquisition of Westland: as noted above, the proposed sale of Westland Dairy Co-operative Company to Inner Mongolia Yili Industrial Group’s subsidiary for $558 million has been announced. The transaction is subject to shareholder and court approval and consent from the Overseas Investment Office.
• Apax Partners acquisition of Trade Me: Trade Me Group received shareholder approval for a $2.6 billion takeover offer from British Private Equity firm Apax Partners. The
approval means the sale will go ahead following a final approval from the High Court. Trade Me shareholders were 99% in favour of the takeover. Trade Me Group will delist from the NZX and ASX after the sale.
• Next Capital acquisition of NZ Bus: Australian private equity group Next Capital has acquired NZ Bus from Infratil in a $229 million transaction. NZ Bus operates 720 buses from 13 depots and employs 1,400 staff in Auckland, Wellington and Tauranga. Infratil has owned NZ Bus since 2005. The transaction requires the approval of the Overseas Investment Office.
OVERSEAS INVESTMENT UPDATEOverseas Investment Act reforms
The government has announced the next phase of its plans to reform New Zealand’s overseas investment rules. The second round of reforms focuses on reducing the Act’s complexity to better support high-quality overseas investment. The Treasury is seeking views on issues centring around three main themes: what is to be screened, who is screened, and how the screening process works. Questions posed include whether to introduce a national interest test, whether there should be greater ability to consider national security, water, and Māori cultural values when assessing the impact of an investment and the best way to assess the character and capability of an overseas person who wants to invest in NZ. The consultation calls for submissions on the various policy issues being considered, to feed into the Government’s legislative process, leading ultimately to the new law being passed by Parliament in mid-2020. Simpson Grierson will be encouraging The Treasury to take steps to increase certainty around the consenting process and to increase the efficiency of the process overall. Consulting on the reforms closes on 24 May 2019.
Decisions of note (December 2018 to May 2019)
May
• Oceana Gold (New Zealand) Limited: Oceana Gold’s application to acquire farmland incidental to its mining activities at Waihi was declined after a split decision by the relevant Ministers on 3 May 2019. The Associate Minister of Finance’s view was that the acquisition did meet the sensitive land benefit to New Zealand test, but the Minister for Land Information disagreed. The benefits put forward by Oceana Gold mentioning increased employment, export receipts and technology were not substantial enough to meet the benefit to New Zealand test in the Ministers for Land Information’s view. We expect the decision to be appealed by Oceana Gold.
March
• Merck Sharp & Dohme Corp: United States, European and other countries investment in significant business assets, being the applicant’s acquisition of rights or
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interests in 100% of the ordinary shares of Antelliq Corporation. The consideration for the transaction is approximately $100 million. The applicant is a wholly owned subsidiary of a global healthcare company. The OIO approved the application on the basis that the individuals who will control the investment have relevant business experience and are of good character.
• Titan AcquisitionCo New Zealand Limited: United States, Singapore and other countries investment in significant business assets, being the applicant’s acquisition of 100% of the shares in Trade Me Group. The consideration for the transaction is approximately $2.5 billion. The applicant is a private equity fund. The OIO approved the application on the basis that the individuals who will control the investment have relevant business experience and are of good character.
• McMillan Shakespeare Limited: An Australian and other countries investment in significant business assets, being the applicant’s acquisition of rights or interests in 100% of Eclipx Group, its assets and its 25% or more subsidiaries. The consideration for the transaction is approximately $967 million. The applicant is listed on the ASX and provides a variety of vehicle fleet and financial services. The OIO approved the application on the basis that the individuals who will control the investment have relevant business experience and are of good character.
• Pacific Healthcare BidCo Limited: An Australian investment in significant business assets and sensitive land, being the applicant’s acquisition of 100% of the units in EHPO trust. The consideration of the transaction exceeds $100 million. The applicant is a newly created company managed by Australian private equity fund Pacific Equity Partners. The OIO approved the application on the bases that the applicant would develop the Wakefield and Royston hospitals, and introduce $10 million in additional capital investment into New Zealand.
February
• Craigmore Permanent Crop Limited: Hong Kong, Germany, United Kingdom and other countries investment in sensitive land, being the applicant’s acquisition of a freehold interest in 479 ha of land in Hawkes Bay. The applicant is a horticulture investment vehicle. OIO approved the application on the basis that 79 jobs will be created and approximately $21.1 million of export receipts will be received annually.
• Global Valar, S.L: Spain, Mexico and other countries investment in significant business assets, being the applicant’s acquisition of up to 100% of Restaurant Brands New Zealand Limited. The consideration for the transaction is approximately $883 million. OIO approved the application on the basis that the individuals who
will control the investment have relevant business experience and are of good character. Simpson Grierson acted for Global Valar in this transaction (led by Partner James Hawes).
• Tamarind NZ Onshore Limited: Singaporean and Australian investment in significant business assets, being the applicant’s acquisition of 100% of shares in Cheal Petroleum Limited, existing interests in petroleum exportation and mining, and other assets. The consideration for the transaction is approximately $106 million. OIO approved the application on the basis that the individuals who will control the investment have relevant business experience and are of good character.
• GWA Group Limited: Australia and other countries investment in significant business assets, being the applicant’s acquisition of 100% of Methven Limited. The consideration for this transaction is approximately $117 million. OIO approved the application on the basis that that the individuals who will control the investment have relevant business experience and are of good character. Simpson Grierson acted for Methven in this transaction (led by Partner Andrew Matthews)
January
• OneFortyOne Plantations Holdings: Partial Australian and United States investment in sensitive land, being the applicant’s acquisition of a freehold interest in 2411 ha of land at Manuka Island Forest. OIO approved the application on the basis that the applicant intends to expand the silvicultural management systems, increase the number of logs processed in New Zealand and implement environmental protection practices. The investment is also likely to advance the Government’s one billion trees strategy.
December
• Foley Family Wines Limited: Partial United States investment in sensitive land, being the applicant’s acquisition of 70.5 ha of freehold land and 109.8 ha of leasehold land associated with Mt Difficulty Wines Limited. OIO approved the application on the basis that the applicant intends to create jobs in the Wairarapa and Marlborough regions and has approximately 30% New Zealand ownership.
• Adamantem Capital Management: Partial Australia, United States and other countries investment into significant business assets, being the applicant’s acquisition of 77% of the shares of Hellers Limited and up to an additional 14% of the shares of Hellers Limited. OIO approved the application on the basis that the individuals who will control the investment have relevant business experience and are of good character. Simpson Grierson acted for Adamantem in this transaction (led by Partner and Head of Commercial, Michael Pollard).
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• OMV New Zealand Limited: OMV intends to increase its ownership of Shell’s offshore Pohokura and Maui gas fields and the related onshore production and processing facilities. After the transactions are complete, OMV will own 74% of Pohokura and 100% of Maui. The OIO approved the application on the basis that the investment is likely to create significant new employment opportunities, new capital for research and development and protect the historic heritage on the land. The consideration for the transaction is approximately $817 million. Simpson Grierson acted for OMV in this transaction (led by Partner James Hawes).
• Viaduct Holdings IV Limited: Partial Hong Kong, Switzerland and other countries investment in significant business assets, being the applicant’s acquisition of 100% of the shares in Wynyard Precinct Holdings. OIO approved the application on the basis that the individuals who will control the investment have relevant business experience and are of good character.
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters. © Copyright Simpson Grierson 2019.
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VICTORIA ANDERSON Senior Associate
DDI: +64 9 977 5188 M: +64 21 923 037 E: [email protected]
ROBERT MCLEAN Partner
DDI: +64 9 977 5077 M: +64 21 987 050 E: [email protected]
• IX Infrastructure Pty Limited: Singapore and other countries investment in significant business assets, being the applicant’s acquisition of rights or interests in 100% of the shares in Ixom Holdco Pty. OIO approved the application on the basis that the individuals who will control the investment have relevant business experience and are of good character.
• Guoco Group Limited: Applicant is registered in Bermuda and publicly listed in Hong Kong. Investment in significant business assets, being the applicant’s acquisition of 100% of the shares of Pacific Health Group TopCo1 Limited (being the Manuka Health Business). OIO approved the application on the basis that the individuals who will control the investment have relevant business experience and are of good character. Simpson Grierson acted for Guoco in this transaction (led by Partners Simon Vannini and Don Holborow).
OTHER COMMERCIAL PARTNERS
JAMES HAWESPartnerDDI: +64 9 977 5448M: +64 21 826 994
DON HOLBOROWPartnerDDI: +64 4 924 3423M: +64 29 924 3423
HUGH LINDOPartnerDDI: +64 3 968 4010M: +64 27 711 7171
ANDREW MATTHEWSPartnerDDI: +64 9 977 5402M: +64 21 420 072
MICHAEL POLLARDPartnerDDI: +64 9 977 5432M: +64 21 400 852
MICHAEL SAGEPartnerDDI: +64 9 977 5006M: +64 21 664 993
CATH SHIRLEY-BROWNPartnerDDI: +64 4 924 3451M: +64 21 302 751
SIMON VANNINIPartnerDDI: +64 9 977 5186M: +64 21 499 178
Please get in touch with one of us, or your usual Simpson Grierson contacts.
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